Standard & Poor's warned of a possible downgrade to Pennsylvania in the latest bond rating company tongue-lashing over the commonwealth's inability to overhaul its pension system for state employees.
"The negative outlook on Pennsylvania reflects our view that the state's growing expenditure pressures, primarily due to inaction on pension reform, coupled with slow economic growth and limited-to-no reserves, have diminished the state's financial flexibility and could result in a downgrade," analyst John Sugden wrote April 28 as S&P affirmed its AA rating and negative outlook.
The report came ahead of a scheduled April 29 competitive sale of $834 million in general obligation new-money and refunding bonds.
According to Sugden, S&P will monitor budget deliberations and pension overhaul efforts and could lower Pennsylvania's rating in the next few months if a structurally balanced budget and meaningful pension change is lacking.
Last year, Fitch downgraded the state to AA from AA-plus with a negative outlook after lawmakers passed a budget that did not include any of Gov. Tom Corbett's proposed changes. Pennsylvania has two employee pension funds, the State Employees' Retirement System and the Public School Employees' Retirement Systems.
"S&P's comments serve as a timely and most appropriate message that Pennsylvania needs to assign a high priority to adopting funding reforms by immediately eliminating all collared rates and contribute amounts necessary to actually eliminate the current unfunded liability over a period of 15 to 20 years," said Richard Dreyfuss, a senior fellow at the Manhattan Institute for Policy Research. "This should take place in addition to enacting plan design reforms based upon best-demonstrated practices observed within the private-sector."