Pennsylvania received its third bond downgrade in two years Monday, after Gov. Tom Corbett signed a budget that papers over a massive deficit with stopgaps and failed to win passage of legislation to rein in a rising public pension debt.
New York-based credit ratings agency Moody’s Investors Service dropped Pennsylvania’s $11.1 billion of general obligation bonds a rung on its rating ladder, from Aa2 to Aa3, leaving it ranked among the six worst states in Moody’s ratings for the 47 states with general obligation debt.
It was the second downgrade by Moody’s in two years. Fitch Ratings downgraded Pennsylvania last year, and Standard & Poor’s has warned it could downgrade Pennsylvania if it didn’t see significant strides to address deficits and pension liabilities.
Moody’s cited Pennsylvania’s growing structural deficit and weak reserves, as well as relatively slow economic growth that it said is unlikely to keep up with the state’s growing public pension liabilities.
Also ranked at Aa3 are Connecticut, California and Arizona. One notch below is New Jersey and three notches below is Illinois.
Pennsylvania’s tax structure and finances are key topics in this year’s gubernatorial campaign between Corbett, a Republican, and Democrat Tom Wolf. Both sides seized on the downgrade Monday.
Corbett’s campaign cited the downgrade in trying to make the case that Wolf is wrong when he does not agree that the state’s $50 billion pension debt is in “crisis” stage. Corbett’s official office used it as part of his campaign to pressure the Republican-controlled Legislature to reduce retirement benefits for future state government and public school employees.
“I urge the citizens of Pennsylvania to join in this fight and demand that the Legislature address the most important fiscal challenge facing the commonwealth: pension reform,” Corbett said in a statement. “Pennsylvania families and taxpayers deserve nothing less.”
Democrats tried to pin blame for the downgrade on Corbett.
Wolf’s campaign said the downgrade is a result of Corbett’s “gimmick-filled budget, weak economy and failed leadership,” while House Minority Leader Frank Dermody, D-Allegheny, said Corbett has put Pennsylvania “in a more precarious financial position.”
All told, payments by school districts and all agencies of the state government into the state’s two major public pension funds are on course to rise from $750 million in 2009 to well over $6 billion in 2018, in part because of previous decisions by state policymakers to delay the pain of pension contributions.
This month, Corbett signed a $29 billion budget that does not raise broad-based taxes on sales or income, cuts business taxes and relies on more than $2.5 billion in one-time stopgaps, including postponing Medicaid payments, raiding off-budget programs and draining reserves.
It also came unaccompanied by the passage of pension legislation he supports.
Democrats oppose the Corbett-backed bill because its only savings arise from cuts in benefits and instead proposed a plan to refinance a portion of the debt.
Some Republicans balked because it would not relieve any immediate pressure on school district budgets.
Corbett had proposed temporarily slashing the legally required pension payments, but dropped it after House Republican leaders opposed it.