Credit rating agency Moody’s Investors Service on Monday said it was downgrading Pennsylvania’s debt over concerns with the way the Commonwealth pays its bills.
In an update to investors, Moody’s said it would rate the $11.1 billion in general obligation bonds issued by Pennsylvania from Aa2 to Aa3, putting it on par with states like California, Arizona and Connecticut.
“The downgrade of the general obligation rating to Aa3 reflects the commonwealth’s growing structural imbalance, exacerbated by the fiscal 2015 enacted budget that depends on non-recurring resources,” Moody’s wrote. That comes in part because the state’s 2014 budget missed its revenue targets; Pennsylvania budget analysts expected revenue growth of 2.9 percent, while revenue actually shrank by 0.1 percent.
That left state legislators and Gov. Tom Corbett (R) struggling with a budget deficit this year. Pennsylvania had no money in reserve to make up the deficit, after a rocky recession sapped state funds in 2010. Corbett signed a budget balanced through transfers of unspent money from state agencies, money that will not be available in the future.
Pennsylvania’s economy has grown more slowly since the depths of the recession than other states. Monthly employment growth has lagged more than a whole percentage point behind the national average, even though the commonwealth’s unemployment rate is lower than the national rate. Moody’s estimated that the recovery will continue to lag behind the rest of the country, especially in the rural middle part of the state.
The one-time money went to pay a portion of Pennsylvania’s Public School Employee Pension, an increasing cost that has drained more and more of the commonwealth’s resources over the years. In a statement, Corbett cast the downgrade as a call for action on pension reform.
“It’s clear that this pension crisis has put sever strain on Pennsylvania’s finances,” Corbett said. “As families struggle with skyrocketing property taxes, pension costs are consuming more than 60 cents of every new dollar of state general fund revenues. Doing nothing is not an option and doing nothing fails our families.”
And the pension problem is only expected to get worse. Moody’s estimated Pennsylvania’s unfunded pension liability, both for school employees and state employees, is expected to grow from $41 billion to $65 billion in the coming years.
Moody’s also downgraded several debts owed for specific projects, separate from the general obligation debt, including bonds to pay for the Philadelphia Regional Port Authority, Pittsburgh’s Sports & Exhibition Authority and the Pennsylvania Turnpike Motor License Fund. Lower ratings mean states have to pay more to borrow money from investors.
Moody’s is the second rating agency to take action against Pennsylvania’s debts. In July 2013, Fitch Ratings downgraded the debt. The third major rating agency, Standard & Poor’s, said it would monitor Pennsylvania’s progress, a possible prelude to its own action.
Democrats criticized the Corbett administration for refusing to back taxes that could deliver new revenue. State legislative leaders want Pennsylvania to begin taxing oil and natural gas extracted from the Marcellus Shale, a major new source of energy. Many energy-producing states, like North Dakota, Wyoming and Alaska, survived the recession relatively unscathed thanks to booming severance tax revenue.
Corbett faces a steep uphill climb in his bid for reelection against businessman Tom Wolf (D), a former state revenue secretary. A Quinnipiac University survey from June shows Wolf leading Corbett by 20 percentage points; voters said Wolf would do a better job than Corbett handling taxes, government spending and the economy by double-digit margins.