The commonwealth's “failure to adequately address key fiscal pressures,” including pension reform, prompted Fitch Ratings on Tuesday to downgrade the rating on $10.9 billion in outstanding general obligation bonds.
Pennsylvania’s GO bonds were downgraded to AA from AA+.
“Continued budgetary structural imbalance, a failure to boost the adequacy of pension funding and the lack of a reserve cushion signal an inability or unwillingness on the part of political leaders to make difficult fiscal decisions,” the credit rating agency said in a news release.
State lawmakers, who recently passed a 2013-14 budget, failed to tackle several major policy items deemed priorities by the Republican majority. Those include public-sector pension reform, increased funding for transportation infrastructure and liquor store privatization.
“This isn’t unexpected,” said Jay Pagni, a spokesman for the Office of the Budget. “(Secretary Charles Zogby) has warned about this, in terms of any credit implications should we not implement any pension reform or fail to fill budget shortfalls with recurring revenue streams.”
The state has an unfunded pension liability of more than $47 billion. Proposals are on the table to move away from defined-benefit plans in favor of defined-contribution, or 401(k) models.
“The commonwealth’s debt ratios are moderate and at the median for U.S. states rated by Fitch,” the release said. “However, the commonwealth’s long-term liability profile including unfunded pension liabilities is above-average, and will likely continue growing given the current statutory schedule of persistent pension underfunding.”
Lawmakers could take up these big items when they return from summer break.
“We have a serious problem with growing pension obligations and unfunded liability,” Pagni said. “That isn’t going away. That is a problem that will continue to affect Pennsylvania.”
For fiscal 2014, the commonwealth estimates the general fund share of pension costs will increase 46.2 percent, or $511.2 million, to $1.6 billion. That represents nearly 80 percent of the total spending increase in the budget. The budget office projects that contribution rate to increase at double-digit rates through fiscal 2018, absent any substantive pension reform.
The downgrade could mean it will cost the commonwealth more when it goes to the bond market to issue new general obligation debt. That typically occurs annually or semi-annually, Pagni said.
Continued inability to address Fitch’s concerns — or worsening of conditions — over the next one to two years could trigger further negative rating action, the agency said.
On the positive side, Fitch noted an increase of 3.4 percent in general fund tax revenue collections. For fiscal 2014, the state’s Independent Fiscal Office forecasts baseline tax revenue growth of $407 million.
Corporation tax and personal income tax collections were up 4.6 percent and 5.3 percent, respectively, in fiscal 2013. However, sales and use tax collections were only up 1.4 percent from the prior year.
“It’s not a bleak picture, but rather a realistic commentary on where we are fiscally right now,” Pagni said of the agency report.
In conjunction with the GO bond rating, Fitch also downgraded five other ratings supported by commonwealth appropriations.