Standard & Poor's Rating Service is saying it will lower the state of Pennsylvania's credit rating in the next few months if state's leadership doesn't get its act together, pension-wise.
In a report to investors, S&P analyst John Sugden warns that if Pennsylvania's political leaders don't implement "meaningful pension reform," the agency will lower ratings for the $545 million the state plans to borrow in general obligation bonds, and the $293 million it has planned for bond refunding. S&P currently places a AA ("Very Strong") rating on Pennsylvania's debt.
The latest threat comes on the heals of a report issued in 2012, when the agency gave Pennsylvania two years to bring its debt obligations in balance with revenues. The threat of a downgrade was made again in April of 2013.
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Demographic shifts as baby boomers enter retirement, coupled with below-average job creation, will strain the state's revenues over the next five years, according to S&P. Legislators' policy of economic stimulus and infrastructure funding has meant the state is spending money faster than it can pay down existing debts.
"The budget is not structurally balanced and relies on one-time savings, deferrals and other measures that add uncertainty," and that could leave the state "ill-prepared" for a recession, according to S&P.
Gov. Tom Corbett's proposed budget for fiscal year 2014-2015 calls for Pennsylvania's General Assembly to defer $300 million in pension payments at the state and local level. The state has $2 billion on pension obligations to pay out next year.
If passed, Gov. Corbett's budget would defer part of a scheduled $600 million increase in state pension costs this year, as well as deferrals to school district pension funds.
Last year Gov. Corbett proposed moving current state workers and future hires into a 401(k)-style system. Pennsylvania's General Assembly was unwilling to make changes to current workers' pensions in the face of threats of legal action from public sector unions.
According to S&P, a majority of states are in a better fiscal position than at any point since the start of the recession. Along with Pennsylvania, New Mexico and Kentucky have been sited as trailing other states in taking advantage of increased revenues to address structural budget imbalances. S&P has noted that Michigan, Wisconsin and Rhode Island are entering the next fiscal year with notably improved budgets.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
