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July 21 (Bloomberg) -- Pennsylvania’s general-obligation rating was cut one step by Moody’s Investors Service, which said this year’s budget depends on one-time revenue fixes while rising pension costs will limit the state’s finances.

The reduction to Aa3, the fourth-highest grade, affects about $13.1 billion in debt, the company said. Pennsylvania has a “growing structural imbalance,” Moody’s said in a release.

“Large and growing pension liabilities coupled with modest economic growth will limit Pennsylvania’s ability to regain structural balance in the near term,” the company said.

The state’s unfunded pension liability is set to grow by 38 percent to $65 billion in 2018, according to state estimates.

Pennsylvania lawmakers recessed for the summer without voting on a bill backed by Governor Tom Corbett that would shift some of the burden of funding retirement benefits to new state and school workers. The 65-year-old Republican, who’s running for re-election in November, is urging legislators to return and deal with the issue he’s called the state’s “biggest fiscal challenge.”

“It’s clear that this pension crisis has put severe strain on Pennsylvania’s finances,” Corbett said in a statement. “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.”

Funding Gaps

Financing retiree benefits is a deepening challenge for localities nationwide as they recover from the 18-month recession that ended in 2009. The average public system had about 72 percent of the money needed to meet retirement obligations in 2013, the Center for Retirement Research at Boston College said.

Pennsylvania administers two pension plans, covering about 700,000 people. In 2013, the combined funded ratio dropped to 62 percent from 75 percent in 2010, and Standard & Poor’s expects it to continue falling, the company said in April.

S&P last week said it will decide in the next few months whether to lower Pennsylvania’s AA rating, third highest. Eric Kim, a director at Fitch Ratings, which also grades it AA, said last week a cut is “certainly more likely than not.”

A Pennsylvania general-obligation bond due in June 2027 traded today at an average yield of 2.8 percent, an average 0.85 percentage points over benchmark munis, compared with an average premium of 0.87 percentage points for the first half of the year, data compiled by Bloomberg show.

To contact the reporter on this story: Romy Varghese in Philadelphia at

To contact the editors responsible for this story: Stephen Merelman at Mark Tannenbaum, Stacie Sherman

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