Pennsylvania Debt Rating Cut to Lowest Since ’97 by Fitch

Pennsylvania’s general-obligation rating was cut to the lowest since 1997 by Fitch Ratings, which cited a reliance on one-time revenue fixes and growth in costs such as pensions.

Fitch reduced the rating one step to AA-, its fourth-highest level. In July, Moody’s Investors Service lowered its grade to an equivalent Aa3, also ascribing the cut to mounting liabilities for the sixth-most populous state. Standard & Poor’s grades it AA, third highest.

“Pennsylvania faces fiscal pressures in the form of a structurally unbalanced budget, depleted reserves and a rapidly growing pension cost burden following years of underfunding and market-driven investment declines,” Fitch analysts led by Eric Kim said in a release today.

About 7 percent of the state’s $29 billion budget depends on one-time items, such as $125 million in savings from its federally approved alternative to Medicaid expansion, according to Fitch.

This fiscal year, the commonwealth’s pension contributions will rise about $600 million from the prior year to $2.7 billion, according to Fitch. Its burden of debt and unfunded pension obligations totals 9.8 percent of 2013 personal income, above the median for U.S. states, Fitch said.

Lowest Rating

Fitch’s rating matches its lowest, given when the company first graded the state in 1993. The state held that level until it was upgraded in 1997.

Pennsylvania general-obligation bonds maturing in July 2024 traded today at an average yield of about 2.5 percent, or 0.26 percentage point over benchmark munis, data compiled by Bloomberg show.

The Fitch action “underscores the need for pension reform,” Jay Pagni, a spokesman for Republican Governor Tom Corbett, said by telephone. “The governor will continue to push for pension reform in Pennsylvania.”

Corbett, 65, who faces re-election in November, supports a plan for new state and school employees that incorporates both a defined-benefit system and a defined-contribution approach similar to a 401(k). Legislators haven’t voted on it.

Before it's here, it's on the Bloomberg Terminal.