By Eric Boehm | PA Independent
If three times is a trend, we’ll have to find another word to describe the fact Pennsylvania’s credit rating has been downgraded for a fourth time in just a little over two years.
One thing it isn’t: surprising.
WE’RE GOING DOWN: Fitch Ratings slapped Pennsylvania with a second credit rating downgrade in 14 months on Tuesday.
Fitch Ratings dropped Pennsylvania’s credit rating to AA- from AA on Tuesday, citing the state’s reliance on $2 billion in one-time revenue in this year’s $29 billion budget and a refusal to take on the long-term budget-busted pension costs that will continue to drive costs higher for the rest of the decade.
“The ‘AA-‘ rating is sensitive to the commonwealth’s continued ability to address increasing fixed-cost pressures, particularly for pensions,” Fitch said in a statement announcing the downgrade. “Given the magnitude of Pennsylvania’s structural budget gap, Fitch anticipates some continued use of non-recurring items in upcoming budgets, but at a declining rate. Failure to make progress toward structural balance could trigger negative rating action.”
A lower credit rating makes it more expensive for the state to borrow money, but also serves as a gauge of fiscal health.
The AA- rating puts Pennsylvania on level with states like California and Connecticut, neither of which have a reputation for fiscal restraint.
When it comes to pensions, Fitch highlighted the fact Pennsylvania hasn’t made the so-called “annual required contribution,” or ARC, in recent years and doesn’t expect to meet that goal until at least 2017.
As we pointed out earlier this year, the ARC is basically equivalent to a minimum payment on a credit card statement — it’s the amount the state must pay into the pension system each year to keep the situation from getting worse.
“Under current law, contributions are projected to reach the ARC for the two primary pension systems by as soon as fiscal 2017, but the budgetary burden will increase, crowding out other funding priorities,” Fitch warned.
If this all sounds familiar, that’s because it should.
All three major credit rating agencies issued warnings to Pennsylvania lawmakers in advance of the June budget session, and Fitch is the second agency to issue a downgrade since the state budget passed.
Here’s a quick history of Pennsylvania’s credit rating over the past two-plus years. It’s repetitive and not too pretty.
July 2012: Moody’s Investors Service drops Pennsylvania to Aa2 (its third-highest rating) from Aa1. The agency cites “the commonwealth’s high debt position” and “a sizable unfunded pension liability” as the main reasons behind the downgrade.
July 2013: Fitch drops Pennsylvania to AA (its third highest rating) from AA+. The agency says the downgrade “reflect the commonwealth’s failure to adequately address key fiscal pressures,” including — that’s right — pension costs and other long-term debt. Fitch also gives Pennsylvania a “negative” ratings outlook, a warning that further decreases could be on the way.
July 2014: Moody’s hands Pennsylvania another credit rating downgrade, knocking the state down to Aa3 (its fourth highest rating). Moody’s says the downgrade “reflects the commonwealth’s growing structural imbalance, exacerbated by the fiscal 2015 enacted budget that depends on non-recurring resources” and “the expectation that large and growing pension liabilities coupled with modest economic growth will limit Pennsylvania’s ability to regain structural balance in the near term.”
September 2014: Fitch whacks Pennsylvania again, as described above, in downgrading the state’s credit rating to AA- (its fourth highest ranking).
Someone involved in the annual state budget process might look at this trend of credit downgrades — most of which came just a month after the state budget was signed in three consecutive years — and draw some sort of conclusion about the direction Pennsylvania is heading.
Gov. Tom Corbett has promised to hold a special session on pension issues if he gets re-elected, but he is trailing badly in most polls of the race. But Corbett continues to talk about “short term savings” from pension reform, which means further shortchanging the system to free up budgetary dollars for other things.
His opponent, York County businessman Tom Wolf, opposes making any changes to the current pension system, as do most Democrats in the state Legislature.
Boehm can be reached at Eric@PAIndependent.com and follow @PAIndependent on Twitter for more.