HARRISBURG — Pennsylvania government officials were not surprised that Moody’s cited the state’s unfunded pension liability, as its main reason for downgrading the commonwealth’s bond rating.
“This is a problem that’s been going on for years (long before Gov. Tom Corbett’s tenure began in 2010) and has only been exacerbated over the last decade,” said Erik Shirk, spokesman for Corbett, who has made public pension reform a priority of his administration. “This is a problem that we need to fix.”
Moody’s Investors Service on Monday lowered Pennsylvania’s outstanding general obligation, or GO, bonds to Aa2 from Aa1 and assigned an upcoming $363.5 million bond issuance an Aa2 rating.
The agency’s reasons were the state’s growing unfunded pension obligation — currently near $40 billion — and the state’s recent history of systematically underfunding the pensions, which will require higher contributions in coming years.
GO bonds are backed by the state’s ability to repay bonds from tax revenue. But because of Pennsylvania’s sizable pension liabilities and a sluggish economy, the state may have to commit a larger portion of the tax revenue pie toward pensions.
The Independent Fiscal Office, which serves as a legislative counterweight to Corbett’s budget office, agrees that pension liability growth will be the main fiscal risk in upcoming years.
“If the U.S. economy recovers, there is a good chance that growth in Pennsylvania will be slightly lower,” said IFO Director Michael Knittel. “It is also true that the Pennsylvania economy is more resilient when facing downturns.”
In November, IFO will release a five-year outlook that will cover in full the state’s pension liability and the risk it poses to the economy.
But it’s not all bad news. Moody’s said that the state’s financial outlook has been revised from “negative” to “stable”, thanks in part to “improved governance” and “timely budget adoption.”
This story was updated at 3:33 p.m. to correct the name of Corbett’s spokesman.