Pension gap lowers Pennsylvania credit rating

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HARRISBURG -- Ahead of this week's refinancing of $363 million in state bonds, a major credit-rating agency downgraded Pennsylvania's rating in the face of its looming pension liabilities.

That decision, which will affect interest rates on the state's future debt, was attributed to what Moody's Investor Services described as "the expectation that large and growing pension liabilities and moderate economic growth will challenge [Pennsylvania's] return to structural balance."

Moody's last week lowered its rating for the state one notch to Aa2 from Aa1, two levels below its top-grade triple-A rating.

Addressing the commonwealth's $37 billion and growing gap between its pension liabilities and current funding of its retirement systems for state and public-school employees is poised to be a top issue for debate next year.

Gov. Tom Corbett pointed to the annually increasing pension costs during this year's budget process, and said at the end of June that he wants to put a more permanent funding fix in place early next year.

"While obviously we'd rather not have the downgrade, it points to and confirms what we've known: that we have these looming challenges coming, with the huge one being pensions," said state Budget Secretary Charles Zogby in an interview last week. "The governor has been out for some time talking about pensions."

The downgrade was followed by a separate moves last week by Moody's to lower a southeastern Pennsylvania county's creditworthiness, as well as to issue a warning to the 14 state-owned universities that they could be next.

The state's lower rating wasn't a surprise to top state officials, including Mr. Zogby, who said Moody's and other rating agencies indicated last year that Pennsylvania's pension costs were an area of concern.

Matthew Knittel, director of the state's Independent Fiscal Office, said he would characterize the downgrade as "fairly minor but still unfortunate."

"I think everyone recognizes that the biggest problem in the upcoming budgets is the pension liability," he said.

State obligations related to the State Employees Retirement System (SERS) and the Public School Employees Retirement System (PSERS) increased by about $500 million in the 2012-13 fiscal year, and are scheduled to rise by another $680 million the following year.

"I don't think we're going into [discussions] with an approach that takes anything off the table at this stage," Mr. Zogby said, indicating that changes for new and current employees may be considered.

While high debt costs were a main negative factor highlighted by Moody's, along with recovery challenges related to having an older and slower-growing population, there was some good news as well in the report.

Analysts commended state officials for passing the budget on time for the second year in a row last month, and said the commonwealth's economy has shown "modest strengthening" in its recent revenue growth.

Mr. Zogby also saw a silver lining in the rating downgrade helping to generate a dialogue in the General Assembly. State Rep. Stephen Bloom, R-Cumberland, who has raised concerns about the pension costs since taking office last year, posted on Twitter about the downgrade and its potential effects.

"Not only will pension costs consume more of future budgets, but now debt service costs rise too," he wrote on the social-networking site.

Conversations on the policy challenge are expected to occur this summer and into the fall, but specific corrective measures will have to wait until the new session begins next year. The Legislature has fewer than a dozen session days listed for September and October before members head home to finish campaigning.

Some public discussion on pension costs is in the works as well. Two House committees are scheduled to hold an Aug. 14 hearing in Harrisburg on a series of reform bills, which would alter how the retirement systems work and change rules regarding pension forfeiture.

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Harrisburg Bureau Chief Laura Olson: or 717-787-4254.


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