Pennsylvania had its general-obligation rating 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 state’s unfunded pension liability is set to grow by 38 percent to $65 billion in 2018, according to state estimates.
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.”
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