July 16 Fitch Ratings said on Tuesday it cut Pennsylvania's nearly $11 billion of outstanding general obligation bonds to double-A from AA-plus because of the state's failure to address key fiscal issues, including public pension funding.
Wall Street credit rating agencies have been warning the state for months that they could lower ratings because of a $47 billion-and-growing unfunded pension liability.
Republican Governor Tom Corbett proposed a plan in February to help reduce the future shortfall and get ballooning pension costs under control, but lawmakers failed to address the issue before they recessed for the summer.
The rating action is expected to lead to higher borrowing costs for the state because investors will likely demand a higher interest rate to offset the increased risk of lower-rated bonds.
"The amount of penalty that they pay at first could be minor, but if they fail to address (the problems) it could become a significant number," said Richard Ciccarone, managing director of McDonnell Investment Management.
Jay Pagni, a spokesman for Corbett's budget office, said the state was examining how much more it could have to pay to borrow money.
"The failure of the legislature to enact pension reform, and the use of one time money to balance this year's budget instead of looking at recurring revenues or areas to reduce spending, have contributed to this," Pagni said.
The 10-year yield spread between Pennsylvania general obligation bonds over Municipal Market Data's benchmark triple-A scale closed at 26 basis points on Tuesday, up from 19 basis points a year ago. MMD is a unit of Thomson Reuters.
Fitch also cut its ratings on debt linked to the state's general obligation rating, including economic development and school construction programs.
In addition to pension funding problems, the state has a budgetary structural imbalance and lacks a reserve cushion, Fitch said.
Together, Pennsylvania's problems "signal an inability or unwillingness on the part of political leaders to make difficult fiscal decisions," Fitch said in a statement.
The credit rating agency also maintained its negative outlook on the state, reflecting its view that "growth in fixed costs will outpace projected revenue growth, absent further action on expenses or revenues."