UPDATE 1-Moody's cuts Pennsylvania rating to Aa2 on budget concerns

Mon Jul 21, 2014 2:51pm EDT

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July 21 (Reuters) - Moody's Investors Service downgraded its rating on Pennsylvania debt to Aa3 from Aa2 on Monday, the third consecutive year that a new state budget has prompted a credit cut.

Moody's cited underperforming revenues and the continued use of one-time measures in its latest downgrade. After wrestling with lawmakers over public pensions and cutting millions of dollars through line-item vetoes, Pennsylvania Governor Tom Corbett didn't sign the 2015 budget until more than a week after the start of the new fiscal year on July 1.

The state has about $50 billion of unfunded long-term pension liabilities. About 63 cents of every new dollar of state revenue goes to pay pension costs, Corbett, a Republican, has said.

In order to close a deficit of about $1.5 billion without raising taxes, the state's Republican-run legislature passed a spending plan that included one-time transfers of money from dedicated funds, such as one that helps volunteer fire companies purchase equipment.

Growing pension liabilities, coupled with modest economic growth, will limit Pennsylvania's ability to regain structural balance in the near term, Moody's said. (bit.ly/1u8mG2C)

Moody's action affects about $13 billion of outstanding general obligation and related bonds, as well as ratings assigned through the state's intercept programs. The outlook is stable.

Last July, Fitch Ratings sliced its rating on Pennsylvania to AA from AA-plus. And in July 2012, Moody's lowered its rating, then Aa1, down to Aa2.

The governor's office did not immediately respond to a request for comment on Monday's downgrade. (Reporting by Hilary Russ in New York; Additional reporting By Anjali Rao Koppala; Editing by Saumyadeb Chakrabarty, Bernard Orr)

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