September 23, 2014 / 3:50 PM / 5 years ago

UPDATE 1-Fitch downgrades Pennsylvania on budget, pension concerns

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Sept 23 (Reuters) - Fitch Ratings cut Pennsylvania’s rating one notch to AA-minus on Tuesday because of the state’s budget problems and escalating pension liabilities.

Nearly 7 percent, or $2 billion, of Pennsylvania’s $29 billion budget for fiscal 2015 relies on one-time revenue sources, Fitch analysts said.

What’s more, Pennsylvania’s pension fund for state employees is funded at 59.2 percent as of Dec. 31, 2013. That’s a slight improvement from the 2012 valuation but still far below the 80 percent level generally considered healthy for U.S. public pension plans.

Fitch revised its outlook to stable from negative. The downgrade affects about $10.9 billion of general obligation bonds and $3.5 billion of GO-related debt.

In July, Moody’s Investors Service cut Pennsylvania debt to Aa3 from Aa2, the third consecutive year that a new state budget has prompted a credit cut. Moody’s outlook is stable.

Standard & Poor’s Ratings Services rates the state AA with a negative outlook.

Pennsylvania Governor Tom Corbett, a Republican who is up for reelection in November and polling poorly, has proposed changes to the state’s pension system but hasn’t been able to get consensus from the state legislature, also run by Republicans.

His office did not immediately reply to an email seeking comment on the latest downgrade on Tuesday.

His administration did, however, strike a deal in August with the federal government to allow Healthy PA, the state’s own kind of Medicaid expansion under the Affordable Care Act. It will use federal funds to pay for private health insurance coverage for at least 500,000 residents, and could save the state $125 million beginning this year, Fitch said.

Overall, the state is forecasting 3.6 percent tax revenue growth, which is “somewhat aggressive” in light of the 0.1 percent growth in fiscal 2014, Fitch noted. (Reporting Hilary Russ in New York; Additional reporting by Kanika Sikka in Bangalore; Editing by Meredith Mazzilli and Saumyadeb Chakrabarty)

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