Pennsylvania Credit Rating Takes Another Hit

Citing the unwillingness of political officials to make difficult decisions, Fitch bond rating agency has lowered Pennsylvania’s credit rating. This follows Moody’s downgrade last year. Fitch also says that unfunded pension obligations now represent the dominant share the state’s long term obligations.

The failure to address the problem this year compounds the issue and inevitably makes the eventual coming to grips more difficult. There are reasonable proposals on the table including those made by the Governor earlier this year. Fear of offending the powerful unions has hamstrung the Legislature who apparently cannot put the well-being of the state ahead of their fear of being opposed heavily by unions in the next election.

But no one should be surprised. This is the same Legislature that refuses to deal with the money wasting prevailing wage law, public ownership of liquor stores, teacher strikes, transit strikes or any other issue that unions defend with all their considerable power.

While they might congratulate themselves on maintaining their privileged positions, they must be made to understand that in the long run, their opposition to solving any problems they create will make it harder for Pennsylvania to compete. The boost the state has received from Marcellus Shale will not be enough to overcome the obstacles represented by the free market killing behavior of so much of the body politic.

More downgrades can be expected. How many will it take to get Harrisburg’s attention?

Poor Outlook for City’s Creditworthiness

"Adoption of a budget that continues to rely on outside approvals, unrealistic revenue assumptions, or unachievable savings will result in a downgrade". That’s what one of the "big three" bond rating agencies said about Pittsburgh’s finances. That was in October of 2003, prior to Act 47, prior to an oversight board, prior to a massive parking tax increase, prior to a tax reform package, prior to a new casino, a new hockey arena, etc. And it was before the recent budgetary machinations of a tuition privilege tax, a soda tax, and higher non-profit contributions to the City.

Just yesterday another of the trio of rating firms downgraded their outlook on the City from "stable" to "negative" (joining another who did so in the fall) in light of the ongoing pension problems, which, unless the rating agencies have not been watching, has been prevalent for a long time. The agency’s report said "The negative outlook reflects our view of the city’s increased financial pressures associated with its pension system and the uncertainty regarding the potential takeover of the city’s pension system by the state". Again, even with a state takeover the sunniest of scenarios that have the City meeting the Act 44 funding threshold leave residents, employees, taxpayers, and bond analysts looking at a pension system that will have about half of the assets it needs to pay the promised liabilities.

The revised Act 47 plan contains a recent long-term look at the ratings Pittsburgh received in the decade of the 2000s: regardless of which one of the "big three" ones looks at, the ratings stayed in the "B" level which implies "average", "good", "speculative", "adequate", or "ongoing uncertainty" depending on what letter or numeral followed the letter grade.

The plan contained quotes from the agencies on their most recent rating at the time (January of 2009) and all three were concerned with the high per capita debt burden of the City, much of which is related to the pension bonds issued in the mid- to late-1990s. Pittsburgh ended up with a temporary bump in pension funded ratio and traded that for an addition to long-term debt. Now it has poorly funded pensions to go along with the debt burden, which is supposed to drop off around 2018 if the City issues no new debt and continues to pay for capital needs out of ongoing revenues and other sources.

Officials Fiddle As Credit Rating Teeters

Moody’s has downgraded the City of Pittsburgh’s financial outlook from "stable to negative." While the City keeps the A1 rating from 2008, the rating agency obviously has misgivings about the direction elected officials are taking in trying to deal with the massive unfunded pension liability, other legacy costs and bond debt.

One can only wonder how long the City can hold on to its A1 rating as it fritters time away and fails to deal with the coming jump in payments to the pension plans. Officials hoping for a surge in economic growth in Pittsburgh that would boost tax and other revenues are likely to be greatly disappointed given the struggling national economy that is unable to shake off a prolonged period of recession and near stagnation. Thus, it has become incumbent upon the City’s government to take some painful steps to address the "negative" financial outlook.

What credit rating firms do not see is any effort on the part of the City to reduce its spending through paring back non-essential services, outsourcing or privatizing services or even making a serious effort to consolidate services with the County or enter into contracts with the County to provide services.

Council has made it painfully clear that privatization in any form is unwelcome as shown through statements objecting to leasing the parking authority garages and City parking meters. It’s all about protecting jobs of City employees. The long running objections to outsourcing garbage collection when that particular function is carried out by private companies all over the County and state point to intransigence and irresponsibility toward taxpayers that are woven into the fabric of Pittsburg governance. Moreover, the Council’s insistence on passing prevailing and living wage ordinances demonstrates a pitiable lack of understanding of economics and the importance of free markets to economic growth.

In short, it is amazing that Moody’s ever assigned an A1 rating to Pittsburgh. How could Pittsburgh, which has been under financial oversight by two state appointed groups for the last six years and where officials have failed to reduce spending and payrolls to per capita levels more in line with other U.S. cities, be considered an A level credit risk?