Pennsylvania's recent debt downgrade means it may cost the state more to borrow money, because investors will want to pay less for taking on riskier debt, but the effect of the lower score might be more political than financial.
The drop from Aa1 to Aa2 by Moody's Investor Service is likely to have a small effect on typical investors who invest in state bonds, but analysts are taking note of the major reason given for the change: ballooning pension costs expected to hit the state in increasingly large waves over the next several years.
Jeff Roof, of Roof Advisory Group in Harrisburg, said because the pension problem is clearly understood, the downgrade wasn't out of left field.
"The rating services take a look at items from a bigger picture perspective, so it was not telegraphed that this was going to be occurring beforehand, but it was not, quite frankly, a real significant surprise, either," Roof said.
Roof said his clients with general obligation debt in their portfolios haven't yet seen price changes, but the downgrade could affect prices in a sale of more than $363 million dollars in state bonds scheduled next week. Even so, Roof said, the typical investor in state bonds will likely see a smaller, incremental difference in price. "You would not see anything that was earth-shattering," said Roof.
"For a typical investor looking at Pennsylvania government securities, you would not see anything that was earth-shattering," said Roof. "It would be more of a smaller, incremental difference." Roof said the big message of this downgrade is that the state's pension problems have reached a critical point.
"A rating agency saw it appropriate to say, 'OK, Pennsylvania has some things it needs to address in the not-too-distant future,'" Roof said.
Governor Tom Corbett has been saying for months his top issue this fall will be pension reform. His office also points out that although the state's debt was downgraded, its outlook was elevated from negative to stable. Other Republican state lawmakers highlight the rating report's mention of two consecutive on-time budgets as contributing to the commonwealth's surer financial footing.
