Is Gov. Wolf Ignoring Credit Rating Agencies?

Last week, Gov. Wolf once again resorted to defending his latest budget vetoes citing the fear of credit rating downgrades. Oddly, he seems to miss that pension reform and pension funding are mentioned eight times in the latest memo from S&P.

In fact, in every credit downgrade, rating agencies mention our pension crisis and the need for reform.

  • Here is Moody’s in 2012: “Rapidly growing pension contributions will absorb much of the commonwealth's financial flexibility over the next five years.”
  • In 2013, Fitch echoed this concern, citing “Sizable increases in [pension] contributions,” and expressing the fear that it is “unclear if any pension reform will be enacted.”
  • S&P said much of the same in 2014, citing “inaction on pension reform” and questioning the political appetite for tackling the issue: “It is unclear to us whether the state has the willingness to address its significant pension issues.”
  • And again in 2014, Moody’s writes that “Material reduction in long-term liabilities, including unfunded pension liabilities” could make the ratings go back up.

To be clear, these ratings reports also cite a structural imbalance—though one which can be solved by reducing spending or addressing the cost drivers (including pensions) in the budget. Most credit downgrades also provide warnings about Pennsylvania’s slow economic growth—a problem that will only be made worse, not better, by raising taxes.  

Nonetheless, every credit warning has cited our pension liability and the need for pension reform.

But what kinds of reform will improve our credit rating? As we’ve noted here many times before, it isn’t pension obligation bonds—a solution favored by Gov. Wolf. 

Financial experts warn that pension bonds would only weaken our fiscal condition. Moody’s actually called pension obligation bonds a “red flag.” Earlier this year, Fitch issued a very strong warning against pension bonds:

Pension obligation bonds (POBs) will not correct unsustainable benefit and contribution practices and are not a form of pension reform, Fitch Ratings says. Issuing POBs is neutral for some governments' credit quality and negative for others. 

In contrast moving new employees to a defined contribution plan (like a 401k) or even a “hybrid” plan is seen as a positive financial move. Here is S&P on the subject of moving to a new plan design in a 2014 report:

According to NCSL, between 2012 and 2014, 17 states and Puerto Rico passed 43 bills related to defined contributions, cash balance, or hybrid plans. Among these are Kentucky, Louisiana, Tennessee, and Virginia. Earlier this month, Oklahoma became the 18th state to join the ranks after Gov. Mary Fallin signed a bill that moves future employees of the state's non-hazardous plans to a 401(k) defined contribution plan. …

We believe that such reforms, despite potentially adding more near-term budgetary costs, can be important components of a government's overall liability management and contribute to greater plan affordability over time.

If Gov. Wolf truly wants to work on improving our credit rating, he needs to support real pension reform.