Lower State Spending Could Improve Bond Rating

Last week Moody’s warned an out-of-balance state budget could result in another credit downgrading. By not acting to balance the budget, Governor Wolf is aiding in the devaluation of the commonwealth's credit, something he's been quick to decry in the past.

That’s a big deal since Pennsylvania’s credit-rating is already the third worst in the country, behind Illinois and New Jersey. Philadelphia Inquirer columnist Joseph DiStefano points out that the Commonwealth pays around half a percentage point extra to borrow, compared to AAA-rated, states like Delaware and Maryland.

Moody’s writes,

While the rating recognizes the fundamental economic capacity Pennsylvania has to resolve its structural budget gap and fully fund its pension liabilities . . . [it] also recognizes the hurdles it faces to do so in practice.

The coming months will be crucial. If the Commonwealth is able to balance the budget, either through revenue increases or expenditure decreases [emphasis added] or a blend of each, its credit could stabilize at the current level.

The rating agency also cites pension reform as a critical factor in an upgrade of the state’s bond rating or removal of its negative outlook.

What the rating agency doesn’t say is that higher taxes or revenue increases will slow an already sluggish economy, making it increasingly unlikely that Pennsylvania will improve its long-term fiscal situation any time soon.

The declining credit of the commonwealth is proof that we can’t sustain Harrisburg’s spending addiction.

Update: On Monday July 11th, S&P announced Pennsylvania is on its CreditWatch list. Pennlive has the story: “The CreditWatch action reflects recent developments that indicate that Pennsylvania will likely proceed into fiscal 2017 with a spending plan that is not supported by a revenue package or offsetting spending cuts to bring the budget into alignment,” said S&P Global Ratings credit analyst Carol Spain in a news release, “but if lawmakers continue to negotiate and reach a balanced budget within a 90 day timeframe, we could remove the ratings from CreditWatch.”