Tuesday, July 17, 2012

Pennsylvania's Bond Rating Downgraded

Moodys logo blueNext week, Pennsylvania plans to hold a $363.6 million sale to re-fund general-obligation bonds.  That plan continues to hold even after Moody's downgraded the state's credit rating yesterday from Aa1 to Aa2 and rated the bond sale at Aa2. Moody's outlook on Pennsylvania also changed from "stable" to "negative" based on the state's weakened financial position and slow movement towards growth in the state economy.  Pennsylvania has been rated Aa1 since 2010, but now joins 16 other states at Aa2 or below.

Moody's said its decision was based on “Large and growing pension liabilities and moderate economic growth will challenge the return to structural balance, contributing to a protracted financial recovery.”  Financial reports show that Pennsylvania's retirement systems do not have enough money to meet projected liabilities.

Today, Moody's "put Pennsylvania's higher education system on review for a possible downgrade" due to worries about lower enrollment and the state's credit rating.  As of today, the system has an Aa2 rating.

So what does all this mean? Lower ratings seem to lead to higher borrowing costs, but according to the Inquirer, "investors' strong demand for state and local government bonds has kept yields cheap even for lower-rated issuers in recent years." In other words, analysts say it may be a while before Pennsylvania feels the effects of this change.



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