Moody's: Pa.'s 'imbalanced' budget = 3d-worst state debt rating

A Moody's sign is displayed on 7 World Trade Center, the company's corporate headquarters in New York, Feb. 6, 2013. (Brendan McDermid / Reuters)

Moody's Investors Service says it has cut Pennsylvania's bond rating to Aa3, down a notch from Aa2. Only New Jersey (A1) and Illinois (A3) now have lower ratings, among U.S. states. The cut is Moody's response to Pennsylvania's "imbalanced" 2015 state budget and fiscal problems which "will further deteriorate" due to the General Assembly's one-time gimmicks and "non-recurring revenues," along with Pennsylvania's slow economic growth, which has lagged other states despite Gov. Corbett's attempts to attract industry by avoiding new taxes and easing business regulation.

Looking on the bright side, Moody's noted Pennsylvania gives Gov. Corbett the power to cut spending between budgets if he wants, noted analyst Kimberly Lyons in the report. But Pennsylvania remains highly indebted, with a growing gap between the money the state has promised to pay retired elected officials, state workers and teachers and the amount it has set aside to pay them, and low cash reserves, Moody's added. The state is expected to continue to "grow slower than the U.S. on average." 

The ratings cover $11 billion in state general-obligation debt plus another $2 billion in bonds backed by state appropriations. Pennsylvania last had its Moody's ratings cut in 2012. The lower the rating, the less likely a borrower is to repay debt, and the more it will typically have to pay to sell future bonds. Recent near-record low interest rates have kept low bond ratings from boosting financing costs a lot, but are expected to hurt more as U.S. interest rates rise in the future.