Pennsylvania Receives Lowest Interest Rate Ever; Ratings Agencies Caution about Increasing Pension Obligations
HARRISBURG, Pa., April 12, 2013 /PRNewswire-USNewswire/ -- PA Budget Secretary Charles B. Zogby today announced the successful close of a $950 million General Obligation Bond sale.
Bank of America Merrill Lynch was the successful bidder, offering a 2.904 percent interest rate. Six companies offered bids.The proceeds of this bond sale allow the commonwealth to finance its public capital projects, provide grants to local water and sewer projects, and provide funding for Growing Greener—a grant program aimed at addressing critical environmental concerns across the state. This sale yielded the lowest interest rate ever due to, in large part, the commonwealth's strong fiscal management. In addition, Fitch Ratings, Moody's Investor Service and Standard & Poor's have acknowledged the commonwealth's relatively strong financial position when rating its bonds. Under Governor Corbett's administration, the state passed two on-time budgets, improved jobs outlooks, balanced revenue shortfalls and reduced reliance on non-recurring revenues. All of these factors were cited by the rating agencies as contributing to the second highest rating from all three services. However, all three rating agencies also pointed to increased pension contributions and growing unfunded liability in the public pension systems as having a potentially negative impact on the commonwealth's ratings which, in turn, could affect the interest rate the state pays to fund its capital debt. Fitch Ratings points to a negative rating outlook and reflects its concern with "expected significant growth in annual pension funding obligations." It also states that maintaining the current "AA+" rating will "depend upon the commonwealth's ability to stabilize the downward trajectory in pension funding levels while continuing a commitment towards fiscal balance and replenishing reserves." Standard & Poor's notes that it has "the potential…to lower the state rating to 'AA-' in the next two years in the absence of meaningful pension reform efforts or significant economic growth that would help mitigate the impact of growing pension costs on Pennsylvania." Moody's has echoed these concerns, stating, "the commonwealth will experience significant budgetary pressure over the next five years as the pension contribution increases...the unfunded liability is projected to grow to $65 billion from the current $41 billion, materially increasing the commonwealth's adjusted debt ratio." As part of his 2013-14 Executive Budget, Governor Corbett introduced his pension reform proposal. It calls for temporary reductions in the steep year-over-year employer contribution increases, introduces a defined contribution plan for new employees, and proposes changes to the future benefits for existing public and school district employees. This proposal will be part of the general budget negotiations over the next three months.