Way No. 9: Bond Ratings

Ratings on debt issued by Pennsylvania have been downgraded five times in the last three years. Just last week Moody's Investors Service downgraded seven groups of school construction debt, citing the "commonwealth's chronically late budgets" and increasing uncertainty regarding Pennsylvania's ability to honor commitments to local school districts that will enable them to repay these bonds.

Lower bond ratings signal that debt issued by the commonwealth is riskier for investors who, in return, demand higher interest rates.

Pennsylvania’s credit rating has been lowered repeatedly in response to such fiscal irresponsibility as recurring budget deficits, a lack of financial reserves and limited revenue growth.

The Wolf budget would restore fiscal responsibility and help improve the state’s credit rating by:

  • raising the sales tax 0.6 percentage points and broadening it to include more goods and services
  • raising the personal income tax 0.7 percentage points
  • enacting a severance tax on natural gas production
  •  adopting a “fix” to a 2013 bank tax change that was supposed to be revenue-neutral but in reality lowered revenue.

By contrast, the Republican budget plan for 2015-16 would continue fiscal irresponsibility by using one-time budgetary maneuvers to delay significant payments until 2016-17. These maneuvers include:

  • taking $306 million for the state’s school construction fund off budget and shifting it to future years
  • shifting $170 million in child welfare payments (from Medicaid) to future years
  • shifting $87 million in school employee Social Security payments and $25 million in PSERS payments to future years
  • using all of the state’s $375 million budget surplus from this year for next year
  • assuming $220 million in revenue from an unspecified liquor privatization proposal, which research suggests would reduce state revenues from the wine and spirits industry long term, worsening the structural deficit
  • including revenue from special funds and other one-time transfers ($53 million total)
  • including other savings that may not materialize: $97 million because of optimistic assumptions about 2015-16 revenues; and questionable reductions in estimated state cost of managed care programs ($187 million) and payments to nursing facilities

The failure of the Republican budget proposal to include any future revenues raises substantially the risk of a further deterioration of Pennsylvania’s credit rating.

Downgrades in Pennsylvania's debt rating can cost the commonwealth tens of millions of dollars on each billion dollars of borrowing. This is a waste: Pennsylvania taxpayers pay more for less when state policymakers cannot get the state's fiscal house in order. Real fiscal conservatism would bring an end to this waste.

Return to Why the Budget Matters: Let's Count the Ways.