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S&P threatens to downgrade Pa.'s credit rating

Pennsylvania is racing New Jersey to the bottom as Standard & Poor's considers another reduction in the Keystone State's credit rating.

Pennsylvania is racing New Jersey to the bottom as Standard & Poor's considers another reduction in the Keystone State's credit rating.

S&P has threatened to cut Pennsylvania's AA-minus rating for general obligation debt by one or more notches. In a report to clients this week, the agency cited the state's "failure to pass a budget package for fiscal 2016 that addresses long-term structural balance" - financial-analyst code for the state's seeming inability to agree on boosting its cash reserves or lining up pension-fund income with the relatively generous checks paid to hundreds of thousands of retirees.

Only Illinois, New Jersey, and Kentucky have lower S&P credit ratings, while California's and Michigan's ratings are the same as Pennsylvania's current rate, according to S&P.

Low-rated borrowers typically have to pay bond buyers and other lenders extra, because they are considered a little more likely to default on their debts.

Pennsylvania taxpayers had to pay investors an extra 0.52 percent interest to sell bonds as of last month, more than any state except New Jersey and Illinois, according to a report by PNC Financial Services Group. Those bond premiums closely track state ratings posted by S&P's rival, Moody's Investors Services.

"Eight months into the fiscal year, [Pennsylvania] lawmakers have yet to agree on necessary expenditure or revenue adjustments to balance the current-year budget," analyst Carol Spain wrote in the S&P report.

Looking forward, Spain wrote, "Gov. Wolf's fiscal 2017 executive budget, albeit balanced, relies on passage of a bipartisan compromise bill, which failed to gain sufficient votes in December."

Spain doubts that Wolf, a Democrat, will succeed in his plan to pass a compromise budget through the Republican-led Assembly by the end of March or in any "timely manner," considering the "deep divide" between Democrats unwilling to give up education spending targets and Republicans unwilling to allow tax increases.

"If the legislature and governor do not enact a fiscal 2016 budget that addresses structural balance by the end of the March sessions, we will likely lower the rating," she wrote.

Noting that the S&P report resembled previous credit warnings, Wolf spokesman Jeffrey Sheridan said Friday, "This is no surprise. We are facing a massive structural deficit, which the governor inherited. We can't cut our way out. We can't wish it away. We are here because of the refusal by Republican leaders and some rank-and-file members to recognize a deficit that could be $2.6 billion by the end of next year," according to data from the state's Independent Fiscal Office.

S&P declined to endorse Wolf's practice of vetoing basic education funding and other services analysts consider essential in order to keep the budget balanced. Spain called the resulting cuts "poor fiscal stewardship," and faulted Pennsylvania for failing to clarify fiscal 2016 spending projections.

S&P acknowledged that the state's political failure hasn't stopped it from paying interest on bonds.

Pennsylvania is still a wealthy state that could afford to raise taxes if needed, bond analysts say. But the "lack of political will" threatens to make its pension deficit and spending pressures "insurmountable," S&P's report added.

The state faces a political "stalemate," but it's "nothing that can't be fixed" and probably less bad than the long-term outlook in New Jersey and Illinois, whose pension deficits are bigger, said Glenn Williams, president of Philadelphia-based investment adviser A.H. Williams & Co.

JoeD@phillynews.com

215-854-5194 @PhillyJoeD

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