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PA's Debt Downgrade

Tuesday July 17, 2012
Mary Wilson, Capitol Bureau Chief

Pennsylvania's recent debt downgrade means it may cost the state more to borrow money because investors will want to pay less for taking on riskier debt. The effect of the lower score might be more political than financial.

The drop from Aa1 to Aa2 by Moody's Investor Service is likely to have a small effect on typical investors who invest in state bonds, but analysts are taking note of the major reason given for the change: ballooning pension costs are expected to hit the state in increasingly large waves over the next several years.

Jeff Roof, of Roof Advisory Group in Harrisburg, said because the pension problem is clearly understood, the downgrade wasn't out of left field.

"The rating services take a look at items from a bigger picture perspective. So it was not telegraphed that this was going to be occurring beforehand, but was not, quite frankly, a real significant surprise either".

Roof says his clients with general obligation debt in their portfolios haven't yet seen price changes, but the downgrade could affect prices in a sale of more than $363 million dollars in state bonds scheduled for next week.

"Even so, the typical investor in state bonds will likely see a small, incremental difference in price. You would not see anything that was earth-shattering. The big message of this downgrade is that the state's pension problems have reached a critical point. A rating agency saw it appropriate to say, 'Ok Pennsylvania has some things it needs to address in the not-too-distant future," Roof said.

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