By Hilary Russ
(Reuters) - Credit rating agencies are warning Pennsylvania about the high cost of its pension system, with Standard & Poor's Ratings Services saying on Thursday that it could downgrade the state in the next two years if the problem isn't fixed.
S&P changed its outlook on the state's debt to 'negative' from 'stable,' saying it was concerned in part about mounting spending pressure for public pensions amid a slow-growth economy.
S&P affirmed the 'AA' credit rating on the state's GO debt, but said the rating could drop a notch if Pennsylvania does not enact pension reform.
The action followed a move on Monday by Moody's Investors Service, which cut Pennsylvania's credit rating to 'Aa2' from 'Aa1' and cited similar concerns.
Pennsylvania Governor Tom Corbett has vowed to reform the state's pension system. Many other states have already made changes or are in the midst of doing so, though most reforms are challenged in court.
Corbett told Reuters last week that he would be spending the summer working to come up with recommendations.
The state has two main pension funds. One, for public school employees, had a $26.5 billion unfunded liability and was funded at 69 percent as of June 30.
Another pension fund, for state employees, had a liability of nearly $15 billion and was funded at 65.3 percent as of December 31.
Experts consider a pension funded at 80 percent to be healthy.
On Thursday, Fitch Ratings affirmed its 'AA-plus' credit rating and negative outlook on the state's GO debt.
The state is planning to sell just over $360 million in general obligation refunding bonds next Tuesday.
Pennsylvania Budget Secretary Charles Zogby said by phone that the state is "determined to make progress" on pension reform and on continuing to restore structural balance in the budget.
"Of course the downgrade itself is disappointing," he said, adding that the rating agencies also took note of the state's on-time budgets and its reduced reliance on one-time revenue measures, both seen as positives.
The state also has low to moderate bonded debt levels that are "conservatively structured and well-managed," Zogby said.
(Reporting by Hilary Russ; Editing by Phil Berlowitz)