PENN­SYL­VA­NIA’S HOUSE OF

The Bond Buyer - - Front Page - By Paul Bur­ton

Rep­re­sen­ta­tives, work­ing against the back­drop of a threat­ened state spend­ing freeze and more rat­ing-agency back­lash, was sched­uled Mon­day to be­gin de­bat­ing a $2.2 bil­lion tax-and-rev­enue plan to bal­ance the state bud­get

Penn­syl­va­nia’s House of Rep­re­sen­ta­tives, work­ing against the back­drop of a threat­ened state spend­ing freeze and more rat­ing-agency back­lash, was sched­uled Mon­day to be­gin de­bat­ing a $2.2 bil­lion tax-and-rev­enue plan to bal­ance the state bud­get.

The Se­nate ap­proved a rev­enue pack­age in late July af­ter Gov. Tom Wolf let a $32 bil­lion fis­cal 2018 spend­ing plan be­come law with­out his sig­na­ture. The $2.2 bil­lion gap rep­re­sents 7% of ap­proved spend­ing.

Wolf has called Fri­day de­ci­sion day, when he said he must freeze some state spend­ing to pre­vent the gen­eral-fund bal­ance from fall­ing into neg­a­tive. Demo­crat Wolf has been at odds with the Repub­li­can-con­trolled state leg­is­la­ture since he took of­fice in Jan­uary 2015.

A freeze could af­fect schools, emer­gency sys­tems, vol­un­teer fire com­pa­nies and road re­pair. “If the money isn’t there to pay for those things, then Penn­syl­va­ni­ans are go­ing to get hurt,” Wolf said.

The com­mon­wealth re­cently bor­rowed $750 mil­lion from its short-term in­vest­ment pool. Wolf also au­tho­rized a $241 mil­lion bor­row­ing from the mo­tor li­cense fund to pay its Aug. 31 dis­tri­bu­tion to schools.

The Se­nate pack­age would au­tho­rize $1.3 bil­lion of bor­row­ing against fu­ture rev­enues from Penn­syl­va­nia’s share of the 1998 to­bacco set­tle­ment. The plan would also raise an es­ti­mated $100 mil­lion an­nu­ally by im­pos­ing a new tax of 2 cents per thou­sand cu­bic feet of Mar­cel­lus Shale nat­u­ral gas.

In ad­di­tion, the rev­enue bill would ex­pand gam­bling, tele­phone ser­vice and on­line sales.

Rat­ing agen­cies cited late and im­bal­anced bud­gets in a se­ries of down­grades. S&P Global Rat­ings on July 6 placed its AA-mi­nus Penn­syl­va­nia gen­eral obli­ga­tion rat­ing on credit watch with neg­a­tive im­pli­ca­tions. Moody’s In­vestors Ser­vice rates the com­mon­wealth’s GOs Aa3. Fitch Rat­ings on July 26 main­tained its AA-mi­nus rat­ing.

Lack of a rev­enue bud­get would force Penn­syl­va­nia to choose which bills it’s go­ing to pay, said state Trea­surer Joe Torsella and Au­di­tor Gen­eral Eu­gene DePasquale.

Penn­syl­va­nia’s school dis­tricts rely on state aid for 43% of their an­nual rev­enues on av­er­age.

De­spite past fis­cal stale­mates, the state has a strong track record of fund­ing schools through its state aid in­ter­cept pro­gram, ac­cord­ing to Alan Schankel, a man­ag­ing di­rec­tor at Jan­ney Cap­i­tal Mar­kets in Philadel­phia.

The pro­grams add a layer of bond­holder se­cu­rity for lo­cal school district bond is­suers, thus ben­e­fit­ing dis­tricts with shakier credit.

“Th­ese state aid in­ter­cept pro­grams en­hance bond­holder se­cu­rity and typ­i­cally earn a rat­ing re­flect­ing the stronger se­cu­rity,” said Schankel. “For dis­tricts with low un­der­ly­ing rat­ings, the higher rat­ing and ex­tra se­cu­rity pro­vided by the in­ter­cept trans­late into lower bor­row­ing costs for cap­i­tal in­vest­ment – new school build­ings, for ex­am­ple.”

The nine-month stale­mate two years ago over the fis­cal 2016 bud­get sig­nif­i­cantly dam­aged Penn­syl­va­nia’s credit pro­file and that of many school dis­tricts. In the first half of that fis­cal year, school dis­tricts re­ceived no aid pay­ments from the state, forc­ing some dis­tricts to is­sue short-term notes.

“To be clear, no debt-ser­vice pay­ments were missed,” said Schankel. “The sit­u­a­tion pre­sented a chal­lenge to the rat­ing agen­cies, with each of the main three agen­cies tak­ing a dif­fer­ent ap­proach.”

Moody’s down­graded the rat­ings twice in the sec­ond half of cal­en­dar 2015, then up­graded the pro­grams in Au­gust 2016 af­ter en­act­ment of the fis­cal 2017 bud­get.

S&P with­drew all in­ter­cept-based school rat­ings in De­cem­ber 2015, al­though it con­tin­ues to sup­ply un­der­ly­ing rat­ings to school dis­tricts. Fitch, which rates far fewer Penn­syl­va­nia school dis­tricts, made no changes to in­ter­cept-based rat­ings, ac­cord­ing to Schankel.

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