Pa. borrows $1.24B; spread widens
State's falling credit adds millions to borrowing costs
Pennsylvania today closed its three-weeks-long sale of bonds worth $1.242425 billion. That borrowed money will be used for capital projects and to repay old debt. Borrowers charged the state an effective interest rate of 3.113217%, through underwriter BofA Merrill Lynch, which underbid Barclays, Citi, JPMorgan and Morgan Stanley for the sale.
Is that a good rate? It's a savings, if you compare it to the 4.25% to 5% rates the Commowealth was paying on old bonds the sale partly refinanced, notes Jeffrey Sheridan, a spokesman for Gov. Tom Wolf. That saving works out to $7.4 million a year, over the expected 12 year life of the issue; or $73.4 million in all, if you discount the total to present value.
On the other hand, the 3.11% investors demanded Pennsylvania pay is 0.83% more expensive than the benchmark AAA rate paid by high-credit-rating states like neighboring Delaware. And it's a jump from the 0.49% premium on Pennsylvania debt earlier this year, and 0.3% last year; which means bond buyers' perceptions of Pennsylvania's financial future are moving in the wrong direction. The sale cost taxpayers $5.5 million more a year, compared to the spread investors demanded just last winter -- or $10.3 million more a year, vs. what Pennsylvania would pay if its credit was as good as Delaware's, or other top-rated states.
With an investment-grade credit rating of Aa3, Pennsylvania credit (and the spread it has to pay) is worse than any other state except New Jersey and Illinois, which, like Pennsylvania, have yet to resolve the multibillion-dollar gaps between the public pensions they have promised to pay and the money they have set aside to pay them with.
Gov. Wolf, Sheridan notes, has a plan for that, which would involve additional borrowing and increased state liquor sales and profits. The Republicans who run the General Assembly (some of whom have suggested borrowing more than Wolf wants, for pensions) want to go in a different direction: limiting future pensions first, before dealing with the current deficit.
The credit analysts at Moody's and other bond-watchers don't much seem to care which solution Pennsylvania chooses. Though current and future pensioners will almost certainly collect more under Wolf's plan. -- Until there's a deal, Pennsylvania taxpayers can expect to keep paying extra millions to borrow the billions that keep their Commonwealth afloat.