S&P Global Ratings threatened Thursday to cut Pennsylvania’s AA- general-obligation bond rating a notch, which would likely drive up taxpayers’ annual borrowing costs. The “negative credit watch” warning “reflects Pennsylvania’s eroding financial position and our view that there is a significant likelihood that the commonwealth will not enact a structurally balanced budget for fiscal 2018” over the next three months, analyst Carol Spain said in a statement.
Though the General Assembly has “passed a $32 billion spending plan,” members can count on only $30 billion in tax income and haven’t said where they will get the remaining $2 billion, Spain noted. Gov. Wolf “has 10 days to sign or veto the spending plan or to let it lapse into law” while the Republican-controlled legislature weighs a last-minute revenue deal.
“Pennsylvania has repeatedly had protracted budget negotiations that failed to result in structural alignment, but given the larger size of the structural gap (6.3 percent, based on the recent spending plan) and the commonwealth’s weaker liquidity position to begin fiscal 2018, from a credit perspective, deliberations are even more important than in past years,” S&P noted in its report.
In a statement of his own, Wolf called the S&P warning “an urgent call to action for a long-term solution to our budget deficit.” The Democratic governor said he and legislative leaders have so far “found common ground on education funding, pension reform, and expanding opioid treatment. If we continue working together, we will not only ensure our fiscal house is in order, but prove to our creditors and the people of Pennsylvania that we can face our budget challenges.”
That would be a welcome change from Pennsylvania’s usual practice, according to Spain. “While it is not uncommon for states to have periodic structural imbalance, Pennsylvania’s chronic misalignment and eroding general fund position, particularly during a period of economic growth, demonstrate a pattern of financial mismanagement,” she said in a statement.
“Lawmakers should return this week to figure out the revenue portion of the budget and to address the ongoing budget deficit of almost $2 billion,” notes Eric Kazatsky, municipal bond analyst for Bloomberg Intelligence, in a report to clients.
Legislators are considering money-raising programs such as getting more Pennsylvanians to gamble and borrowing money against future payments from the 1998 Tobacco Master Settlement Agreement, under which cigarette companies agreed to pay states what amounts to compensation for the social costs of smoking.
Tobacco payments have declined as fewer Americans smoke, as such “payments to Pennsylvania have declined by 17 percent” since the program started and may be headed lower, he noted.
If Pennsylvania falls back on asset sales and other onetime gimmicks to raise cash, “we would likely lower the rating,” S&P added. According to S&P, Pennsylvania already rivals Connecticut, Illinois, Kentucky, and New Jersey among states with the worst credit ratings.
As a result, Pennsylvania typically pays more than half a percentage point more than Delaware, Maryland, and other top-rated states with balanced budgets when it goes to borrow money. That means Pennsylvania taxpayers pay an extra $5 million a year for every $1 billion in state debt used to fund highway, prison, school, and other long-term projects. New Jersey’s “spread” and its excess cost are about double Pennsylvania’s.