PhillyDeals: Analyst: Pa.'s fiscal woes will hurt Wolf's agenda

Gov.-elect Tom Wolf's

"Fresh Start for Pennsylvania" campaign promised better school funding, plus economic stimulus to create more jobs. Voters approved.

But "Pennsylvania's tax base is not expanding at a fast-enough pace to maintain current levels," let alone fund more spending, warned Tom Kozlik, municipal credit analyst at Janney Capital Markets, the largest investment banking group based in Pennsylvania.

Pennsylvania's reputation among bond buyers is already low enough that the state has to pay a 0.3 percent surcharge over the interest rate charged for top-rated states such as Delaware, Virginia, and Utah, Kozlik noted in a report to clients Wednesday.

Even with today's rock-bottom interest rates, this works out to an extra $33 million a year that taxpayers have to pay to finance Pennsylvania debt, because of its weaker credit rating and investors' perception that the state is more likely to stiff them.

Only Illinois (with a 1.4 percent risk premium on its debt) and New Jersey (0.56 percent) have to pay investors more to buy their bonds, Kozlik added, citing bond data from Thomson Reuters.

The problem is Pennsylvania's all-too-peaceful status as a nicer place to live than it is to find work.

"The state's economic growth, labor market indicators, and tax revenues have mostly trailed, [and] benefits from Marcellus Shale hydraulic fracturing have not been the boon they were projected to be by some," Kozlik wrote.

Gas drilling was in decline as far back as 2012, before energy prices started dropping. So Kozlik doesn't believe Wolf's proposed 5 percent gas-extraction tax would be nearly large enough to balance the state's books.

"Even a return to a more 'normal' level of growth would not cure the Keystone State's ills," Kozlik wrote.

After years of underfunding (and some embarrassingly expensive bad investments - both the state workers' and state teachers' pension funds have been slow to explain what happened to some of the funds I've asked them about lately), future liabilities for Pennsylvania public school and state retirees are $76 billion ahead of the assets set aside to pay them.

That's more than double the unfunded retirement that most states face, compared with their revenues, according to data from Moody's.

There are two ways out of any budget squeeze.

Will Wolf agree to stiff the schools, the road-builders, or other supporters who voted for change and all his promises?

Will the Republican-led General Assembly agree to raise taxes to shore up the state's sagging infrastructure, or its overbuilt and underfunded educational programs?

No and no, Kozlik expects.

"We are becoming increasingly skeptical that meaningful reform can be enacted," Kozlik wrote in his report.

"All year I have been advising investors that the fiscal condition in Pennsylvania will soon be in the same category as New Jersey, and then maybe even Illinois," Kozlik said.

He predicts the credit agencies will cut Pennsylvania's ratings, and its borrowing will become even more expensive.