Pa's fiscal health is shaky

Political bickering costs taxpayers millions:

In its recent bond auction, Pennsylvania had to promise to pay 3.11 percent interest to get investors to lend it $1.24 billion so it can fix up buildings and pay down debts, in a sale arranged by BofA Merrill Lynch, which outbid Barclays, Citi, JPMorgan and Morgan Stanley for the deal. The sale closed Monday.

Is that a good rate? Fifteen-year home mortgages and credit-union car loans were cheaper.

Pennsylvania still got a bargain, compared with the 4.25 percent to 5 percent the commonwealth paid on older bonds the sale will refinance with part of the cash, Jeffrey Sheridan, a spokesman for Gov. Wolf, said. That saving totals $7.4 million a year for the expected 12-year life of the bonds.

But the rate on the new bonds is also 0.83 percentage points more than high-credit-rating states such as Delaware are paying to borrow. That's a lot in muni-bond land. It shows that investors think Pennsylvania's financial health is heading the wrong way.

That premium, or spread, on Pennsylvania bonds rose from 0.49 percent earlier this year, and 0.3 percent last year. So taxpayers will pay $10.3 million more a year for the lack of confidence the state now inspires, versus last year's spread.

The commonwealth's credit rating, at Aa3 (Moody's), still looks good, compared with a lot of private borrowers.

But among U.S. states, which, unlike most borrowers, can impose higher taxes when they need money, Pennsylvania's credit (and borrowing cost) is worse than any place but New Jersey and Illinois. All three states have yet to solve the multibillion-dollar gaps they have allowed to open between the pensions they have promised to pay public workers, and the money set aside to pay them.

Gov. Wolf, Sheridan reminded me, has a plan based on more borrowing and higher liquor revenue. Republicans in the General Assembly want to limit future police and teacher pensions first.

At least until the sides cut a deal, taxpayers can expect to pay extra for the billions that keep the commonwealth in business.

After Pennsylvania chose lawyers for this bond sale back in April, the state treasury won "Best Practice" honors from the Government Finance Officers Association (GFOA) for bidding the job competitively, instead of relying on the usual Pennsylvania custom of letting an elected official pick his favorite law firm.

"Tradition was, the governor, the auditor general, and the treasurer select the bond team" on a rotating basis, acting Pennsylvania Treasurer Christopher Craig said.

It was Craig's turn to find bond lawyers since the most recent elected treasurer, Rob McCord, quit after admitting he had extorted campaign cash for state work. Craig says he took seriously Gov. Wolf's campaign promise to make law firms compete on price. So he put the work out for bid. "It was easy for me. I'm not running for office" or raising campaign cash from lawyers, he said.

Previously bond lawyer fees were based on debt volume. Craig said that would have priced the job at $131,000 - but "we wanted lower." Of 17 firms that bid, state officials picked Saul Ewing's $85,000 offer, saving taxpayers an apparent $46,000.

Yet a look at those 17 applications shows the state might have saved even more. Ballard Spahr offered to do the bonds for $38,500 - less than half what Saul Ewing charged.

Why not hire Ballard? The one-page cost sheet Ballard gave the state shows the firm agreed "no expenses shall be paid or reimbursed" beyond its price, as the state insisted. But at another point in the application, Ballard said it could add "out-of-pocket expenses" to its bill.

Craig said the treasury-led team reviewing the applications disqualified Ballard for that, without giving Ballard a chance to fix its error. Bond work is about details, after all. Ballard attorneys would not comment.

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