Pa. budget impasse leads to credit downgrade

HARRISBURG — As the budget deadlock in the Capitol drags on, a credit rating agency on Wednesday delivered a hard fiscal punch to Pennsylvania: a credit downgrade.

Standard & Poor's lowered Pennsylvania's bond rating a notch, citing the state's out-of-balance budget, its more than $2 billion deficit, and its reliance on one-time financial fixes in negotiating budgets over the last decade.

The agency also noted that it believes the stalemate over how to fund the state's $32 billion spending plan could "extend considerably further."

"The commonwealth's structural deficit remains manageable, but its reliance on one-time revenues has stressed its available cash, making internal resources insufficient to timely meet certain obligations," S&P Global Ratings credit analyst Carol Spain said in a written statement Wednesday morning.

The credit downgrade places Pennsylvania in the bottom five in S&P's rating of states, and means that it will cost the state more to borrow money, which some view as a backdoor tax that could end up affecting residents.

The governor's office estimates it will cost an additional $53 million annually in interest payments going forward.

News of the downgrade came a day after Gov. Wolf, a Democrat, said he believed he could stave off any major harm from the state's unfinished budget until Oct. 1.

In an interview with Pittsburgh radio station KQV on Tuesday, the governor said that if legislators can find a compromise and approve it by that time, "I can make this work."

He also said he had spoken on the phone earlier in the week with S&P representatives and that he came away with the sense that the state could push off that day of reckoning until next month.

"They're willing to let us work through this process," Wolf said. "I think they like the sense of optimism that we're all expressing and believe that's a good sign that we will land in a place that works out. In the meantime, I can make things work financially."

Pennsylvania is grappling with a $2.2 billion deficit, and the governor has already been forced to delay some payments. Going forward, he could have to freeze funding or make cuts.

In a statement Wednesday, Wolf urged the legislature to swiftly complete work on a plan to pay for the $32 billion spending plan it passed June 30.

"Today's news should be a wake-up call to come together and end this now," he said.

He then warned: "If an agreement has not progressed by next week, I will be forced to take further steps to manage this situation."

The GOP-controlled Senate and House have been unable to agree on a revenue package.

The Senate in July passed a plan, endorsed by Wolf, that would balance the books through a mix of borrowing and new and increased taxes. The House did not immediately take it up, instead leaving for a six-week summer hiatus.

When it returned to the Capitol last week, the House instead passed a no-new-tax plan that involved transferring money out of special state funds that pay for transportation and environmental projects, among other things.

Senate leaders Wednesday voted overwhelmingly against the House's proposal.

After news of the downgrade became public, the blame game began.

In a statement, House Republican leaders said it should spur state officials to begin looking at budgetary items such as "entitlement programs and corrections costs" that drive up the cost of running state government.

They added: "When those in charge of the checkbook – the same fiscal officers who approved the deficit spending last fiscal year – very publicly refuse to pay bills, even as bank accounts hold billions, of course our credit rating will take a hit."

House Minority Leader Frank Dermody (D., Allegheny) blamed the downgrade in part on the House's inaction over the summer.

"After every House Republican leader voted for a budget spending $32 billion on June 30, that same leadership group proved incapable of finding an honest and realistic revenue plan to pay for it," he said.

He called the plan that passed the House last week a "bad joke" that "used almost every gimmick that the credit rating agencies specifically warned against."