August 12, 2015
STATE & LOCAL GOVERNMENT SECTORS
Tom Kozlik
What Does Pennsylvania’s Delayed Budget
Mean for Municipal Credit?
[email protected]
State budgets are not always approved on a timely basis. In fact, delays occur more often than
some think. Sometimes late budget agreements reflect divided governments. Other times delayed
budget plans are reactions to strained economic circumstances. In the past, late budgets offered
nothing more than political theatre for municipal bond market investors. We see this dynamic
shifting. Political grandstanding should no longer be considered simply political theatre. There
will be an impact on Pennsylvania state, local, and related credits as a result of the fiscal choices
being debated in Harrisburg. It is too soon to determine whether the effect will be positive or
negative.
Upon closer examination the delayed budget agreement could be considered an encouraging
indicator to municipal bond investors. We use the word "encouraging" because the holdup may
illustrate that political actors understand the importance of their upcoming decisions as they
relate to the future fiscal status of the commonwealth. Pennsylvania’s budget is a little over a
month late now. Parties in Harrisburg are still nowhere closer to a spending plan than they were
in June. As of now it is difficult to handicap the sentiments of those involved to figure out when the
delay of 2015 will be resolved in comparison to past budget battles.
Selected Pennsylvania Budget Battles
Fiscal Year Agreement/Signed Days Late Governor
2016
2010
2004
1992
1978
1972
1971
1970
1969
1968
1964
1960
1956
Not Yet
10/9/2009
12/23/2003
8/5/1991
8/21/1977
8/31/1971
3/6/1971
8/1/1969
8/31/1968
8/25/1967
8/14/1963
11/12/1959
6/1/1956
?
101
176
35
51
61
248
31
61
55
44
134
336
Notes
Wolf
At issue: school funding, divided government
Rendell
Employee loans from PSECU
Rendell
Schools warned could not open after holiday break
Casey
$3 billion in new revenues
Shapp Proposed new education spending, revenues proposed
Shapp
Shafer
Passed first PA income tax
Shafer
Shafer
Shafer
Scranton
Lawrence
Leader
-
Sources: Patriot News, Temple Institute for Public Affairs, and PNC Municipal Strategy
The very-short-term municipal-credit-related consequences of a delayed budget are nonexistent
to minor if the delay lasts only a few months. Credit negative outcomes increase, however, if the
stalemate drags on past the December holidays. For bond investors the consequences of the
delay itself are not as important as the issues keeping lawmakers divided. The origins of the
Pennsylvania budget delay of 2015 is unlike most of those we examined. In fact, the issues
currently dividing lawmakers could prove to continue to have a significant impact on state and
local government credit quality in Pennsylvania.
In recent years, Pennsylvania’s credit quality has been falling because of the state’s growing
structural imbalance. Pennsylvania's structural imbalance cannot be blamed on cyclical factors.
There are vital structural influences at play. A key element to blame for the structural imbalance
is the commonwealth’s large and rising unfunded pension liability. This condition was exacerbated
in recent years because the state chose not to fully fund required pension plan payments.
215-585-1441
For bond
investors the
consequences of
the delay itself
are not as
important as the
issues keeping
lawmakers
divided.
Pennsylvania’s Five-Year Fiscal Outlook Remains Imbalanced
Source: Pennsylvania Independent Fiscal Office and PNC Municipal Strategy
Pennsylvania’s credit conditions will worsen unless these infractions are reversed. The credit
quality of Pennsylvania local governments, including school districts, and other related municipal
bond issuers could also be negatively affected if policies are not altered.
The Politics of Pennsylvania
During our survey of past budget delays we saw an important tendency related to spending. At
issue now is not just political questions related to revenues (tax rates) and expenditures (what to
spend money on). At issue for bondholders now is whether or not political actors involved
recognize the current fiscal reality and whether the political will exists to react in a credit positive
manner.
Poll: What Do You Think Is the Most Important Problem Facing
Pennsylvania Today?
Poll Response
Education, schools
Unemployment,
personal finances
Governement,
politicians
Taxes
Economy
Energy issues, gas
prices
Senior issues,
Social Security
Roads,
infrastructure,
transportation
10/10 8/11
8/12
5/13
8/13 10/13 1/14
6/14
8/14
9/14 10/14 3/15
6/15
4%
12%
13%
17%
23%
21%
19%
23%
29%
30%
25%
19%
18%
17%
38%
30%
11%
21%
17%
26%
21%
16%
16%
20%
15%
18%
14%
11%
15%
16%
16%
17%
11%
15%
14%
13%
14%
16%
17%
8%
39%
5%
9%
4%
12%
7%
18%
5%
7%
8%
5%
11%
5%
9%
5%
10%
3%
11%
4%
9%
5%
17%
6%
12%
7%
0%
3%
3%
4%
3%
4%
2%
5%
5%
3%
5%
3%
6%
1%
2%
1%
3%
1%
1%
1%
1%
1%
4%
1%
1%
6%
2%
3%
2%
2%
3%
4%
3%
5%
3%
2%
2%
4%
5%
Source: Franklin and Marshall College Poll, June 2015 and PNC Municipal Strategy
At issue for
bondholders now
is whether or not
political actors
involved
recognize the
current fiscal
reality and
whether the
political will
exists to react in
a credit positive
manner.
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