December 12, 2013
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2013
Frequently Asked Questions About
Pennsylvania’s Debt
The urgency of raising the national debt ceiling, as well as the amount and use of debt generally by all
levels of government, have been topics of national debate this fall. Pennsylvania’s borrowing activities
differ greatly in size and purpose than the federal government’s, but still play an important role for the
citizens of the commonwealth.
Unlike the federal government, Pennsylvania cannot borrow to pay for its operating budget because the
state constitution requires a balanced budget. However, the state constitution allows for temporary
borrowing within a fiscal year to manage cash flow.
Pennsylvania has a AA bond rating, meaning its debt is of high quality and subject to very low credit risk.
Nationally, Pennsylvania ranks roughly in the middle-of-the-pack for its debt per capita, personal income
and gross domestic state product.
Q: Does Pennsylvania borrow or issue bonds to
pay for its budget, like the U.S. government?
No, Pennsylvania does not borrow to pay for its
operating budget because the state constitution
requires it to have a balanced budget. However, the
state constitution allows for temporary borrowing
within a fiscal year to manage cash flow, since much
of the commonwealth’s tax revenues are paid in
March and April, but expenses are incurred
throughout the fiscal year. These loans, known as
tax anticipation notes, must be repaid by the end of
the fiscal year, and can only be paid from currentyear revenues. Aside from that, the balanced
budget requirement means Pennsylvania cannot
borrow money long-term to finance day-to-day
operations of state government.
Q: What does Pennsylvania do with the money it
borrows?
The state constitution lays out several purposes for
which the commonwealth can incur direct debt,
such as:
 To suppress insurrection or for disaster relief.
 To manage cash flow with tax anticipation
notes.
 To refund existing debt.
 For purposes approved by the voters in
referenda.
 For the approved capital budget.
The majority of the commonwealth’s outstanding
direct debt is for the capital budget, which is the
portion of the state budget that provides for the
construction, rehabilitation, renovation and
improvement of state-owned facilities, including
the acquisition of land and structures. Because
these facilities are used over many years, the
commonwealth uses bond financing to spread the
costs over the life of the asset.
Over the years, policymakers have found important
state priorities that do not fit in one of the five
constitutional categories for direct debt. In some of
these cases, separate state authorities have been
established with the ability to issue debt. Debt
incurred by commonwealth authorities does not
have the same full faith and credit general
obligation pledge used for direct debt. Instead, the
debt service is often backed by specific revenues
pledged by the commonwealth to the authority, or
by appropriations made each year by the General
Assembly. A recent example of an authority issuing
debt on behalf of the commonwealth is the
refinancing of the unemployment compensation
loan from the federal government by the
Pennsylvania Economic Development Financing
Authority.
Q: Does Pennsylvania have a debt limit?
Yes, Pennsylvania has a debt limit, but only for
certain kinds of debt. The state constitution limits
the amount of capital budget debt that can be
incurred to 1.75 times the average annual tax
revenues for all funds over the previous five fiscal
years. The Auditor General certifies the capital
budget debt limit, and the current debt ceiling is
approximately $59.8 billion. Pennsylvania is
nowhere close to its constitutional capital debt
limit; however, it could not support the debt service
requirements of a debt load near the limit.
Aside from the constitutional limit on total capital
budget debt, the capital budget act for each fiscal
year specifies how much new principal can be
incurred in that fiscal year for capital projects. For
the 2013/14 fiscal year, the maximum amount of
new principal debt that can be issued for the capital
budget is $1.275 billion. The Redevelopment
Assistance Capital Program (RACP) portion of the
capital budget is subject to a statutory limit of
$3.45 billion in total debt, recently set by Act 77 of
2013.
The constitution does not place any overall limit on
debt issued for insurrection suppression, disaster
relief or voter-approved purposes. Debt was
incurred for disaster relief such as flooding in the
1996 flood, and for voter-approved investments
such as Growing Greener and Pennworks for water
and sewer projects. The sizes of these issuances
were limited by the acts passed by the General
Assembly and the referenda approved by voters.
Q: What is Pennsylvania’s bond rating?
Pennsylvania has a AA bond rating, meaning its debt
is of high quality and subject to very low credit risk.
The three major rating agencies’ opinions are as
follows:
 Moody’s Investors Service
Aa2 (Stable)
 Standard and Poor’s
AA (Negative)
 Fitch Investors
AA (Negative)
Recently, the commonwealth’s ratings were
downgraded a notch within the AA category by
rating agencies. In their opinion, the finances of the
commonwealth will continue to be strained
because of slow revenue growth and growing
House Appropriations Committee (D)
mandated costs, such as pension liabilities. These
pressures limit the ability of the commonwealth to
deal with unexpected fiscal issues, especially when
reserves like the Rainy Day Fund are depleted.
The credit downgrade matters to the extent that it
leads investors to require a higher interest rate
when the commonwealth issues debt, increasing
the debt service paid each year. Other market
factors can have a greater impact in determining
the interest rates besides the bond rating, but it’s
important to note that both short and long-term
budgetary decisions affect our borrowing activities.
Q: This fall, many people were concerned that
inaction by Congress could cause the federal
government to default on its debt. Could
Pennsylvania default on its debt?
Pennsylvania actually defaulted on its bonds in
1841. The commonwealth undertook a large canal
construction effort, and intended to use the canal
revenues to pay the debt service. The scheme
collapsed when canal revenues only generated 12
percent of the projected income. Because of
insufficient tax revenues at the time and
unwillingness on the part of the General Assembly
to raise sufficient taxes to meet the obligation, the
commonwealth defaulted on its bonds.
The ramifications of the 1841 event continue to be
felt, as they prompted the General Assembly to
place increased safeguards in the state constitution.
In the event that the General Assembly does not
appropriate enough money for debt service, the
Treasurer is directed to set aside the first revenues
collected to pay bondholders. Combined with
Pennsylvania’s moderate bonded debt levels and
long-time conservative debt policies, it is extremely
unlikely that the commonwealth could default on its
debt. Pennsylvania’s solid bond ratings reinforce the
market’s confidence in its ability to pay its debts.
However, there is a different, but related risk – that
the General Assembly will not pass the capital
budget each year in a timely fashion. While that
delay doesn’t affect the payment of interest or
principal to bondholders, construction contracts
funded with bond proceeds could be affected if
sufficient borrowing authority is not enacted on
time. To save money on interest costs, the
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Budget Briefing Report on Key Issues—PA’s Debt
December 12, 2013 - Page 2 of 3
commonwealth does not borrow the full project
cost up front; instead it borrows on an as-needed
basis to cover cash flow needs as construction
progresses.
A few times in recent years, the General Assembly
has not passed a capital budget until later in the
fiscal year. Without the statutory authority to issue
the needed debt, the Capital Facilities Fund
accounts, which pay for projects, ran very close to
empty. Shutting down ongoing capital projects
would have a negative economic impact across the
state, so it is important that the General Assembly
passes the legislation each year to make sure the
bills are paid and projects continue as planned.
Q: How much debt does Pennsylvania have
outstanding?
Net outstanding general obligation debt as of June
30, 2013, was approximately $10.86 billion. In
addition, the commonwealth has approximately
$2.2 billion in in long-term lease payment
obligations.
million was for lease payments. The remaining
$1.275 billion in debt service is mostly paid by the
General Fund, although other special funds
contribute as well, like the Motor License Fund, and
the Environmental Stewardship Fund.
Q: For how long does Pennsylvania typically
borrow?
Generally speaking, the commonwealth issues 20year bonds. For capital projects, the state
constitution requires the debt to be paid back
within the useful life of the asset and the debt must
also begin to be paid off within one-tenth of the
term of the debt. This means that some projects
with a shorter lifespan will be amortized within a
shorter time frame.
Q: How does Pennsylvania’s debt level compare
with other states?
Q: How much does Pennsylvania spend on debt
service?
A meaningful comparison of relative debt loads
requires adjustment for the different wealth and
population levels across the country. The annual
Moody’s State Debt Medians report makes these
adjustments
to
provide
apples-to-apples
comparisons amongst states.
Annual debt service for General Obligation debt and
lease payments was approximately $1.43 billion for
the 2012/13 fiscal year. Of that total, about $156
The following table summarizes Pennsylvania’s
position relative to other states, according to the
most recent Moody’s report.
Metric
Pennsylvania
Net Tax-Supported Debt Per Capita
Net Tax-Supported Debt as a % of 2011
Personal Income
Net Tax-Supported Debt as a % of 2011
Gross State Domestic Product
$1,208
National
Median
$1,074
National
Average
$1,416
Pennsylvania
Rank
22nd
2.8%
2.8%
3.4%
23rd
2.66%
2.47%
2.92%
20th
Source: Moody’s 2013 State Debt Medians report, issued May 29, 2013.
House Appropriations Committee (D)
Miriam A. Fox, Executive Director
House Appropriations Committee (D)
Eric Dice, Budget Analyst
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Stephanie Weyant, Communications Director
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Budget Briefing Report on Key Issues—PA’s Debt
December 12, 2013 - Page 3 of 3