January 7, 2016
STATE AND LOCAL GOVERNMENT SECTORS
Pennsylvania Budget Update:
Tom Kozlik
215-585-1083
[email protected]
Excessive Delay Could Signal Increased Challenges for
Commonwealth, Related State, and Local Government Credits
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Pennsylvania Governor Tom Wolf line-item vetoed a budget and distributed six months of
Basic Education Funding to school districts.
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The Commonwealth still has no budget plan, and state aid payments for first-half 2016
remain trapped.
Pennsylvania’s budget has been delayed for a modern record of 190 days.
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The delay is likely a signal that increased political and fiscal challenges for Pennsylvania and
its related state and local government credits are likely for at least the near and medium
term.
When lawmakers finally compromise on a spending strategy, it does not necessarily mean it
will be one that helps Pennsylvania regain structural balance.
The line-item veto relieves some short-term uncertainty, but overall offers no binding solution
or significant positives for Pennsylvania local government credit.
The Governor's line-item veto does nothing to strengthen the near-term credit quality of the
Pennsylvania State Aid Intercept Program for School Districts.
Status of PA Budget: Still Delayed, Some Funding Sent, 2016 State Aid Still
Trapped
Just before Christmas, the Republican-controlled Pennsylvania General Assembly sent a
$30.3 billion budget to Governor Tom Wolf, a Democrat elected in November 2014. Governor Wolf
announced his plan to line-item veto (action which allows approval of portions of a bill enacted by
the legislature) the budget and send emergency funding to school districts and social services
early last week, on December 29. Pennsylvania is starting 2016 without a formal budget plan, and
no end is in sight for a political compromise. The current delay, now up to 190 days, is a modern
record for Pennsylvania lawmakers.
Pennsylvania Budget Delay Is Modern Record, Illustrates Political Divide
*FY2016 budget still not final; has been delayed 190 days as of January 6, 2016.
Source: Patriot News, Temple Institute for Public Affairs, PNC Municipal Capital Markets
The Commonwealth still has
no budget plan, and state aid
payments for first-half 2016
remain trapped.
2
Political and Financial Implications of the Delay
We took an optimistic approach to the budget divide when it was just about a month old. In our
August 12 analysis we wrote that we thought the delay could be considered encouraging. We used
the word encouraging because we postulated that the interruption might have meant that
lawmakers clearly understood the weight their upcoming decisions would have on the future fiscal
status of the Commonwealth. However, nothing encouraging has occurred over the last six
months. Worse is that formal budget negotiations did not even begin until around Thanksgiving.
Summary of Selected Pennsylvania Budget Delays
The Commonwealth’s
budget has been structurally
imbalanced for several years
now.
Source: Patriot News, Temple Institute for Public Affairs, PNC Municipal Capital Markets
Commonwealth of Pennsylvania Credit Considerations
The delay could be interpreted as a signal that increased political and fiscal challenges for
Pennsylvania and its related state and local government credits are likely for at least the near and
perhaps medium term. The Commonwealth’s budget has been structurally imbalanced for several
years now. Ongoing expenditures exceed revenues by $2 billion, and this number is closer to
$3 billion (10% of the overall budget) when considering pension contribution shortfalls, according
to Moody’s.
Adequate details have not been released about all spending plans under consideration by
lawmakers. It is difficult to know for sure if the plans will chart a path back to structural balance
for Pennsylvania. The $30.3 billion plan does not sufficiently address pension reform, and
Standard & Poor’s reported lawmakers do not consider it to be structurally balanced. While we
should wait for the completed spending plan before assigning a final verdict, it is important for
interested observers to understand that when lawmakers finally compromise on a spending
strategy, it does not necessarily mean it will be one that helps Pennsylvania regain structural
balance. The question remains: Is a structurally balanced budget out of reach for Keystone State
lawmakers?
It will be difficult for Pennsylvania to restore structural balance in this budget, especially
considering the combative political situation. Adjustments were required on the revenue and
expenditure side even before the FY2016 budget process began. Now, an even higher threshold of
revenue increases is required for the additional spending items, such as property tax relief and
higher state aid spending for schools included in the Governor’s March 2015 proposed budget. The
Republican-controlled Pennsylvania General Assembly, especially those in the House, have been
signaling a lack of support for tax increases, much less new spending that would require additional
revenue enhancements. Pennsylvania exhausted its reserve or rainy day funds years ago.
Outlook for Pennsylvania’s General Obligation Ratings
The rating agencies have exhibited a neutral to increasingly negative bias toward Pennsylvania
recently as a result of the state’s multiyear string of structurally imbalanced budgets and
especially because of the divided political environment that has developed. The Commonwealth’s
general obligation ratings are still low double-AA for now.
It will be difficult for
Pennsylvania to restore
structural balance in this
budget, especially
considering the combative
political situation.
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Pennsylvania General Obligation Ratings and Outlooks
Source: Moody’s, Standard & Poor’s, Fitch, and PNC Municipal Capital Markets
Local Government Credit Considerations in Pennsylvania
This budget impasse does not come at an opportune time for Pennsylvania local governments,
including school districts. We have been slowly seeing municipal market credit quality regain its
footing in the wake of the Great Recession. We think that 2015 could be the first year since the
beginning of the recession that public finance rating upgrades outpace downgrades (Moody’s
rated). If it does not happen in 2015, it could very well occur in 2016. There are some Pennsylvania
local governments following this positive trend.
We have been slowly seeing
municipal market credit
quality regain its footing in
the wake of the Great
Recession.
Pennsylvania local governments and especially school districts have been among the most
downgraded public finance credits in recent years. Some have had a difficult time adjusting to the
new fiscal reality of lower revenue growth and higher expenditure demand. Near- and mediumterm credit implications for those at the medium and lower end of the credit spectrum need to be
closely monitored. The budget impasse is making fiscal planning very difficult. This is further
complicating local government credit conditions in Pennsylvania.
The line-item veto relieves some short-term uncertainty, but overall offers no binding solution or
significant positives for Pennsylvania local government credit. It merely resets the clock and will
force local government leaders to again allocate time to finding short-term lending solutions
instead of planning their organizations' fiscal futures.
Update on the PA State Aid Intercept Program, Rating Agency Treatment
The Governor's line-item veto does nothing to strengthen the near term credit quality of the
Pennsylvania State Aid Intercept Program for School Districts. Sure, six months of emergency
funding was disbursed to school districts (the Pennsylvania Treasury announced the funds were
sent on January 4, 2016, see the press release here). The amount distributed to each school
district is available here at the Pennsylvania Department of Education website. But, future state
aid is not going to be paid in coming months without a completed budget. Therefore, the
Pennsylvania credits that could be the most negatively affected by this impasse will be the neardistressed and distressed school districts. Some of these school districts rely on the state
intercept program and rating for market access.
The rating agencies have taken different approaches to their intercept program ratings as a result
of the budget impasse. Moody's lowered its enhanced rating cap for the enhancement programs
to a Baa1 with a “Negative” outlook on December 22. But these are analyzed on an individual basis
based on Moody’s criteria. Standard & Poor’s withdrew its intercept ratings in December and
stated that it does not expect to re-introduce the enhancement ratings as a result of the line-item
veto funding.
Pennsylvania local
governments and especially
school districts have been
among the most
downgraded public finance
credits in recent years.
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Summary of Emergency Distribution (Selected School Districts)
Six months of emergency
funding was disbursed to
school districts.
Source: Pennsylvania Department of Education, PNC Municipal Capital Markets
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