Proposed state budget projected to have negative effect on credit

| Monday, April 28, 2014, 11:00 p.m.

The proposed state budget, if passed as written, could hurt Pennsylvania's borrowing ability, a major credit analyst warned on Monday.

Standard & Poor's analyst John Sugen said a combination of inaction on pension reform, a proposed reliance on one-time revenues and poor revenue collections leading up to the 2014-15 budget season could result in a credit downgrade of the state's $545 million in general obligation bonds.

The agency looks for a “structural balance” in the budget where recurring revenues match expenditures, Sugen said. This next proposal, Sugen said, has “a significant amount of one-time revenues and one-time expenditures.”

Pensions, he said, are an ongoing concern. Pennsylvania's two major pension plans carry an unfunded liability of about $50 billion, according to the governor's budget proposal, meaning $50 billion in unfunded future costs. Combined, the systems for school employees and state employees are 62 percent funded. A healthy ratio is considered 80 percent.

Jay Pagni, Corbett's spokesman, said the administration continues to push for pension reform as a part of this year's budget negotiations. Lawmakers balked at such a proposal last year.

“The expectation is that the Legislature will enact a plan that addresses the short-term, year-over-year costs, and couple those with long-term reforms,” he said. Goals include shifting risk away from taxpayers and instituting long-term changes that result in savings, Pagni said.

A decreased credit rating could mean higher borrowing costs for future bonds. At present, the state's general obligations bonds have a “AA” rating and a negative outlook.

“We are very cognizant of the effect on any inaction on pension reform with respect to the commonwealth's ability to borrow money and to issue new debt,” Pagni said.

Gov. Tom Corbett's $29.4 billion budget proposal increases spending by 3.3 percent over this year. It proposes $150 million in one-time revenues from unclaimed property laws and $125 million in anticipated savings pending federal approval of a Medicaid plan.

State law requires a budget by July 1.

A factor that could affect discussions is projected revenue collection. In early April, Secretary of Revenue Dan Meuser said the state was $176 million behind in revenue collections, blaming a combination of lower-than-projected tax collections and an early transfer of money from the Liquor Control Board.

Erik Arneson, spokesman for Senate Majority Leader Dominic Pileggi, R-Delaware County, said analyses such as the one from Standard and Poor's are “one of the many factors considered as discussions proceed” during budget season.

Senate Minority Leader Jay Costa, D-Forest Hills, said the state should consider new revenues, such as a severance tax on Marcellus shale natural gas drillers. And expanding Medicaid under the Affordable Care Act would bring in as much as $450 million in federal money to offset state spending, Costa said.

“That very quickly fixes one budget problem,” he said. “No longer will you be viewed as being a risk.”

Bill Patton, spokesman for the House Democrats, said the Legislature will have to alter the budget proposal “just to meet the cost of essential services” because of the decreased revenue collections made worse by the governor's rejection of a shale gas tax.

“Everyone with an interest in the budget is awaiting the April revenue report on Thursday,” Patton said in an email. “That number will set the tone for the next 60 days.”

Melissa Daniels is a staff writer for Trib Total Media. She can be reached at 412-380-8511 or

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