The United Kingdom's referendum vote to leave the European Union may accentuate the fiscal strife facing states in the Northeast.
The Brexit turmoil across the sea simply adds another variable to problems that were already present.
State revenues have risen more slowly than expenditure demand since the 2008 recession, according to PNC Capital Markets managing director Tom Kozlik. The result, he said, is a worsening effect on state credit.
"We anticipate minimal to no impact [from Brexit] on the U.S. state government sector credit or on broader municipal market credit quality," Kozlik
The June 23 Brexit vote rattled markets; potential fallout from market losses includes lower income and capital gains tax revenues, reduced spending on goods and services at upper levels affecting states overly reliant on the sales tax, and public-pension underfunding.
According to Wells Fargo Securities, any immediate effects of Brexit would intensify continuing trends.
"Longer term, a high level of uncertainty has the ability to curb individual and corporate spending and investment and that makes state and local planning more difficult," the bank said.
Several Northeast states were already struggling.
"I think revenue misses will continue to be the rule, rather than the exception," said Alan Schankel, a managing director at Janney Capital Markets. "It will be interesting to watch."
Pennsylvania lawmakers, unlike last year, agreed to an on-time budget, though the $
"I hate to see it done that way, but that's the politics we're stuck with," said Schankel.
On the table are higher taxes on tobacco products, an expansion of casino-style gambling and even using part of a workers compensation fund. The latter seems a stretch, with critics saying it could open the door to a pension-style unfunded liability.
Wolf has until midnight Monday to act on the budget, but given that state law requires a balanced spending bill, he can't sign what lawmakers sent him.
Moody's rates the commonwealth's GOs Aa3. Fitch Ratings and S&P Global Ratings rate them Aa3. Fitch assigns a stable outlook, the others negative.
"The commonwealth is fundamentally capable of solving its problems, but the lengthy political stalemate that delayed the passage of a full-year budget until nine months into fiscal 2016 suggests practical difficulties regaining its footing in a structurally balanced fashion in the near future," Moody's said on Tuesday.
Budget leaders in Massachusetts twice last month
House and Senate negotiators announced they would close an estimated $750 million revenue gap by canceling a $200 million deposit into the commonwealth's stabilization, or rainy-day fund, and through a series of re-estimates and other budget maneuvers.
Gov. Charlie Baker, who signed a $39 billion fiscal 2017 budget on Friday after the legislature signed off a week earlier, acknowledged the market uncertainty.
"We're making some assumptions for next year that are based on best guesses with the notion that Brexit falls into the category of an unknown at this point," he told reporters.
Though less in the rating-agency crosshairs than fellow Northeast states Pennsylvania, Connecticut and New Jersey – Massachusetts is double-A plus across the board and its bonds often trade on a triple-A scale – Bay State lawmakers got a warning from S&P, which urged "more clarity" on fiscal year-end 2016 fund balances.
The compromise package announced on June 29 came one day after S&P's scolding.
"The bond rating agencies view that favorably, that when we see a change in our revenue, we move very quickly to deal with that," said House Ways and Means Committee Chairman Brian Dempsey, D-Haverhill.
The business-backed Massachusetts Taxpayers Foundation was unimpressed, calling the budget a smoke-and-mirrors job that "still leaves the state in a precarious financial position."
Massachusetts' havoc resonated in neighboring Connecticut.
"Massachusetts recast its numbers for this year as well as next year. We're not alone in this and quite frankly it's largely due to volatility on Wall Street," said Gov. Dannel Malloy, acknowledging that the state would have to use most of its $
Moody's rates Connecticut's general obligation bonds Aa3 with a negative outlook. Last month, S&P Global Ratings and Fitch Ratings lowered the state's ratings one level to AA-minus with stable outlooks. Kroll Bond Rating Agency rates the state AA and negative.
"Despite repeated and generally structural responses to bring the current biennial budget into balance, it remains unclear whether the state has succeeded in fully aligning its budget to potential future economic and revenue performance," said Fitch.
Blaming Brexit, said Schankel, could merely provide another crutch for states.
"Sometimes it's too easy to blame Wall Street, although states like Connecticut, New York and New Jersey have taken a disproportionate hit," he said.
Brexit-related losses by public pension funds could put further pressure on tax bases to help meet targeted returns.
"The share of investment in international assets runs the gamut in public pension funds, from none to more heavy allocations," said Wells Fargo Securities.
Richard Dreyfuss, a Hummelstown, Pa., actuary and an adjunct fellow with the Manhattan Institute for Policy Research, sees the danger of more unfunded liability for Pennsylvania's two main public pension funds, the Public School Employees' Retirement System and the State Employees' Retirement System. That liability is now estimated at roughly $63 billion.
"Only so many tax dollars can come through," said Dreyfuss, a retired Hershey Foods executive.
Dreyfuss repeated his call for the pension funds to lower their expected rates of return. "In the middle of all this, how do you earn even 7%?"
He said Britain's intended pullout from the EU, which could take about two years of negotiations, could start a self-sufficiency trend overall.
"The European Union had become dependent on countries like Germany and Great Britain helping bail out countries like Greece, Spain and Italy," he said. "I think the market's gotten ahead of itself with artificial subsidies. Here in Pennsylvania we have the horse racing subsidy, the horse farm subsidy, the agriculture subsidy ... We have a host of subsidies."
According to New York City Comptroller Scott Stringer, Brexit-related turmoil drives home the need to diversify pension funds across asset classes and geographic regions.
"With a 30-year horizon for our investments, short-term market fluctuations should always be kept in perspective," he said.
