Pennsylvania's 67 counties continue to wait for state aid and reimbursements as lawmakers have yet to resolve a fiscal 2010 budget battle, though market participants say local governments can ride out the storm until the spending plan is passed.

Rating analysts, county officials, and the County Commissioners Association of Pennsylvania say county governments are all right for now, but by November local governments with liquidity issues will need to begin receiving state aid in order to provide essential services.

"Everybody's telling us that the earliest is probably November when they might start feeling a push or a crunch," said Moody's Investors Service analyst John Medina, "So it sounds like everyone's going to be OK through October."

Meanwhile, Gov. Edward Rendell yesterday signed into law an $11 billion "bridge budget" to pay roughly 77,000 state workers and maintain essential services. The state still needs a complete fiscal 2010 budget, with Senate Republicans not in favor of tax increases to help balance the spending plan. Rendell's earlier proposal to increase the state's personal income tax by 16% is no longer under consideration.

"Now that the PIT has been taken off the table by all sides, I am waiting for them to come up with alternative revenue proposals that will in fact do two things .... Number one, it will preserve the things that are crucial in this budget like education, like health care," Rendell said yesterday during a press conference. "And number two ... recurring revenues to make sure that we don't have a budget deficit next year."

In looking at the bridge budget, county governments will receive very little, if any, of those funds. CCAP executive director Doug Hill said that, so far, he has identified one program - the medical assistance transportation program - that will gain funds from the $11 billion bridge budget. CCAP is still reviewing the approved line items.

During a press conference yesterday regarding the $11 billion bridge budget, budget secretary Mary Soderberg said that along with school districts, universities, and hospitals, Pennsylvania's counties will also need to operate without state funds absent a "real" state budget.

"Many of our local governments, our services providers, will not be receiving their state benefits as well," Soderberg said.

Every year, Harrisburg allocates funds to county governments to support human service needs such as drug and alcohol programs, mental health and mental retardation services, and juvenile and youth programs, among other services. As those funds are divided throughout more than 80 line items in the state budget, Hill, county officials, and Pennsylvania's Office of the Budget, said that it is difficult to pinpoint the total amount of funds that counties are waiting on. Hill said it is in the billions of dollars.

County governments that have limited liquidity and-or lower credit ratings, which could make it harder to obtain a bank credit line, may feel the effects of the state budget impasse more readily and more acutely than counties with stronger finances.

"Our biggest concerns are going to be our lower-rated counties," Medina said.

Moody's Tuesday downgraded Adams County in southeastern Pennsylvania to Baa1 from A1, affecting $37.2 million of general obligation debt. The outlook is negative. The agency cited the county's weakened fiscal position and its practice of not budgeting for annual transfers to other operating funds that require general fund support. The rating change is not due to the current state budget impasse, according to Moody's.

"The downgrade was not predicated on a delay in the state budget," Medina said via e-mail. "The county had a deficit fund balance and a declining financial position before the budget delay."

In addition, Lackawanna County in northeastern Pennsylvania carries a BBB-minus rating, with a stable outlook, from Standard & Poor's. Moody's rates the county Baa3 with a negative outlook.

Standard & Poor's analyst Rich Marino said he doesn't see any immediate concerns among the counties that the rating agency evaluates.

"We haven't seen any counties that have had any problems," he said. "The late state aid payments to them, that could result in some issues, but outside of that I don't know where there would be any significant problems."

Jefferson County also carries a credit rating just above investment grade. Moody's rates the county Baa3.

Even in those lower-rated counties, Medina said the delay in state funds and reimbursement dollars is not an immediate concern for Lackawanna and Jefferson, but could become an issue by November.

Tom Durkin, Lackawanna's chief financial officer, said that for right now, the county is subsidizing the missing state aid payments for the time being.

"At some point in time we will have to stop paying bills to state-funded agencies or we're not going to be able to pay our own bills," he said. "That date hasn't happened yet. When it will be, I can't say."

Philadelphia, which is both a city and a county, has had its own city budget held up in the state budget impasse. Philadelphia is seeking legislative approval to increase its sales tax to 8% from 7% and decrease its pension contribution payments in fiscal 2010 and fiscal 2011 to help balance its fiscal 2010 budget. The House yesterday passed a bill containing those initiatives. It now moves to the Senate for its consideration.

The municipality has until Aug. 15, the date set by the Philadelphia Intergovernmental Cooperation Authority, which oversees the city's finances, to obtain state legislative approval of budget initiatives, or face additional layoffs and spending cuts.

Fitch Ratings last month placed Philadelphia's BBB-plus general obligation credit rating on negative watch, citing the state-level budget delay. Standard & Poor's rates the credit BBB-plus, with a stable outlook. Moody's assigns the city its Baa1 rating with a negative outlook.

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