As Pennsylvania lawmakers debate Gov. Tom Wolf's proposed $32 billion fiscal 2017 spending plan, fallout from the fiscal 2016 budget fiasco still resonates.
The Keystone State has received five downgrades in three years. Moody's Investors Service in late March, though sparing the commonwealth yet another one, fired the latest warning shot while affirming its negative outlook.
"The coming months will be crucial," said Moody's. "If the commonwealth is able to balance the budget, either through revenue increases or expenditure decreases or a blend of each, its credit could stabilize at the current level. If not, further budget deterioration would likely apply downward pressure on the rating."
In plain English, more downgrades.
Moody's rates Pennsylvania's general obligation bonds Aa3 with a negative outlook. Standard & Poor's rates them AA-minus, also with a negative outlook, while Fitch assigns an AA-minus rating and stable outlook.
Pennsylvania has moved into the sketchy neighborhood of basket-case economy states, according to Paul Mansour, a managing director and head of municipal credit research at Hartford, Conn.-based asset management firm Conning. In common are high debt, lower income and soaring pension liability.
"If you look at Pennsylvania from a year ago, it has definitely moved in with a handful of states we are most concerned about, including Illinois, New Jersey, Connecticut and Kentucky," said Mansour.
Spreads reflect investor disfavor of the Keystone State, according to Mansour.
"The 10-year GOs are trading at 60 to 65 over, whereas a year ago they were more like 45 over," he said. "Also, they've made no progress closing their structural deficit and there's still a lot of political acrimony."
Wolf, a Democrat, and the Republican-controlled legislature have sparred ever since Wolf was sworn in to replace Republican Tom Corbett in January 2015. Wolf on March 23 ended a 266-day stalemate, allowing a nine-months-late fiscal 2016 budget of $29.4 billion overall to become law without his signature.
The move left only Illinois without an approved budget.
Bond analysts and other observers still mention Illinois and Pennsylvania in the same breath.
"They're very similar," said Mansour, whose firm conducts semi-annual State of the States rankings by several economic factors. "They don't have as much ability to generate other revenue as other states, they have huge pension deficits and there is acrimony among their legislators.
"I think Illinois is more in the seventh or eighth inning while Pennsylvania's in the fourth or fifth inning, but it's pretty much the same baseball game."
PNC Capital Markets managing director Tom Kozlik's survey in March of 146 municipal bond credit specialists, mostly buy-side analysts, revealed that 96% have a moderate or higher level of concern about Illinois' and Pennsylvania's budget delays, and 67% of municipal bond credit specialists question the ability of these states to repair their finances because of their protracted budget delays.
That 93% of responding analysts in the PNC study rated the public pensions - notably, funding levels and reliance on pension obligation bonds - as the biggest concern in the muni sphere should also worry Pennsylvania. The state has an estimated unfunded liability of about $64 billion.
"It's growing, if you haven't figured it out, at $143 a second. It's at $4.5 billion a year and it's jeopardizing the future economic growth of Pennsylvania," retiree Barry Shutt of Lower Paxton Township told reporters outside the state capitol cafeteria in Harrisburg, where a Shutt pension debt clock ticks away, mimicking the one in New York's Times Square that chronicles the federal debt.
Richard Dreyfuss, a Hummelstown, Pa., actuary and adjunct fellow at the Manhattan Institute for Policy Research, said the pension problem goes back years. "We are dealing with overstated assets and understated liabilities coupled with poor funding practices," said Dreyfuss, a retired Hershey Foods executive.
Critics say pension plan-design changes that have been proposed, such as moving new employees into a 401(k)-style defined contribution plan, ignore the immediate underfunding problem.
The budget crisis has also prompted calls for structural changes to how government operates, including zero-based budgeting and a default budget totaling 80% of the previous year's should an impasse occur.
State Sen. Ryan Aument, a Republican who represents northern Lancaster County, has filed a bill that would change Pennsylvania to a two-year budget cycle, which the state discontinued in 1959.
"I want it to be part of a broader discussion of our current system," he said in an interview. "It's not a silver bullet, nor is it a panacea, but we have to reform how we do business."
That bill would require a state constitutional amendment - not easy, given the need for lawmakers in both chambers to sign off in consecutive sessions and voters to approve it in a referendum thereafter.
Prompting the move, he said, was feedback within his district during the impasse.
"Around December, when the 'broad framework' agreement collapsed, I visited school superintendents and other administrators and I heard a lot of frustration," said Aument. "They ask how they can be expected to propose a school budget when they don't know the state appropriation.
"What intrigues me the most is the efficiency and productivity that could some with long-term planning."
Lt. Gov. Michael Stack, a Democrat, supports Aument's bill.
"It's worth examining if there's anything we can do structurally," he said. While admitting there's no foolproof way to eliminate late budgets, Stack said the move could enable more accurate long-term planning by state agencies.
Twenty states operate on biennial budgets, according to the National Association of State Budget Officers. They include Connecticut, with problems similar to Pennsylvania's and where frequent tweaks are necessary.
"When you look at states with budget difficulties, like Connecticut, it hasn't prevented a messy situation," said Conning's Mansour.
"With a one-year cycle, you get to deal with the problems again. A two-year budget is more cosmetic," he said.
"It's really de-facto one year, even six months or shorter," said one Connecticut lawmaker, state Sen. Scott Frantz, R-Greenwich. "The past six quarters we've had to update our budget because revenue estimates have become too optimistic or they're 7% to 15% below target."
Alan Schankel, a managing director at Janney Capital Markets in Philadelphia, said planning for two years ahead is difficult.
"When you spread the process out, problems arise. You have shifting economies and priorities," he said. "It's tempting to do it and say you'd only have gridlock every two years, but I think whatever benefits you'd realize would not offset the negatives.
"Pennsylvania's a big state. The legislators don't just work a few days a year. They're pretty active year-round."