Debate over Pennsylvania's proposed $29.1 billion budget is entering the home stretch after the House of Representatives approved it Wednesday, five days before the June 30 deadline.
After the Republican-dominated House passed it 110-93, mostly along party lines, the Senate must grapple over how to close an estimated $1.5 billion deficit. Legislative leaders hinted at debate over the fiscal 2015 spending plan lasting through the weekend.
Still up in the air is pension funding. Gov. Tom Corbett has called changes to pension plan design for state employees essential.
Corbett, a Republican up for re-election, wants to merge traditional-defined benefit state employee retirement plans with a 401(k)-style defined contribution plan in a hybrid that critics say would still leave Pennsylvania with an estimated $50 billion liability.
Standard & Poor's warned it could downgrade Pennsylvania should it not pass "meaningful pension reform."
Fitch Ratings downgraded Pennsylvania's general obligation bonds in July 2013 after the state let pension overhaul slide. Fitch and S&P rate Pennsylvania AA, both with negative outlooks. Moody's rates Pennsylvania Aa2 with a stable outlook.
Longer-term challenges remain nationwide, Standard & Poor's said in a report Tuesday on pension funding levels.
"Some states whose pension liabilities management has contributed to lower credit ratings or negative outlooks include Illinois, Kentucky, New Jersey, and Pennsylvania," credit analyst John Sugden wrote.
S&P pegged Pennsylvania's funding ratio — the actuarial value of assets divided by the actuarial accrued liabilities — at 63.9% as of Dec. 31, 2012, below the nationwide average of 70.9%.
The House bill includes $380 million from expected licenses that the state would derive from privatization of state-run liquor stores, but such privatization is seen is improbable in the Senate, where Republicans only enjoy a 27-23 advantage.
Under one scenario, the Senate could balance the budget by replacing the liquor allocation with a severance tax on Marcellus Shale natural gas drilling, which Democrats favor and Corbett has previously opposed.
But Corbett's budget director, Charles Zogby, said earlier this week that "on the revenue side, everything's on the table except the [personal income tax]."