Capital projects at higher educational institutions, prisons, and construction of a new convention center in Philadelphia could hit a financing roadblock if state legislators in November fail to pass Pennsylvania’s fiscal 2010 Capital Debt Act.
Lawmakers are keeping the borrowing measure on hold until both chambers agree on a table games bill that would allow casinos and race tracks to begin offering black jack, poker, and roulette.
The Senate passed a table games bill earlier this month. The House has yet to take up that bill or hold a final vote on its own table games measure. Lawmakers differ on potential licensing fees and the tax rate on table games. While Gov. Edward Rendell signed a fiscal 2010 budget on Oct. 9, that spending plan depends upon roughly $200 million of new revenue derived from table games. Fiscal 2010 began July 1.
The General Assembly will reconvene the week of Nov. 9, after the general elections on Nov. 3.
Tentative borrowing plans including issuing $800 million of long-term general obligation debt in early December, said Rick Dreher, director of the bureau of revenue, cash flow, and debt in the state’s Budget and Administration Office. The state cannot issue bonds until the legislature approves the Capital Debt Act, which allows for $2.32 billion of debt issuance this fiscal year.
As the state is nearly four months late in enacting its borrowing plan, capital improvements are waiting to receive funding. Developments and construction may need to stop or be delayed if the state cannot issue long-term debt in December.
“We have already starting experiencing some cash-flow issues on capital projects,” Dreher said. “We have been able to loan money between the different capital programs. That’s only a very short-term solution, maybe a month, before those funds are exhausted. So, if the General Assembly does not enact the debt act in November, we would likely start to see projects shutting down in December.”
Projects include renovations at state-run higher educational institutions — including the University of Pittsburgh, Temple University, and Lincoln University — major prison expansions, development of a new convention center in Philadelphia, capital needs at state parks, and road and bridge improvements, among other capital projects.
Dreher said the commonwealth is considering using taxable Build America Bonds in its December GO bond transaction. With BABs, issuers can elect to receive a 35% federal subsidy on interest costs.
Pennsylvania, by law, must issue new-money bonds via competitive bid and changes in the BAB marketplace could facilitate a BAB issuance. In May, the state sold $616.8 million of new-money debt with traditional tax-exempt securities, as the commonwealth did not expect the BAB market to be receptive to a competitive BAB deal.
Nearly six months later, Dreher now believes the market could absorb a competitive BAB sale.
“A lot of the ways that municipal tax exempts have been structured — serial maturities, 10-year call period competitive bidding — were all foreign to the taxable bond market,” Dreher said. “And we’ve seen a lot of evolution with BABs coming around to structuring the way traditional municipal tax-exempt bonds are structured ... We’re now able to fully consider the use of BABs as part of our issuance structure and we will consider that in the December GO issue.”
Along with the long-term borrowing, Pennsylvania will issue $500 million to $1 billion of tax anticipation notes in December or later to help the state with cash-flow needs. Dreher said he does not anticipate offering the Tans and the long-term debt on the same day.
The short-term transaction does not depend upon legislative approval, Dreher said.
Fitch Ratings and Standard & Poor’s rate Pennsylvania AA, both with a stable outlook. Moody’s Investors Service rates it Aa2 with a negative outlook.