Like a student rushing to complete a homework assignment on time, Pennsylvania lawmakers scurried last weekend to pass a $28.4 billion budget that reached Gov. Tom Corbett’s desk three hours before the midnight Sunday deadline.
But even though a majority of legislators from both branches are Republican, as is Corbett, the governor’s “big three” major policy initiatives of the session – transportation funding, liquor privatization and public pension overhaul, all with major financial repercussions – remained stalled.
Public pension inactivity could prompt further downgrades from rating agencies, given an unfunded liability fast reaching $50 billion, and the stalled $2.5 billion transportation bill leaves myriad questions, not to mention aging infrastructure, unanswered. Privatizing the state’s liquor stores, which Corbett said could bring Pennsylvania more than $1 billion for public education, just didn’t gain traction this session, nor did efforts to link a liquor bill to transportation.
Corbett downplayed talk of failure to move any of his three major initiatives.
“These aren’t easy things to do. There are, as you know, many interest groups with many, many perspectives in a bill like this,” Corbett said. “When we get back in the fall, let’s get it done.”
One muni observer said the summer break will give Corbett some valued assessment time. “This is a short term defeat for the governor as he tests the waters on what can be privatized and overhauled,” said Villanova School of Business professor David Fiorenza.
But while talk about the budget and the big three dominated the state capitol in Harrisburg, a red flag went undetected again: a gutted stabilization, or so-called rainy day fund.
Pennsylvania is hanging with some dangerous company. According to Janney Capital Markets, it is among nine states with virtually no rainy-day money; 16 states have such funds at less than 1% of expenditures.
“Some would call this very irresponsible financial planning,” said Janney director Tom Kozlik. “Such situations make those states more susceptible to negative rating actions and make other issuers in those states that rely on state aid more susceptible to negative rating actions as well.
“The best budgets plan for the worst and hope for the best, but it looks like social and political pressure might be trumping sound financial planning in some states.”
According to a Janney report, the aggregate fiscal 2014 rainy day, year-end balance for all 50 states as a percent of expenditures looks strong at 7.4%, but Alaska and Texas skew that metric. Those two states account for roughly half the aggregate balance and rainy-day functions in those two states are atypical. In Alaska, a portion of oil company receipts compensates residents for the use of oil reserves, while the Texas fund is also a repository for oil- and gas-related revenues.
“I am troubled to see a low fund balance,” said Fiorenza, a former chief financial officer of Radnor Township, Pa. “As a prior CFO and borough manager, one of the three top priorities is fund balance. The other priorities are debt and maintaining a healthy budget.
“All are connected and all affect each other. A lower fund balance will eventually translate into a lower bond rating and higher interest rates when the next bond issue happens.”
Corbett’s budget secretary, Charles Zogby, fears rating agency backlash over pension liability. Standard & Poor’s and Moody’s Investors Service last summer downgraded Pennsylvania’s general obligation bonds to AA and Aa2, respectively, citing pension underfunding. Fitch Ratings assigns it AA-plus.
“The Pennsylvania funding ratio is a concern to monitor, but should by no means cause investors to stay away from Pennsylvania or related bonds,” said Kozlik.
Fitch and Moody’s last month downgraded Illinois after its lawmakers failed to act on pension change, prompting Gov. Pat Quinn to convene a special session.
“The rating agencies will continue to look at the effects of the pension plans of the public state employees as part of their process,” Fiorenza added.
Corbett’s $2.5 billion transportation bill, which passed the Senate 45-5 but got stalled in the House, is necessary for a multitude of fixes, according to transportation Secretary Barry Schoch.
“I think we’ve been very clear about this. There are consequences to not taking action. We just lost a construction season by not getting this done now,” Schoch told reporters in Corbett’s reception room Sunday night.
The funding package would have ranged from bridge repair to transit systems in Philadelphia and Pittsburgh to funding a part of Amtrak’s Pittsburgh-to-Harrisburg service, the latter a federal requirement.
“It’s across all modes,” Schoch said.
The state plans to restrict weights on 1,200 bridges by fall at the latest, according to Schoch. “That’s due to the age of the system, the number of bridges we have, and the lack of revenue we have to get to all of them.”
Corbett maintains that privatizing the liquor stores would bring Pennsylvania more than $1 billion through licenses and fees. He encountered headwinds, however, from pro-union Democrats who say such a move could jeopardize 4,000 state jobs and cost the state $200 million in annual revenue. Moderates, meanwhile, only favor a partial privatization.
Democrats, meanwhile, are upset at their counterparts for what they call “linkage,” or attempts to tie the liquor and transportation bills in one bow.
“They’re all important issues. We obviously feel [Corbett’s] priorities are skewed. His priority was selling the state liquor stores, which we think is wrong-headed, and to tie them together was a huge mistake also,” said Rep. Frank Dermody, D-Oakmont.
Also stalled is expansion of the Medicaid program under the federal Affordable Care Act, leaving Pennsylvania among roughly half the states that have not embraced the expansion since the U.S. Supreme Court last year made state participation optional.
The House GOP early this week stripped Medicaid expansion language the Senate had passed as an amendment to a budget trailer component known as the fiscal code. Then on Wednesday, the Senate reversed course and sent Corbett the bill with the stripped language.
Corbett, who must approve such a measure, has worried about costs to Pennsylvanians the federal portion of the funding drops.
Dermody said delays in approving the plan could cost Pennsylvania hundreds of millions in federal funding. “It’s such a mistake and we’re embarrassed by it,” he said.
“All of the surrounding states have done it, and a lot of states with Republican governors have done it, some states even more conservative to Pennsylvania,” added Rep. Mike Hanna, D-Lock Haven. “So it just doesn’t make sense that [Corbett] continues to be the holdout.”
Also dangling for now as part of the fiscal code bill is $45 million of a $140 million state aid package for Philadelphia’s teetering school system. The district, citing a $304 million shortfall, recently laid off 3,800 employees, or about 20% of its staff.