Pennsylvania Gov. Edward Rendell yesterday announced proposals to address a transportation funding shortfall, including a short-term plan in which the state would sell $1 billion of debt during the next two years.

Such borrowing — which is not the Democratic governor’s preferred plan — would help offset for two years an annual $472.5 million transportation funding deficit, beginning in fiscal 2011. That gap opened up when the Federal Highway Administration last month denied Pennsylvania’s request to place tolls on Interstate 80.

Following that decision from Washington, Rendell called for a special legislative session to begin May 4 in order for lawmakers to begin addressing the funding gap.

That new deficit is included in a report that the Transportation Advisory Committee released Monday, which indicates that the commonwealth needs to invest an additional $3.5 billion per year, with that amount increasing over time, to keep Pennsylvania’s roads, bridges, and mass transit in a state of good repair.

Rendell, who will finish his second term in January, said allowing the state to sell debt for transportation infrastructure would supply needed capital funds in fiscal 2011 and fiscal 2012 and enable Pennsylvania’s next governor to work on a long-term plan with the Legislature.

“Given our low level of debt per household and our excellent debt rating, the commonwealth could borrow a billion dollars to fund the two-year Act 44 hole,” Rendell said in his speech before a joint session of the Legislature. “Doing this would increase our debt service payments by $80 million for the next two decades, but it would certainly provide the minimal level of funding and some breathing room.”

Fitch Ratings and Standard & Poor’s rate the state AA-plus and AA. Moody’s Investors Service rates the credit Aa1.

Rendell said Pennsylvania has capacity to take on up to $40 billion of outstanding debt, far above the nearly $10 billion the state currently holds.

Rendell’s $1 billion borrowing proposal, which he himself called “shortsighted,” is not his first choice to address transportation financing woes.

The governor’s ideal long-term plan involves two initiatives that the Legislature has previously rejected — a tax on the profits that oil companies earn in Pennsylvania on the marketing and sale of fuel along with placing the 530-mile Pennsylvania Turnpike in a concession agreement with a private company.

“If I were king of the world, I’d go back to my original proposition, make the oil companies pay a profits tax,” Rendell told reporters after his speech. “And number two, I would go back and do a full lease or a partial lease on the Pennsylvania Turnpike. Together those two things would generate close to a $1.5 billion [per year].”

He said hedge funds and investment firms have contacted him in regard to a potential lease of the Turnpike.

At a minimum, the governor said, lawmakers should create a long-term solution that replaces the funds lost due to the federal government’s denial of tolling I-80, although those funds would fall short of the Transportation Advisory Committee’s suggestions.

Rendell stressed that a more robust long-term plan that goes beyond the lost I-80 toll revenue would generate more jobs and attract more business growth than just finding an additional $500 million per year for transportation infrastructure.

“Investing in our infrastructure is a win-win for the commonwealth,” Rendell said during his speech. “If we don’t address the loss of the I-80 funds, we, in essence, lose 12,500 good-paying jobs for our citizens. But if we choose the third option on top of these 12,500 jobs, tens of thousands of additional jobs will be created.”

Rendell also raised the issue of the gas tax, which could help fill the nearly $500 million annual funding gap.

Drivers in Pennsylvania currently pay 32.3 cents per gallon in various gas taxes. A nine-cent increase in the oil company franchise tax and a four-cent hike in the retail tax would generate $500 million and $260 million, respectively, the governor said.

Funding for transportation infrastructure isn’t the state’s only fiscal challenge. The administration projects a current-year fiscal deficit of $1 billion due to underperforming revenue. Fiscal 2010 will end June 30.

Rendell has called for spending cuts and potential layoffs to help fill that gap, along with a tax on extracting natural gas from the Marcellus Shale region and a tax on cigars and smokeless tobacco.

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