Pennsylvania's budget delay itself is less important to bond investors than the issues that divide lawmakers, according to a commentary by PNC Capital Markets.

"The origins of the Pennsylvania budget delay of 2015 is unlike most of those we have examined," said managing director and municipal credit analyst Tom Kozlik.

Pennsylvania's budget is six weeks late, caught in a rift between Democratic Gov. Tom Wolf and a hardened Republican legislature. Wolf in late June vetoed the legislature's proposed $30 billion budget and the sides have barely spoken, except through the media.

Wolf wants to raise the income and sales taxes and impose a severance tax on Marcellus Shale natural gas drilling. The Republican-crafted budget raised no taxes.

The commonwealth's deteriorating credit ratings loom as a backdrop. Pennsylvania ranks among lowest-rated states. All three major credit rating agencies last year lowered the commonwealth, citing an unfunded pension liability now estimated at $53 billion, and budget imbalance.

Moody's Investors Service rates Pennsylvania's general obligation bonds Aa3. Standard & Poor's and Fitch Ratings each rate them AA-minus.

"Pennsylvania's structural imbalance cannot be blamed on cyclical factors. There are vital structural influences at play," said Kozlik. The rising pension liability has contributed to the imbalance. Pennsylvania has not fully funded its actuarially required contribution since 2004.

According to Kozlik, the credit-quality consequences of a delayed budget are nonexistent to minor if the delay lasts only a few months. A stalemate that drags past the December holidays, though, could compromise state credit.

Pennsylvania is no stranger to late budgets. The previous two budget delays, under Gov. Ed Rendell, lasted more than 100 days. A 2010 stalemate of just over three months forced employees to take out loans from the Pennsylvania State Employees Credit Union. A nearly six-month standoff for fiscal 2004 ended when schools warned in late December that they could not afford to open after the holiday break.

Passage of the fiscal 1956 budget took about a year over bickering about a proposed income tax. The fiscal 1971 budget ran about eight months late, with lawmakers finally approving the tax.

"As of now it is difficult to handicap the sentiments of those involved to figure out when the delay of 2015 will be resolved in comparison to past budget battles," said Kozlik.

According to Nuveen Asset Management, a long budget delay or weakened credit profile could hit stressed local governments and school districts especially hard.

"Like a small number of other states, Pennsylvania is wrangling with both troubling and fiscal political challenges," Nuveen said.

Pension funding and liquor privatization, while not part of the budget bill, are enmeshed in the Harrisburg politicking. Wolf in late June also vetoed legislation that would have moved new state employees from a traditional defined-benefit plan to a 401(k)-style defined contribution plan. He also nixed a bill to privatize the state-run system of liquor stores.

"Privatization of Pennsylvania's state liquor store operations would be a sound fiscal practice," said Paul Mansour, a managing director at Hartford, Conn., asset management firm Conning. "Revenues generated by state liquor store operations provide a stable source of revenues to secure bonds or annually support state operations. "

According to Mansour, the municipal market has embraced Ohio's privatization as a model. "Conning purchased these bonds and has been pleased with their performance," he said.

 

 

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.