Both Pennsylvania and Philadelphia have yet to pass fiscal 2010 budgets, but the state plans to refinance $700 million of fixed-rate debt later this month while the city must wait on its planned short-term issuance until state lawmakers pass legislation to help the city balance its budget.
The state and Philadelphia have been operating without budgets since July 1. Gov. Edward Rendell last week signed into law a $11 billion "bridge budget" so the state can meet payroll and maintain essential services.
Budget or no budget, Pennsylvania aims to take advantage of favorable market conditions to advance refund about $700 million of bonds in a competitive sale to generate an estimated $30 million of net present-value savings, according to Rick Dreher, director of the bureau of revenue, cash flow, and debt in the Budget and Administration Office. The tentative pricing date is Aug. 25.
"The last time we did a refunding was in March and rates have come down considerably from where they were in June, which is the time of our last general obligation issue," Dreher said. "And despite the lack of a fully enacted state budget, there's still $30 million of savings that can be achieved for the taxpayers, so we're going to proceed with this refunding."
He said the state will fully disclose the fact that Pennsylvania is operating without a complete budget and will include certified general fund revenues of $25.56 billion, against which the state has now appropriated $11 billion, in the preliminary official statement.
In addition, while the state will have to take on negative arbitrage in the advanced refunding, officials may opt for other securities beyond U.S. Treasury state and local government series securities to achieve better interest rates.
"Basically there will be some negative arbitrage," Dreher said. "Our financial advisers are looking at options of open market securities versus SLGS, so they are looking at that issue and will be recommending a strategy to us."
Public Financial Management Inc. is the state's financial adviser. Cozen O'Connor is bond counsel.
Conversely, Philadelphia cannot issue a planned $275 million tax and revenue anticipation note deal until it resolves its fiscal 2010 budget. The city is waiting for the state to pass a temporary increase in the city's sales tax to 8% from 7% and a measure allowing it to make smaller pension contribution payments this year and next. The measures have been held up due to the state's own fiscal 2010 budget impasse.
Without an authorized spending plan for the current fiscal year, Philadelphia would be forced to pay higher borrowing costs for the short-term transaction. Officials have opted to postpone the note sale until a city budget is in place as the one-year debt issuance is heavily dependant on the current fiscal year, said Philadelphia Treasurer Rebecca Rhynhart.
"It's really been told to us from many sources that until the two pieces of our budget are resolved, the public borrowing would be at very high rates," she said. "And that it's advisable not to go out until those budget items are resolved."
Citi is book-runner on the $275 million note deal. Janney Montgomery Scott and Loop Capital Markets are co-managers.
Rhynhart said the city's liquidity levels are sufficient for now as Philadelphia last month stopped paying its vendors and suppliers. The city continues to support essential services, payroll, and debt service with collections from wage taxes, sales-tax receipts, and other revenue streams. City coffers will begin receiving property tax revenue in the spring.
If the legislature fails by Aug. 15 to pass HB 1828, the measure that would boost the sales tax to 8% and alter the city's pension payments, Philadelphia officials would then have 15 days to file a revised budget to the Pennsylvania Intergovernmental Cooperation Authority. PICA provides fiscal oversight of the city's finances, including the annual budget.
Without the temporary sales tax hike and reduced pension payments, Philadelphia has said it would be forced to lay off 3,000 city employees and cut the fiscal 2010 budget by $250 million and reduce its five-year spending plan by $700 million.
The Senate Finance Committee today will hold a public hearing on HB 1828, which passed the House last week. Republican members, who control the upper chamber, believe this is an opportunity to weigh in on Philadelphia's budget issues but also evaluate statewide pension reform initiatives.
Sen. Pat Browne, R-Lehigh and Monroe, who chairs the Finance Committee, said Monday evening that he would include debate on two pension reform bills in today's hearing.
"Philadelphia's pension fund, over the long term, has serious problems," Browne said in a press release. "We have a chance to make some important reforms not included in the current version of HB 1828 which would ensure the system's long-term health. We should not squander that opportunity."
Officials anticipate HB 1828 passing the legislature by the end of the month.
In addition, Senate President Dominic Pileggi said he will ask PICA to grant Philadelphia an additional month to craft a balanced budget, giving the Senate more time to work on pension issues.
"The only hard deadline in this process is the one determined by PICA," Pileggi said in a press release. "I am urging the board to extend its deadline by one month, to Sept. 15. That will allow the legislative process to proceed in a responsible manner."
Conversely, Democratic senators would like the GOP majority to act quickly on HB 1828 so that Philadelphia can move forward with its financial plan.
"We've asked the Republican leadership to reconvene so we can pass a bill that makes Philadelphia responsible for putting its own fiscal house in order and we've had little to no cooperation," Democratic Minority Leader Sen. Bob Mellow of Lackawanna said in a press release. "We're asking them to do the appropriate thing for the people of Philadelphia."
Fitch Ratings last month placed Philadelphia's BBB-plus general obligation credit rating on negative watch, citing the state-level budget delay. Standard & Poor's rates the credit BBB-plus with a stable outlook. Moody's Investors Service assigns the city its Baa1 rating with a negative outlook.
