Democratic Gov. Tom Wolf and Pennsylvania's Republican-dominated legislature settled nothing over the weekend as the commonwealth's $30.2 billion budget remains unsigned and nearly three weeks overdue.
The parties are at odds over taxes, with other issues such as pension overhaul and privatization of the state-run retail liquor system at play. Wolf has vetoed a bill moving new state hires to a 401(k)-style pension plan and a liquor privatization bill, in addition to the budget.
Wolf, in his first year, wants large increases in education funding and is looking to raise the sales, personal income and tobacco taxes and introduce a tax on Marcellus Shale natural gas drilling. Lawmakers sent him a spending plan free of tax hikes, using transfers and one-time revenues.
The state's deteriorating credit quality has been a backdrop to the drama in Harrisburg. Last year, all three major bond-rating agencies downgraded the commonwealth's general obligation bonds, citing budget imbalance and its escalating pension liability, estimated at around $53 billion.
Fitch Ratings and Standard & Poor's rate Pennsylvania GOs AA-minus. Moody's Investors Service assigns an Aa3 rating.
Wolf and legislative leaders have taken turns accusing the other of jeopardizing Pennsylvania as a credit. Wolf warned that the proposed budget would leave Pennsylvania with at least a $3 billion deficit heading into fiscal 2017. GOP leaders have argued that switch to 401(k)-style plans could put the commonwealth in better graces with bond rating agencies.
"We are paying close attention to state budget plans, especially those of the most fiscally troubled states. The plans indicate to us how serious they are in solving their structural imbalances," PNC Bank managing director Tom Kozlik said in a commentary. "And this is no time to dismiss political dialogue especially in those states with forbidding issues to solve."
While some states have effectively balanced rising expenditure demands and moderate revenue growth, said Kozlik, "others have not been taking the concept of fiscal balance quite as seriously, and their credit quality has and will continue to suffer if financial stability is not prioritized."
GO bond spreads reflect states' fiscal conditions "reasonably well," according to Loop Capital Markets, which noted spread widening in several states - Pennsylvania, Connecticut, Louisiana, New Jersey and Illinois -- with ongoing budget problems. Spreads in Pennsylvania have widened about 40 basis points since last fall, said Loop.
According to Wolf's office, Pennsylvania will continue operations for all critical functions that affect health, safety and-or welfare, while most payments to vendors or to grantees for programs or expenditures incurred during fiscal 2016 that the budget has authorized will be delayed.