Pennsylvania's House of Representatives on Tuesday night approved a financing proposal that aims to close a $2.2 billion deficit for fiscal 2018.
The measure, which passed by a 102-88 vote on concurrence around 10 p.m. in Harrisburg, includes up to $1.5 billion in borrowing against revenues from the 1998 landmark settlement with tobacco companies and drops a controversial hotel tax.
It also features roughly $500 million in one-off transfers from other state accounts -- including $200 million from the Pennsylvania Professional Liability Joint Underwriting Association, and a variety of taxes that could yield $140 million per year. It would expand online gambling and tax fireworks and online sales.
The next step is the state Senate, and a probable give-and-take. Democratic Gov. Tom Wolf insists on a plan with recurring revenues rather than one-offs while leaders in the Senate and House -- Republicans control both -- have bickered throughout the four-month impasse. Wolf in early July let a $32 billion spending plan become law without his signature.
Wolf also favors a tax on Marcellus Shale natural gas drilling, which Republican leaders oppose. Pennsylvania is the only such state without a tax. The House finance committee is scheduled to consider a shale tax bill on Wednesday,
The governor earlier this month said he would ask the three-member Pennsylvania Liquor Control Board to approve borrowing against $1.25 billion in profits from the state-run liquor system to pay off a prior-year deficit, and would take further steps to streamline government services without layoffs.
The tobacco borrowing would represent a slight uptick from the Senate revenue plan which passed in late July, but which the House rejected.
Three straight budgets under Wolf's watch have been late since he took office in 2015. The commonwealth as nine months late with its fiscal 2016 plan and the following year's budget became law without his signature.
Also, whether the tax-and-revenue plan now at play would satisfy bond rating agencies is an open question.
“Reliance on borrowing, fund sweeps and expansion of gambling likely means that future budgets will become even more difficult to balance," said Municipal Market Analytics.
S&P Global Ratings last month downgraded Pennsylvania’s general obligation bonds to A-plus from AA-minus. Moody’s Investors Service and Fitch Ratings assign Aa3 and AA-minus, respectively.
“The accumulation of its reliance on one-time revenues has stressed its available cash, making internal resources insufficient to timely meet certain obligations," said S&P. "Additionally, stalemated budget negotiations have reached a point that their consequences extend beyond policy considerations to credit quality;”
State Treasurer Joe Torsella on Oct. 13 authorized a five-day, $700 million line of credit from Treasury’s short term investment pool to the commonwealth’s general fund to enable the commonwealth to make scheduled payments to Medicaid providers.
“Deficit borrowing does not exemplify strong budget management practices," said S&P. "However, in our view, borrowing that restores the commonwealth's liquidity to a position in which it can make timely payments would be preferable from a credit perspective than an accumulation of unpaid bills.”
Treasury also extended a $750 million, two-week line of credit to the commonwealth in late August.
The commonwealth has made all scheduled debt service payments to date, including those due on Sept. 15.