Pennsylvania's House of Representatives, working against the backdrop of a threatened state spending freeze and more rating-agency backlash, is scheduled Monday to begin debating a $2.2 billion tax-and-revenue plan to balance the state budget.

The Senate approved a revenue package in late July after Gov. Tom Wolf let a $32 billion fiscal 2018 spending plan become law without his signature. The $2.2 billion gap represents 7% of approved spending.

Wolf has called Friday decision day, when he said he must freeze some state spending to prevent the general-fund balance from falling into negative. Democrat Wolf has been at odds with the Republican-controlled state legislature since he took office in January 2015.

Pennsylvania Gov. Tom Wolf said he would freeze state spending on Friday if no budget passes. Pennsylvania Internet News Service

A freeze could affect schools, emergency systems, volunteer fire companies and road repair, according to the governor. “If the money isn't there to pay for those things, then Pennsylvanians are going to get hurt,” Wolf said.

The commonwealth recently borrowed $750 million from its short-term investment pool. Wolf also authorized a $241 million borrowing from the motor license fund to pay its Aug. 31 distribution to schools.

The Senate package would authorize $1.3 billion of borrowing against future revenues from Pennsylvania’s share of the 1998 tobacco settlement. The plan would also raise an estimated $100 million annually by imposing a new tax of 2 cents per thousand cubic feet of Marcellus Shale natural gas.

In addition, the revenue bill would expand gambling, telephone service and online sales.

Bond rating agencies have cited late and imbalanced budgets in a series of downgrades.

S&P Global Ratings on July 6 placed its AA-minus Pennsylvania general obligation rating on credit watch with negative implications. Moody’s Investors Service rates the commonwealth's GOs Aa3. Fitch Ratings on July 26 maintained its AA-minus rating.

Lack of a revenue budget would force Pennsylvania to choose which bills it’s going to pay, said state Treasurer Joe Torsella and Auditor General Eugene DePasquale.

DePasquale, meanwhile, said legalizing marijuana could help shore up the revenue side. In an op-ed for the Philadelphia Inquirer, DePasquale said Pennsylvania could realize about $200 million annually from regulating and taxing marijuana. Other estimates range as high as $300 million.

Eight states and the District of Columbia have legalized marijuana. Pennsylvania neighbors Delaware, New Jersey and Maryland are among the others considering it.

Pennsylvania's school districts rely on state aid for 43% of their annual revenues on average.

Despite past fiscal stalemates, the state has a strong track record of funding schools through its state aid intercept program, according to Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.

The programs add a layer of bondholder security for local school district bond issuers, thus benefiting districts with shakier credit.

“These state aid intercept programs enhance bondholder security and typically earn a rating reflecting the stronger security,” said Schankel. “For districts with low underlying ratings, the higher rating and extra security provided by the intercept translate into lower borrowing costs for capital investment – new school buildings, for example.”

The nine-month stalemate two years ago over the fiscal 2016 budget significantly damaged Pennsylvania’s credit profile and that of many school districts. In the first half of that fiscal year, school districts received no aid payments from the state, forcing some districts to issue short-term notes.

“To be clear, no debt-service payments were missed,” said Schankel. “The situation presented a challenge to the rating agencies, with each of the main three agencies taking a different approach.”

Moody’s downgraded ratings twice in the second half of calendar 2015, then upgraded the programs in August 2016 after enactment of the fiscal 2017 budget.

S&P withdrew all intercept-based school ratings in December 2015, although it continues to supply underlying ratings to school districts. Fitch, which rates far fewer Pennsylvania school districts, made no changes to intercept-based ratings, according to Schankel.

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Paul Burton

Paul Burton

Paul Burton is the Northeast Regional Editor for The Bond Buyer and the author of the book "Tales from the Newsrooms." He is a sought-after public speaker and has appeared on radio and TV shows, including former CBS News White House correspondent Sharyl Attkisson’s public-affairs program, “Full Measure.”