Pennsylvania today will begin fiscal 2010 without an approved spending plan as Democratic Gov. Edward Rendell and the Republican-controlled Senate have yet to agree on how best to address a $3.2 billion deficit.

The governor and GOP leaders were meeting yesterday and met Monday evening in an attempt to resolve the budget impasse, according to Rendell spokesman Chuck Ardo.

The main point of disagreement involves Rendell's proposal to increase the state's personal income tax by 16% for three years from the current flat rate of 3.07% to 3.57%, bringing in $1.5 billion of new revenue per year to help counteract sluggish revenue collections.

Conversely, GOP members believe the state should make additional spending cuts to bring expenditures in line with revenues.

"We continue to be here ready and able to work towards a budget, but a budget compromise has to come with certain parameters," Senate President Joseph Scarnati said during a Republican press conference on the stalemate.

"Certainly one parameter would be no broad-based tax increases for the commonwealth. Secondly, it is a budget that must be able to spend less than last year, as many Pennsylvanians are doing, and as a budget it must be able to sustain itself in the coming two to three years once the federal dollars go away and we're back on our own revenues."

This will be the seventh consecutive year that the Keystone State begins a fiscal year without an authorized budget. Rating analysts at all three agencies said they are reviewing the situation and expect that the double-A rated state will continue to meet its obligations on debt service payments.

"We're not surprised by [the impasse]. We are monitoring the situation and we're comfortable that the debt will continue to be paid even in the case of a late budget," said Moody's Investors Service analyst John Ceffalio.

Pennsylvania's revenue gap has been growing since the start of the year and reached $3.2 billion in mid-June. To close that deficit, the governor in February proposed depleting the state's $750 million rainy-day fund, and tapping into another $275 million reserve account previously set up for medical malpractice claims that the state no longer needs, and implementing roughly $2 billion of spending cuts.

"If [lawmakers] agree to that approach, then those transfers would occur and the credit is to [fiscal 2009]," said Rick Dreher, director of the bureau of revenue, cash flow, and debt in the Budget and Administration Office. "If the legislature doesn't agree to that, then that deficit rolls forward into [fiscal 2010] and becomes part of the budget-balancing negotiations for the [fiscal 2010] budget."

To tackle the state's growing revenue shortfall and projected less than anticipated growth in fiscal 2010 revenues, Rendell last month proposed the 16% income-tax boost and also freezing a corporate tax rate on capital stock and franchise tax, which would generate $374 million of additional funds in fiscal 2010.

Rendell yesterday announced 10 banks and credit unions that will offer low-cost loans to qualified state employees who will not receive a paycheck due to the budget stalemate. Roughly 69,000 employees will not see a paycheck until lawmakers approve a spending plan.

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