Pennsylvania, after a two-week delay, expects to come to market Tuesday with the Commonwealth Financing Authority’s $1.4 billion sale of tobacco master settlement payment revenue bonds.

Jefferies is lead manager.

Securing the bonds are proceeds from annual payments tobacco companies make from a 1998 landmark legal agreement.

Officials postponed the sale when six fireworks companies sued in the Commonwealth Court of Pennsylvania over a state law passed last year that added a tax on fireworks. The same law authorized the sale of the tobacco bonds as a move to balance a $2.2 billion budget gap.

An amendment to the preliminary official statement acknowledged the possibility of the court declaring the state law, known as Act 43, unconstitutional. It said the commonwealth could reintroduce the legislation.

S&P Global Ratings and Fitch Ratings rate the bonds A and A-plus, respectively. Moody’s Investors Service rates the bonds A1.

Last week, Gov. Tom Wolf released his $32.9 billion executive budget for fiscal 2019 to lawmakers. He repeated his call for a severance tax on natural gas drilling. He cited revenue growth and targeted savings to backstop a roughly 3% increase in the general fund budget.

His proposal “will likely face headwinds in the legislature,” said Fitch. Pennsylvania’s budget has been late the past four years, including the three under Wolf, a Democrats who works with a Republican-controlled legislature.

Wolf, a Democrat, is up for re-election this year. Among his challengers are state Sen. Scott Wagner, R-York, who received the state Republican endorsement on Saturday. House of Representatives Speaker Mike Turzai, R-Marshall Township, suspended his campaign.

All 203 House of Representatives seats and half the 50 Senate seats are up for the taking.

Pennsylvania has received several rating downgrades over the past three years, most recently in September when S&P lowered Pennsylvania’s general obligation rating to A-plus. It was one of eight S&P state downgrades in 2017.

Fitch Ratings and Moody’s rate the GOs AA-minus and Aa3, respectively.

“Fitch's focus during the commonwealth's budget process will be on whether Pennsylvania is able to continue making progress in addressing its still sizable structural budget gap,” said the rating agency. “A pattern of weakening fiscal practices, including growth in the structural deficit, could trigger a downgrade.”

According to Wolf, a natural gas severance tax could generate $250 million annually. Different versions emerged in his three previous budgets. Last year, the Senate approved such a tax as part of a revenue package, but the measure stalled in the House.

“Last year's Senate passage could lead to additional momentum behind the measure this year,” said Fitch.

Contrary to previous years, Wolf did not call for personal income or sales tax increases. Revenue forecasts by the nonpartisan Independent Fiscal Office anticipate continued growth, though more modestly.

According to S&P, Pennsylvania is still on shaky financial ground.

“Projected lean margins and minimal reserve levels still leave Pennsylvania vulnerable to variations in revenues or expenditures,” said S&P. “In our view, despite stronger tax revenue growth, reliance on significant uncertain revenues exposes the commonwealth to a potential deficit for fiscal 2018 and a wider fiscal 2019 budget gap.”

Wolf’s budget includes a $100 million increase in basic aid for public schools. If approved, the commonwealth would distribute about $400 million of $6.1 billion in basic education aid under a funding formula it adopted in 2016.

The executive budget also proposes full funding of actuarially determined contributions for both the State Employees Retirement System and the Public School Employees Retirement System for the first time since fiscal 2004.

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