For the third straight year, Gov. Tom Wolf has let Pennsylvania’s budget become law without his signature.
The latest matador move has essentially bought Wolf and state lawmakers some time to pass the bills necessary to fund the $32.2 billion spending plan.
“I think it does,” said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia. “The message was pretty accommodating to the process and the people on both sides of the aisle.
“I’m disappointed that they didn’t pass the whole package but I don’t see the harsh rhetoric of the past two years.”
It also marked the second year of budget approval ahead of a revenue agreement. Facing a midnight deadline Monday, Wolf chose the passive stance, while telling lawmakers there are “many options available to balance the budget.”
Bond rating agencies have long had Pennsylvania in their radar. S&P Global Ratings last week placed its AA-minus general obligation rating on the commonwealth on credit watch with negative implications.
Fitch Ratings also assigns its AA-minus rating to Pennsylvania GOs, while Moody’s Investors Service rates them Aa3.
“Outside agencies are preparing to downgrade the state’s bond rating if we don’t do this right,” said Rep. Frank Dermody, D-Cheswick.
Wolf's calls for unity didn't end the partisan rhetoric at the state capitol in Harrisburg. "This is the third consecutive state budget without the governor," said House Majority Leader Dave Reed, R-Indiana. "I would question where's the leadership."
Democrat Wolf favors a severance tax on natural gas drilling, but cannot win over the Republican-controlled legislature. House and Senate leaders have discussed a revenue package that could include gambling and liquor-sales expansion, and tobacco-settlement borrowing.
"[Trading off] tobacco bonds I don't like to see," said Schankel. The annual payment to Pennsylvania the last five years, he added, has ranged from $204 million to $369 million.
Wolf called the latest S&P warning shot an “independent call to action made it clear we must avoid gimmicks to protect from a downgrade.”
He added: “As with pensions, many of the people currently in Harrisburg did not create this problem, but we must face this challenge and address it in a responsible way.”
Several states have struggled to pass budgets on time. The most visible, Illinois, passed a spending plan last week just as Moody's threatened to downgrade its bonds to junk.
Municipal Market Analytics expects rating trends for states to skew negative over the near to medium term and that the result will be a rating distribution that looks more like a barbell.
"We expect that overall most states will remain in the AA-range, but that a few more states will transition through the A-range to land in the BBB-category," MMA said in a commentary. "Broadly, we find it likely that struggling state tax revenues depict weaker-than-advertised regional and national economic growth."
Pennsylvania last month enacted a pension overhaul bill that enables future state hires to choose between a traditional benefit plan and a hybrid that includes a 401(k)-style defined-contribution component.
Opponents say the bill does nothing to curb spiraling pension debt, with some estimates pegging the unfunded liability, estimated at up to $76 billion. Short-term, said Moody's, the commonwealth's pension costs will continue to rise.
Rating agencies may cast a jaded eye on what they consider one-shot budget revenue moves, according to Villanova School of Business professor David Fiorenza.
“The governor is correct that many of the people in Harrisburg did not create the pension problem, but on the other hand, they did not act swiftly or more boldly to stop the unfunded obligations for the taxpayers of Pennsylvania,” said Fiorenza, a former chief financial officer of Radnor Township, Pa.
“The options for balancing the budget, such as expansion of gambling, are short-term solutions to our long-term expense budget problems.”