Deficit-ridden Pennsylvania warned of another hit to credit

HARRISBURG, Pa. (AP) — Pennsylvania was put on notice Thursday that it faces another credit downgrade and higher borrowing costs if it does not improve its deficit-ridden finances.

The sharply worded warning by Standard and Poor’s that suggested state government is guilty of financial mismanagement came amid a six-day-old stalemate as lawmakers tussle over how to pay for a $32 billion spending package. They face a midnight Monday deadline for Democratic Gov. Tom Wolf to make a decision on the main appropriations bill on his desk.

Pennsylvania has struggled with an entrenched post-recession deficit, and credit downgrades in 2012 through 2014 have left it with among the nation’s lowest credit ratings.

Putting Pennsylvania on a negative “creditwatch” reflects Pennsylvania’s eroding financial position, Standard and Poor’s said, as well as its view that there is a “significant likelihood” that Pennsylvania state government will not pass a structurally balanced budget for the fiscal year that began Saturday.

Pennsylvania’s chronic and widening deficits, particularly during a period of economic growth, “demonstrate (a) pattern of financial mismanagement,” Standard and Poor’s said in its statement. A budget that relies on optimistic assumptions or one-time cash sources — such as borrowing — likely would draw a downgrade, the New York-based credit rating agency said.

In a statement, Wolf called Standard and Poor’s move “an urgent call to action” for the state to come up with a long-term solution to its budget deficits. A credit downgrade would increase taxpayer costs and hurt the state’s economy, Wolf said.

Wolf’s office said it calculated in 2015 that a downgrade would add $10 million in interest costs to every $1 billion that is borrowed, including when the state goes to refinance debt.

Wolf’s budget proposal released in February included a $1 billion tax package, including a tax on Marcellus Shale natural gas production in the nation’s No. 2 natural gas state. He also wanted to assess a fee on municipalities that get free state police coverage in an effort to stem the amount of highway construction money being diverted to underwrite the state police budget.

Anti-tax Republicans who control the state Legislature put those ideas aside. Instead, they have focused on trying to come up with $2.2 billion by borrowing, expanding casino-style gambling and selling more private-sector wine and liquor licenses.

The Capitol was quiet this week while top lawmakers negotiated privately elsewhere. The House was scheduled to return Friday and the Senate on Saturday in a rush to wrap up business before Monday night.

House Majority Leader Dave Reed, R-Indiana, said in a Thursday memo to rank-and-file House GOP members that no agreements have been reached in private negotiations. Reed also told House Republicans that he is opposed to a “broad-based” tax increase and favors gambling and liquor legislation advanced by his chamber to balance the budget.

Gambling and liquor legislation also would rest heavily on one-time, upfront license fees to generate money, and critics say it is too unreliable to use in trying to balance the budget.

One idea backed steadfastly by House GOP members — allowing up to 40,000 slot machine-style video gambling terminals at thousands of bars, truck stops and liquor license holders — is opposed by the Senate, while Wolf’s Department of Revenue told lawmakers that setting up regulatory systems could take a year or more.

Meanwhile, allowing gambling in so many new locations would eat into revenue the state gets from the Pennsylvania Lottery and licensed casinos, the department said. Taking sales away from the state-controlled wine and liquor system would be a long-term money loser, opponents say.

Without a signed budget plan in place since Saturday, the state has lost some of its spending authority, although the Wolf administration said it anticipated no program or service interruptions, at least through next Monday night.