S&P downgrades PA credit outlook as revenue scramble continues

Harrisburg – Much like the death of Mark Twain, it appears rumors of legislative leaders being close to a deal on a revenue package to close out FY 2016-2017 and balance FY 2017-2018 are greatly exaggerated.

After another quiet day in the Capitol that saw some rank-and-file members begin to return in advance of Friday’s planned House session day, it appears as though lawmakers are still nowhere near a global agreement that will bring about the approximately $2.2 billion necessary to balance the commonwealth’s books.

As previously reported, many of the options remain the same: gaming expansion, fund transfers – especially from the Racehorse Development Fund – and some sort of liquor revenue all offer ways to attract FY 2017-2018 money.

A $1.5 billion bond securitized by Tobacco Settlement Fund money is still leading the option to close out FY 2016-2017’s deficit.

However, according to an email to House Republican legislators from Majority Leader Dave Reed (R-Indiana), members will be returning on Friday to position bills in the event of a deal, but no leader-based agreement is likely to appear in front of legislators on their return to Harrisburg.

"Over the last week, the leaders of all four caucuses, as well as staff representing all five parties, have participated in numerous meetings, conference calls, and conversations focused on completing the legislation necessary to conclude the 17/18 budget process. To date, no agreements have been reached on any such items," he wrote in the email obtained by The PLS Reporter.

"As you know the House has successfully passed and/or publicly discussed more than a billion dollars in non-tax revenue options in the first six months of this session. For other parties and individuals to expect our caucus and members to just walk away from those legitimate concepts in favor of tax increase after tax increase is just not realistic or acceptable.”

He added that broad-based tax increases will continue to be off the table.

“To be perfectly clear, no matter the thoughts of any other party, we are absolutely opposed to any consideration of a broad-based tax increase. During these discussions, we have offered several compromises on a variety of items,” he wrote. “We understand that governing requires each party to have a willingness to work together; however, it does not mean we completely abandon our perspectives in favor of the other parties. The sooner everyone comes to this realization the sooner this process will be complete."

The Senate on Thursday sunshined a session for Saturday, July 8, and told members to prepare to be in town until Tuesday, July 11 – the potentially first public recognition of several privately held beliefs that lawmakers will be unable to reach a deal in advance of the midnight Monday deadline to get a revenue package to Gov. Wolf before he must decide how to handle the unbalanced budget bill currently on his desk.

Meanwhile, some outside groups continued to voice their opinions about currently discussed revenue generators Thursday.

Pennsylvanians for Responsible Government, an organization opposed to video gaming terminal legalization, issued a statement Thursday noting two of Pennsylvania’s largest casinos, Parx and Sands, remain opposed to the VGT legalization often mentioned as a key part of gaming expansion.

“Casinos across our Commonwealth know that VGTs will negatively impact the nearly 18,000 casino workers and diminish the $1.4 billion in tax revenue that goes to property tax relief and the state budget," said spokesperson Mike Barley. “We encourage Pennsylvania lawmakers to reject VGTs and protect Pennsylvania taxpayers, casino workers and our communities.”

Currently, sources indicate, VGTs are likely on the outs in terms of a potential budgetary revenue source, but a new “games of skill” option is being floated to allow VGT-like machines to be operated in Pennsylvania.

In terms of other revenue, the Commonwealth Foundation chimed in on the rumored transfer of funds from the Racehorse Development Fund to the state general fund, arguing the move would help end government support for an industry that goes to support out-of-state business interests.

“State government has no business propping up the horse racing industry on the backs of taxpayers,” said Commonwealth Foundation VP and COO Nathan Benefield. “Lawmakers and Gov. Wolf must reduce unfair corporate welfare spending before asking Pennsylvanians for one dollar more.”

In response, the Pennsylvania Equine Coalition sent a letter to state lawmakers defending the subsidy and calling attention to alleged Commonwealth Foundation lies about the use and benefit of the money in the Racehorse Development Fund.

"Virtually every piece of information about the state’s horseracing industry that the Commonwealth Foundation shares is inaccurate. From the size of the Racehorse Development Fund (RHDF) to its economic benefits, the Foundation’s data and numbers are just flat out wrong," read the letter signed by organization executive director Kim Hankins and five other members.

"Rather, the RHDF is funded by an assessment that casino operators agreed to pay on their slot machine revenues - an 'obligation' they voluntarily undertook to offset the negative impact that the legalization of slot machines would have on live racing and the state’s agricultural industry. It was part of a commitment they made to gain support for Act 71 (which legalized slot machines) from the horse racing and breeding industry, as well as legislators representing agricultural districts. That assessment ensures that rural counties with horse breeders, stables, and farmers who supply the industry also see some benefit from slot machine legalization in the form of revenue for the agricultural industry and protection of open space."

One inevitable result of the continued uncertainty: Standard and Poor’s credit rating agency Thursday released a report downgrading Pennsylvania’s rating outlook to negative given the continued structural imbalances in the budget and the increasing likelihood that lawmakers might not agree on a revenue package to end the commonwealth’s fiscal issues.

"The CreditWatch action reflects Pennsylvania's eroding financial position and our view that there is a significant likelihood that the commonwealth will not enact a structurally balanced budget for fiscal 2018," said S&P Global Ratings credit analyst Carol Spain. “However, if lawmakers continue to negotiate and bring the budget into structural alignment within a 90-day timeframe, we could remove the ratings from CreditWatch."

The analysis spoke almost directly to ongoing negotiations concerning a revenue package by noting that further downgrading of Pennsylvania's bond rating could come depending on the type of revenues used to support the budget package.

"If legislators enact a budget that relies on what we view as optimistic assumptions or one-time sources, we would likely lower the rating. We understand that lawmakers are considering various one-time measures to address the carried-over deficit general fund balance from fiscal 2017," the analysis stated. "The deficit does not represent the gap between fiscal 2018 current year's revenues and expenditures; it originates from the commonwealth's ongoing structural imbalance. Therefore, we would likely view any one-time solutions, such as bonding, to address the deficit unfavorably."

Gov. Tom Wolf Thursday said the warning is not to be taken lightly.

"Today's credit agency warning is an urgent call to action for a long-term solution to our budget deficit. With a spending plan in place, we must fund the services the budget promises to provide, and responsibly tackle the structural deficit. A failure to do so will lead to a credit downgrade that increases costs for taxpayers and negatively impacts our economy," he said in a statement.

"Over the past several months, we have found common ground on education funding, pension reform and expanding opioid treatment. If we continue working together, we will not only ensure our fiscal house is in order, but prove to our creditors and the people of Pennsylvania that we can face our budget challenges head-on."