HARRISBURG, Pa. – An emphatic weekend rejection by Pennsylvania's House of Representatives of a pension-overhaul bill -- seen as pivotal to a budget compromise -- has forced legislative leaders to regroup in an effort to break a six-month-old stalemate over a fiscal 2016 spending plan.
House GOP leaders said Sunday night they would attempt to introduce a stopgap budget on Tuesday, one day before the commonwealth would break its own dubious record by reaching 176 days without a signed budget.
The existing mark came in 2003, when school districts threatened to remain closed after the holiday break. Tom Wolf, a Democrat, is a first-year governor as was Ed Rendell in 2003. Wolf and the Republican legislature have been at odds over the budget all year.
Wolf already vetoed a stopgap budget in September. "This is not over. We still need a [full] budget. And we need it now," he said Saturday night.
The state's dysfunction is coming under the glare of bond analysts and rating agencies.
Two weeks ago, Standard & Poor's withdrew its ratings based on the commonwealth's state aid intercept program for school districts and community colleges. The program guarantees debt-service payments by redirecting basic education funding or state aid payments from a school district in default to the paying agent bank.
Philadelphia, the state's largest school district, has said its schools could close Jan. 29.
"After that date, our ability to keep schools open, issue paychecks and pay bills is uncertain," Superintendent William Hite said on the school district's website. "The prospect of running out of operating funds is dire."
Moody's Investors Service rates Pennsylvania's general obligation bonds Aa3 with a negative outlook. Fitch Ratings and S&P rate them AA-minus, with stable outlooks. All three agencies downgraded the commonwealth last fall, citing budget imbalance and the pension liability.
Paul Mansour, a managing director at Hartford, Conn.-based Conning, which has about $93 billion in assets under management overall, said his firm is scrutinizing local Pennsylvania credits, notably those heavily dependent on state aid.
"The budget impasse is hurting state credit quality," he said. "Dysfunctional government has a price in terms of widening credit spreads."
Pennsylvania is the fourth-largest bond issuer among the states this year, issuing roughly $2.2 billion of debt as of Dec. 9, according to Bank of America Merrill Lynch.
Only Pennsylvania and Illinois lack fiscal 2016 budgets, although Illinois passed a stopgap K-12 education budget to provide state funds for schools.
"It will be interesting to see if agreement can be reached by January," Wells Fargo Securities said of Pennsylvania.
On Saturday, the more conservative House rejected the pension bill by a 149-52 vote with all Democrats and 66 moderate Republicans opposed. The measure would have moved future state government and school employees into a hybrid pension system that would have combined a defined-benefit plan with a 401(k)-style defined-contribution plan.
"Pennsylvania could have made a move in the right direction," said Senate Majority Leader Jake Corman, R-Bellefonte.
Senate leaders, who had worked out a $30.8 billion budget agreement with Wolf that included an additional $350 million for basic education, had hinged their support for the spending plan and tax package – details of the tax increases were still unclear -- to the pension bill.
Richard Dreyfuss, a Hummelstown, Pa., actuary and an adjunct fellow at the Manhattan Institute for Policy Research, criticized the pension bill after reviewing an actuarial note by the Public Employee Retirement Commission. The figures presented, said Dreyfuss, show virtually no savings with the potential even for some significant future liability increases.
"As expected this bill does little to address the ever-growing unfunded liability for current members," said Dreyfuss. "This is not terribly surprising since this deficit is closely associated with benefits already earned to date.
"As such it is hard to reconcile the prospects of permanent tax increases in exchange for the passage of such a bill."
