In the latest twist to Pennsylvania's budget crisis, state Treasurer Timothy Reese extended a $2 billion line of credit to the commonwealth to prevent its general fund cash balance from falling to as much as $922 million in the negative by next week.
On Wednesday, the administration drew $1 billion against that line of credit, said Reese, responding to a request from Gov. Tom Wolf's administration and in consultation with Auditor General Eugene DePasquale.
It marked the second borrowing by Pennsylvania in 16 months to avoid a negative balance. In September of 2014, Treasury loaned the state $1.5 billion. Pennsylvania has borrowed under these circumstances 14 times in 24 years.
State lawmakers returned to Harrisburg this week with the state now more than six months overdue on a full spending plan for fiscal 2016. In late December, Wolf signed off on a $23 billion plan -- about three-fourths of what the legislature sent him -- while vetoing line-items related to basic education aid. The Democratic governor, who has sparred all year with the Republican-controlled legislature, wants a spike in such aid of about $350 million.
Because public school subsidy payments were withheld during the prolonged budget impasse, the general fund had maintained an artificially elevated balance since the current fiscal year began. With schools receiving subsidies of this week after Treasury sent out nearly $3.3 billion to cover the budget-impasse backlog, the general fund dropped sharply.
Without the line of credit, according to Reese, the general fund balance would probably have remained negative balance until the seasonal tax revenue spike in early spring.
"These shortfalls keep getting larger and are happening more frequently," said Reese. "Borrowing to meet operating expenses is not a responsible or sustainable solution."
Last month, the state's Independent Fiscal Office noted that under the state's existing revenue structure, expenditures will continue to outpace revenues over five years and that "the structural imbalance grows each year." The IFO identified continued credit rating downgrades as an immediate consequence of the structural deficit.
Moody's Investors Service cited an "extreme" political environment preventing sustainable budgeting when it lowered its outlook on Pennsylvania's Aa3 rating in October.
All three major bond rating agencies downgraded the commonwealth in 2014, citing an unfunded pension liability estimated at roughly $57 billion. Fitch Ratings and Standard & Poor's rate Pennsylvania GOs AA-minus.
"It remains to be seen if a new budget will adequately address the structural deficit," said Reese. "Treasury will continue to monitor the situation and work with the administration to manage it as cost-effectively as possible."
The $2 billion line of credit will come from Treasury's cash investment fund, "Pool 99," and will have an interest rate of 0.6%. By securing the credit line from Treasury, the state will avoid higher interest rates and fees it would have incurred through the financial markets.
At the same time, said Reese, Treasury will generate a positive return for the taxpayers above what it otherwise would have probably earned with short-term market investments.
