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OP-ED: Credit agencies watching Pa. impasse
By SHARON WARD
Pennsynvania Governor's Budget Office
Our commonwealth is at a critical crossroads. On June 30, Gov. Tom Wolf vetoed the Republican budget, a budget that fell short of what is needed to fix our schools, improve early childhood education, and help our seniors by providing much-needed property tax relief.
Equally important — the budget was not balanced. Accepting it would have increased the deficit to more than $3 billion. By failing to adequately pay our bills or plan for the future, the budget would have had significant ramifications for Pennsylvania's financial status for many years to come.
Pennsylvania — like every state and many countries around the world — borrows funds to pay for capital projects, such as roads and bridges, new buildings and improvements to water and sewer infrastructure. The idea is that a new highway or new municipal sewer line will serve customers for 30 or 40 years, so the expense is paid in annual increments. This way everyone who will benefit from the expense, whether it is next year or in 30 years, will contribute toward it.
Much like a homeowner purchasing a new house, the interest rate the commonwealth receives depends on its credit rating. A strong credit rating signals that a borrower is fiscally healthy and is able to repay its obligations. Until recently, Pennsylvania enjoyed a strong credit rating, but our rating has dropped to the third worst state in the nation — behind only Illinois and New Jersey, two states facing critical fiscal crises.
The current budget impasse — a direct result of the Legislature's refusal to address the deficit — will create significant ramifications in the credit markets. A poor credit rating will limit our access to necessary borrowing and increase costs. This in turn will make it harder to pay for critical infrastructure and reduce our ability to fund schools, health care and economic development investments we need to create good family sustaining jobs.
In 2014 Moody's, one of the three national ratings agencies, downgraded bond ratings in only three states, Pennsylvania, New Jersey and Kansas, and Puerto Rico, which is on the brink of bankruptcy. That same year, it upgraded bond ratings in New York and California, two states that pursued a strategy of reinvestment after devastating job losses during the recession.
There are three critical elements that are needed to reassure the credit markets:
First, the markets need a reliable, functioning government — a government that works. The commonwealth's pledge of its full faith and credit, the promise behind every bond that is issued, must be meaningful. That means enacting a budget that meets its obligations, not one that makes permanent a large and growing budget deficit. Accepting the Republican budget would have undermined our fiscal health even further and signaled to the credit markets that Pennsylvania is unwilling to seriously address its fiscal problems.
Second, all budgets submitted for debate and discussion must commit to operating stability and avoid gimmicks. The credit markets have punished Pennsylvania for balancing budgets with one-time revenue injections, putting off mandated payments, tapping lines of credit and raiding special funds. The GOP budget vetoed by Gov. Wolf included over $1.5 billion of these one-time revenues. These strategies amount to little more than a large and growing pile of IOU's.
The bond rating agencies have specifically cited such maneuvers as one of the primary reasons for previous downgrades. This has, and will continue to, create a structural imbalance — with expenses not matching sustainable revenue streams. It is irresponsible governing and it's simply not fair to the hard-working taxpayers of Pennsylvania.
Third, the commonwealth needs to focus on maintaining and improving its economic vitality. Long-term growth in a diverse industrial and business base and the resource-based economy will create jobs and opportunities for young workers and their families. This will enable us to responsibly meet the needs of our growing senior population and fund investments that will position Pennsylvania for long-term economic growth.
Governor Wolf's budget proposal, for example, provides support for at least 14,000 new children to enroll in pre-K programs and it restores cuts Republicans made to K-12 schools as well as our superb institutions of higher education. Investing in these areas will create a sustainable base for future budget funding cycles and help Pennsylvania improve and maintain a superior credit rating.
The most important step that needs to be taken right now is for all parties to negotiate with these critical elements as guiding principles. During months of budget negotiations the governor has offered major concessions on the severance tax, liquor reform and pensions three key concerns of Republican leaders but this good faith effort has been met with nothing but silence. Gov. Wolf remains committed to working with Republicans to come to a negotiated solution because, as a political outsider and a businessman, he knows first-hand that the credit markets are blind to political ideology — effective and efficient government is what matters most.
— Sharon Ward is director of Pennsynvania Governor's Budget Office.