Gridlocked: Wall Street more concerned about impasse effects on munis in Pa than Illinois

Written by Emily Previti, Keystone Crossroads Reporter | Nov 4, 2015 4:00 AM

Pennsylvania and Illinois are going on their fifth month without budgets.

Both states face still steeper borrowing costs after credit ratings downgrades last month that are merely the latest in a succession.

And both have a relatively high number of local governments, counties and school districts - all municipal entities, each with borrowing power.

But Moody's Investors Service recently deemed the picture decidedly bleaker for Pennsylvania's municipal borrowers.

"Ability to repay debt serviced is a primary concern, but we also are looking at the budget impasse in terms of impact on operations," says Moody's analyst Orlie Prince. "We'll ask (schools): 'How can you contribute pay teachers and debt service?' We're asking many questions to understand how they'll perform without receiving state aid."

Main reason: School funding

Analysts primarily tied their assessment to Pennsylvania public schools borrowing $414 million at cost of $14 million, the bulk of this expense attributable to Philadelphia.

That hasn't happened in Illinois, analysts noted, because the state approved a separate education spending bill, so funding's continued to flow.

Gov. Tom Wolf and Democrats rejected Republicans' stop-gap measure advanced that would have done the same for human services in Pennsylvania.

Think soup kitchens, domestic violence shelters, and medical vans senior citizens rely on to get to the doctor.

Funding to counties to meet those types of needs, or contract third-party providers to do so, has been drying up since July in both states.

Counties also a factor

Moody's analysts say the situation also is worse for counties in Pennsylvania than Illinois.

That's because in Illinois, some state funding is disseminated to counties according to statutory formulas (Pennsylvania's municipal pension aid is similarly unaffected), and counties there are less dependent on it overall, according to Moody's analysts and county finance officers.

For most Illinois counties, state funding comprises about one third of revenues and about a third of that isn't subject to annual appropriation, so it hasn't been affected by the state budget impasse, Illinois finance pros say.

That leaves about one quarter of an Illinois county's revenue subject to annual appropriation by lawmakers and therefore impacted by the state budget impasse, according to Illinois public finance professionals.

About 40 percent of the average Pennsylvania county budget (though this can vary widely, depending on which) is affected by the impasse. It's comparatively higher because the Commonwealth's counties start out with half of revenues coming from the state, though some are disbursed via statute regardless of lawmakers agreeing on a state budget (that includes 911 funds, county motor fuels tax and other motor license fund payments from PennDOT, and Marcellus Shale impact and legacy fees, according to County Commissioners' Association of Pennsylvania Executive Director Doug Hill.

It's far from enough to make up for the shortfall, though, and many counties have arranged loans and lines of credit, or plan to borrow.

Illinois officials say haven't heard of other counties doing so to deal with the budget impasse.

In Pennsylvania, at least a dozen counties have taken loans or lines of credit.

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