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Pennsylvania Defaults on $1 Billion Worth of Debt

Most Pennsylvanians avoided the big budget hurt when the state ran out of money Friday to cover $2.5 billion in bills amid a months-long budget stalemate in the state Capitol.

By Steve Esack

Most Pennsylvanians avoided the big budget hurt when the state ran out of money Friday to cover $2.5 billion in bills amid a months-long budget stalemate in the state Capitol.

With the Legislature unable to pass tax and revenue bills to pay for the state budget since July, Gov. Tom Wolf announced the state temporarily would default on medical and pension bills rather than not pay state employees or shut down programs.

Wolf delayed a $1.2 billion payment that was due Friday to eight state-contracted managed care providers. The providers act as middleman in paying doctors, hospitals and nursing homes that treat poor, infirm, elderly and disabled who qualify for government-funded Medicaid. That means either the providers have to get loans to cover their bills or skip their own payments to those on the front lines of care until the state pays its bills.

The governor also postponed the state's $581 million payment that was due Monday for its share of pension obligations to the Pennsylvania School Employees Retirement System. Wolf spokesman J.J. Abbott did not offer a time frame for when that bill would be paid to the system, which already was carrying about $43 billion in debt.

The governor also has asked Republican legislative leaders in the House and Senate to talk this weekend about settling the budget.

By postponing those two bills, the state was able to cover about $81 million in payroll and $100 million in bond debt that were also due on Friday.

Abbott said the state will not have the medical money for at least another week. He did not offer a time frame for when the pension payment would be met.

"As a result of the ongoing budget stalemate, the commonwealth today was forced to delay significant payments given the failure to pass a complete budget and fully fund the appropriations approved overwhelmingly 76 days ago," Abbott said.

The state has been without a fully operational budget since the Legislature approved a nearly $32 billion spending plan on June 30, but also neglected to pass various tax and programmatic code bills to pay for the spending.

The unfinished budget is the latest example of the Legislature and governor's inability to work together to pass balanced budgets. The state has had deficits for several years, even though the constitution says the budgets must be balanced. Its structural deficit is pegged at $2.2 billion through June 30, 2018, without cuts, tax increases, one-time transfers or a combination of those scenarios.

In July, the Republican-controlled Senate passed bipartisan bills to raise utility taxes for electricity, natural gas and phones, as well as institute a new tax on natural gas drillers to generate $611 million in new revenue. It also relied on a $1.3 billion bond from proceeds of the state's tobacco settlement fund.

Since then, Wolf had been warning the state would run out of money and he would have to make tough decisions on how to manage the state's finances. Last week, Treasurer Joe Torsella and Auditor General Eugene DePasquale, both Democrats, said they were disinclined to approve short-term treasury loans to the state to cover costs.

House Republicans, who objected to the Senate plan, called Wolf's warnings bogus, saying tax money continues to roll in.

But on Thursday, Rep. Stan Saylor, R-York, chairman of the House Appropriations Committee, implored Torsella and DePasquale to issue short-term loans to cover expenses. The House's budget vote on Wednesday "provides a basis for budget negotiations to continue between the governor and the General Assembly."

They didn't and Wolf froze the medical and pension payments.

The payment freezes came two days after the Republican-controlled House narrowly approved its own budget bill that did not include tax increases on utilities and natural gas drillers as the Senate's budget bills did to raise an additional $611 million.

Instead of higher taxes, the House would rely on about $630.5 million in fund transfers from special accounts that cover transportation, environmental, hazardous waste cleanup and a variety of other public projects. That amount was far lower than the $2.4 billion in transfers a group of conservative House lawmakers had originally proposed but scaled back under intense pressure from moderate Republicans, Wolf administration and special interest groups.

Like the Senate bill, the House would rely largely on borrowing more than $1 billion from the state's tobacco settlement fund. The GOP House used semantics to get that borrowing plan passed its more conservative caucus, which is generally opposed to the state issuing more bonds. The House called it's tobacco plan a "sale" of some fund proceeds to potential bidders, but like a bond, that money must be repaid with interest over time.

Unlike the Senate bill, the House's bill also does not include about $600 million in funding for state-related universities: Penn State, Temple, Pitt and Lincoln.

"Though the Senate passed a package that addressed our structural deficit, recurring revenue that funds all approved appropriations and separate funding legislation for state-related universities has not yet been sent to the governor's desk," Abbott said.

The Senate is back in session on Monday.

"The House took six weeks to deliver us a plan," said Jenn Kocher, spokeswoman for Senate Majority Leader Jake Corman, R-Centre. "We felt it was responsible to take a few days to go over it with a fine-tooth comb. Our plan is to have significant information for members of our caucus on Monday to discuss."

The longer the stalemate goes on, the more taxpayers will pay if Wall Street bond rating companies go through with their threat to raise the cost of the state's bonds due to unstable politics.

(c)2017 The Morning Call (Allentown, Pa.)

Caroline Cournoyer is GOVERNING's senior web editor.
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