Pennsylvania Budget Strategy Dares Lawsuit, Bond Downgrade

State government began operating Tuesday under a $31 billion election-year spending bill that nevertheless lacks the tax collections to sustain it for the entire fiscal year, and lawmakers say they are scrambling to fix that before it draws a lawsuit or bond downgrade.

Tuesday was expected to be crucial in determining whether the tax-averse Legislature controlled by huge Republican majorities will pass a tax increase to fully fund the spending bill and help shore up the state government's deficit-riddled finances.

However, by Tuesday evening, no major tax legislation had been unveiled, amid closed-door wrangling over hundreds of pages of budget-related legislation and open disputes about taxes and Republican efforts to pave the way for more charter school slots in the cash-strapped Philadelphia School District.

"There's still some issues out there that we're trying to work through," said House Majority Leader Dave Reed, R-Indiana. "You always have issues that are still going to be out there until the moment you're ready to go."

The House and Senate remained in session Tuesday evening, and Wednesday was likely to be another long day in the Capitol, lawmakers said.

At midnight Monday, the spending bill became law after negotiations proved fruitless, and Democratic Gov. Tom Wolf decided not to stand in its way. Tax collections are projected to fall hundreds of millions of dollars short of funding it, while nearly $600 million in aid to Penn State, Temple, Pitt, Lincoln and Penn remained held up in the House.

Top lawmakers said Tuesday that a revenue package that Wolf would accept was close to finished. They hope that will put a quick end to legal questions over how the state can operate on an unbalanced budget and the potential that it could draw another downgrade of Pennsylvania's battered credit rating.

Failure to act swiftly could create the momentum to do nothing, and leave it in limbo for at least the rest of the summer, top lawmakers warned.

"Leaving here, with the way the governor has set the table for all the budget to become law, whatever that is, doesn't put a lot of pressure on people to come back here and do funding, and so I'd rather see us with a responsible funding package than nothing at all," said Senate President Pro Tempore Joe Scarnati, R-Jefferson.

Credit ratings agency Standard & Poor's took note that Pennsylvania was embarking on its 2016-17 fiscal year without a balanced budget and swiftly warned of a downgrade to the state's credit rating.

Closed-door revenue discussions had revolved around a $1.3 billion package that relies heavily on a $1-per-pack cigarette tax increase, to $2.60-per-pack. The grab-bag included increasing taxes on banks, extending the 6 percent sales tax to digital downloads of music and videos and extending wholesale taxes to smokeless tobacco and electronic cigarettes, said Senate Appropriations Chairman Patrick Browne, R-Lehigh.

Legislation to make Pennsylvania the fourth state to legalize casino-style gambling on the internet will wait until the fall, but be counted on to provide $100 million for the state treasury, Browne said.

The package also would include some sources of one-time stopgap cash that Wolf had sought to limit.

The Wolf administration maintains that it is constitutional to allow the spending bill to become law and suggested that the state constitution makes the Legislature, not the governor, responsible for ensuring that spending bills are funded.

Reed said he had some concerns about the legality of the bill. There is precedent from a 1932 court ruling under which legally mandated expenses are protected, but discretionary programs must be reduced by the same share across the board, Reed said.

"If we don't get a revenue package done here probably in the next 24 hours or so, I think that becomes a legitimate discussion," Reed said.

Even if lawmakers pass a revenue package, it does not solve a long-term deficit for the state government, as rising costs are expected to continue to outpace sluggish tax collections.

That could be compounded by budget negotiators agreeing to fund state prisons and several Medicaid lines at more than $300 million below what the Wolf administration had recommended would be necessary to cover costs. That leaves open the possibility of significant cost overruns in the current fiscal year.

Copyright AP - Associated Press
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