Responding to a request from the Wolf Administration, State Treasurer Timothy A. Reese Tuesday extended a $2.5 billion line of credit to the Commonwealth of Pennsylvania.
A draw of $400 million from the line of credit to the General Fund was immediately made to prevent the General Fund cash balance from falling into the negative this month.
This is the second time in 2016 and the third time in 23 months that the state has needed to borrow money to meet short-term cash needs illustrating the ongoing structural budget deficit facing the Commonwealth.
While progress has been made on reducing the structural deficit, additional revenues enacted as part of the 2016-17 budget will not be fully realized until late in the fiscal year and, as a result, the General Fund balance began this fiscal year with $500 million less than the previous fiscal year.
“The General Fund’s low cash balance so early in the fiscal year is a troublesome sign and illustrates the need for Pennsylvania to adequately and decisively address its ongoing structural deficit,” said Reese. “While Treasury will continue to work with the administration and the General Assembly to manage these continuing shortfalls, until our state’s fiscal house is in order Pennsylvania’s credit rating will continue to suffer, and taxpayers will pay more to fund our debt.”
Though Moody’s Investors Service recently revised Pennsylvania’s outlook to stable, and affirmed the Commonwealth’s Aa3 general obligation rating, it noted that the General Fund’s borrowings from the Treasury have grown larger because of the structural imbalance and depletion of the rainy day fund.
In addition, last month, after reviewing the state’s general fund budget and revenue plan for the next fiscal year, S&P Global Ratings reaffirmed its AA-rating of Pennsylvania’s debt, restating its negative outlook. Pennsylvania’s credit rating is the fourth lowest in the nation, surpassed only by New Jersey, Illinois and Kentucky.
Because of lower credit ratings, the state’s Independent Fiscal Office has predicted that the state’s borrowing costs could increase by $1 billion over the next 20 years.
The $2.5 billion line of credit will come from Treasury’s cash investment fund, “Pool 99” and will have an interest rate of 0.75 percent.
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, Treasury will generate a positive return for the taxpayers above what it otherwise would have likely earned with short-term market investments.The Commonwealth has borrowed to cover short term General Fund shortfall 15 times over the past 24 years.