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High spending, low taxes boosts Pa. bond costs another $7M/year above neighbors' (Corrected)

Taxpayers pay more while politicians dicker

Pennsylvania says it will save $54 million by refinancing nearly $1 billion in bond debt this week, compared to previous costs when U.S. bond rates were higher.

But the state's relatively low credit rating, and Wall Street's threat to downgrade its AA- credit rating unless it boosts taxes or cuts spending, means the Commonwealth is also paying an extra $5.6 million a year (CORRECTED) --  for this one bond issue -- compared to the cheaper bond rates charged by states with top credit ratings, such as Delaware, Maryland and Virginia.

To figure that extra taxpayer burden, I applied the state bond rates posted in a report by analyst Eric Kazatsky at Janney Montgomery Scott in Philadelphia last month. According to Janney's data, investors make Pennsylvania pay 0.57% (57 basis points) more for its debt than the 10-year U.S. Treasury rate. The Treasury rate is also what the AAA-rated states pay (DE and VA a point less, MD two points more.)

(Update Wednesday) : Since October, Pennsylvania debt has been trading at a higher implied spread -- more like 0.7% -- boosting the excess for a billion-dollar issue to $7 million a year.

Only New Jersey (0.7%) and Illinois (1.63%) paid more interest to sell bonds than Pennsylvania. And Pennsylvania's rate spread has increased this year, as if investors doubt the state will get its act together, while Illinois and New Jersey rates have dropped a bit on hopes they might come closer to balancing their budgets.

Pennsylvania refinanced another billion, also at higher rates than some of its neighbors, in June. That's another $50 milion-plus taxpayers would save each year, with a better-balanced budget.

Put another way, if Gov. Tom Wolf and the Republicans who lead the state legislature could agree on tax, spending and state pension adjustments totalling a few hundred million dollars, the state would increase its savings and reduce its borrowing costs every time it refinances its bonds, also reducing the need for future tax hikes and spending cuts.

Eric Kim, analyst at Fitch Ratings in New York, blames, not just recent Harrisburg politics, but "decades" of slower-than-U.S. average economic and population growth, for Pennsylvania's budget imbalance and below-average state credit rating, in this brief report.

Standard and Poor's analysts Carol Spain and John Sugden in a report to clients today warn that the Pennsylvania Department of Revenue and Independent Fiscal Office (IFO) have projected 2016-17 state tax revenues "will likely fall short of official estimates and expenditures will likely exceed budgeted appropriations."

That's a special problem for Pennsylvania, because, unlike most states, it doesn't have a rainy-day cushion in case the economy slows, the S&P analysts added.

The most recent Harrisburg budget included such gimmicks as $175 million in new revenues from gambling expansion, including a second Philadelphia casino, that legislators or regulators haven't yet approved, and a $200 million loan from the state malpractice insurance fund.

Gov. Wolf could always cut the budget without Republican approval, Spain added in her report.

But since "required pension and human services expenditures driving much of rising costs," and since Pennsylvania growth continues to "lag" other states, and "given the state's recent track record" for raising funds to pay promised programs and benefits, S&P is considering a rate cut that could drive borrowing costs up further, Spain concluded.