Pennsylvania, which has shored up its finances in recent years, continues to face structural budget problems as some bond raters project a budget gap of at least $1 billion for fiscal 1996.
Raters are forecasting the fiscal 1996 gap based on revenue and expenditure items in the state's fiscal 1995 budget, which ends June 30. At this point, the state's fiscal 1995 budget is in balance, and may even produce a surplus.
Pennsylvania has made great strides in eliminating its structural or long-term deficit in recent years, and market analysts said they are confident that the state's improving economy and history of fiscal prudence will produce a balanced budget in 1996 and beyond.
However, a mismatch of revenues and expenditures projected for 1996 suggests that the state's structural budget problems have not disappeared, and raters as well as some of the state's leading politicians are taking note.
Two weeks ago, Mayor Edward Rendell of Philadelphia raised the issue during a speech to members of the municipal bond community. Speaking at a reception sponsored by Municipal Bond Investors Assurance Corp., Rendell said the state is "facing a very deep budget deficit" in fiscal 1996. "A lot of difficult choices have to be made."
Rendell is not alone in this assessment.
Steve Nelli, a director at Standard & Poor's Corp., said raters believe the state will face a budget gap of more than $1 billion in fiscal 1996, which begins July 1, 1995. Nelli said the state will "need to do some active budget management" to balance its 1996 budget. Standard & Poor's rates the state's general obligation debt AA-minus.
One area that needs to be brought under control is Medicaid, financial analysts say. Like other states, Pennsylvania's Medicaid costs are growing faster than the rate of inflation.
But the state faces other potential credit problems. Earlier this year the state enacted a business tax cut, a move that could reduce state revenues and add to the budget's structural weakness.
In addition, Governor-elect Tom Ridge campaigned on a platform of cutting taxes, particularly corporate taxes, which could reduce revenues even more.
Nelli, of Standard & Poor's, said that, if necessary, the state could reinstate the business taxes to boost revenues.
But this action could prove politically damaging to Ridge. In fact, Ridge's appointed budget director, Robert Bittenbender, said cutting spending, not reinstating revenue sources, would be a priority for bringing the state's 1996 finances into balance.
At Moody's Investors Service, raters are also projecting a fiscal 1996 budget gap, but would not say how large it would be. Moody's rates the state A1.
In fact, Bob Kurtter, a vice president at Moody's Investors Service, Said the state's finances are largely in order. He added that the outgoing Casey Administration will leave Ridge with the funds to cover the tax cuts through fiscal 1996 and 1997, and that the rating agency does not believe "the state is facing an inordinate budget gap."
State officials and their financial advisers say they are not worried. Bittenbender cited the state's growing revenue base, and the incoming governor's commitment to cut spending.
Bittenbender said this while be could not predict the magnitude of the gap, he was confident that the state's budget picture was "manageable."
"We are not what I would call robust, and our growth rates present a challenge," Bittenbender said. "But we have been dealing with that situation for a decade."