What happens when the Commonwealth runs out of money?

Author: Jason Gottesman/Tuesday, December 16, 2014/Categories: News and Views

At his mid-year budget briefing earlier in December, Budget Sec. Charles Zogby noted tax anticipation notes—borrowing based upon the anticipation of greater tax revenue later in the year—might be used to fill slower revenue months.

However, not all state officials seemed convinced that the prospect of additional borrowing is necessarily the right thing to do, especially since the Commonwealth has already borrowed money to ensure the state’s bills are paid.

In September, Treasurer Rob McCord—who along with Auditor General Eugene DePasquale must “sign-off” on any tax anticipation notes—extended the Commonwealth a $1.5 billion line of credit out of Treasury funds after the General Fund’s operating account dropped below zero in the middle of the month.

The inter-Commonwealth line of credit offered by the Treasurer at the time in lieu of tax anticipation notes comes at a cheaper price for the Commonwealth—which pays less in fees compared to the open market—and the accounts the Treasury used to fund the line of credit will see a financial gain from the interest payments.

By November, the Commonwealth exhausted the available credit line.

It was only just a few weeks later that Sec. Zogby again said that tax anticipation notes might be needed to deal with the “ebbs and flows” of revenue in the coming months.

“The state’s financial situation is worse than it has been in a long time,” said McCord’s press secretary Gary Tuma.

He noted the FY 2014-2015 budget left the Commonwealth with “structural financial problems” and “a large potential deficit” of around $2 billion.

Asked about the potential for future tax anticipation notes as implied by Sec. Zogby, Tuma said “you can’t do that endlessly.”

“You can’t reach the end of the fiscal year and not have a balanced budget,” he said. “It’s not a permanent fix to the structural financial problems.”

He said “other revenue sources” like a natural gas extraction tax, slowing the rollback of the Capital Stock and Franchise Tax, closing the Delaware Loophole, and looking at the overall structure of the state’s tax base are possible solutions offered by the Treasurer for the structural financial issues.

He added all of the debt taken out this year, and any other potential debt to fill revenue lulls, will have to be paid off by the end of the fiscal year.

Jay Pagni, spokesperson for Gov. Tom Corbett, said revenues will have to match spending—including the debt—in order to pay off any amounts borrowed.

“In the event that we get closer to June 30 and revenues are not tracking, then you look at other budgetary mechanisms to bring spending in line with revenue,” he told The PLS Reporter.

Hypothetically, he said, things like budgetary freezes and program reductions could be utilized to ensure spending and revenues align.

At this point, he said he is “not aware of anything” where additional borrowing would be needed over the already extended line of credit.

However, Pagni did relay tax anticipation notes have been used as a normal instrument to deal with revenue lulls almost every year for 30 or 40 years.

He also took issue with the Treasurer and Auditor General being alarmed at the early nature of the loan in the September line of credit announcement.

“We’ve done them in October and November in the past, so right around the same time frame in the past,” he said. “It just depends on what you need it for when you need it.”

He explained a significant portion of the Commonwealth’s outlay for expenses comes early in the fiscal year, when the loan was used.