Taxpayers must repay $806.5 million by June 30

On Dec. 7, the Rendell Administration authorized the sale of $800 million in Tax Anticipation Notes (TANs) to insure adequate state cash flow.

While not an indication of bankruptcy, a legal term, it does suggest the state is having solvency problems, meaning its ability to cover current and future debt.

Taxpayers will have to pay back the $800 million, plus $6.5 million in interest, by June 30, the end of the current fiscal year.

“The Commonwealth is issuing the Notes to provide cash to the General Fund so as to permit disbursements to be made in accordance with statutory payment dates and to allow timely payment of payrolls and other operating costs in advance of the receipt of General Revenues to the General Fund,” according to the bond issue document.

In other words, when state business taxes roll in during March, followed by personal taxes in April, the state’s first order of business will be to pay off the TANs which, under law, have first right to the revenues. Tax dollars are scheduled to pay off the short term debt with payments of $300 million in May and $500 million in June.

The TANs agreement also states, “The (Rendell Administration) ha(s) irrevocably directed that all amounts so allocated shall be set aside and paid, at the times and amounts allocated, prior to the payment of all other expenditures and appropriations, including current expenses, payable from the General Fund.”

While paying the TANs off, the annual struggle between Gov. Ed Rendell and the General Assembly to fund a 2010-11 state operating budget will be underway. The next budget will likely be settled between the current $28 billion and $30 billion for next year. The current budget was not finalized until early this month, when the passage of a table gaming law provided the anticipated revenue to purportedly balance the state’s current operating ledger.

Mr. Rendell frequently speaks of the state’s high bond ratings and its short term debt rating, in this instance, is also solid. Standard & Poor’s and Moody’s, two of the top rating firms gave the Pennsylvania TANs offering their highest grades. They also gave the same grades to financially troubled California.

A key to a good bond rating giving governments an edge over competitive enterprise is “established cash flow” from the taxpayers.

TANs are not unknown to financially-strapped governments when all other resources have been tapped and revenues are lower than anticipated.

Rick Dreher of the state Budget Office said this is the state’s first TANs offering since 1997. The new offering was brought on by a combination of the state’s $2.5 billion tax revenue shortfall last year and the severe national economic downturn that has caused havoc.

Mr. Dreher said the action should not be a concern and is a regular practice of many state and local governments to get through revenue shortfalls until the major parts of their taxes are received at various times in a budget year.

Primarily, Mr. Dreher said, the $800 million will used to meet mandated payments to government school districts that are due every other month and state payrolls. Once the bulk of taxes begin to come in, things will return to normal, he said.

State General Fund revenues were running $257 million behind projections at the end of December, according to the state Revenue Department.

“TANs are not an annual event, but indicate a weakness in your fiscal structure. It shows they (the Rendell Administration) have exhausted every kind of financial reserve they might have had,” said a state budget expert with more than 30 years of experience.

Gubernatorial candidates Auditor General Jack Wagner, a Pittsburgh Democrat and Republican State Rep. Sam Rohrer of Berks County were the only major candidates to respond to PI’s request for comment on the TANs issuance.

Mr. Wagner said “…TANs are a standard practice for state governments, whether the Governor is a Republican, Democrat, or Independent, because state revenues can fluctuate seasonally.”

Mr. Rohrer differed, saying, “To say (TANs) are common is not true. When the deficit of $3.2 billion was accumulating, the governor said he was cutting back (on state spending).”

“This is an absolute indicator as to where he has taken this state in terms of financial integrity,” Mr. Rohrer said.