Left With Few Fiscal Options, Another Pennsylvania Locality Turns to Borrowing

With cash flow from the state cut off due to an ongoing budget stalemate in Harrisburg between General Assembly lawmakers and Gov. Tom Wolf, a county in eastern Pennsylvania late last week moved to borrow as much as $50 million to shore up its finances in the coming months.

Northampton County is the latest local government entity in the Keystone State to take such a step. At least 27 school districts have also made arrangements to borrow cash, as has York County.

Pennsylvania has not had a budget in place since the start of its July 1 fiscal year. As a result, state payments normally made to school districts and counties, as well as those going to nonprofit organizations, have not been issued, leaving their budgets squeezed.

Most of the state funding that goes to Northampton County pays for human services, such as assisting people with addiction problems, protecting children from abuse and caring for the elderly.

To cover these costs while the budget battle plays out in the state capital, the county has been drawing down the balance in its general fund—its primary financial account.

But that balance is now approaching uncomfortably low levels.

Last year around this time, the fund had about $61.5 million in it, according to Northampton County Executive John A. Brown.

As of the end of October, the balance was about $19.3 million, the county executive said. “After December, cash flow becomes a problem,” Brown explained by phone on Friday. “We don’t see a light at the end of the tunnel coming from the state. So we’re being very conservative.”

Direct blame for the stark difference between this year’s and last year’s account balances—and the need for borrowing—can be placed on the state budget deadlock, according to Brown. He said the county has “not seen a dime” from the state for its human services programs since June 30, and that “without those monies we’ve continued to fund all those programs ourselves.”

“We elected not to suspend the programs. We believe it’s important to keep them going,” he added. “But after four or five months it’s coming to the point where we don’t have the cash flow.”

Clearing the way for the borrowing plan in Northampton was an emergency ordinance that county councilmembers there adopted last Thursday in a 6-3 vote.

The approved borrowing should enable the county to get to mid-March without state payments. At that time, local tax revenue would start to come in, bolstering the county’s accounts.

While covering costs until March would likely require only about $35 million based on the county’s projections, Brown said that allowing for the extra $15 million would provide a buffer. To keep interest costs at a minimum, Northampton will not take all $50 million up front. Instead, the money will be drawn as needed, on a week-to-week basis.

“We’ll only borrow exactly what we need,” Brown said.

Council President Margaret Ferraro voted for the emergency ordinance that allows for the borrowing.

“The money is eventually going to come, I’m sure, and the most we would incur would be some interest costs,” she told Route Fifty on Friday. Looking at those costs “versus the turmoil that it would cause” to cut services, or layoff staff, she added, “we felt this was the much more sane way to go.”

“We just didn’t want to hurt the people we serve,” Ferraro said.

Brown said that the county would lobby the state to get reimbursed for borrowing costs, and estimated that the interest rate for the borrowed money would be around 2 percent.

With a population of about 300,000 residents, Northampton is situated just west of Pennsylvania’s border with New Jersey and just east of Allentown. The county seat is the city of Easton.

In the county’s 2015 adopted budget, total expenditures were set at $383,933,500.

Ferraro voiced exasperation with the progress being made on the state budget talks. “I just think this is such a debacle,” she said. “Why can’t they compromise? It just doesn’t seem as though they’re doing any compromising, whatsoever, on either side.”

The clash over the budget has centered on a number of issues.

Wolf, a Democrat in his first term as governor, wants to see multibillion tax increases to help pay for education spending, and to eliminate a long-term budget deficit. General Assembly Republicans, who have majorities in both the House and the Senate, have snubbed his plans. Meanwhile, they’re looking to end traditional state pension benefits for most future employees, opting instead for 401(k)-style retirement plans. They also want to allow for the privatization of liquor and wine sales, which are now state-controlled in Pennsylvania. Wolf has pushed back against those proposals.

Pennsylvania’s auditor general, Eugene DePasquale, said on Oct. 28 that borrowing among school districts as a result of the budget impasse had reached $431 million at that time, and that interest and fees on that money could potentially hit $14 million.

Commissioners in York County, which is located south of Harrisburg, approved borrowing up to $20 million in late October to make up for money that was not flowing from the state capital.

In a report issued on Oct. 28, Moody’s Investors Service said the budget gridlock in Pennsylvania was a credit negative for local governments there—especially school districts.

The ratings agency noted that state aid makes up between 10 percent and 83 percent of operating revenues for the districts, and that many are already under financial pressure from other factors, including rising pension costs.

Also noted in the report is that the effect of the budget delay on cities has been relatively minimal, as state aid is not a primary source of income for them, comprising an average of 8.5 percent of their general fund revenues.

Legislators, and the governor’s office, expressed optimism late last week about progress on the budget talks. According to The Associated Press, House Majority Leader Dave Reed informed Republican lawmakers on Friday that passage of a budget by Thanksgiving was a possibility.

Even if that were to happen, Brown, the county executive in Northampton, pointed out that there would likely be a 60 to 90 day lag before any state funds starts rolling into local government coffers. He also said that while it’s not uncommon for state lawmakers to pass budgets late in Pennsylvania, this year’s delay is “going well beyond what we could have planned for.”

“Obviously it is a stalemate,” Brown said. “At the same time, we have to operate the county, regardless of what they’re doing.”