Excerpted from Keystone Crossroads, by Kevin McCorry
Dozens of Pennsylvania’s most impoverished school districts are finding it more difficult to borrow money after Pennsylvania’s historical budget impasse.
In December, as lawmakers entered a sixth month without a state budget, S&P Global withdrew its rating of Pennsylvania’s “intercept” program, through which the state guarantees loans for school districts that don’t have high credit ratings.
Through the program, if a district says it cannot meet its loan obligations, the state promises to pay the lender out of the pot of cash the district is set to receive from the Department of Education.
The promise that the state will “intercept” this payment, makes banks more willing to lend.
But if there’s no state budget, there’s no pot of cash from which to draw.
“We had recognized a trend of late budgets at the state level which render the program ineffective for large portions of the year,” said John Sugden, a senior director at S&P Global. “We saw a lack of commitment to the program and to program oversight.”
Now, although the budget was passed in late March, the rating agency’s confidence in state government has not grown.
“At this point, we’ve told the market and our clients that we don’t expect to reinstate the program,” said Sugden.
That means the 57 districts and community colleges that had been taking advantage of the program are in a difficult position, and will either be locked out of the market entirely or forced to pay higher interest rates.
These districts include Philadelphia, Reading, Coatesville, Hazelton and Erie — where Erie Public School District Superintendent, Jay Badams, says the system can’t get through the summer without short term borrowing.
“Our bank that we’ve done most of our work with over the years, would not give us a definitive answer.”
If shut out of the market, Badams will have to ask the state for an advance — which is a potential trigger for moving the district into state recovery status.
“So we’re teetering on the verge of insolvency,” he said.
Top republicans and democrats say they hope to pass a budget on time this year and win back the faith of the ratings agencies.
S&P says, at this point, that won’t be good enough. It wants to see specific legislation that marks a major commitment to the program.
Philadelphia School District Chief Financial Officer, Uri Monson, says that this year’s budget must be passed on time to ensure that the district can make capital investments in its aging stock of school buildings.
“I would not comment on what S&P chooses to rate. Our hope is that there will be a legislative fix that would insulate the intercept from periods of non-appropriation,” he said in an email. “It would then be up to S&P to evaluate the merits of that fix.”