For Immediate Release
January 6, 2016
Treasury Provides $2 Billion Credit Line to Bolster State’s General Fund
State forced to borrow for the second time in 16 months to avoid negative balance.
Harrisburg – Responding to a request from the administration and in consultation with Auditor General Eugene DePasquale, Pennsylvania Treasurer Timothy Reese has extended a $2 billion line of credit to the commonwealth to prevent the General Fund cash balance from falling to as much as $922 million in the negative by next week. Today, the administration drew $1 billion against that line of credit.
Because public school subsidy payments were withheld during the prolonged budget impasse, the General Fund, which is the state’s main operating account, had maintained an artificially elevated balance since the current fiscal year began. With schools receiving the subsidies this week, the General Fund’s balance has dropped sharply. Without the line of credit, it is likely that the General Fund would have maintained a negative balance until the usual seasonal tax revenue spike in early spring.
This is the second time in 16 months that the state needed to borrow money to pay its bills, illustrating the ongoing structural budget deficit facing the commonwealth. In September of 2014, Treasury loaned the state a total of $1.5 billion when the General Fund was depleted.
“These shortfalls keep getting larger and are happening more frequently. Borrowing to meet operating expenses is not a responsible or sustainable solution.”
Timothy A. Reese, State Treasurer
Last month, the state’s Independent Fiscal Office (IFO) noted that under the state’s existing revenue structure, over the next five years expenditures will continue to outpace revenues and that “the structural imbalance grows each year.” The IFO identified continued credit rating downgrades as an immediate consequence of the structural deficit.
Credit rating agency Moody’s also cited the ongoing structural deficit as well as an “extreme” political environment preventing a sustainable budgetary resolution when it lowered its outlook on Pennsylvania’s credit in October. Additionally, Moody’s threatened that additional negative ratings were possible as a result of the budget impasse and the failure to make fiscal improvements.
As a result of credit downgrades like Moody’s, IFO has predicted that the state’s borrowing costs could increase by a total of $1 billion over the next 20 years.
“It remains to be seen if a new budget will adequately address the structural deficit,” said Reese. “Treasury will continue to monitor the situation and work with the administration to manage it as cost-effectively as possible.”
The $2 billion line of credit will come from Treasury’s cash investment fund, “Pool 99” and will have an interest rate of 0.6 percent. By securing the credit line from Treasury, the state will avoid higher interest rates and fees it would have incurred through the financial markets. At the same time, Treasury will generate a positive return for the taxpayers above what it otherwise would have likely earned with short-term market investments.
The state will draw from the line of credit only as needed, avoiding interest payments on the full credit line. The state is required to pay back the loan by June 30, 2016.
Historical Commonwealth Short Term Borrowing (1991-2015)
||Amount (in thousands)
||Avg. Interest Rate
- Commonwealth has borrowed to cover short term General Fund shortfall 14 times over the past 24 years.
- General Fund at historic low for this time in the calendar year.
*Largest anticipated borrowing for General Fund shortfall.
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The Pennsylvania Treasury is an independent department of state government led by the state treasurer, who is elected every four years. The department's primary duty is to safeguard and manage the state's public funds. It invests state money to generate income on behalf of the citizens of Pennsylvania, reviews and processes payments for state government agencies, and serves as custodian of more than $100 billion in state funds. Key Treasury programs include Unclaimed Property, PA 529 College Savings Program and the Board of Finance and Revenue.
To learn more visit patreasury.gov.