Bonds, notes may be flawed, a risk to state budget

May 1st, 2010
By Walter F. Roche Jr.
Pittsburgh Tribune-Review

State officials waited several months to tell bondholders and other lenders about two court cases that threaten to blow an $800 million hole in the state budget.

Several experts say the state should have disclosed the lawsuits when it issued $800 million in tax anticipation notes in late December and a series of bonds totaling nearly $1 billion this year.

Commonwealth Court ruled in the lawsuits last month, reversing the transfer of hundreds of millions to the general fund from two accounts established to offset the cost of malpractice insurance. State officials said they will appeal.

"I would think that most bond counsels would want that mentioned," said former state Budget Secretary Robert Bittenbender.

Mark D. Schwartz, a Bryn Mawr attorney and former aide to the late House Speaker K. Leroy Irvis of Pittsburgh, said the lawsuits represented "a material fact" and federal securities statutes require disclosure.

"There is a positive obligation to disclose," said Schwartz, who said he did work on bond issues in the past.

Gary Tuma, a spokesman for Gov. Ed Rendell, said the administration heard no complaints from bond rating agencies or other interested parties.

The materials for the tax anticipation notes were prepared in the fall, Tuma said. The hospitals and physicians groups filed their lawsuits in October. Tuma said the same materials were used for the $900 million bond issue this year.

"There were a moving set of facts," he said, adding that state budget officials consulted with the general counsel and the state attorney general, and "neither raised the issue."

After Commonwealth Court ruled, administration officials acknowledged the lawsuits by attaching an addendum to the April 5 preliminary official statement on a $142 million revenue bond issue.

"Now they've changed their view," Tuma said. "The suits will be included in future bond issues. Basically it's at our discretion."

Schwartz said the failure to disclose could leave the state liable to subsequent lawsuits from bondholders.

Robert P. Strauss, professor of economics and public policy at Carnegie Mellon University, said it could hurt the state's credibility in future borrowings.

"It doesn't help the next governor, no matter who it is," he said.

Commonwealth Court's 4-1 decision last month closely paralleled its July ruling rejecting a move by state lawyers to have another lawsuit thrown out. In that decision, the court rejected all but one of the state's arguments in defense of a transfer from the medical fund.

The transfers were a key element in ending a long battle over a state budget lawmakers resolved last fall.

The transfers were from funds established under the Medical Care Availability and Reduction of Error Act of 2002 and the Health Care Provider Retention Program. The first $100 million transfer from the funds occurred in October. The balance of the $800 million was part of this year's budget agreement.

Attorneys for the state argued the budget agreement eliminated the HCPR fund and the rights of health care providers to its contents. The court rejected that argument, concluding providers had "vested rights that cannot be extinguished by the October 2009 budget legislation."

A spokesman for the Pennsylvania Medical Society said the state's appeal put the matter on hold and attorneys were preparing to present arguments to the state Supreme Court.