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12/19/2018 10:20 AM
Pennsylvania House of Representatives
https://www.legis.state.pa.us/cfdocs/Legis/CSM/showMemoPublic.cfm?chamber=H&SPick=20170&cosponId=22937
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House of Representatives
Session of 2017 - 2018 Regular Session

MEMORANDUM

Posted: February 15, 2017 02:22 PM
From: Representative John A. Lawrence
To: All House members
Subject: Cosponsor Memo - General Assembly Authorization for Lease-Backed Debt
 
Dear Colleagues

SUMMARY

The Pennsylvania constitution requires all state debt issuances to be approved either by the General Assembly or the people via voter referendum. However, creative minds have developed a method to circumvent this constitutional protection by utilizing lease-backed debt to encumber the state with long-term payment obligations without any legislative or voter approval. Currently, nine separate deals of this type are on the books, all of which were authorized by the Executive Branch without legislative or voter approval. Even though these arrangements were not vetted or approved by the General Assembly, we are obligated to pay for them out of the General Fund.

These deals tend to be very complex, but the basic idea is this: The state enters into a long term lease – perhaps DGS will lease (with intent to purchase) a building for 20 years from a county economic development authority. The 20 year lease is then used by the country economic development authority to borrow enough money to acquire the building to be leased, with the understanding that ownership will transfer to the state after 20 years. The state lease payments to the authority are, conveniently, exactly enough to make each month’s interest payments on the authority’s bond.

My legislation will require legislative approval of any future deals of this nature, to ensure legislative oversight where none currently exists.


DETAILS
In the near future, I will introduce legislation to require legislative approval for the Commonwealth or any of its departments, agencies or authorities to enter into a “lease-backed debt obligation.”
These arrangements have also been called “installment purchase agreements.” A Commonwealth entity is the lessee and makes payments pursuant to a lease agreement which are used to service bond obligations. Effectively, this is “stealth debt,” and is typically serviced by Commonwealth appropriations to different agencies and authorities under their general government operations (GGO) line in the annual budget.
The General Assembly, the branch of government solely vested with the power of appropriation under the Constitution, only finds out about these agreements long after the ink is dry and the obligation already exists. Failing to meet these lease-backed debt obligations would have a direct and substantial impact on the Commonwealth’s credit ratings.
Currently, there are nine such lease arrangements. All of these “off the books” debt deals were created under the Rendell administration. The outstanding principal balance on these debts is nearly $785 million. Annual debt service (i.e. the “lease payment”) paid out of the General Fund is about $64 million; with an additional $27 million paid out of the Gaming Economic Development and Tourism Fund (though, if the GEDTF funds fall short of the annual “lease” payment, the Commonwealth is obligated to make up the difference).
My legislation would require the administration to introduce a Lease-Backed Debt Itemization Bill and obtain a majority vote in the General Assembly before entering into such agreements. This ensures that the power of appropriation remains with the General Assembly and we, as a Commonwealth, only enter into these agreements with full disclosure of all the relevant aspects of the proposal.
I urge you to add your name to the list of cosponsors in support of this legislation that brings a level of openness and transparency to future arrangements of this nature.



Introduced as HB82