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C O M M O N W E A L T H O F P E N N S Y L V A N I A

O F F I C E O F T H E G O V E R N O R

H A R R I S B U R GTH E GOV E R N OR

November 30, 2010

Honorable Rob McCordState TreasurerPennsylvania Treasury129 Finance BuildingHarrisburg, PA 17120

The Honorable Jack WagnerAuditor GeneralOffice of the Auditor General229 Finance BuildingHarrisburg, PA 17120

Dear Treasurer McCord and General Wagner:

I appreciated the chance to meet last week and to explain why it is vitally important for theCommonwealth to complete the proposed $1 billion General Obligation Bond offering prior to December14, 2010. The purpose of this letter is to reiterate those points and to drive home the need for swift action.

First, the existing Build America Bonds (BABs) program is scheduled to sunset on December 31,2010; expiring along with it will be the commitment that the Commonwealth would receive an interestrate subsidy from the IRS equivalent to 35 percent of the interest for the next 20 years. The BABsprogram has been utilized successfully by the Commonwealth on two prior bond offerings this year and

the Commonwealth is currently receiving $20 million annually in BABs subsidies from those bondissues. Based on the present sizing of the bond offering, $1 billion with approximately $725 million to becomprised of BABs, the Commonwealth could expect to receive varying IRS interest rate subsidyamounts of upwards of $10 million annually over the next 20 years. Failure to issue the bonds beforeDecember 31, 2010 is likely to result in the Commonwealth losing $162 million in future BABs subsidiesfrom this transaction.

Second, while it is true that there has been recent discussion that the U.S. Congress may extendthe BABs program for one more year, such action has not occurred to date and there is no guarantee thatsuch legislation will be enacted. Further, the discussions that have occurred to date regarding a possibleextension of the BABs program include a proposed reduction in the subsidy rate from the current 35percent to a proposed 32 percent. This potential reduction in the BABs subsidy rate is significant to the

Commonwealth and would make the BABs program less attractive, as it reduces the marginal differencein the Commonwealths cost of borrowing between tax-exempt and taxable BABs and will result in lowerBABs subsidy payments over the life of the bond.

Third, the current delay in issuing the bonds has already cost the Commonwealth $15 million inincreased debt service costs over the life of the bonds due to an increase in interest rates. TheCommonwealth initially intended to sell its bonds on November 10, 2010, well in advance of theexpected rush to market of BABs issuers in December. Interest rates are up 30 basis points sinceNovember 10th and further delay adds to the uncertainty of the pricing of the proposed bond issue. Therecan be no guarantee as to where interest rates will be in early 2011. Additional interest rate increases willcontinue to cost the Commonwealth more every day that we delay issuing the bonds.

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Fourth, during every gubernatorial transition since 1968, the outgoing administration has issuedbonds in order to provide the incoming Administration with sufficient capital resources to meet currentcapital needs for previously approved and ongoing capital projects. This action has allowed previousincoming Administrations the opportunity to properly brief new staff and decision-makers as to theprocesses of the capital markets before actually having to approve a new bond financing. Further, thisaction has allowed previous Administrations the opportunity to focus their attention on the proposed

General Fund budget which must be presented by the incoming Administration a mere six weeks aftertaking office in January 2011. It is important to note that we have fully briefed Governor-elect Corbett'stransition team regarding this bond issue. This is in no way, shape, or form, a post-election surprise.

Finally, and most importantly, projections indicate the Commonwealth will begin to run out ofcapital funding in various capital budget accounts within the Capital Facilities Fund as early as January2011. Failure to sell the bonds by December 14, 2010 will result in the Commonwealth having to shutdown thousands of ongoing capital projects that are providing economic stimulus to the Pennsylvaniaeconomy in this trying time. Construction contractors will go unpaid for work already completed andthousands of construction workers would likely lose their jobs.

In order to meet the deadline of selling our bonds by December 14, 2010 several actions must

occur in sequence prior to December 14th

. The Issuing Officials (each of you and myself acting jointly)must execute the Initial Resolution authorizing the bonds. The Office of the Budget must prepare, printand distribute the Preliminary Official Statement and it must run advertisements soliciting bids to bereceived by December 14th. The Initial Resolution must be signed by December 1st in order to provideadequate time to complete the aforementioned tasks. Failure to execute the Initial Resolution byDecember 1st will effectively terminate the Commonwealths ability to issue its bonds during December2010.

In short, further delay is likely to cost the taxpayers of the Commonwealth hundreds of millions ofdollars, thousands of jobs due to work stoppage, and cripple the incoming Administration. I'm sure youwill agree that is no way to ring in the new year. I trust that the information provided to you previouslyhas addressed your concerns regarding the proposed bond issue. I look forward to receiving your

response, prior to the close of business on December 1st

, as to whether you will join me in approving theproposed bond issue.

Sincerely,

Edward G. RendellGovernor

cc: Steve Crawford, Chief of Staffcc: Mary Soderberg, Secretary of the Budgetcc: Cathy McCormack, Special Assistant to the Governorcc: Rick Dreher, Deputy Secretary of the Budget