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November 30, 2010

Honorable Rob McCord The Honorable Jack Wagner

State Treasurer Auditor General
Pennsylvania Treasury Office of the Auditor General
129 Finance Building 229 Finance Building
Harrisburg, PA 17120 Harrisburg, 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 the
Commonwealth to complete the proposed $1 billion General Obligation Bond offering prior to December
14, 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 interest
rate subsidy from the IRS equivalent to 35 percent of the interest for the next 20 years. The BABs
program 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 bond
issues. Based on the present sizing of the bond offering, $1 billion with approximately $725 million to be
comprised of BABs, the Commonwealth could expect to receive varying IRS interest rate subsidy
amounts of upwards of $10 million annually over the next 20 years. Failure to issue the bonds before
December 31, 2010 is likely to result in the Commonwealth losing $162 million in future BABs subsidies
from this transaction.

Second, while it is true that there has been recent discussion that the U.S. Congress may extend
the BABs program for one more year, such action has not occurred to date and there is no guarantee that
such legislation will be enacted. Further, the discussions that have occurred to date regarding a possible
extension of the BABs program include a proposed reduction in the subsidy rate from the current 35
percent 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 difference
in the Commonwealth’s cost of borrowing between tax-exempt and taxable BABs and will result in lower
BABs subsidy payments over the life of the bond.

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

Fourth, during every gubernatorial transition since 1968, the outgoing administration has issued
bonds in order to provide the incoming Administration with sufficient capital resources to meet current
capital needs for previously approved and ongoing capital projects. This action has allowed previous
incoming Administrations the opportunity to properly brief new staff and decision-makers as to the
processes of the capital markets before actually having to approve a new bond financing. Further, this
action 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 after
taking office in January 2011. It is important to note that we have fully briefed Governor-elect Corbett's
transition 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 of
capital funding in various capital budget accounts within the Capital Facilities Fund as early as January
2011. Failure to sell the bonds by December 14, 2010 will result in the Commonwealth having to shut
down thousands of ongoing capital projects that are providing economic stimulus to the Pennsylvania
economy in this trying time. Construction contractors will go unpaid for work already completed and
thousands 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, print
and distribute the Preliminary Official Statement and it must run advertisements soliciting bids to be
received by December 14th. The Initial Resolution must be signed by December 1st in order to provide
adequate time to complete the aforementioned tasks. Failure to execute the Initial Resolution by
December 1st will effectively terminate the Commonwealth’s ability to issue its bonds during December

In short, further delay is likely to cost the taxpayers of the Commonwealth hundreds of millions of
dollars, thousands of jobs due to work stoppage, and cripple the incoming Administration. I'm sure you
will agree that is no way to ring in the new year. I trust that the information provided to you previously
has 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 the
proposed bond issue.


Edward G. Rendell

cc: Steve Crawford, Chief of Staff

cc: Mary Soderberg, Secretary of the Budget
cc: Cathy McCormack, Special Assistant to the Governor
cc: Rick Dreher, Deputy Secretary of the Budget