Pennsylvania to re-attempt $1.39 bln bond sale as legal questions linger

NEW YORK, Feb 8 (Reuters) - Pennsylvania's Commonwealth Financing Authority on Thursday updated an offering statement for the planned sale of $1.39 billion of tobacco bonds next week after its first attempt to market the deal failed due to a lawsuit against state officials.

The sale was postponed when fireworks companies in Pennsylvania filed a complaint questioning the constitutionality of a state act, known as Act 43, that includes provisions related to tax collection on fireworks. The Act also includes provisions for selling the tobacco bonds.

The authority was initially going to sell the bonds the week of Jan. 28.

While the complaint focuses on the fireworks provision, it asks the court to declare the entire act unconstitutional, investors were warned in the updated offering statement.

The supplement said it is possible that the court could declare the state act unconstitutional, which could negatively impact the bonds and may result in the bondholders not being paid. If that happens, the supplement said legislation could be introduced to the state's general assembly to reauthorize the bonds.

According to an opinion from the state's special counsel included in the supplement, "the Bonds are conclusively presumed to be fully authorized and issued under the laws of the Commonwealth, and any person ... is estopped from questioning their validity, sale, execution or delivery by the Authority."

Erin Ortiz, a managing director and municipal analyst at Philadelphia-based Janney Montgomery Scott, said the opinion is a step forward for the deal.

"I just don't know what the outcome is going to be, though it seems there are steps to indicate that this would be a valid bond issuance but there is a lingering question," Ortiz said.

The revenue bond issue, backed by Pennsylvania's share of a multi-state settlement with U.S. tobacco companies, is aimed at raising money for the current state budget.

On Tuesday, Pennsylvania Governor Tom Wolf, a Democrat, presented a $32.9 billion budget for fiscal 2019 that seeks to increase spending 3.1 percent.

The proposed budget is "likely to face headwinds" from Pennsylvania's Republican-controlled legislature, according to a statement from Fitch Ratings on Thursday.

Wolf's executive budget includes a tax on natural gas extraction that he said would yield $248.7 million to pay for education spending of $225 million. However, the state's Republican-led legislature has rejected Wolf's previous attempts to impose a severance tax on Pennsylvania's gas industry.

(Reporting by Stephanie Kelly; Editing by Daniel Bases and Chris Reese)