Pennsylvania State Budget
Recent headlines have former Gov. Ed Rendell challenging Gov. Tom Corbett on the issue of the deficit he left the current administration. Gov. Corbett has campaign ads stating he closed a $4.2 billion budget deficit. Gov. Rendell recently claimed he left Corbett a $1 billion surplus.
Gov. Rendell’s claim is the easier to address—he is simply using the word "surplus" incorrectly. When he says "$1 billion surplus," he means there was a fund balance just over $1 billion in June 2011—effectively, there was money remaining in the state's bank accounts. But spending exceeded General Fund revenue in each of Gov. Rendell's last 3 budgets.
Make no mistake, by any accounting standards, or just the dictionary, this is considered a "deficit." No business or household could claim to be running a surplus simply because they had some money in their checking account at a certain point in time.
The question is exactly how large the deficit was when Gov. Corbett took office. The "$4.2 billion deficit" comes from Gov. Corbett’s first budget proposal. It is based on the fact that the 2010-11 budget included $2.65 billion in federal stimulus funding, $750 million in one-time revenue, and $665 million in one-time revenue reductions (see page 4 of the slide presentation).
This overstates the amount of cuts Gov. Corbett had to make to balance the budget. As noted above, the state wasn't spending every last dime in 2010-11 (though some lawmakers wanted to), giving some leeway. Revenue also increased in 2011-12, and both Gov. Rendell and Gov. Corbett made some freezes to 2010-11 spending.
By the end of fiscal year 2010-11, the state had spent about $1.8 billion more than it collected in revenue.
Perhaps the most important thing taxpayers should know is that the state has been spending more than it collects in revenue for six straight years. Gov. Corbett's proposed budget would make that a seventh year.
This deficit spending was made possible through temporary federal stimulus funds, one-time transfers from other funds (like the Rainy Day Fund and the MCare Fund), and spending down the remaining fund balance.
Gov. Corbett has done well to balance the budget, given the deficit left to him, without raising the income or sales tax. But we aren’t out of the hole yet, as the state continues to deal with a structural deficit.
Moreover, this problem will only get worse. The commonwealth continues to pay less than it needs to for pension costs, given the artificial caps set by Act 120 of 2010 (indeed, Gov. Corbett’s proposed budget includes lowering these caps further).
Because of rising pension payments, along with welfare spending that continues to grow faster than our economy, the Independent Fiscal Office projects the deficit to grow to $2.1 billion by 2018-19. Years of overspending have created a structural deficit in Pennsylvania, and it's still here.
Pennsylvanians are losing economic freedom according to the Fraser Institute’s annual report, Economic Freedom of North America 2013. The commonwealth is slowly losing ground ranking 33rd in 2009 and dropping to 40th in the latest study.
The index measures the limitations on economic freedom imposed by all levels of government in the 50 U.S. states and 10 Canadian provinces under three broad categories. Pennsylvania performs poorly in each category:
- Size of government: 48th
- Takings and discriminatory wealth redistribution: 34th
- Labor market freedom: 24th
There are several reasons for Pennsylvania’s abysmal performance. Chief among them is Pennsylvania's growing debt and spending, which has created $47 billion in unfunded pension debt and an estimated $1.2 to $1.4 billion budget deficit.
If policymakers want to improve the lives of Pennsylvanians, focus should be on increasing economic freedom and opportunity by enacting pension reform, slowing the growth of overall spending and reducing the size of government.
For more on how to accomplish these goals, check out our newest report: Blueprint for a Prosperous Pennsylvania.
The 2014-15 Pennsylvania State Budget proposal is more than 1000 pages, but we've boiled it down to five facts taxpayers you need to know
1. State Spending is at an All-Time High: The budget proposal increases total spending to $71.8 billion and General Fund $29.4 billion, both are all time highs. That's a 6 percent increase in total spending (which includes increases in transportation spending and federal funds) from 2013-14. The General Fund increase of 3.3 percent exceeds the rate of inflation plus population growth.
Despite union leaders' big lie of "$1 billion cut," education spending is at an all-time high. Governor Corbett's proposal would increase education funding by more than $360 million, with more than $10 billion going to public schools.
2. State Spending Exceeds Revenues. The state will begin next fiscal year with $217 million in the bank (so to speak) and end with $27 million—spending $190 million more than revenues. The budget is also predicated on one-time sources of funding, and “savings” from pension reform (which may not happen) and is contingent on federal approval of Healthy PA to spend federal taxpayer dollars rather than state taxpayer dollars for some Medicaid recipients.
This structural deficit is the result of years of spending beyond our means, and was made possible by the federal stimulus and draining reserve funds. Gov. Corbett has done well to balance the budget without raising the sales or income tax, but we haven’t dug out of that hole yet.
3. Pension Reform Cannot Wait: We agree with Gov. Corbett’s call to "pass pension reform this session." Pennsylvania’s exploding pension liability now stands at $47 billion and will drive up taxes both at the state level and in school property taxes (or require teacher layoffs) if not addressed.
Gov. Corbett proposed short-term relief by contributing less in 2014, but such a proposal will cost more overall if not must be accompanied by long-term pension reform. This should start with a defined benefit (401k) plan for future hires to take politics out of pensions. Refusing to act is, as Gov. Corbett said, “deeply unfair to children, communities, and our schools.”
4. Liquor Choice is Still on Tap: The governor repeated his call from last years’ budget to end the state liquor store monopoly. A majority of Pennsylvanians from all political persuasions agree that the government in the booze business is a lose business. Legislation has already passed the state House, and the Senate should act this year.
5. Obamacare Isn't Free: The budget includes $219 million for Affordable Care Act benefits and more than $39 million to implement the ACA in Pennsylvania. Taxpayers will also shell out more than $109 million in 2013 and 2014 in Obamacare taxes on health coverage for state workers.
Gov. Corbett's budget assumes $125 million in state savings next year if the federal government approves Healthy PA—his application for a waiver to use federal Medicaid expansion money to put newly-eligible recipients into the federal exchange. But he also projects more than $2 billion in new federal funds spent on Healthy PA.
Pennsylvania ranks 42nd in overall fiscal condition, according to a report by Sarah Arnett of the Mercatus Center. The report, State Fiscal Condition: Ranking the 50 States, analyzes states' abilities to meet their financial obligations.
Dr. Arnett uses four indices to determine state rankings: cash solvency, budget solvency to cover near-term bills, long-term solvency, and service-level solvency to provide residents with an adequate level of services. Due to low rankings in all four categories, Pennsylvania comes among the bottom 10 states in the overall fiscal condition.
Top performing states matched revenues and expenses, allowing them to pay short term bills and construct strategies for managing long-term liabilities. In contrast, bottom performing states have mismanaged at least one fiscal condition. More specifically, decades of irresponsible bond issuance, underfunded pension systems, rising health-care costs, and the appearance of balanced budgets—in short, poor financial management decisions on top of bad economic conditions—have harmed these states fiscal conditions.
Pennsylvania is guilty on each of these counts.
- The Independent Fiscal Office warns that federal stimulus dollars and reserves are running dry, yet state spending has reached an all-time high, surpassing $66 billion, an inflation-adjusted increase of $12,655 per family of four (or $3,163 more per resident).
- Combined state and local debt has reached $125 billion.
- Unfunded pension liabilities between the state’s two public pension systems total $47 billion.
- Both Fitch Ratings and Moody's have downgraded Pennsylvania’s bond ratings, citing pension liabilities and limited reserves.
Already ranking 10th highest in the nation in state and local tax burdens, Pennsylvania's bills are coming due, and absent reform, the burden on taxpayers will only get heavier.
The time has come to heed these warnings as our state leans further and further off the fiscal precipice.
Cancelled health care plans, an unusable exchange website—do we still trust the federal government to deliver on its health care promises?
In what could be a sign of what's to come, the federal government looks likely to give less funding to Pennsylvania for matching welfare costs. Department of Public Welfare Secretary Beverly Mackereth estimates a formula change would result in a $325 million reduction in Medicaid funding for Pennsylvania next year. Medicaid is jointly funded by the state and the federal taxpayers, with the federal government chipping in more than half of the costs.
While Medicaid spending is already out of control, these cuts don’t come along with the flexibility Pennsylvania needs to revamp its program to save costs and provide better care to low-income families.
This could become new normal if Pennsylvania accepts federal Medicaid expansion funds to purchase insurance for low-income individuals on the exchange boondoggle. President Obama has already twice proposed reducing the matching rates for Medicaid expansion.
The federal reductions should serve as a warning to resist any form of "free federal money."
Gov. Corbett signed a more than $28 billion budget at the end of June—but was it a win for you the taxpayer? CF policy experts offer answers on this and more of your questions, video below.
Prefer an audio-only version? Click here to listen in podcast format.
- Is Medicaid expansion finally dead?
- What happened with liquor privatization?
- With a Republican governor and Republican majorities in the House and Senate, why can't we get common sense reforms across the goal line?
- Do reforms still have a chance in the Fall?
- What can you do to effectively make your voice heard on these issues?
Find out what the major obstacles preventing liquor privatization and pension reform are in our latest commentary, Big Government Party Blocks Bold Reforms.
And thank you for contacting your legislators as things came down to the wire in June!
The state budget deadline came and went without passage of any of the "Big Three" policy items—liquor store privatization, pension reform, or transportation tax and fee increases. It was clear heading down the stretch that while pension reform made progress, there wasn't agreement on all the details.
But many pundits expected deals to be cut to get liquor privatization and transportation done. So what happened?
To the surprise of many, government union bosses spent last weekend trying to stop the House from passing any transportation funding plan. Their opposition wasn't done because of any principled opposition to the proposal, but solely out of spite. Their lobbying effort was aimed at blocking transportation funding so the Senate would not act on liquor store privatization, despite having both legislative and public support for that.
PA Independent notes emails sent from leadership of the Independent State Stores Union, representing liquor store managers, trying to thwart the entire policy agenda.
As further evidence that the two issues are linked: on Saturday, a union opposing liquor privatization began urging House Democrats to block the transportation bill – despite the fact that other major unions in the state favor the transportation spending plan that would put an estimated 12,000 people to work.
"Privatization is now being tied to transportation funding currently being deliberated by the House. Call your House Representative, Republican or Democrat, and tell them to vote NO to transportation until the Senate pulls the plug on privatization of the state stores," read a portion of the email sent by the Independent State Store Union, which represents managerial-level employees in the state-run liquor system.
It seems that the efforts of the government unions were effective, at least for the time being. As the Patriot News reports,
Meanwhile, House Republicans pointed to an email from union leaders as perhaps the culprit behind the Democrats’'stubbornness about negotiate their demands. The email urged union members to call on lawmakers to vote against the transportation bill "until the Senate pulls the plug on privatization of the state stores."
For those who still wonder why these major reforms stalled out, look no further than the special interests who would do anything to preserve the status quo.
Medicaid expansion is an optional part of Obamacare that would result in quarter of Pennsylvanians on government health care.
It takes courage to say no "free money" from Washington but these lawmakers understand that the short-term gain will be followed by long-term pain. The expansion is estimated to cost Pennsylvania taxpayers billions over the next decade in both state and local taxes, and would have resulted in untold harm to the poor who experience long wait times and worse health outcomes under Medicaid.
Before the vote, 33 representatives signed a letter promising to vote against the budget if Medicaid expansion was included in any of the budget-related bills. These lawmakers deserve special praise. Their united front was essential in defeating a last-minute expansion effort.
Please take a moment to thank these brave men and women who stood on principle to protect you and set Pennsylvania on a path to real health care reform.
Finally, a big thank you to Americans for Prosperity Pennsylvania for their tireless efforts to reassure lawmakers that Pennsylvanians do not want to expand Obamacare.
This past weekend was not for the political faint of heart. Special interests, led by government union bosses and crony capitalists, prevented real liquor privatization and effective pension reform from moving forward. They did so by a slim majority, but they did it nonetheless.
Until lawmakers address these important issues fully, Pennsylvania families will continue to pay for their inaction. Property taxes will rise to feed the $47 billion pension deficit, and government officials will still promote and sell liquor on your dime.
We’re disappointed, but this is not the time to despair. The fight is far from over, our resolve has only grown stronger, and we’ll keep pushing this summer and beyond. These issues will continue to be debated in the fall, and thanks to you and the thousands of messages you sent lawmakers this spring, we’ve made significant progress already. Special interests delayed, but did not kill, these critical reforms.
The floodgates are opened, and the beneficiaries of big government cannot keep the will of We the People at bay forever. We are encouraged by lawmakers that stood strong against expanding a failing Medicaid program, preventing it from being included in the budget for now. We are grateful that cyber school funding was not arbitrarily slashed, so thousands of kids can continue to attend these schools of choice. And considerable progress was made in both houses on pension and liquor store privatization, though we have yet to achieve the outcomes you deserve.
Those who benefit from big government are counting on you to give up – because the only way they can win is if we stop fighting. That is why it’s critical that we keep up the pressure, stay informed, and stay engaged with the process.
Both Republicans and Democrats have recently engaged in some risky business by pushing for the Medicaid expansion. They've been quick to assure state taxpayers they won’t be left with an enormous bill if federal matching funding deteriorates thanks to "opt-out" protections and cost-saving reforms.
The problem is that there’s nothing in the law that gives states the ability to opt out of Medicaid expansion, even if the federal government doesn't hold up its end of the deal. All the power is in the hands of HHS Secretary Kathleen Sebelius. In short, expansion is forever, or a "Hotel California," as Rob Alt over at the Buckeye Institute calls it. States can check-in, but never leave.
Other states have already tried to insert cost-saving reforms with little avail. Maine sought to extend the 100% matching rate beyond 2016, Tennessee tried to increase co-pays, and Indiana is still awaiting an answer on whether their Healthy Indiana Plan can be expanded to meet the Medicaid expansion provisions. In short, the federal government has been quick to squash state reforms.
Even worse, the federal government will not give the commonwealth a straight answer on whether they can opt-out or what reforms will be denied until a proposal is in writing. This is the same tactic used on Arkansas in the midst of their expansion debate. And even if the federal government allowed Pennsylvania to opt-out of an expansion, it would be politically impossible to pull the rug out from under citizens who have come to depend on government health care.
Rest assured federal funding will deteriorate, triggering opt-out provisions. Congressman Joe Pitts warned, "There is no way the federal government can keep these promises. We can't afford the entitlement promises we made before the ACA, and we can’t afford this either. . . "
Christie Herrera sums it up nicely over at the Mackinac Center blog: "[states have] no other option but to expand the Medicaid program exactly as it exists today, which other states have done with disastrous results. States can't vary Medicaid benefits or implement co-pays or other cost-sharing mechanisms that aren't currently allowed by federal law. If exchange benefits don't comply with current Medicaid requirements, states must provide "wrap-around" coverage at the state's expense."
Our lawmakers are playing fast and loose with people's health and taxpayer dollars by trying to outmaneuver the federal government to collect millions in taxpayer cash.
Instead of playing political games, let’s follow the lead of Florida which is working to improve Medicaid on their own terms.
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The Commonwealth Foundation is Pennsylvania's free-market think tank. The Commonwealth Foundation crafts free-market policies, convinces Pennsylvanians of their benefits, and counters attacks on liberty.