Pennsylvania State Budget
With an estimated $2 billion "planning deficit" announced this week, one might believe crafting a balanced budget that doesn’t raise taxes is impossible. Yet earlier this year, we released a report identifying reforms that could save taxpayers billions of dollars.
There are many areas where state spending isn't helping Pennsylvanians. For example, over the last eight years, the commonwealth has spent more on so-called economic development than any state in the country, according to the Council for Community and Economic Research. However, such spending has been relatively ineffective. States that spent the most on economic development saw their economies grow at a slower rate than states spending the least on such initiatives.
The root of the commonwealth's budget woes are mandated programs with ballooning costs—costs first ignored by Governor Rendell. Chief among those are increases in pension payments—estimated to grow by $1.7 billion over five years—and the enormous Medicaid program (with $5.8 billion just in General Fund costs), which is set to grow by 3.5 percent next year.
Years of overspending, not "right-wing ideology," have resulted in our current fiscal predicament.
The Governor's Mid-Year Budget Briefing shows that mandated spending cost drivers, such as pensions and Medicaid, must be addressed in order to repair the Commonwealth's fiscal balance.
Balancing the budget without tax increases won’t be easy, but it is possible if officials are willing to take on the spending drivers that have been squeezing taxpayers for decades.
Last week, legislation moved out of the Senate Finance Committee that would set guardrails on state government spending, establish a “Rainy Day Fund,” and, potentially, even send rebate checks back to Pennsylvania taxpayers.
Check out our new Taxpayer Protection Act handout for more information.
So, what are some of the benefits of responsible spending limits?
CF’s Nate Benefield answers in a conversation with radio host Gary Sutton. Listen here:
The Gary Sutton Show airs daily on WSBA 910AM in the York area.
Follow Commonwealth Foundation’s SoundCloud stream for more of our audio content.
We at the Commonwealth Foundation are pleased to welcome State Treasurer Rob McCord to the fight for fiscal restraint.
McCord, along with Auditor General Eugene DePasquale, held a press conference today to raise concerns about state finances. While DePasquale in his role as Auditor General is regularly fighting waste and abuse, such as his audit of Scranton's failing pension plan, this seems to be a first for McCord. The impetus is the state needs to borrow money from the Treasury to pay its bills until taxes roll in.
This is a real concern, but this is far from the first time the state has been in this fix. In 2009 and 2010, Pennsylvania issued "tax anticipation notes"—borrowing funds with interest until enough tax revenue comes in to pay them off. But McCord issued no warning shot then. He simply signed onto the bond issue.
In contrast, the Commonwealth Foundation has been sounding the alarm for years about the state's fiscal health, noting the "Four Alarm Fire" facing our commonwealth, and the frequent bond downgrades we are experiencing thanks to a pension crisis and excessive debt. As we've noted, this problem has been caused by seven consecutive years of spending more than revenue.
Nonetheless, we welcome Treasurer McCord in the fight for fiscal restraint. The treasurer noted, "the state's true financial condition is even worse than it appears because Pennsylvania has papered over its problems by draining other funds to balance the last several budgets."
In other words, this is a long-standing problem caused by decades of excessive spending. We have to put our fiscal house in order.
One good start is the Taxpayer Protection Act, which passed the Senate Finance Committee today. Click here for our fact sheet on that important issue.
Lawmakers should also tackle the critical issue of pension reform. And recent House efforts to reduce the "debt ceiling" on the RACP program—which is essentially borrowing for corporate welfare projects—would be a major step towards fiscal sanity.
Readers of PolicyBlog already know that Pennsylvania education spending is at a record high, that state funding to school districts for pension costs is skyrocketing, and that school district spending, revenues and reserve funds are at all-time highs.
That should be enough to stop government union leaders from repeating the $1 billion cut lie...but they're still at it. In fact, a new lie to defend the original lie has emerged.
Talking to Capitolwire (paywall), PSEA spokesman Wythe Keever claims, "No previous administration cited pension funding in order to boost their claims about K-12 funding."
It is preposterous to think that the cost of teachers' pensions isn't part of the cost of education, or that state aid to school districts for pension costs isn't part of state aid to school districts.
Of course, this is far from the first lie Wythe Keever has been caught in.
As we recently wrote, Mr. Keever has denied that union dues are used for any sort of political activity—even as his employer, the PSEA, told its members (as required by law) that 12 percent of their dues go to politics.
Wythe Keever also once denied to a reporter that the PSEA was behind mysterious ads claiming school choice would require a tax hike. We later uncovered that the PSEA spent $575,000 from union dues to fund those ads.
That a spokeman for PSEA consistently resorts to outright, provable lies is a telling commentary on how far government union executives are willing to go to advance their policy agenda.
House Majority Leader Mike Turzai took to the podium last week, providing press and spectators his response to the Governor’s criticisms, blue-line budget reductions, and House priorities.
We applaud Rep. Turzai for making paycheck protection among the important issues discussed, stating:
I know there is controversy in respects to the paycheck protection issues, but I think this is important. With respect to the state [union] contracts, at that bargaining table you could've negotiated out the ability to collect political contributions or the ability to collect union dues.
Despite the sparring between the Governor and state lawmakers, many public officials were united in their belief that public-sector unions are blocking desperately needed pension reform. As Governor Corbett noted, "The out-of-touch, paid union leadership of PSEA sent out an email blast, taking credit for blocking [pensions]. We need to have the public-sector teachers' union in Philadelphia step up and make concessions."
Senator John Eichelberger agreed saying, "When the PSEA brags about stopping reform to the pension system and promotes the unethical practice of having the government collect their political funding, something needs to change."
State Representative Jerry Knowles adds, "The truth is, common sense can't even be heard above the voices of the union leaders and special interests. Union leaders are controlling Harrisburg through the heavy handed tactics of their highly paid thugs and a bottomless pit of money they give to Democrats and a group of liberal Republicans."
Unions aren't just opposed to pension reform; they are blocking a host of needed reforms. Franklin and Marshall College political science professor Terry Madonna explains the union conundrum well in the context of teacher seniority reform,
The problem is, Pennsylvania public unions, particularly the teachers unions, are very powerful, and they have a lot of even Republican support. Now, they could pick up some Democrats, but Democrats in Pennsylvania are often union-backed. I think it’ll be very tough to move that legislation.
The stage is set to end the collection of union political money with taxpayer resources. It's time to restore fairness to the political process in Pennsylvania.
The recently passed Pennsylvania state budget sets a new record for state funding for public schools. The chart below illustrates this growth over the years.
The total budgeted for the 2014-15 fiscal year—$10.04 billion—is $290 million more than the prior year. Indeed, in represents an increase of nearly $1 billion since 2011-12 (Governor Corbett's first budget).
It is even higher than years when state tax dollars were supplemented with temporary federal stimulus funds—$400 million more than the combined total in 2010-11 (and $1.5 billion more when just looking at state tax dollars).
Yesterday, the PA House of Representatives advanced a $29.1 billion spending bill. This bill could be voted on by the full House today. There is much to like in this budget in terms of fiscal responsibility.
For starters, the $29.1 billion budget represents a 2.1% increase over the 2013-14 passed budget (1.9% when including "supplement appropriations" that are added to 2013-14 spending totals). This increase is less than the rate of inflation and population growth as measured by the Taxpayer Protection Act.
The budget plan also addresses the spending gap without raising any taxes. While it does rely on transfers from other funds, it does not delay pension payments or expand Medicaid.
Underfunding pensions, while making it easier to balance the budget this year, requires higher future payments to make up the difference and lost investment income. Moreover, shifting costs to the federal government via Medicaid expansion would grow the welfare state—hurting Pennsylvanians with higher federal taxes and higher future state costs and harming the poor with low-quality health care—without tackling the necessary reforms to fix a broken system.
Further, the proposed budget and revenue changes include temporarily suspending some targeted tax breaks and reducing some economic development subsidy programs. These programs are generally less effective than lower tax rates across the board in encouraging job growth and making Pennsylvania more economically competitive.
Finally, the proposed budget would use $380 million in revenue from liquor privatization. While recent indications are that liquor privatization seems unlikely to pass the Senate, the House plan sets the right priorities.
Enacting liquor privatization, a reform that the vast majority of Pennsylvania voters want, would deliver greater convenience, selection and prices for consumers. This should be a budget priority given the oft-suggested alternative of job-killing tax hikes.
Pennsylvania doesn’t need more government spending to improve the quality of life in our state. In the heat of budget season, this message tends to get lost in the shuffle. This year is no different.
Higer taxes may be on the horizon too. Pennsylvanians labor under the 10th highest tax burden in the country, but that hasn’t stopped government unions—and their allies— from pushing for a $1 billion tax increase.
Instead of sticking taxpayers with the tab, lawmakers should focus on balancing the state’s budget by controlling excessive and harmful spending. Below are five ideas to help achieve this goal.
1. Don’t Increase Spending: A large portion of the nearly $1.3 billion deficit is the result of proposed spending increases in Governor Corbett’s budget. If lawmakers were to forgo the increases, a significant amount of the projected deficit would be eliminated. Government should not be spending money it doesn’t have.
2. Utilize Part of the Legislative Reserve Fund: According to an audit, lawmakers have $153 million sitting in their reserve fund. While a portion of this may be necessary to continue operations during budget disputes, lawmakers should consider transferring some of this money into the general fund to bridge the budget gap. This move is not unprecedented, as reserve funds have been transferred to the Hazardous Sites Cleanup Fund and Accountability Block Grants for public schools.
3. Eliminate Corporate Welfare: Government grants and loans given directly to businesses harm real people and hinder job creation. The Commonwealth Foundation has identified more than $700 million in grants, loans, and special tax credits which should be phased out, preventing taxpayers from having to pay more for years of government overspending.
4. Reform Prevailing Wage Mandates: Pennsylvania’s Prevailing Wage Act mandates contractors pay inflated wages on most state or local government-funded construction projects. Mandating the highest “prevailing” wages on qualifying government construction projects has increased costs by 10 percent to 30 percent more than what contractors would pay workers for identical projects funded with private dollars. If the mandate were ended, taxpayers could save upwards of a billion dollars.
5. Partner with the Private Sector: Pennsylvania owns 117 state parks and 24 museums and historical sites. Contracting out management of these locations would realize real savings and free up revenue for other areas of the budget.
For more ideas on how to fix Pennsylvania’s fiscal problems, read our report, Blueprint for A Prosperous Pennsylvania.
Pennsylvania has a prioritization problem. Recent controversies about the State Racing Fund and the legislature's reserve fund provide two examples of why Pennsylvania consistently wrestles with budget crises.
Auditor General Eugene DePasquale criticized the Department of Agriculture last week for shifting resources from the State Racing Fund to consultants and other non-related programs. But why does the state have an adviser on horse and harness racing issues when we’re facing a $50 billion pension liability? A liability that caused both Moody’s and Fitch to downgrade Pennsylvania’s bond rating, while Standard and Poor’s rated Pennsylvania’s fiscal outlook as negative, down from stable.
If Pennsylvania doesn’t prioritize pension reform, its bond rating could be downgraded again, which would increase the cost of borrowing and the likelihood of future budget gaps.
Likewise, it seems imprudent to squirrel away more than $100 million in the legislature's reserve fund. The last budget standoff reportedly cost $50 million in reserve funds. To be fair, lawmakers have allocated reserve funds to General Fund needs in the past. However, the reserve fund's suspicious history is reason for concern. Reserve funds were used for questionable expenditures such as expensive dinners and parking tickets. The most recent audit uncovered $150 for a Starbucks reward card.
On the other hand, taxpayers are facing exploding Medicaid costs with or without Healthy PA. The IFO (Independent Fiscal Office) projects public welfare will grow by 4.9 percent per year for the next five years while state revenues increase by only 3.1 percent.
It’s time to reprioritize the commonwealth’s spending and fund promises before perks.
In 2012, Americans paid more in taxes than they did for food, clothing and shelter combined. In Pennsylvania, residents labor under the 10th highest tax burden in the country. Put simply, Pennsylvanians already pay too much in taxes.
Yet government union executives, who pretend to be champions of the middle class, support increasing taxes on working Pennsylvanians. AFL-CIO executive Rick Bloomingdale explains why in a 2012 speech: "But remember, we [government unions] live off tax revenue."
Mr. Bloomingdale is exactly right: Government unions depend on tax hikes and bigger government to survive.
So it should come as no surprise when the CLEAR Coalition, consisting of Pennsylvania’s largest government unions, who send members' dues to this lobbying and advocacy group, lobbying for Representative DiGirolamo’s alternative budget, which calls for a tax increase of more than $1 billion.
The long list of tax hikes and other revenues in this proposal:
- Stop the already-delayed phase out of the Capital Stock and Franchise Tax
- Move to mandatory unitary combined reporting (MUCR) for corporations
- Eliminate the vendor discount for businesses that collect sales tax for the state
- "Amazon tax" on Internet sales bought by Pennsylvania residents from out-of-state companies
- Natural gas severance tax
- New tax on e-cigarettes and smokeless tobacco
- Roll back the net operating loss allowance for corporations
- Cut the Educational Opportunity Scholarship Tax Credit
- Give the Pennsylvania Liquor Control Board the flexibility to raise prices on wine and liquor
- Expand Medicaid to get more "federal dollars"
What would be the the impact of this $1 billion government union tax hike?
1) Higher business costs and fewer jobs.
Supporters see businesses tax hikes as a way to make corporations and "the rich" pay their "fair share." But this new revenue doesn't come out of thin air. It requires employers to make cuts elsewhere, often to the detriment of the most vulnerable.
Raising taxes on businesses results in higher prices, forcing consumers to pay more for products and services, and higher utility bills. Further, higher taxes means less money available for businesses to invest and expand, making Pennsylvania less competitive nationally and internationally. This means fewer jobs, lower wages and lost opportunities for workers.
We don't get to witness the jobs that aren't created and opportunities lost because of high taxes, but evidence shows how high taxes (combined with overspending) undermine state economic growth.
2) Ending educational opportunities.
The Opportunity Scholarship Tax Credit offered more than 1,300 students scholarships to their school of choice in its first year by encouraging businesses to donate to scholarship programs.
The OSTC is growing in popularity both among students and businesses. Scholarships for students who need a lifeline from failing and violent schools should not be on the chopping block. Rather, lawmakers should look at other areas of the budget, like corporate welfare and targeted tax breaks, that are ripe for elimination.
3) Consumers will pay more for wine and liquor.
As part of the effort to "modernize" the government liquor monopoly to "act more like a business," the union billion-dollar tax hike would give the PLCB the power to raise prices on wine and spirits to generate more revenue.
In other words, to help fund the highest spending levels in the state’s history, you will have to pay more for your beverages at state liquor stores. This is nothing more than a back-door tax increase.
4) Expanding a broken welfare system.
Moreover, Obamacare's Medicaid expansion requires billions in new spending, adding to the program's current unsustainable spending growth. This will increase the deficit and require dozens of new taxes. Leaving future generations to pay for today's bills is the wrong approach to balancing the state budget.
And "savings to the state" are unlikely to materialize as the federal government, which is more than $17 trillion in debt, is already looking at ways to cut their Medicaid spending by shifting more of the cost back to states.
The total tax hike on Pennsylvanians from this union leader-backed proposal? – $1.06 billion
Not only are government unions throwing their support behind a $1 billion tax hike, they’re doing so with the help of taxpayer resources. If unions want to campaign for higher taxes on working people, that’s their prerogative; but they should not be using taxpayer resources to aid their campaign.
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