Dubious Deficit Discussions

JUNE 17, 2015  | by BOB DICK

Pennsylvania State Budget Debate

Just how big is Pennsylvania's structural deficit? And what does that term even mean?

Although some news outlets reported Gov. Wolf and legislative leaders came to an agreement on the size of the deficit, The PLS Reporter published a story to the contrary. The Wolf Administration continues to put the budget deficit at more than $2 billion while House and Senate Republicans say the budget shortfall is closer to $1 billion.

So who's right? According to revenue estimates provided by the Independent Fiscal Office (IFO), Republicans have the edge in the deficit debate.

Projected Structural Budget Deficit (Totals in Millions)
2014-2015 2015-2016
IFO Revenue Projection $30,540 $30,722
Less Tax Refunds ($1,287) ($1,275)
Beginning Balance $81 $376
Prior Year Lapses $90 $0
Total Revenue Available $29,424 $29,823
IFO Projected Spending $29,048 $30,777
End Year Balance $376 ($954)
Sources: Independent Fiscal Office 2015 June Revenue Estimate; 2015-2016 Governor's Executive Budget

Over the past few months, revenues have surged above the original estimates, making Pennsylvania’s short-term budget picture look less bleak.

But even this budget "deficit" assumes a $1.7 billion increase in spending. In fact, projected spending increases will cause deficits for at least the next five years. This is the "structural deficit" referred to above. However, for this year, lawmakers can balance the budget simply by slowing the growth in spending.

By keeping spending growth at or below the cap established by the Taxpayer Protection Act, or a $498 million spending increase in the next fiscal year, the state would be on target to end the fiscal year with a $277 million surplus.

2015-2016 Budget Outlook Under TPA (In Millions)
IFO Revenue Projection $30,722
Less Tax Refunds ($1,275)
Beginning Balance $376
Total Revenue Available $29,823
Spending Under TPA $29,546
End Balance $277

To be sure, addressing the state's long-term structural budget problems requires tackling pension reform and controlling welfare costs. But balancing this year's budget doesn’t require tax hikes.

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District Reserve Funds Continue to Rise

JUNE 17, 2015  | by JAMES PAUL

Contrary to claims about budget cuts to public education, Pennsylvania school districts continue to accumulate large reserve funds, up to $4.1 billion in 2013-14. This amounts to more than 15 percent of their total revenue, according to recent figures from the Department of Education, and a $100 million increase over 2012-13.

A school district's fund balance is essentially a rainy-day fund. 

SD Fund Balances 13-14

Take a look at our most recent Policy Memo for more trends in Pennsylvania public education. 

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Pension Debt Strangles Local Government

JUNE 17, 2015  | by BOB DICK

Pension Reform

Pension reform commands a great deal of attention in Harrisburg these days, and deservedly so. Pension systems for state and public school employees are in bad shape, and reform is vital.

But the commonwealth's pension problems aren't confined to state government and school districts. Pension costs are strangling many of the Keystone State's local governments. Earlier this year, the Auditor General released a report detailing the magnitude of the local pension problem.

The report focused on 562 "distressed" municipalities. These 562 municipalities have underfunded their pension systems by at least $7.7 billion. Rising pension costs are forcing local governments to raise taxes and fees, lay off workers, and cut back on services—including those devoted to public safety.

To address this problem, lawmakers in the House and Senate introduced legislation to put new public safety employees into secure defined contribution or cash balance plans. Moreover, these bills would take pensions off the table during collective bargaining and binding arbitration—a process by which an arbitrator can set pension benefits regardless of a municipality’s ability to pay.

Here’s a short description of two pieces of legislation aimed at tackling municipal pension problems:

  • HB 316, sponsored by Representatives Keith Greiner and Seth Grove, freezes pension benefits at current levels for public safety employees and moves those employees into a cash balance plan to prevent the accumulation of additional pension debt.
  • SB 755, sponsored by Senator John Eichelberger, allows municipalities to establish defined-contribution plans for all public safety employees and would prevent local municipalities from using pension assets to fund any other programs aside from pension benefits.

While SB 755 is the better of the two plans—it takes the politics out of pensions—both proposals give local governments tools to fix the their pension problems.

Local government pension reforms are now gaining momentum thanks to bi-partisan support from Democrat and Republican local officials, business leaders, and the Coalition for Sustainable Communities, which the Commonwealth Foundation has proudly joined to help stress the urgency of municipal pension reform.

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Examining State Aid for Public Schools

JUNE 16, 2015  | by JAMES PAUL

State revenue to school districts reached an all-time high in 2013-14, at $9.7 billion. In part 2 of our week-long series on education finance in the commonwealth, take a look at this chart on state education revenue.

Funding levels slightly declined under Gov. Rendell in 2009-10, as they were supplanted by temporary federal stimulus dollars. However, since 2010-11, state aid has consistently increased. On a per-pupil basis, state taxpayers contribute roughly $5,400, which mirrors the national average.

State Revenue to School District 2015

For a more in-depth look at education spending trends, check out our most recent Policy Memo

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Another Year, Another Record High in School Spending

JUNE 15, 2015  | by JAMES PAUL

Pennsylvania spent $26.1 billion on public schools in 2013-14. According to state data, this amounts to a $600 million increase over the 2012-13 baseline. 

As you can see from the chart below, school spending has steadily increased over the past decade, save for 2011-12 upon the expiration of federal stimulus funds. Contrary to the myth propogated by government employee unions, state funding for public education was not cut in 2011-12. More on that tomorrow. 

SD Spending 13-14

School spending on a per-pupil basis also reached an all-time high in 2013-14, exceeding $15,000 per student. Of course, there are several steps lawmakers can take to more rationally and transparently allocate state education aid, but the broader argument that "schools are underfunded" doesn't align with the facts. 

Take a deeper look at education spending trends in our most recent Policy Memo

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A Solution for Persistently Failing Schools

JUNE 12, 2015  | by JAMES PAUL

Amidst a flurry of hearings on severance taxes, incomes taxes, and pension reform, a piece of legislation with less fanfare advanced with bipartisan support out of the Senate Education Committee. Senate Bill 6 has the potential to rescue thousands of students from persistently underperforming public schools.

Senator Smucker's SB 6 has two major components. First, it would enable school districts to utilize new powers to improve schools in the bottom 5 percent of statewide performance. These schools would be identified as "intervention schools," and local school boards would have enhanced staffing flexibility, as well as the ability to convert the school into a charter.

Most importantly, the legislation creates an Achievement School District (ASD), which could absorb schools in the bottom 1 percent of performance. This is the most transformative aspect of the law. Perpetually failing schools would transfer to the ASD, which has similar powers outlined above. However, the ASD is overseen by a seven-member board appointed by the governor and legislature. This unique management structure provides the right incentives to institute meaningful school reform for students who need it most.  

Achievement school districts are gaining in popularity across the country as a means to turn around chronically underperforming schools. They are perhaps most famous in New Orleans, where a Recovery School District was scaled up after Hurricane Katrina. In New Orleans, some 93 percent of public school students attend charters. Only 7 percent of schools are currently designated as failing, compared to 62 percent less than a decade ago. And 62 percent of students test at grade level or above, up from 35 percent in 2006.

Similar turnaround school district initiatives exist in Tennessee and Michigan, and they have recently been enacted in Georgia and Nevada.

Education solutions must be more innovative and forward-looking than simply raising taxes—especially given that Pennsylvania education spending is currently at an all-time high. During Tuesday’s hearing on SB 6, Democratic Senator Anthony Williams explained tax hikes over the last fifteen years have not improved the quality of schools in his district.

"Pouring more water into a bucket that has holes in it doesn't put out the fire." Take a look at Sen. Williams' complete remarks:

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Four Facets of Wolf's Tax Plan


On Wednesday, I testified before the Senate Finance Committee on the effects of Gov. Wolf's proposed tax increases. My testimony covered four key areas.

1) Wolf's plan represents more of the "same old, same old."

Total state spending is already at an all-time high, and has gone up 44 of the past 45 years—a $16,000 increase per family of four in inflation adjusted dollars.

Pennsylvania's tax burden currently ranks 10th highest in the nation, up from 25th in 1991. As a result, Pennsylvania has lagged the nation in job and income growth.

2) Wolf's plan hurts middle class families.

Gov. Wolf's tax increase represents a net increase of $1,400 per family of four. An Independent Fiscal Office analysis found that taxpayers in every single income group would pay more.

Moreover, families with certain expenses—such as day care or nursing care costs—would be hit far harder than the average family, with hundreds or thousands of dollars in additional costs.

3) Wolf's plan will cost Pennsylvania jobs.

Our analysis finds Wolf's tax proposal would result in 40,000 fewer private sector jobs in Pennsylvania by 2016-17.

4) We can balance the budget without raising taxes

Commonwealth Foundation has outlined several solutions to slow spending growth and prioritize state spending.

You can watch my testimony below, or read the full testimony here.

Gov. Wolf's Tax Proposals

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Affordable Care Act Brings Unaffordable Premium Hikes


Pennsylvania insurance companies are asking for dramatic premium hikes on exchange plans. Highmark underestimated the cost of care for individuals on the exchange and is now requesting a 23% to 39% percent premium hike for 2016 plans. In addition, the insurer expects a $155 million bailout from the Affordable Care Act’s risk management programs.

Highmark isn’t an anomaly in Pennsylvania. Time Insurance Co. is seeking a 61% increase. Gesinger is seeking premium hikes from 40% to 58%. And First Priority is requesting a 21% and 35% hike. Elsewhere, Health Care Service Corp. in New Mexico is requesting an average hike of 51.6%, and BlueCross BlueShield of Tennessee is looking for a 36.3% increase.

It’s undeniable that the ACA is not only failing to make health insurance more affordable, but is making it more expensive.  

On top of premium hikes, exchange customers face higher deductibles. A Families USA analysis shows 43% of those purchasing exchange plans had deductibles of $1,500 per person, and nearly a quarter had deductibles double that amount. This despite cost-sharing subsidies claimed by many lower-income ObamaCare enrollees.

And let’s not forget that exchange premiums are artificially suppressed thanks to federal subsidies that average $277 per Pennsylvanian.

A decision in favor of the plaintiffs in the King vs Burwell US Supreme Court case could reverse the trend of rising premiums and deductibles. If the court rules that subsidies on federal exchanges are illegal, Congress has a golden opportunity to bring consumers relief. (Pennsylvania currently utilizes a federal exchange). 

Should this opportunity arise, the Heritage Foundation proposes elimination of three costly Obamacare regulations: the age-rating rules, the actuarial value restrictions, and the benefit mandates. These changes would create a 45% decrease in premiums for a 21 year old Pennsylvanian and a 9% decrease in premiums for a 61 year old Pennsylvanian (based on bronze plan rates).  

Regardless of what happens in Washington this month, one thing remains clear: the Affordable Care Act has been anything but affordable.  

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Audio: Gov. Wolf's Budget Hurts Everyone


Despite Gov. Wolf campaigning on giving the middle-class a tax cut, his budget plan will raise taxes for every income group.

Disapproval of his tax plan was made apparent after Pennsylvania's House of Representatives­ put it up for a vote and not a single lawmaker voted in support of it.

CF’s President & CEO Matt Brouillette spoke with WPHT's Dom Giordano about Gov. Wolf's budget proposal and how it will harm all Pennsylvanians. 

Matt states that "the average family of four would see an additional $1,400 come out of their family budget…[t]his isn’t going to be good for Pennsylvanians and I think that’s why nobody stood up voting for Governor Wolf’s tax proposals."

Gov. Wolf's broken promise will decrease the standard of living for all Pennsylvanians by taking more dollars out of every family’s wallet—leaving them with less money to buy groceries, pay for medical needs, or put gas in their car.

Click here or listen below to hear more.

The Dom Giordano Show airs daily on WPHT in Philadelphia

Follow Commonwealth Foundation’s SoundCloud stream for more of our audio content. And for mobile listening, get the SoundCloud iPhone and Android apps

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Will Tax Shifting Help Public Schools?


As I pointed out yesterday in a chart and blog post, Pennsylvania spends significantly more per student on public schools than the national average. Moreover, increased spending has not resulted in improvement in academic performance.

Calls for increased education spending tend to ignore these basic facts. At the same time, many readers have asked about our position on a dollar-for-dollar tax shift, which would redistribute the school tax burden in Pennsylvania.

To be clear, CF opposes tax shifting schemes that result in net tax hikes, such as those found in Gov. Wolf's budget. Other tax shifting proposals are revenue neutral, or dollar-for-dollar. Typically, these proposals ask the state to contribute more, or all, to public school funding in exchange for property tax reduction or elimination.

We believe that tax shifting—even of the dollar-for-dollar variety—will not solve structural problems with school financing. Here are our primary concerns: 

  1. Tax shifting does not address overspending in public schools, which is driven by pensions, mandates, union contracts and lobbying, and a government monopoly over the school system.
  2. Tax shifting creates winners and losers. This is true among individuals who would be forced to pay higher sales or income tax rates (and in the case of expansion, some families would face exorbitant increases on nursing care, day care, or other items). Indeed, while the property tax is highly unpopular, it is less detrimental toward state economic growth than is the income tax, which affects workers and small business owners.
  3. Winners and losers will also emerge at the school district level. Tax shifting effectively forces residents in District A to pay more in state taxes, while District B would get more in “relief.” Districts with high property taxes will get less relief than districts that have responsibly kept taxes low. 
  4. Tax shifting fails to provide a student-based funding formula.
  5. Tax shifting does not necessary prevent property taxes from coming back, and it can become a vehicle for increasing our overall tax burden on families and businesses.

Without other reforms, tax shifting will not resolve the larger problem of overspending and unaffordable taxes. As I pointed out in my testimony on property tax reform, there are other solutions that address the spending problem in education, of which high property taxes are just a symptom. Here are five recommendations:

Weighted Student Funding

While Pennsylvania spends more per student than the rest of the country, and provides about the national average in state funding per student, that support isn’t driven out to schools that need it the most. A broken funding formula, in which school districts have been “held harmless” regardless of changes in enrollment for more than 20 years, fails our students.

Moving to a student-based funding system would ensure state dollars go to the schools that need it most—based on student enrollment and student need. We should fund children, not buildings. This reform would better allocate the $26 billion we already spend.

Collective Bargaining Reform

Employee benefit cost growth has greatly exceeded salary growth in public schools. These costs are driven by unaffordable union contracts.

Reforming the collective bargaining process—providing taxpayers and voters with more information about the terms and costs of contracts—could result in major savings for public schools, money that could go back into the classroom.

Mandate relief, including prevailing wage reform and seniority reform

School districts across the state have complained about unfunded and unaffordable mandates. Among the largest of these is the prevailing wage mandate, which requires school districts to pay more for construction projects than the private sector pays for the same work. Prevailing wage mandates increase the cost of construction by 10 to 30 percent, which for Pennsylvania school districts results in $160 to $480 million in additional annual costs.

Likewise, state law that limits when school districts furlough employees, and requires furloughs be done solely on the basis of seniority, deny schools the flexibility to manage costs. Reform that values teacher performance above seniority would improve the quality of education across Pennsylvania, while giving schools the tools they need.

Pension reform

Over the past six years, pension payments from school districts have increased by $2 billion. This amounts to a $600 tax increase per Pennsylvania homeowner, or the salary of 20,000 teachers. Rising pension costs were the justification for 98% of school districts recently seeking exemptions to raise property taxes above inflation.  

We need pension reform that moves the state out of the defined benefit business. Establishing a defined contribution retirement plan for new hires provides costs that are predictable and affordable. Responsible pension reform removes politics from pension management and prevent future crises from threatening our public schools.

School Choice

Lawmakers should expand school choice programs, such as the Educational Improvement Tax Credit (EITC) and the Opportunity Scholarship Tax Credit (OSTC). These programs allow low and middle income families to attend better, safer schools. 

Moreover, the EITC and OSTC save Pennsylvania taxpayers money. The average EITC scholarship is less than $2,000, while the average OSTC scholarship is approximately $4,000. These scholarships are significantly less than the average per-pupil spending in traditional public schools.

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