Union Demands vs. Fiscal Realities

JUNE 30, 2016  | by BOB DICK

One government union’s insatiable appetite for more tax dollars has hit a brick wall.

The Wolf Administration is in the process of negotiating a contract with the state’s largest union—the American Federation of County, State and Municipal Employees Council 13 (AFCSME). The current contract expires at midnight, and it’s highly unlikely a deal will be reached before then.

AFSCME agreed to postpone negotiations because the sides could not reach an agreement. According to AFSCME, the Wolf Administration would not sign off on proposed wage increase and wants members to contribute more to their health benefits. The administration is making these requests in light of the state’s precarious fiscal position.

The costs of public employee compensation is exploding. Benefits are particularly out of control. They’ve risen by more than 71 percent over the last 10 years. Benefits for AFSCME members make up about 44 percent of their total compensation (see page 21). In the private sector, the average is 34 percent.

The growing costs of pensions factor into the dramatic rise in compensation, but health care costs are part of the picture as well. According to the Office of Administration, public employees pay 11.7 percent for their healthcare. The private sector average is 20 percent. To their credit, the Wolf Administration wants to reduce this inequality by requiring employees to pay more for their coverage.

The governor should continue to stand firm and protect taxpayers—especially as the legislature debates a bloated budget that will probably require tax hikes. Capitulating to AFSCME now will only compound this problem.

Fortunately, the public will have an opportunity to review the labor contract before the deal is approved.

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Will the Education Code Protect School Choice?

JUNE 30, 2016  | by JAMES PAUL

In addition to general appropriations (SB 1073) and the fiscal code (SB 1320), lawmakers are finalizing language in the education code, HB 530. This legislation promises significant reforms to Pennsylvania’s charter school law.

Here’s the bottom line on HB 530: It is a sweeping bill that includes a number of positive provisions, but also imposes steep funding cuts on cyber charter schools.

Critically, an amendment by Speaker Mike Turzai increases the available tax credits for the Educational Improvement Tax Credit (EITC) program by $25 million. The EITC, which provides tens of thousands of private school scholarships to students in need, is a pillar of school choice in Pennsylvania. Thanks to the Turzai amendment, $75 million in tax credits would be available for K-12 scholarships, $37.5 million for educational improvement organizations, and $12.5 million for pre-K scholarships.

A large EITC increase would be welcome news, and it is one of the best aspects of HB 530.

On the other hand, the bill increases payment deductions that districts may claim when sending funds to cyber charters. The exact magnitude of this funding cut is unclear, but some cyber school administrators suggest it could reach as high as $27 million per year. These cuts, while less severe than earlier versions of HB 530, are particularly punitive given that spending for traditional public school continues to grow on autopilot.

Additionally, previous iterations of HB 530 included direct pay language for cyber charters, which would ensure cybers receive funding from the state—rather than being stuck in limbo waiting for overdue funds from districts. The direct pay provision was amended out of the bill. (Update: A reader informs us this was removed at the request of cyber schools, who may have changed their view on the subject after last year's budget impasse.) 

What else is included in HB 530? Here are some of the notable provisions and regulations: 

  • A statewide funding commission, composed of lawmakers and school administrators, tasked with making recommendations about how charter schools are funded.
  • Clarification that cyber schools may utilize in-person instruction for students with special needs.
  • Increased financial disclosure regulations for charter school administrators.
  • Increased regulations on charter school debt payment.
  • A standardized application will be created by the Department of Education for charter applicants and charters requesting renewal.
  • Expanded initial charter terms from three to five years, and renewal terms from five to ten years.
  • School districts, intermediate units, and public universities must provide cyber charters with reasonable access to facilities for the purpose of administering standardized tests.
  • Clarifies that charter schools are not subject to caps on enrollment.
  • Charter schools are granted the right of first refusal to purchase or lease unused public school buildings.
  • Allows two or more charter schools to consolidate into a “multiple charter school organization.”
  • Expands the size of the Charter School Appeal Board.
  • Limits the amount of funding charter schools may hold in unassigned reserve funds, and requires that funds in excess of these limits be refunded to school districts. This provision is notable, given the massive reserve funds that many school districts have accumulated.

Although aspects of the law will be welcome news for charter schools, such sweeping reforms may have been better considered in smaller pieces of legislation, rather than one comprehensive bill. The EITC increase, however, is unquestionably a terrific development.

HB 530 is expected to be voted in the House later today, at which point it will still need to pass the Senate. 

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What's in the Senate Budget?


Earlier today the state Senate passed an amended version of a House budget proposal, which included the largest spending increase in a decade. The House must now agree to the Senate's changes before sending it to the governor.

So, what's in the new budget proposal? More spending.

The Senate added $74 million in new spending to the House's proposal. But the spending increase appears smaller because $95 million from the "Transfer to the Commonwealth Financing Authority" line item was shifted off the General Fund Budget. The Senate budget reduces that line item to $0, but taxpayers are still required to foot the bill for the payments, even if it comes out of a different pot of money.

Counting that expenditure, the Senate budget is $31.63 billion—$1.6 billion (5.3 percent) more than last year's enacted budget.

The biggest Senate increases were in the areas of higher education. They also added $9 million in DCED programs—that is, corporate welfare programs and "walking around money" (WAMs) used for local projects in their districts.

The table below summarizes the differences between the two budgets. One last point: The legislature has still not agreed to a plan to balance the budget. So we will continue to monitor what revenue sources will be used to pay for the additional spending.

Department House Senate Difference Notes
Executive Offices $182,918 $184,068 $1,150 Increases to Human Relations Commission and Law Enforcement Activities
Treasury $1,163,015 $1,163,265 $250 Increase to General Government Operations
Agriculture $140,527 $143,658 $3,131 Increases to multiple programs, shows
Community and Economic Development $231,851 $240,847 $8,996 Includes Commonwealth Financing Authority funding moved offline; Major Increases in Marketing to Attract Tourists and Keystone Communities
Conservation and Natural Resources $106,336 $106,961 $625 Increase to Heritage and Other Parks
Drug and Alcohol Programs $52,354 $47,604 -$4,750 Elimination of Emergency Addiction Treatment
Education $11,770,661 $11,781,340 $10,679 Increases to Job Training Programs and Community Colleges
Penn State $244,400 $250,510 $6,110  
Pitt $143,193 $146,773 $3,580  
Temple $146,913 $150,586 $3,673  
Lincoln $14,084 $14,436 $352  
State System of Higher Education $433,389 $444,224 $10,835  
Thaddeus Stevens College $12,949 $13,273 $324  
PHEAA $313,554 $321,289 $7,735 Increases to four programs
Environmental Protection $147,808 $148,356 $548 Increases for Environment Program Management and Chesapeake Bay Commission
General Services $114,886 $119,390 $4,504 Increase for Capitol Fire Protection
Health $214,218 $215,493 $1,275 Increases for General Government Operations and Bio-Technology research
Human Services $11,968,156 $11,982,401 $14,245 Increases in 11 programs
Judiciary $354,503 $355,503 $1,000 Increases in all courts, reduction in Reimbursement of County Costs
Government Support Agencies $51,665 $51,765 $100 Increase in Center for Rural Pennsylvania
General Fund Total $31,554,717 $31,629,079 $74,362 Includes Commonwealth Financing Authority funding moved offline; The state must make this payment, even if it comes from another fund. It does not represent a reduction in spending.


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2015 SAT Scores


The SAT, or Scholastic Aptitude Test, is an important indicator of public education quality in Pennsylvania. Currently, the commonwealth ranks 36th out of the 50 states and 3 US territories (Washington DC, Puerto Rico, and US Virgin Islands). That's one place higher than last year.

A large percentage of Pennsylvania students take the SAT, which does contribute to low overall performance. Average SAT scores are higher in states with lower test participation, typically because only the highest performing students sit for the test. Among states with a participation rate of at least 70 percent, Pennsylvania ranks 6th.

Historical data shows SAT scores are largely unchanged since 1970. Meanwhile, state education spending per student has increased 63 percent. This long-term trend undermines constant calls for more education spending to improve public schools.

To increase student achievement, we must change focus from more spending to reforms that change how tax dollars are spent. One such reform is the creation of education savings accounts, which will give parents stronger control over how, and where, their son or daughter will best succeed.

Below is a table of all states scores and participation rates. Details on Pennsylvania’s statewide performance report can be found here.

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The Taxpayers’ False Choice

JUNE 28, 2016  | by JAMES PAUL

Governor Wolf and legislative leaders present Pennsylvanians with two options. The first requires taxpayers to fork over hundreds of millions in higher taxes. The second calls for steep cuts to essential government programs. In the words of Wolf, “We’re going to have cuts the likes of which this Commonwealth has not seen in a generation, if ever.” Taxpayers, we are told, must choose between lousy outcomes: higher taxes or painful cuts.

Make no mistake—this is a false choice. A responsible appropriations bill can be crafted that controls spending and holds the line on tax hikes. New revenues are not necessary to balance the budget—especially not $1 billion worth.

Recall that just last year, Wolf claimed Pennsylvania’s $2.3 billion “structural deficit” mandated $4.6 billion in higher taxes. When the dust settled after a 9-month impasse, the legislature balanced the budget without taxes while also boosting funding for education ($250 million in non-pension spending) and human services ($83 million).

The 2015-16 General Fund spent roughly $30.0 billion. The final revenue projection from the Independent Fiscal Office projects 2016-17 revenues of $30.4 billion. If, in other words, lawmakers merely limited spending increases, there would be no need for higher revenues. 

Some argue government programs must assume a “cost-to-carry”—baked-in spending increases from one year to the next. Surely, though, this does not apply to Community and Economic Development programs, which see a $10 million bump under the House budget plan. Or the Department of Conservation and Natural Resources, which would enjoy a $44 million boost. Is there a "cost-to-carry" for House Caucus Operations (R and D), which are set to increase by $16 million? 

The spending plan, as currently written, also assumes another $250 million in non-pension education spending, at a time when school district reserve funds are at all-time highs

Don’t fall victim to the taxpayers’ false choice. By limiting spending increases to $400 million worth of core government functions, lawmakers can protect working families from harmful tax increases. 

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What Is in the House Budget?


Last night, the Pennsylvania House Appropriations Committee advanced a $31.6 billion general fund budget. This budget is now lined up for a final vote in the House.

Here is what you need to know about the budget.

The Good

  • Spends less than Gov. Wolf proposed. The $33.3 billion budget Gov. Wolf outlined was never seriously considered, given how far it was outside the realm of political possibility. Still, this budget would spend $1.7 billion less than Gov. Wolf offered.
  • No income or sales tax increases. Last week, Gov. Wolf and legislative leaders declared that “broad-based tax increases”—which mean the state sales tax and personal income tax—were off the table for this budget.

The Bad

  • Spending growth 5 times the rate of inflation and population growth. The $1.5 billion increase represents a 5% increase in a year when inflation is less than 1%. This kind of spending growth is unsustainable.
  • Requires more than $1 billion in new revenue. To generate $31.6 billion in revenue, lawmakers are looking to tax amnesty, revenue from the wine reforms passed earlier this month, expanded gambling, and new and higher tobacco taxes. Revenues from sin taxes are unpredictable and decline over time, while tax amnesty and aspects of the gaming expansion and wine reform are one-time revenue streams. If these revenue estimates fall short or fail to grow, lawmakers may be looking at a personal income or sales tax increase next year to bridge the gap.
  • Raises taxes. The legislature has not yet agreed to a specific tax package. We know that it will include a $500-$600 million increase in the cigarette and other tobacco taxes. These taxes fall primarily on low-income households and result in increased smuggling across state lines. There have also been rumors of a tax increase on homeowners’ natural gas heating bills and a tax increase on bank savings accounts.
  • Biggest spending increase in a decade. The $1.52 billion increase in spending over the enacted budget represents the largest year-over-year increase since 2006-07. (The bill also includes $100 million in “supplemental appropriations” to be spent as part of the 2015-16 budget). Moreover, the $2.4 billion increase in Gov. Wolf’s first two years approaches the $2.85 billion general fund spending increase in the prior eight years combined.

Where is the new spending going?

  • $10 million more for Community and Economic Development, a 4.6% increase.
  • $44 million more for Conservation and Natural Resources, a 71% increase. This increase stems from Gov. Wolf’s decision to bar extracting gas under state lands, shorting the Oil & Gas Fund and leaving taxpayers to foot the bill.
  • $153 million more for Corrections, a 6.8% increase.
  • $665 million more for K-12 education, a 6% increase. This includes $345 million for school pensions, $200 million for basic education, $25 million for government-run preschool, and $20 million for special education.
  • $452 million more in Human Services (formerly Public Welfare), a 3.9% increase.
  • $18 million more for the General Assembly, a 6.3% increase.

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Which Taxes Might be Going Up?


Less than one week remains before the state budget deadline, and details are slowly emerging about a $31.5 billion spending plan.

This $1.5 billion spending increase would be the largest spending hike in a decade. Moreover, this increase is more than 5 times the rate of inflation plus population growth, and is about $1.1 billion more than net revenues for the year.

So where do Gov. Wolf and some legislators propose coming up with the additional money? Here is some of what we know or have heard so far:

  1. Gov. Wolf and legislative leaders have said sales and income tax increases are off the table—but he, along with some lawmakers, are looking at many others ways to extract more in taxes from families and businesses.  
  2. Approximately $150 million of this additional revenue will come from tax amnesty. Rep. Marguerite Quinn’s tax amnesty bill passed the House this week. Another $100 million would come from lapsed funds (unspent tax dollars). These represent one-time revenue sources that don’t take more from working families.  
  3. The state House is positioning a gambling expansion for final passage. The bill would allow casinos to run internet gambling and allow slot machines in international airports and off-track betting facilities. The estimated state revenue from this expansion is $200 million. That’s significantly smaller than the $300 to $450 million projected from a previous gambling expansion proposal that included video gaming terminals in bars and fraternal organizations.
  4. Tobacco taxes remain “on the table.” Gov. Wolf’s proposal for a $1.00 per pack tax hike on cigarettes and a 40 percent tax on tobacco products (excluding cigars) are part of budget discussions. As noted by Elizabeth, this $500 million tax hike would hit poor households hardest, is an unreliable revenue source, and results in greater cigarette smuggling.
  5. A new tax on energy has been rumored. This proposal would impose the gross receipts tax on natural gas sold to homes and businesses. One estimate suggests this proposal would generate $500 million in new taxes. That means more than 2.7 million homeowners (and thousands of businesses) will pay more for their home-heating bill next year.
  6. Gov. Wolf’s proposal to increase taxes on savings accounts held at banks, and a new tax on Uber and other ridesharing services has also been rumored.

Instead of focusing on a halfway point between the governor’s unreasonable $33 billion proposal and the current $30 billion budget, lawmakers should focus on what taxpayers can afford.

If we learned anything from last year’s nine-month long budget marathon, it’s that Pennsylvanians have no appetite for tax hikes.

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According to a new Watchdog.org analysis, Pennsylvania leads in the nation in collections from “sin taxes.” The commonwealth collects more than $2.7 billion annually in taxes on tobacco, alcohol or gambling.

While Gov. Wolf and legislative leaders have declared that sales and income tax increases are off the table for this year's budget, a significant increase in tobacco taxes remains part of the mix.

These taxes have proven to be unreliable and declining sources of revenue.

Current rumors suggest a $500 million tobacco tax increase would be included to support the largest state budget increase in a decade.

Rather than look to more sin taxes, lawmakers should work to control spending growth before asking for more from Pennsylvania families. 

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Pennsylvania's Economy is Falling Further Behind


Pennsylvania's economy isn't looking so hot this summer. The Bureau of Labor Statistics reports:

  • Pennsylvania lost 23,600 jobs in the last two months (nonfarm, payroll jobs).
  • Over the same time frame, the unemployment rate climbed 0.6 percent with 43,900 more individuals officially counted as unemployed. Over a three month span, the unemployment rate rose 0.9 percent, and 60,500 more individuals were unemployed.
  • Pennsylvania now exceeds the national unemployment rate.

Here’s some worse news: Our poor economic performance is part of a long-term trend.

  • Pennsylvania lost 41,600 residents in net moves to other states last yearone person every 12.5 minutes.The Keystone State has lost 295,000 residents with $11.6 billion in annual income since 1992.
  • From 1991 to 2015, Pennsylvania ranked a dismal 46th in job growth, 45th in personal income growth, and 46th in population growth.
  • Pennsylvania currently has the 15th highest state and local tax burden.

This bad news comes at a critical juncture in state budget negotiations. The question for lawmakers: Will raising taxes on families offer good news?

History indicates it won't.

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Three Reasons to Avoid Tobacco Taxes


Media reports indicate the state House is formulating a tobacco tax package to raise an estimated $500 million. The proposal reflects Wolf’s original plan to raise cigarette taxes by $1.00 a pack. But higher taxes are the wrong prescription for Pennsylvania, and tobacco taxes are especially harmful for at least three reasons:

They hit the poor the hardest. Proponents of higher taxes often describe spending reductions as "balancing the budget on the backs of poor people." Yet, that's exactly what cigarette tax hikes will do.

As professors Kevin Callison and Robert Kaestner make clear in a Cato Journal article, a tax increase will hurt the poor most of all, as a large percentage of their household income is spent on cigarettes:

From 2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999 and 2 percent for smokers earning more than $60,000.

When two Cornell University economists studied the effects of this "sin" tax, they discovered an unintended consequence: larger food stamp rolls. This should not come as a surprise. Cigarette taxes are regressive and may very well push those around the poverty line into government programs.

Tobacco taxes are an unstable source of a revenue. The IFO predicts revenue from the current cigarette tax will fall by 3.6 percent in fiscal year 2017.

New York, which has the highest cigarette taxes in the country, saw revenue drop by $400 million over the past four years. While smoking did decline, it cannot account for the dramatic decrease in revenue. Smokers simply turned to the black market or neighboring states for cigarettes.

Higher taxes incentivize smuggling. Under the Republican proposal the state’s tax rate will be higher than four of our six bordering states, spiking cross-border shopping and cigarette smuggling.

According to the Mackinac Center, a 62.4 percent tax hike on cigarettes would spike smuggling rates from zero to 20.3 percent. To put it another way, approximately one of every five cigarettes consumed in the commonwealth would be illicit. Not surprisingly, the overwhelming majority of these cigarettes would come from distant, low-tax states like Virginia or the Carolinas.

The commonwealth already imposes a heavy tax burden on Pennsylvanians. Adding to it will only compound the state’s economic challenges without addressing the source of its fiscal woes.

Lawmakers can protect taxpayers by focusing on addressing cost drivers in the budget and putting together a spending plan based on available revenue.


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