A Penny Saved or a Penny Burned?

Imagine for a minute that you, like many Pennsylvanians, had your hours and pay cut back at work.  You’ve been building up credit card debt month after month, and had to renegotiate your mortgage payments to make ends meet.  Now suppose you found a $100 bill lying in the street.  Would you use this money to pay off some of your bills, or go out and by the latest gadget?

Pennsylvania lawmakers now find themselves in a similar dilemma, as tax collections have come in a bit higher than projected.  Unfortunately, many in the state capitol are pushing to spend the money now rather than pay off the state’s ever-growing obligations.

After April’s General Fund tax collections came in at nine percent above forecasts, some lawmakers are clamoring to use any surplus the commonwealth has at the end of the year to increase spending on education and other programs. Gov. Tom Corbett and House Republicans, however, suggest prudence by holding some back in reserve.

There are several reasons why this advice should be heeded. For starters, one month of strong tax collections does not establish a trend. Like the money found in the street, this windfall is not an indication of a booming economy. While April’s collections were ahead of estimates, March’s tax collections were behind forecasts. For the year, the state is only 2.3 percent ahead of projections.

Secondly, while many erroneously call the windfall a “surplus,” it is simply a difference from estimated revenue, rather than funds remaining after all spending has occurred. Gov. Corbett’s proposed budget already relies on using a surplus—starting the 2011-12 fiscal year with $586 million in the bank and ending the fiscal year with less than $4 million remaining. That is, the budget already spends more money than the state expects to collect in taxes next year.

Most importantly, Gov. Corbett and lawmakers must consider the annual budget in light of Pennsylvania’s long-term fiscal picture. Over the past eight years, state debt nearly doubled, growing by $21 billion. Annual interest payments on bonds tripled, to over $1.1 billion in the proposed budget—a total sure to rise in future years.

On top of this debt, Pennsylvania continues to run a shortfall in other areas, relying on short-term borrowing. This includes the growing debt—currently $3 billion—the commonwealth owes to the federal government for Unemployment Compensation.  And this year the state borrowed $1 billion in tax anticipation notes—this is money borrowed just to have enough cash in the bank so state checks don’t bounce.

The largest looming cost on the horizon is our pension payments for state and school employees. Like refinancing a mortgage, Act 120 of 2010 delayed the “pension spike”, but did so by creating a pension staircase. Taxpayer contributions to pensions of state workers (SERS) and the state share for school district employees (PSERS) are projected to rise from $700 million this year to more than $4 billion by 2017. That is a 500 percent increase in six years.

Lawmakers decided to delay payments into the pension funds because they were unaffordable.  Yet, in putting off these payments-which are contractually guaranteed—legislators relied on the expectation of future revenue growth.  Using such revenue growth for anything other than paying off the state’s legal obligations would be an abdication of their promises to taxpayers and retirees. Pennsylvania parents and grandparents would certainly be sensible enough not to splurge today by passing off more debt to their offspring.

For any family, saving a few dollars for the future and paying off credit card bills would be the fiscally prudent path.  Likewise, state lawmakers should resist the temptation to spend every penny they have, and consider retaining any surplus to pay off debt or put toward pensions.

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Nathan A. Benefield is Director of Policy Research with the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent, nonprofit public policy research and educational institute based in Harrisburg.