Op-Ed: Financial recovery is as important as ending the lockdown

Originally published in Broad + Liberty.

On June 9, a bipartisan majority of lawmakers in Harrisburg passed a resolution to end Governor Wolf’s disaster emergency in an attempt to reopen the state. They did this to confront two enormous problems: first, to stem the mass unemployment and growing wave of small-business closures in Pennsylvania, and second, to keep the crater in the state treasury from becoming insurmountable.

State revenues in May were $440 million less than expected, and projections show the situation could get much worse. On top of these shortfalls, increased costs from COVID-19 will have to be addressed, which means the budget crisis in Pennsylvania will likely be even more challenging than revenue projections suggest. 

While Pennsylvania lawmakers couldn’t prevent the COVID-19 pandemic, they can make it easier to recover from our current financial crunch by passing a crucial reform. We know this because Colorado has set the example with its fiscal discipline and the Taxpayer Bill of Rights (TABOR).

Colorado’s General Fund revenue is expected to be $893 million below estimates for the 2019–2020 fiscal year. Pennsylvania, on the other hand, is facing a General Fund shortage almost three times worse at $2.7 billion.

While the difference in revenue shortfalls is itself notable, the truly amazing benefit of Colorado’s fiscal discipline is how much money they’ve held in reserves for emergencies. Colorado has the savings to cover 123% of its expected revenue shortfall, while Pennsylvania can cover only 13%.

Just as households who overspend and don’t prioritize savings are less able to weather financial problems, states can make hard times even worse. And that’s exactly what Pennsylvania has done: our commonwealth was ranked as having the sixth most exposed economy to COVID-19, and that’s partly due to its third-lowest rainy day fund balance as a percentage of expenditures.

Even with last year’s deposit to the fund, Pennsylvania’s reserves cover less than four daysof expenses. Colorado’s balance, on the other hand, was enough to fund 32.4 days. 

Robust rainy day fund balances are a key indicator that Moody’s Analytics—a top financial intelligence firm—looks for when running stress tests. And Pew has listed rainy day funds as one of the four steps states should take to brace for fiscal distress. 

Luckily, Pennsylvania may be able to mend its current financial conundrum by passing its own version of TABOR, which is awaiting a vote in the state house. It’s called the Taxpayer Protection Act (TPA), and it would limit the growth of spending to the three-year average of inflation and population growth—a metric that would align state spending with the economy.

This bill would not only protect taxpayers during normal times, but also put the Commonwealth in a better position to handle a budget crisis by freeing up funds for rainy day deposits. If the state had enacted this reform back in 2003, the savings would have been enough to cover the current year’s projected shortages 15 times over.

We can’t undo the past, but we can stop repeating it. While no one could have predicted a crisis like COVID-19, revenue shortfalls, and recessions are bound to happen, and the budget should be prepared for them.

Lawmakers worked together to pass the resolution to reopen the economy, and they need to do the same thing to protect it. Passing the Taxpayer Protection Act would slow the growth of spending, enable saving for fiscal downturns, and prevent lawmakers from having to make the harmful decision of raising taxes. Responsible fiscal management is important in both good times and bad.