Pennsylvania’s Governor: Budget ‘Time Bomb’ Is Ticking

Warning that Pennsylvania faces a $2 billion budget deficit and is on the verge of having to make drastic spending cuts to basic services, Gov. Tom Wolf unveiled his 2016-17 executive budget proposal on Tuesday, which includes tax hikes on personal income and tobacco products, as well as a $200 million increase in aid for local school districts.

Wolf, a first-term Democrat, presented his spending and taxation plan as Pennsylvania approaches its eighth month without a finished budget for the current fiscal year, which began July 1, 2015. The governor’s new proposal includes an $80.2 billion operating budget. Of that amount, $32.7 billion falls within the state’s general fund, its largest operating account. That general fund level would mark a roughly 12 percent increase over the $29.1 billion available in the account during fiscal year 2014-15, according to the budget proposal.

In the governor’s view, Pennsylvania has for too long spent in excess of revenues, while relying on one-time patches, and unrealistic assumptions to make up for budget gaps. According to his latest budget proposal, continuing these types of practices will put the state on a path toward a budget deficit that clears $500 million by June, and balloons to over $2 billion by July 2017.

“This deficit isn’t just a cloud hanging over Pennsylvania’s long-term future,” the governor said during his budget address to a joint session of the General Assembly in Harrisburg on Tuesday. “It is a time bomb, and it’s ticking away, right now, even as I speak.”

“If it explodes, the people in this chamber, if you allow it to explode,” he added, “then Pennsylvania will experience a fiscal catastrophe the likes of which we have never seen.”

Disagreements last year between the governor and Republican lawmakers resulted in gridlocked negotiations, which delayed the completion of this year’s budget.

On Dec. 29, Wolf vetoed parts of a $30.3 billion Republican-backed budget plan the General Assembly approved. In doing so, he cited cuts that had been made to education, and also said the plan was out-of-balance, lacking sufficient revenues to cover expenditures.

At that time, the governor did release upwards of $23.3 billion in funding.

Republicans hold majorities in both chambers of Pennsylvania’s General Assembly, and have taken an especially hard line against tax increases Wolf has proposed.

Much of Wolf’s address on Tuesday focused on the state’s broader fiscal challenges, rather than the specifics in his newly released budget blueprint. At one point, he said that if lawmakers were unwilling to “face up to the reality of the situation we’re in” they should “find another job.”

After his address, Republican lawmakers were quick to blast Wolf’s proposals.

“Unless the governor happened to pick up a leprechaun with a pot of gold in his jeep, there is no chance that budget is based in reality,” said House Majority Leader Dave Reed. “I was hoping he was going to come back from fantasy land, instead he left for neverland,” he added. “We are not going to rubber stamp $3.6 billion in higher taxes, for $3 billion in higher spending.”

Senate leaders also chimed in. “It is appropriate that the governor delivered this proposal on ‘Fat Tuesday,’” said Senate Majority Leader Jake Corman in a statement. “After all, he’s asking taxpayers to foot the bill to fatten state spending.”

Under the governor’s plan, Pennsylvania’s personal income tax rate would be raised to 3.4 percent from 3.07 percent, an increase of nearly 11 percent. The higher rate would be applied to income earned on or after Jan. 1, 2016, and would generate about $1.36 billion in additional revenue during the next fiscal year, according to estimates in the budget proposal.

Wolf's plan includes other tax increases as well.

Beginning on April 1, the state’s cigarette tax would go up to a rate equivalent to five cents per cigarette, or $1 for a pack of 20. And a 40 percent tax on the wholesale price of other tobacco products, including large cigars and e-cigarettes, would go into effect May 1.

Meanwhile, the state’s sales and use tax would be expanded beginning on April 1 to cover basic cable television, movie theater tickets and digital downloads. A surcharge of 0.5 percent would be added to fire, property and casualty insurance premiums also.

And a so-called “severance tax” on natural gas extraction would be imposed. Wolf has previously advocated for such a tax, but without success. Natural gas production in Pennsylvania’s Marcellus shale formation thrived amid the fracking boom. But as natural gas prices have slumped over the last two years, rig counts in the region have dropped.

Wolf made the case on Tuesday that it is not possible to solve the state budget’s structural problems through spending reductions alone.

“Indeed, anyone in this chamber who claims we can simply cut our way out of this mess, without also increasing revenue, is just ignoring the math,” the governor said. “If we don’t have sustainable revenue sources in our budget, the result will be billions of dollars in new property tax hikes at the local level.”

But Republican House Speaker Mike Turzai said after the governor’s speech that lawmakers were “listening to their bosses back home,” meaning their constituents.

“You know what they’re hearing?” he said. “Please hold the line on taxes.”  

Wolf argued that if lawmakers do not change their approach to the budget, harsh cuts are not far off.

“We’re talking about Pennsylvania failing to meet its basic obligations this year,” he said.

Since 2011, the governor said the state’s school districts have been forced to increase local property taxes by $1.2 billion because of “irresponsibility, right here in Harrisburg.” Wolf referred to this phenomenon as “tax shifting” and said it was not sustainable.

He went on to paint a bleak picture of what the state’s future holds if the status quo continues with the budget.

Among the looming cuts he described were thousands of teacher layoffs, the loss of nearly $200 million in services for Pennsylvania seniors, and a reduction of $180 million in assistance for people with mental illnesses or intellectual disabilities.

Turzai accused the governor of “fearmongering.”

Rep. William F. Adolph, Jr., the House Appropriations Committee chairman, called the governor’s budget address a “60 minute lecture” and likened the state’s ongoing budgeting process to his recent knee surgery. “Pretty painful,” the Republican lawmaker said. “But not as painful as this process.”

“I don’t agree with the governor that there’s only two paths that we must take, one path which is tax and spend the $33.3 billion, or bankruptcy,” Adolph added. “There’s a middle path.”

Pension funding continues to pose a sizeable fiscal burden for the state.

In an a report issued on Feb. 4, Moody’s Investors Service noted that the combined, reported unfunded liabilities in Pennsylvania’s two largest pension plans—the Public School Employees' Retirement System and State Employees' Retirement System—climbed to about $54 billion in 2014, from around $12 billion in 2005. Unfunded pension liabilities measure the difference between owed benefits and a plan’s assets. The liabilities are not all due in one year, they show how much a pension system is expected to be short over a future period of time.

Wolf’s budget proposes transferring $280 million in personal income tax revenues in the current fiscal year to a restricted account for the state’s school employee pension costs. The transfer would be repeated in the 2016-17 fiscal year, but the amount would be $560 million.

The $200 million increase in state aid for local school districts would come through what is known as the Basic Education Subsidy. The added money would raise the total amount of the subsidy by about 3.3 percent, to around $6.3 billion in the upcoming fiscal year. Wolf’s new budget assumes the subsidy will see a $377 million increase in the current fiscal year.

His plan also calls for a $60 million, 30.5 percent increase in early childhood education funding, and upping a special education subsidy by $50 million, or about 4.6 percent.

Basic education is one of the areas that remains only partly funded in this year’s budget.

Compared to where they once stood, the state’s rainy day funds have dwindled. In 2002, these reserve funds totaled nearly $1.04 billion. By June 2016, it’s anticipated that the state’s rainy day fund balance will be $68.9 million, according to the budget proposal.

The governor told lawmakers that if they can’t agree to the terms of the budget he has proposed, then they should help him find an alternative path forward.

“The train has been careening down the tracks for years,” the governor said. “Now the moment of impact has arrived. And whether or not we crash is up to the people in this chamber.”