Breaking Down The Budget: The PA Fiscal Landscape

Jun 30, 2017

The 2016/17 fiscal year budget ended up $1.5 billion under projections, a deficit that has made negotiations on the new budget much harder.
Credit Matt Rourke / AP Photo

State budgets have two basic parts: one outlines how much government will spend on its programs and expenses, and the other details where lawmakers are getting the money to pay for it.

Last year, the GOP-controlled legislature compromised on a $31.5 billion spending plan, and then took two more weeks to come up with a revenue framework to fit it.

Democratic Governor Tom Wolf let it become law without his signature, declaring at the time that “our budget is balanced this year, and we have greatly reduced the commonwealth’s structural budget deficit.”

But a year later, that budget is $1.5 billion below estimates—the biggest shortfall since the 2009 recession.

“It is pretty clear now that any rational person would come to the conclusion that last year’s budget was not actually balanced,” said Auditor General Eugene DePasquale at a recent press conference.

He and Treasurer Joe Torsella have said that money is now so tight, the state may have to take out outside loans as soon as next month—a move that will likely have an adverse impact on its already-mediocre credit rating.

So why did this happen? Faulty budgeting on the part of lawmakers is certainly part of the reason.

For instance, last year’s revenue plan included $100 million from a gambling expansion. However, the expansion was never actually passed, so that money became part of the shortfall.

But other problems are trickier to predict, like unexpectedly weak state income.

This time last year, the commonwealth's Independent Fiscal Office projected overall revenue growth would be around 5.2 percent. The Wolf administration had the number even higher. But revenues missed the mark by a long shot, coming in at a mediocre 2.3 percent growth.

IFO Director Matthew Knittel said it’s still not clear why that happened.

“It looks like [the weakness] is broad-based—I wouldn’t put it in any one sector,” he said. It’s just that consumers, for whatever reason, were holding back on the spending. And we’re not sure why they’re not spending more.”

A few key areas came up short. Sales tax fell nearly three percent below expectations, and personal income tax pulled similar numbers.

Corporate net income tax revenue had been expected to increase, but instead it sank for the second year in a row—something that has never happened outside of a recession.

Knittel said this isn’t a simple case of state government being too optimistic with their predictions

“The projections were reasonable,” he said. “The labor market in Pennsylvania actually produced about 52,000 jobs last year, and that’s a very solid number. So it was unexpected, it was inconsistent.”

Pennsylvania isn’t alone in having low, unpredictable revenues this year. John Hicks, head of the National Association of StateBudget Officers, said it has happened across the country.

“We had about half the states last year whose revenues came in under budget. This year it’s two thirds,” Hicks said. “For a period of economic recovery that’s a very high number—the highest number that we’ve recorded since we’ve been keeping these records, mostly during the 2000s.”

However, the commonwealth is particularly vulnerable when it has a bad income year. 

Part of the problem is that its rainy-day fund is nearly empty. Plus, the budget is already lean enough that when revenue comes up short, it’s difficult for a legislature opposed to tax hikes to find new places to cut.

One of the major cost drivers is spending for the departments of Health and Human services. A disproportionate part of that money goes toward aid for Pennsylvania’s aging population.

“When you look at the number of folks who are 65 and older, that grew by 10 percent from 2011 to 2015. The population of Pennsylvania grew by 0.5 percent during that same time period,” said Human Services Secretary Ted Dallas.

Dallas said the commonwealth is home to the fourth-highest number of people over 65 in the country, adding that two out of every three dollars the department spends is on people classified as “high need.” Most commonly, that means elderly retirees in nursing homes.

The elderly population is only expected to grow as more Baby Boomers retire, so the state is left with an unwieldy financial burden.

As it is, human services spending has been fairly flat over the last several years. Advocates for people receiving state care—like Russ McDaid with the Pennsylvania Health Care Association—say it can’t go much lower.

“At some point, as funding continues to lag significantly behind the cost of providing those services, we are going to see access issues,” McDaid said. “We are going to see major providers leaving the state, and we’re going to have some significant challenges.”

Another cost lawmakers would be hard-pressed to get rid of? Pension payments.

The state’s struggling under about $70 billion of unfunded pension liabilities—and growing.

The debt originated in the early 2000s when legislators gave all state employees—including themselves—lucrative pension boosts. Since funds were flush at the time, they didn’t allocate money to pensions for a few years. Then, the economy crashed.

The state is now slowly working itself out of the massive costs those decisions created.

Senate Majority Leader Jake Corman recently acknowledged that those expenses aren’t going away anytime soon. Otherwise, the debt would keep growing even faster.

“We’re still going to make the payments,” Corman said. “We’re still going to have difficult budgets, both here, and at the school district level.”

Where does that leave the legislature?

With a lot of expenses, not much revenue, and little consensus on how to solve the problem.

The budget deadline is Friday.