The high cost of the faulty Pennsylvania budget process

Pennsylvania lawmakers and the governor are supposed to pass a budget every year by July 1. But this year, they passed half a budget. The parties involved agreed on how much money they wanted to spend, but they could not come up with an agreement about how to pay for the proposed budget.

There are essentially five parties in the budget negotiating process: Gov. Tom Wolf, Republicans in the Senate, Democrats in the Senate, Republicans in the House and Democrats in the House. The budget deficit is about $2.2 billion out of a total budget of about $32 billion. Four of the five parties agreed a couple of months ago on a way to fill the gap. That plan included the passage of a gas severance tax and raising some other taxes to increase revenue. Only the House Republicans objected to this plan.

While the deadlock was dragging on, Standard & Poor’s once again lowered the state’s credit rating, meaning it will cost the state more in interest payments to borrow money. Initially, House Republicans came up with a plan to fund the deficit by raiding funding already dedicated to specific state projects, many of them related to environmental programs. The House Republicans were the only group of negotiators who thought this was a good idea.

Now, the plan from the House Republicans is to borrow most of the money to fill the gap, which means accepting the higher interest payments, because frankly there’s nothing the state could probably do to reverse the process at this point. The rating company issued the downgrade because the Pennsylvania budget in recent years has been balanced with “nonrecurring” revenue streams, and borrowing to fill the gap is exactly the kind of unsustainable fix the rating agency objects to.

Pennsylvania Treasurer Joe Torsella said on September 20 when the downgrade was announced, “This action marks the sixth downgrade or negative credit watch of Pennsylvania by S&P since 2012. Additionally, the Commonwealth has been on a negative credit watch for nearly a year. These actions result in a backdoor tax for Pennsylvanians, as costs increase for the state to borrow money in the future. Without addressing the structural mismatch between revenues and expenditures, the Commonwealth will be at risk for additional downgrades to our credit rating in the future.”

So now the House Republicans are proposing a solution to fix the gap once again, in large part by borrowing, and also by widely expanding gambling opportunities in the state, which is expected to increase tax revenues. Senate Republicans say the House Republican’s new plan deserves consideration.

But Wolf got tired of waiting for House Republicans to act, and he announced that he’s taking measures on his own to fill the budget gap. That includes borrowing up to $1 billion against the future earnings of the Pennsylvania State Liquor Control Board, which Republicans in both houses have been trying to privatize for decades. If the state must borrow to fill the gap—and now just about all sides agree some borrowing is necessary—Republicans would rather borrow against the tobacco settlement payments over the next 10 years.

Wolf also wants to merge the Department of Corrections and the Pennsylvania Board of Probation and Parole, which the Wolf administration says is expected to save money. That move has triggered warnings of a lawsuit from some Senate Republicans who maintain that such a merger can only be completed through the legislative process.

Wolf is also saying that because of the lack of an approved funding plan, the state can’t afford to give state-owned universities—Penn State, Pitt, Temple and Lincoln—the $600 million they have received each previous year to reduce the cost of tuition for Pennsylvania residents. If that holds, students could end up being charged some $10,000 more for college each year.

To sum up, the state is almost certainly facing interest payments that will be millions of dollars higher over the next decade because of the state’s credit rating, and  college students may pay more for college. It’s easy for House Republicans to blame Wolf for the fiasco the state is in budget-wise because, they say, he should have cut spending more deeply than he did. But when four of the five negotiating parties agree to a solution, and only one party says absolutely not, triggering a costly credit downgrade, the party that said “no” is the party most likely to get the blame for the budget mess.

 

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