Budget Agreement Postpones Budget Problems Rather Than Solves Them

Read PBPC's Media Statement on Budget Agreement

State legislative leaders announced a tentative agreement on a 2009-10 state budget Friday, but later in the day, Governor Rendell said he would veto the budget plan if it reached his desk, saying it was not balanced this year and that it is "a billion dollars short for next year."
Very few of the details of the budget agreement were announced, particularly on individual spending items.
The framework includes general spending and revenue numbers.  The agreement would reduce spending from $29 billion recommended by the Governor and $28.1 billion spent in FY 2008-09 to $27.945 billion.  It would raise $1.2 billion in what the leaders are calling "recurring revenue" and $2.1 billion in one-time revenue sources.
Legislative leaders have agreed to include a $300 million increase in basic education funding sought by the Governor. There is some sense that the increase will be funded at least in part by reductions in other education line items. Also unresolved is whether the agreement would cut state education funding back to 2005-06 levels and use all of the $728 million in temporary federal stimulus funds to make up the difference.
The budget agreement would:

  • Cut spending from $28.1 billion in FY 2008-09 to $27.945 billion.
  • Rely heavily on reserves and fund transfers to balance the budget.
  • Use all of the $755 million in the Rainy Day Fund and $708 million in the Health Care Provider Retention Account.
  • Make one-time changes in tax payments that generate $211 million in 2009-10 and $159 million in 2010-11.
  • Transfer $143 million from the Oil and Gas Lease Fund and $150 million from the Tobacco Settlement Endowment Fund.
  • Enact a tax amnesty program to generate an estimated $100 million.
  • Cut $16 million from tobacco cessation and prevention funding.

Legislative leaders have identified what they claim are $1.2 billion in recurring revenue; however, several of the revenue sources are temporary:

  • Changes in the Capital Stock and Franchise Tax are for two years only.  The increased revenue is offset by further tax cuts for large businesses. On balance, this will raise $300 million in 2009-10 and $458 million in 2010-11.  The tax cuts represent a permanent revenue loss in exchange for a temporary tax increase.
  • $100 million in leases from drilling on state park lands in the Marcellus Shale. These lease payments are one-time payments and depend on relatively high lease prices.
  • $200 million for the introduction of table games in casinos.  Most of this first-year revenue is for licenses; the revenue declines to $121 million in 2010-11.
  • $60 million cut in Medicaid. (Leaders say this is a reduction in eligibility errors; it is unclear whether this is just an appropriation cut.)

Other revenue sources include:

  • $171 million by redirecting 25 cents of the cigarette tax to the General Fund.
  • A 25-cent increase in the cigarette tax to raise $97 million in 2009-10 and $146 million in 2010-11.
  • $75 million in cuts to tax credits.
  • $25 million in transfers from state liquor store profits.
  • $100 million from taxing small games of chance.

Virtually all of the revenue sources are speculative estimates. The tax amnesty program revenue estimate is much higher than what the Department of Revenue estimates it would raise.  In addition, there is some talk of contracting out this function to a private firm, which could cut revenue even further.
We are deeply concerned that this plan postpones Pennsylvania's budget problems rather than solves them by relying on overly optimistic revenue projections and one-time revenue sources. That could set Pennsylvania up for a mid-year budget gap and structural deficits in future years.