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Gov. Rendell Outlines Plan to Close Budget Deficit
Gov. Ed Rendell says $500 million in state budget cuts, an expected federal fiscal stimulus package, and half of the state's Rainy Day Fund will close most of a projected $1.6 billion deficit in the 2008-09 budget.
Briefing lawmakers on the state of the budget December 9, Gov. Rendell also warned that the 2009-10 spending plan will include significant budget cuts, as economists predict a protracted recession.
As for the 2008-09 fiscal year, Rendell said the following sources will plug the $1.6 billion deficit that his budget office is projecting:
- October Budget Freeze: $311 million
- December Budget Freeze: $153 million
- Additional Reductions from Independent Agencies: $36 million
- Appropriated Funds Unused in 2007-08: $101 million
- Rainy Day Fund: $375 million (half of $750 million total)
- Transfer of Marcellus Shale Royalty Payments: $174 million
- Expected Federal Fiscal Relief: $450 million
All told, Rendell has outlined $464 million in budget cuts under his jurisdiction and is seeking $36 million from independent agencies, including the Legislature, the courts, and state row offices, among others. The state also has cut $41 million from the Motor License Fund, although that will not impact the General Fund deficit the state is trying to close.
Gov. Rendell said he is basing the $450 million in federal stimulus on a $900 million, two-year amount, which is what the state received from a 2003 federal stimulus plan, following the last national recession. The governor said $450 million was a conservative estimate, and that he thought the state would receive more in a federal stimulus package in early 2009.
Gov. Rendell and Budget Secretary Mary Soderberg cautioned that the $1.6 billion deficit projection was subject to change, given the difficulty of projecting revenue collections in such a volatile economy. The governor also said next year's budget will bring "deeper and stronger challenges" for the state, and that it will contain significant budget cuts. "We have to look at every line in the budget and some have to be eliminated," he said. Legislative leaders also said budget cuts were likely.
The Pennsylvania Budget and Policy Center has urged Gov. Rendell and state lawmakers to take a balanced approach to solving the budget deficit this year and next. That should include broadening some tax bases through the closing of corporate tax loopholes, a temporary delay in the phase-out of the Capital Stock and Franchise Tax, an analysis of the cost and effectiveness of tax credits, and new revenue options, such as an excise tax on smokeless tobacco and a levy on the extraction of natural resources.
Noted economists Joseph Stiglitz and Peter Orszag have argued that cutting state budgets during a recession is counterproductive and can be worse for the state economy than raising taxes on wealthy individuals. Budget cuts diminish funds flowing into local communities, reduce services at a time when demand is likely to grow, and put additional pressure on local governments and ultimately local taxpayers.
For example, one of the mid-year savings Gov. Rendell has proposed is a 6-percent cut in non-preferred appropriations to the Penn State University system, other Pennsylvania institutions of higher education, and several major museums. The budget cuts to higher education could result in tuition increases next year.
Furthermore, an additional shortfall of $1 billion, which is not out of the question in 2009-10, will require large and painful cuts. A billion dollars is equal to 20 percent of the basic education subsidy or two-thirds of the prison costs. While it is a good idea for lawmakers to find efficiencies in the budget, consolidating or cutting certain line items, as lawmakers have proposed, won't fill such a large shortfall.
The budget should be balanced without jeopardizing public investments in education, health care, and higher education. The deficit is a result of the economic downturn, not overspending. Cutting services that people need and investments that support our economy will put us further behind when the economy begins to recover.
Gov. Rendell's and Budget Secretary Soderberg's December 9 presentation is available online.