Budget Pain in Pennsylvania

Faced with a revenue shortfall in the current fiscal year and ongoing large hikes in the funds needed to cover pension costs, the Governor is almost certain to present a quite austere budget for fiscal year 2012-2013. And as expected the cries of "not fair" and "too harsh" are rising and will be heard vociferously in the days ahead.

Interestingly, when there are austere budgets and some programs get no increases or have actual cuts in their allocations, pundits and critics talk about the pain the budget will inflict. Isn’t it peculiar that the same pundits and beneficiaries of public largesse are seldom, if ever, heard commenting on the pain taxpayers are feeling when they are forced to cough up the money to fund programs and when their wallets are tapped even further to meet the spending demands of special interests?

No, it is always those whose gravy train is threatened who scream the loudest. Why is that? It’s a classic case of public choice theory. When the benefits of government spending are concentrated, as is the case with teacher unions, a decline in spending is felt more acutely than the pain of higher tax revenue spread over the entire population of taxpayers, many of whom have been convinced that tax hikes are a good thing. Then too, because so many special interest group members and their families and friends are also taxpayers, the ability of taxpayers to present a united opposition to tax hikes is even more difficult.

Thus, the beneficiaries often present a more strenuous opposition to spending cuts than the opposition taxpayers are able to mount against tax increases. Only by electing a majority of people who are fervently committed to resisting the massive pressure from many powerful groups to raise spending and taxes can the taxpayers ever have a fighting chance. Apparently, that is the case in Harrisburg right now. And that is driving the special interests nuts.

Will the current favorable situation last beyond the next election? One can hope.

Raising the Redevelopment Roof

The Governor came to Pittsburgh this week bearing gifts from the state’s Redevelopment Assistance Capital Program (RACP) which is a capital budget that is for "the acquisition and construction of regional economic, cultural, civic, and historical improvement projects". Allegheny County will receive $38 million from the program this year for a green jobs center and a biologics center. We wrote a full length report on the RACP in 2003.

The state plans to spend $225 million from the RACP this year, which is slightly more than its capital expenditures on transportation assistance ($212 million) and bridge projects ($200 million) and far more than what it will spend on furniture ($25 million) and flood control ($35 million). RACP spending represents about 14% of all capital spending this coming fiscal year.

Not surprisingly, the state has used the RACP as a credit card, consistently raising the borrowing limit through the years. According to the state’s budget office the RACP began in 1986 with a $400 million cap on borrowing authority. That upper limit was increased five times starting in 1993 through 2002 to $1,450 million, a growth of $1,050 million, or 163% over 16 years.

The current Governor has signed legislation authorizing an extension of the RACP borrowing limit five times, including this past week, since 2003. Beginning with the $1,450 million level reached in 2002, the RACP borrowing limit today stands at $4,050 million, a growth of $2,600 or 179%. That percentage increase bests the growth rate from 1986 through 2002 and did so in half the time. Surely Pennsylvania will be rocketing to the top of the growth charts in no time.

The State Budget: How Rendellian

While the Legislature is congratulating itself over holding the new budget to a 0.6 percent increase over last year’s spending, it still falls short of the needed fiscal restraint in the current economic environment.

Two elements stand out. First, the spending relies on Washington coming up with $850 million in Medicaid funding, which may or may not happen. Second, the budget includes spending increases for K-12 education and economic development. How typical. The Governor’s two pet programs will see increases despite overwhelming evidence that the return on ever higher education spending and economic development expenditures is minimal at best. No amount of evidence is ever enough to move the Governor and his allies in the Legislature away from wanting to spend more on these categories.

We can be thankful that there are no big tax increases. And it would appear the Port Authority’s plea for more dollars went unheeded. But given the games played in Harrisburg, we must wait and see if that decision changes.

Governor Gets It Terribly Wrong on Education Spending

Speaking to group of Pennsylvania teachers on June 22, Governor Rendell tried to make the case for asking the Legislature to approve an additional $355 million in education spending in the 2010-2011 budget.  In his remarks he said school district budget cuts are hurting schools across the state. To illustrate this claim he pointed to Penn Hills where 49 teachers have been furloughed.  Too bad the Governor’s aides had not read the news accounts regarding the furloughs.

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Money for Teachers, Not for State Police

Pennsylvania’s Governor has insisted on massive increases in education spending, much to the delight of his close allies in the teachers union, hikes that are a major factor in the state’s current fiscal crisis. But now we learn there is no money for a cadet class of state police troopers. How derelict in the state’s duty to its citizens.

The state police are a key and important core function of government. There can be no excuse for the underfunding of these police when more spending is being squeezed out for teacher funding. Teachers have paid no price during the recession and fiscal crisis across Pennsylvania. Raises have continued, health care benefits paid, few if any layoffs have occurred, and the right to strike remains in place.

And what have we got in return for the big jumps in education spending in recent years? Flat to lower SAT scores-the gold standard when it comes to measuring educational attainment. Since Rendell became Governor Pennsylvania’s SAT scores have actually declined slightly. North Carolina, where average spending per student is thousands of dollars less per year than Pennsylvania, has marginally higher SAT scores. And the union argument that Pennsylvania has a greater percentage of students taking the test does not hold water. The percentages in North Carolina and Pennsylvania are close (in 2003, 74% in PA, 70% in NC).

All this points to an unfortunate reality: to wit, the political power of the unions and the education establishment, who together can so distort government policy to their wants, is nothing short of breathtaking.

Rendell’s Strange View of Pain Sharing

In a recent comment on budget negotiations the Governor said, "We can’t get this budget resolved without everyone feeling some pain." What a preposterous statement. With his plans to increase or maintain spending on some items, how can it be that he expects everyone to share in the budget pain? Only in the mind of the overly zealous can an increase in spending be viewed as pain. Their ludicrous argument? The increase is less than we wanted.

Unlike other states where the governments have actually made real cuts in overall spending to reflect the revenue shortfall they face, Pennsylvania’s Governor wants to raise spending from last year’s budgeted level with significant boosts in education.

Share the pain? There is no indication teachers will lose any pay raises or benefits and, in the vast majority of districts across the state, no jobs are at risk. Asking recipients of a very big fraction of state and local spending to help by forgoing this year’s raise would have been a reasonable request. But the Governor’s and most legislators’ loyalty to-or fear of-the teacher unions have taken such a common sense notion off the table.

As a result we see the remarkable stance of a Governor wanting to raise taxes in an economy gripped by recession-tax increases that will be with us for a long time with their attendant damage to growth-in order to boost spending from last year’s level. Now that is chutzpah of the highest order. The state deserves better from its leaders.

Spending Without a Budget?

The Governor says he is coming up with a plan to continue government operations and pay employees despite not having a budget in place. If the Governor can do that why not send the Legislature home and let him run the government? This would set a very bad precedent and makes a mockery of constitutionally ordered governance. Just another sign of how Pennsylvanians are losing their grip over their own government.

Willfully disobeying the Constitution is a violation of an elected official’s oath of office. Violating one’s oath is-or should be-an impeachable offense. But we have seen the sense of honor so diminished in modern politics that we are not even surprised or dismayed at open and flagrant examples of officials disregarding their oath of office.

And that raises another issue. Why does the state continue to collect tax revenue when there is no budget? If it cannot get an agreement on spending, then it ought not to be able to collect taxes during that period. Raising money that cannot be legally spent should not be allowed.

Then too, during the time when there is no budget, there should be no pay for the Governor, his staff or cabinet members, legislators and their staffs.

Many Wild Cards in Sales Tax Debate

Under various proposals before legislative committees, PA counties could have the ability to tack on an extra percentage point on to the existing state sales tax, thus giving counties a local option tax, something that only Philadelphia and Allegheny currently have. Bills snaking there way through would either apply to all counties except the two that already have the tax, to Philadelphia only, or to third class cities only.

The most recent PA tax manual shows that of all classifications of local government counties raised the most tax money (97%) from real estate taxes, even more than school districts (many levy the wage tax) and money from a sales tax could be used to offset real estate tax revenue. No mention has been made of replicating the Regional Asset District set-up of Allegheny County or the general budget use of Philadelphia if the tax were to go into effect.

Of course, there is still the possibility that the state budget deliberations could involve the state raising the sales tax in order to pay for its own budgetary needs, which would likely forestall the counties getting the add-on. And then there is still the prevailing attitude that taxpayers don’t want any tax increases and county commissioners being reluctant to adopt the tax.

How Would PA’s Income Tax Compare?

The proverbial "other shoe" dropped today in the state budget deliberations when the Governor proposed a temporary, three year increase in the state’s personal income tax from 3.07% to 3.57%. The Governor says that even with the increase PA will still have the "third lowest" income tax rate.

Here’s what the latest data from the Tax Foundation shows on personal income tax rates in the nation. Seven states have no income tax; two tax just interest and dividends, not wages; that leaves 41 states with a personal income tax.

Pennsylvania and five other states (CO, IL, IN, MI, and UT) have flat income tax rates (as opposed to graduated rates). Right now PA has the next to lowest rate out of those six states. An increase to 3.57% would move it ahead of IN (3.4%) into second next to lowest (IN and IL, at 3%, would be lower). Only CO and PA have no standard deduction or personal exemptions according to Foundation data.

Going back to 2000 data, CO and MI have lowered their rates; UT moved from a graduated system to a flat rate; IL and IN made no changes; PA increased from 2.8% to the current 3.07%. A boost to 3.57% would represent a 30% increase in the income tax rate since 2004, when the rate was raised to the 3.07% level.

Governor Continues to Smoke a Pipedream

Governor Rendell has again lashed out at Senate Republicans for their plan to reduce spending on "economic development". This is a particularly odd stance for the Governor to take in light of the fact that Pennsylvania has spent over a half billion dollars a year on development since he was first inaugurated in 2003 and there is little statistical evidence to show that the money has been effective at stimulating job growth. Indeed, most of the job gains in the state have been in sectors that receive little or no development money with most employment gains over the Governor’s tenure attributable to national economic trends and policies such as low interest rates and tax cuts.

When the opportunity cost of the money spent on development as well as the cost of borrowing much of it is considered, there is no doubt that the funds would have served Pennsylvanians better if they had been left in the hands of taxpayers. Until there is thorough review and evaluation of the myriad grant and loan programs to measure their actual net benefit to the state, it is wise to stem the flood of dollars into these programs. They could actually be having a net negative effect. They are certainly turning Pennsylvania businesses into seekers of government help and thereby permanently enlarging the role of government in the economy with all the attendant problems that will bring.

In effect, the development money creates obligations and support for politicians among those receiving state funding while producing anger and resentment among those who try to make it own their own. Those who seek help and don’t get it will be especially resentful. Government picking winners and losers is the antithesis of the private, free enterprise market driven economy and will lead to more stagnation, not prosperity. But to true believers such as Governor Rendell, growing government is more important that growing the economy.