Governor’s Budget Proposal Seems to Be a Non-Starter

The budget proposed for fiscal year 2015-16 is facing a lot of skepticism as being too aggressive, too far reaching and ill-considered.  In short, it ought to be viewed as a non-starter.


In the first place, it seeks to make far more major structural changes than can possibly be thoroughly analyzed and evaluated by the General Assembly before June 30. These changes include hefty increases to sales and income taxes, levying a severance and per cubic foot tax on the Marcellus Shale industry, cutting corporate net income tax with major changes in factors determining tax liability, altering the operations of the liquor stores, an increase in tobacco product taxes, issuing bonds to fund green energy projects, raising the minimum wage to $10 and tying it to inflation, major amendments and expansion of health care provided by the state, and setting up funds to distribute income tax revenue to property tax relief.  All told, the proposed tax increases when fully implemented in 2016 would generate an expected $6.5 billion in additional annual revenue.


These changes, not to mention dozens of other smaller ones, will take months to wade through from an economic analysis standpoint and much longer to deal with politically.   There is much opposition to many of these proposals. Moreover, there is only a minimal nod toward solving the gigantic pension crisis that will require more than just throwing money at it or kicking the can down the road again. The state’s credit rating has been lowered because of the failure to grapple with the monstrous problem.  And absent meaningful reforms soon, the credit rating agencies might well lower the rating again.


Writing off the sale of the liquor stores will not sit well with many members of the Legislature.  Raising the minimum wage by a third will not sit well with employers and is unlikely to get much traction in the Legislature.


On the spending side, the budget plan calls for huge increases ($100 million) in pre-K programs and special education as well as a $400 million rise in basic education funding. Presumably, the severance tax is supposed to cover much of the education spending increase. Enacting a severance tax appears to be very unlikely at this time. Interestingly, the state’s normal funding for school pensions is not in the proposed budget.  There is however, a $1.75 billion transfer of funds into a restricted account for school employee pensions.


In a cautionary note, it is important to bear in mind that the economic and employment forecast for the next several years is a matter of concern. The revenue forecasts in the budget are based on a doubling of growth in incomes and employment in 2015 from the 2014 pace. The faster pace would persist through 2016, lifting the state’s economic fortunes to a much higher plateau. But as many have learned to their dismay, economic forecasts can be very unreliable and lead to major shortfalls of predicted revenue.


A key element in the budget is the plan for dramatic changes to education funding. Education is slated to receive sizable increases in appropriations over the next five years in the Governor’s proposal. This is in line with, and follows the philosophy of, the educational establishment who suffer from the belief that every academic shortcoming can be fixed by dumping more money on it.


Before the General Assembly considers the proposed major increases in spending, the Governor needs to explain some things to taxpayers.  In the first instance, he needs to explain how it is that Peters Township schools spent only $11,602 per student in 2012-13 ($3,000 per student less than the state average and merely $2,608 per student from the state) and had 93 percent of 11th grade test takers in 2013-14 scoring proficient or higher on the PSSA math test and 98.6 percent proficient or higher in reading. These proficiency levels are far above the 70 percent range of scores in the statewide averages. Then too, Greater Latrobe spent only $11,800 per student (about $3,000 below the state average) and has almost 30 percent of the students classified as economically disadvantaged. Yet 85 percent of the district’s 11th graders scored proficient or higher in math and 93 percent scored proficient or higher on reading.


Consider the Hampton district where per student spending is $1,000 below the state average but the high school is ranked as the 8th best in the state, even including all the magnet academies. Then there is Mt. Lebanon where per pupil spending is only slightly higher than the state average yet manages to rank consistently among the top tier of academically performing districts in Pennsylvania.   Many other examples could be cited but these make the point that hefty spending is not necessary to achieve excellent or very respectable academic outcomes.


Now consider two districts that spend over $20,000 per student—Pittsburgh and Wilkinsburg.  Bear in mind that despite having a fairly high local funding capability, Pittsburgh received $9,000 per student from the state in 2012-13. Note, in an interesting aside, the North Hills District with PA Education Department aid ratios that are virtually identical to Pittsburgh’s received only $3,411 per pupil.


Notwithstanding its enormous expenditures per pupil, Pittsburgh’s academic performance is very weak. Indeed, in the City’s high schools, other than a couple of magnets and Allderdice, the PSSA scores are lower than in 2008. At the five non-magnet high schools only 30 percent of 11th graders were able to score at the proficient level on the latest year’s math test; in a couple of schools fewer than 20 percent were proficient. The schools’ reading proficiency was equally disappointing.  Among K-8 PSSA test takers barely 60 percent scored proficient or better in math and only 53 percent in reading. It is a sad but undeniable truth that while not good, the elementary and middle school academic achievement levels are still much higher than the 11th grade performance.


Note that Pittsburgh spends a fifth of its school budget, or about $100 million, on special education including programs such as pre-K and early intervention—areas where the Governor wants to greatly increase spending.


In Wilkinsburg, despite the $21,000 per student expenditures, only 8 percent of 11th graders were proficient in math and 13 percent in reading. At the middle school only 24 percent scored proficient in math and 33 percent in reading.  The elementary scores were modestly better than the middle school but still far below a level to create any encouragement that the schools were effectively educating the students in their charge.


It is important to point out that the high schools in Pittsburgh and Wilkinsburg share a common devastating  problem—high absenteeism.  With official attendance rates hovering at 80 percent (for both districts) that means the average student is absent 36 days per year and some probably out 50 or more. The low attendance rate suggests strongly that a large fraction of students have no interest in education and a woeful lack of commitment to getting one.


How can the General Assembly be asked to spend a lot more money to educate students who have no interest in learning?


The Governor needs to explain why more dollars will not simply feed the maw of ineffective spending when the problem in many schools is a lack of interest on the part of so many students.  More spending cannot solve the underlying causes of the poor academic performance, as much as advocates want to believe it will. They need to offer some evidence before the Legislature considers massive increases in spending. Improving third grade or even seventh grade scores is not enough if that fails to translate into 12th graders who are ready to go out into the world as employees or postsecondary students. When large numbers of students are graduating as functional illiterates, the schools have failed regardless of how excited school boards are about third grade scores.


In short, there are very good school districts in Pennsylvania that spend a moderate amount per student and some very poorly performing ones that spend enormous amounts of money. It should be obvious that huge additional dollops of money are not the answer to what is wrong with the poorly performing schools.


Equally disturbing is the continuing claim that the previous Governor cut a billion dollars out of the state’s education budget. In fact, it was the previous Governor’s predecessor who cut state funds to education. Of course, he had the luxury of using a big chunk of Pennsylvania’s “stimulus” money.  So, even with the recession and falling state revenue he was able to increase school funding using Federal money.


But as we know, his successor would have no such good fortune. Federal funds fell by well over a billion dollars, and the state was facing a $3 billion dollar deficit. Nonetheless, the newly inaugurated Governor added back $250 million in state money to education expenditures.  But the loss of a billion Federal dollars simply could not be made up in the economic environment that existed. Unfortunately, the exploitation of that situation by politicians who conveniently forget how the previous Governor had set the whole thing in motion by using up large chunks of the stimulus money has become part of the enduring political narrative.


In sum, the new Governor’s first budget is predicated on easily refuted arguments and tired old rhetoric and is unlikely to get very far without substantial modifications.

Governor’s Plans for Mass Transit


In the proposed budget for FY 2013-2014, the Governor laid out a plan to increase transportation spending for state highways and bridges, help with local roads, Turnpike projects and mass transit. 



The plan calls for raising additional revenues primarily through the elimination of the cap on the wholesale price of fuel used to calculate the Oil Company Franchise Tax liability. Other transportation taxes will be lowered-such as reducing the liquid fuels tax on gasoline by 17 percent over two years-as an offset to the retail price impact that will likely occur as the Oil Company Franchise Tax moves significantly higher. Some administration accounts have suggested that transportation-designated revenues will rise about $500 million next fiscal year (FY) 2013-2014 and over five years increase to about $1.8 billion annually beyond the current level in FY 2017-2018. If the reports are accurate the plan will raise and spend an additional $5.4 billion more than would happen without the tax increase over the next five years.


However, based on data in the budget, these figures appear to be too high. First of all, the FY 2017-2018 total operating spending for transportation is only $1.2 billion above the current spending rate and, second, the cumulative five year boost above the current level is only $3.9 billion.


For mass transit, or public transportation as it is generally designated in the FY 2013-2014 budget documents, the Governor’s summary page describing the proposed transportation changes indicates mass transit will receive approximately $250 million more per year than it currently receives. However, that figure does not match up with projected appropriation in the Transportation Department budget.  It is only in year five, i.e., FY 2017-2018, that the increase reaches the $200 million mark above current year spending.  In the coming fiscal year the proposed appropriation actually drops.  Significant increases are not projected until year three (FY 2015-2016).


Note too, that in FY 2017-2018, five years out, the annual operating appropriation reaches $755.6 million, a rise of $45.6 million or just 6.4 percent above the current FY 2012-2013 budgeted expenditure. Next year, in FY 2013-2014, appropriations for transit operations are budgeted to fall before beginning a modest growth trend in FY 2014-2015.


Indeed, most of the five year jump in mass transit funding out of current revenues is slated for the line item called Asset Improvement-which next year absorbs the capital improvements line item to simplify the accounting. Asset Improvement appropriations hold flat until year three when they jump by almost $100 million and, after staying flat in year four, leap by more than $100 million in FY 2017-2018, reaching $251.6 million. Note that combined asset improvements appropriations and capital improvement appropriations in the current fiscal year stand at $53.3 million.  Thus, after five years this category of spending will have risen by just under $200 million and account for the bulk of new state expenditures on mass transit.


There is other funding for capital projects through the Capital Facilities Funds and the Public Transportation Assistance Fund but that funding appears to be level at $175 million throughout the period.


But there are more serious problems with the plan as revealed in budget forecast data. Based on estimates provided in the FY 2013-2014 budget documents, the elimination of the wholesale price cap on the Oil Company Franchise Tax will raise only $1.06 billion more in revenues five years from now in FY 2017-2018 than are forecast for the current fiscal year. Moreover, the budget documents’ projected five year cumulative addition to revenue from eliminating the wholesale price cap compared to current year levels is only $3.8 billion. Then too, other categories of motor license fees and taxes are being lowered considerably holding down net motor license fund revenue growth. 


By the same token, funds for transportation are also taken from other state revenue sources. For example, mass transit receives a 4.4 percent share of the state sales tax, payments from the Turnpike Commission, the Lottery, certain motor vehicle fees and from Capital Facilities Fund bond proceeds. These funds will help revenue available for transit to increase.


An immediate question arises concerning the use of the Oil Company Franchise Tax for mass transit. Motor fuels taxes are constitutionally not permitted to be used for purposes other than highways and bridges.  Unless there is a plan to shift fungible revenues to mass transit, the plan as proposed will probably not pass muster. If there is such a provision it is not spelled out anywhere in the Transportation Plan or in the recently released budget.


One thing is certain: motorists will not take kindly to having the price they have to pay for fuel raised to fund mass transit. Especially motorists in most of non-urban Pennsylvania where there is no public transportation.  And even more especially when the income transfer is going to support transit agencies that are egregiously expensive and cost inefficient.  Local transit should instead receive a large share of its support from a local tax levy that has been put to voters in a referendum. A local option sales tax for example distributes the cost of subsidizing public transportation to those who benefit most from the presence of the transit services.  A share of parking tax revenue in a county or city would be another option for raising revenues to subsidize transit. But there is a reason the Constitution prevents the use of motor fuels from being diverted to transit and that law needs to be enforced.


Beyond the funding source considerations, it is incumbent on the Commonwealth as creator of the transit authorities to take more responsibility to help ensure efficiencies of operation and to keep costs under control. For instance, Pennsylvania should immediately end the right of transit workers to strike. The right to strike has been the single biggest factor in driving the Port Authority to virtual bankrupt status. The appointment of board members of the Port Authority exclusively by the Chief Executive of Allegheny County is another serious problem.  The Legislature and Governor should look for ways to insure high quality, non-political appointments to boards as important as the Port Authority.


Moreover, Pennsylvania will continue to ill-serve its taxpayers until it eliminates the prevailing wage requirement on construction and maintenance projects that use state funds. Many millions could be saved each year that could be returned to taxpayers or shifted to other core services, reducing the tax burden on the state’s residents and businesses.  


Finally, the transit plan will gradually raise the local match to receive funds for capital projects to 20 percent from the current 3.3 percent and gradually raise the match to receive operating funds from 15 to 20 percent.  These changes are designed to help ensure better local management.  It could help restrain unnecessary and poorly thought capital projects. In Allegheny County the 20 percent match requirement could lead to a hike in the drink tax, which was originally created to generate the local matching funds but was lowered from 10 percent when it produced more than enough revenue to meet the County match.


Another provision in the proposed mass transit scheme requires local transit agencies to modernize services by carrying out consolidation studies. If cost savings can be realized and agencies implement the consolidation they will have their matching fund requirement for state dollars drop from 20 to 15 percent.  If they fail to adopt the changes their local match for state funds will rise to 25 percent.  Unfortunately, what is meant exactly by consolidation studies is not clear. Does it mean consolidation of routes or service runs within a county’s transit agency? Or does it mean consolidation of services with other counties’ transit agencies? If the latter, the opportunities for the Port Authority are slim indeed because of its very high labor compensation costs compared to the other regional agencies.  Who will evaluate the studies to see if they have assiduously looked for savings or considered sufficiently radical changes that would produce significant savings?


Rather than trying to force consolidation as a way to lower costs, the language of the bill ought to set outsourcing targets-with either private carriers or other regional carriers. For example, in the next five years 25 percent of Port Authority bus service should be provided by lower cost regional or private carriers. These carriers would get the Port Authority state per passenger subsidy passed through to them as the contractor carrier to enable them to compete for bus service.


In short, the proposed mass transit plan offers little in the way of real structural change either in management or in the underlying drivers of cost.


2013 Budget Shortfall Blamed on Fiscal Discipline

It was just announced by the state Budget Secretary that the Commonwealth will need to find $750 million in spending cuts to balance the 2012-2013 fiscal year budget. Revenues are continuing to fall short owing to the lingering high unemployment rate and despite some reasonably good private sector job gains.

Predictably, some members of the Legislature were quick to criticize the Governor for not doing enough to stimulate job growth and generate more revenue. Of course, what they mean by stimulate job growth is to borrow money and spend it on public sector projects that will use union labor. And of course, he should have spent any remaining rainy day fund to make sure fewer teachers got laid off. All unionized workers. Notice a pattern?

The problem is that borrowing comes at a cost. Raising taxes is not an option during a recession and balancing the budget is a Constitutional requirement. Thus, when the rainy day fund is inadequate to close a budget gap, spending cuts have to be made. If the previous administration had not insisted on increasing spending at rates well above inflation for two terms, the budget deficit would never have reached the $4 billion mark and the spending cuts would not have been so painful in the current fiscal year.

But for some, spending taxpayers ‘money, whether from taxes or borrowed and paid back out of taxes, is always the answer to budget problems and job creation. Apparently they have not noticed that all the Federal stimulus and deficit spending a long with extraordinarily easy monetary policy has had precious little impact on the rate of job growth nationally, especially in view of the gargantuan amounts of money being spent and created.

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.

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.

Should City’s Recovery Delay State Budget Settlement?

Apparently the Post-Gazette editorial board thinks so. They want the Allegheny County legislative delegation to hold firm for the "modest" tax and fee proposals the City wants to enact and, if necessary, hold the state budget process up even longer.

What on earth makes the editorial board think that the County’s delegation is interested in enacting taxes or fees that would fall on their constituents who work in or visit the City? There hasn’t been an outpouring of support for boosting the $52 Local Services Tax to $144. Many in the delegation would fight very hard against such an increase. And if it were to happen it is a certainty that the Legislature would allow it in all classes of municipalities across the state, thus essentially making it a statewide tax increase, the exact thing that legislators are fighting against now with the PIT.

Then too, the Act 47 plan outlines three options for the City to generate more revenue for its pension costs. Taxes and fees are one, but the City can also cut its expenditures or leasing parking garages. Why isn’t the City putting pencil to paper now during the budget impasse to look at the alternatives?

Because the PG thinks that if the Philadelphia delegation can throw its weight around and ask for a sales tax increase (another tax option that, if passed, would likely apply statewide) or pension reform. Do they honestly think that the Legislature would pass on a budget agreement to wait and include a solution for Philly’s problems? Even the Governor would likely not do that.

Pittsburgh received a good deal of attention from the state when its tax reform package was put together in 2004-it is doubtful that the issue will be revisited soon.

State at Budget Impasse, But Don’t Stop the Music!

Taxpayers will be thrilled to know that while deliberations over the state budget continue into their third week and efforts are on to hold off a tax increase, the state printing press-also known as the capital budget-churns on. Today City Council made its plea via the URA to apply for funding from the state’s Redevelopment Assistance Capital Budget, $30.4 million to be exact.

The requests include funding for the Pittsburgh Opera ($2.2 million), Pittsburgh Ballet ($750K), and Pittsburgh Symphony ($1.4 million); the August Wilson Center ($9.1 million); and monies for the redevelopment of Federal North ($2 million), Oak Hill ($2.5 million), Point Park ($500k), and the YMCA in the Hill District ($3 million). Council documents show that some of the requests-the Wilson Center, the Opera, and Panther Hollow-will actually ask for more money than what was originally requested.

What’s the message here? That the state is not as in as bad shape as some have claimed and can afford to hand out money for cultural venues? That despite support from the Regional Asset District or some other form of subsidy that "enough is never enough"?

It is not sufficient to say that the RACP money comes from a different pot. The state had to borrow the money, meaning that taxpayers will be on the hook for a long time, much longer than the current stalemate.

“Don’t Cut You, Don’t Cut Me…

Cut the fellow behind the tree". Taking liberties with Senator Long’s famous quip proves a point: countless groups will stage protests and rallies decrying the various state budget proposals but few, if any, will take the next step of identifying how valuable their pet program is and what function should go in order to save their expenditure. It is past time for them to do so.

Just yesterday hospitals and arts organizations, along with supportive Legislators, rallied at the Capitol. The hospital lobby noted that cuts under the proposed spending plans (anywhere from $105 to $280 million) are unacceptable because "the proposed budget cuts could result in potential job losses for thousands of individuals who are either directly employed by hospitals or through jobs in communities that are related to hospitals".

Later a state senator noted "We must send a clear message about the need for arts in Pennsylvania…and that "the arts are an economic engine for Pittsburgh and Allegheny County" (likely no mention of the support for the arts through the Regional Asset District sales tax).

So here is the chance for the clear message, one that goes beyond a rally. What specific function or line item should go in order to fully fund health and arts? It is easy to demonstrate, a lot harder to say "arts are more valuable than the Opportunity Grant program" or "hospital funding should take precedence over early childhood education". If the groups truly believe in their importance, then it is incumbent upon them to identify another program that should be de-funded in order to close the ever growing budget gap. If they don’t like the feeling of pitting their program against another that is too bad-they need to make their case. Failing that, come out is support for a specific tax increase to fund their wishes.

It’s easy to rally and then go back to work. In fact, more rallies are planned for the remainder of the week. It’s harder to offer meaningful suggestions.