The Pennsylvania budget drama is like a poorly scripted film and we are the bored, angry audience stuck in the theater. It is the inevitability of mediocrity that makes state politics so frustrating. But at least this drama will likely come to an end soon.
A December compromise that could have been achieved in July or August will likely make its way to a successful vote prior to the Christmas Holiday break.
Let’s review how we got here and if it is possible to avoid this mess next year. Because, believe it or not, a new budget for 2016-17 will be presented by the Governor in March, 2016, a little more than four months from now.
How we got here.
The Job Not Done: Pennsylvania has one Governor, 50 State Senators, and 203 State Representatives. It is the second largest State Assembly in the nation, surpassed only by New Hampshire, which has a part-time legislative body. Our state politicians have one major responsibility above and beyond their oath to protect and obey the State and U.S. Constitutions: To pass a balanced budget by July 1st of each year. They have failed to do this one job for the past five months.
Power Sharing: As noted several times in this column and elsewhere, this is a perfectly divided government from the perspective of political power; neither party can push a budget through without significant defections from the other side or without a compromise agreement that neither side will much love. This is the hardwiring of present budget politics. There is no way to get around it. Nobody owns the chessboard and we begin at stalemate. Any assumption that we begin with an advantage on one side over the other is mathematical folly and a misreading of state politics.
Three Core Issues: The state budget had to address three major issues: a structural deficit of approximately $1 billion, long-term unfunded pension liabilities of around $50 billion, and the loss of $1 billion in basic education funding from the federal stimulus high water point.
Short and Long Term Requirements: The structural deficit has to be dealt with either through capping spending or raising taxes. Fixing the pension fund deficit is a matter of using the new budget to gain ground by catching up with contributions, while making changes that result in future savings. Increases to basic and special education, while discretionary and not mandated, became a political imperative with broad bipartisan support. They will take more than one year to be restored. A key issue here will not only have to do with new funding but the formula that is used to distribute the money.
Money, money, money: All of the tax negotiations (corporate, sales, gas, income, property) are about how to deal with those three issues: deficits, pension costs, and increased contributions to education. What to do with liquor stores—while also about ideology and jobs—is really about how to pay for the budget. How to tax the gas companies is about fairness and economic growth, depending on your perspective. But it, too, ultimately comes down to how to raise money to address the three major budget issues.
Citizens Tune Out: Pennsylvanians have largely ignored the five month impasse, in part because they are as divided as the governor and legislature on taxation and spending goals, and in part because most of the state continues to run without obvious interruption. Given the stakes, there has been very limited protest against the budget stalemate. Republicans and Democrats have held their respective positions, with only a few legislators straying from leadership positions. The local jurisdictions where taxes are collected and sent to the state coffers have made a few rumbles—the Erie school district comes to mind—but have been more passive than expected. They are captive to all the same political constraints as their colleagues in Harrisburg.
Did leadership on either side of the aisle learn anything from this budget battle? Budgets have to be viewed as something other than a once a year event.
The Pain is Real: The inability to pass the budget is directly hurting social service groups and a number of school districts, particularly those that depend on a high percentage of state revenue to operate. Service agencies and school districts are dealing with the crisis by deferring programs, laying off personnel, and taking on more debt. Moreover affected school districts and social service groups have not been able to plan appropriately since even when they get money from the state they do not know what the level of retroactive payments will be and they certainly will not be able to cover their interim debt costs or the costs of re-hiring laid-off workers.
Rating agencies have their say: In October, Moody’s Investor Services downgraded the outlook for Pennsylvania bonds to negative from its previous ranking of stable. During the past two years there have been several actual downgrades of Pennsylvania bond quality by all major credit agencies. The current Moody’s rating of Aa3 places the state at the bottom of the national ratings, with only New Jersey and Illinois ranked lower. And don’t forget our local government bond ratings. State dysfunction puts pressure on the debt from agencies that depend on the state.
The December Compromise: For the past several weeks, a compromise framework has been agreed upon, which ought to lead to a budget before the Christmas holidays. It includes no new taxes on Marcellus Shale and a likely escalation of the most regressive tax: Sales. There will be a substantial increase for basic education, but no agreement as of yet on the formula for its distribution. Pension fund reform will likely include a hybrid system for new state employees (limited defined benefit with a 401K-style defined contribution). Details on the liquor stores are taking longer to emerge.
Lowering expectations: Smart politicians raise and lower expectations on a dime. The Pennsylvania budget will fall far short of the Governor’s expectations and set up a rematch for a 2017 budget battle. The next budget will play out against the same cast of characters, as there are no new elections until November 2016. As far as this budget, the Democrats can feel good about increased spending on education. The Republicans will point to the limitations they placed on new taxes. And both sides will pretend they were victorious around pensions and liquor sales.
Whether we can avoid this mess next year has to do with five issues and it is not too early to start asking questions about all five.
- Will the 2015-2016 budget pave the way, in terms of incremental tax rate changes and expense projections, for an easier agreement on how to handle future education spending and pensions? And was the structural deficit resolved through a recurring source of revenue? If the answers to those questions are yes, then next year’s budget battle could have less of a sting.
- Did leadership on either side of the aisle learn anything from the battle? And can they develop bipartisan committees to look at the potential big issues for the next budget? Budgets have to be viewed as something other than a once a year event. Rather, they should be seen as ongoing deliberations on a host of economic and governance issues that have to get addressed.
- Can an independent voice emerge to demand greater accountability and better governance in the next round? Many people were nervous about pushing for a compromise resolution because they did not want to invoke the wrath of partisan powers. The budget mess exposed the absence of a nonpartisan voice in Harrisburg. Part of the problem is the declining coverage of traditional media in terms of state capitol reporting. And then there’s the overall partisanship of political culture. I already know how the Commonwealth Foundation (conservative) and the Pennsylvania Budget and Policy Center (progressive) will answer before most questions are even posed. They are as predictable as FOX and MSNBC.
- Will a stronger economy that generates more state revenue make it easier to deal with the budget? It is hard to know but the question is an important one. Revenue collection has not uniformly moved upward since the end of the Great Recession. Moreover, we are now an energy state and so the price of oil and gas, and its effect on other commodities, plays a big role in our economy. These are huge drivers for any budget conversation. Right now, the 2016 Pennsylvania Gross State Product projections are at the middle to the upper tier of state-by-state projections, depending on whose analysis you use.
- What effect will the national election environment bring? The next budget will be proposed, discussed, voted on, and potentially delayed against a hyper-political season. In November, we vote for a new President, a new Senator, and new Congressional leaders. In the state, all 203 State Representative offices are up for election and half of the 50 State Senate seats. The DNC will hold its convention in the summer of 2016 right here in Philadelphia. This kind of attention and intensity can bring out the best or the worst in politicians at the local level.
It is important to remember that this present budget cycle began with Governor Wolf’s budget presentation in March. Thus we are into the 10th month of a political conversation about priorities. That process simply did not work. The very least we can do is ask political leaders to commit to a different process, one with less posturing and more long term solutions.
Let’s turn the page.