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The Leadership Gap

Pennsylvania is in free fall. Where are the adults to lead us?

The Leadership Gap

Pennsylvania is in free fall. Where are the adults to lead us?

Every year the investor oriented website 247wallst.com analyzes the best and worst managed states in terms of fiscal management and economic outcomes. The site notes discrete indicators including debt per capita, credit ratings, unemployment, median income and poverty levels.

Like any index, it can be challenged on methodology: which indicators are used, how qualitative data is considered, how various factors are weighted. But it gives a reasonable comparative impression of state economic performance.

Unlike Commerce Department press releases, the rankings do not push vanity metrics for marketing purposes. And unlike the chatter from politicians, the rankings do not blame or credit one political party over another.  

So how does the Keystone State match up? In the most recent ranking we are 41st of 50. More alarming, if you go back a few years (to the 2010 ranking) we were 21st. We’ve dropped 20 slots rapidly. We are losing ground in Pennsylvania.  

The index slams us on pension fund liabilities, deficits, an inability to pass a budget, the absence of rainy day funds, and the potential for rating agency downgrades. Many of Pennsylvania’s economic development numbers—income, debt per capita, and unemployment—are middle of the pack. But we are brought down by a public sector unable to handle its structural deficit.

The term “structural deficit” has been thrown around a lot during the recent budget impasse. The Governor warns of an impending $2 billion structural deficit that has been built on a history of budget tricks and one-off solutions. So what does he mean?

A structural deficit simply means that over a period of time, revenue does not meet expenses, regardless of changes in the business cycle. Structural deficits (versus cyclical deficits) occur even when the economy is performing at its potential. Said differently, revenue does not cover expenses, given the current operating model.  

How do you deal with a structural deficit? Temporary fixes include borrowing money and selling assets, but only really help if additional steps are taken to address the longer-term problem. Borrowing and asset liquidations buy time, but generally do not fix the structural issue.

The longer-term solutions involve cutting costs or raising revenue. Cutting costs are hard to do if the costs are mandated or contractual, such as pension fund obligations. But cutting costs is still one way to solve structural challenges, including productivity gains through technology, reorganization, and outsourcing.

The other way to solve structural deficits is raising revenue through additional taxes and fees. The structural problem is solved if revenue is a recurring, as opposed to a one-time, source to meet expenses.

The Pennsylvania budget impasse is not the cause of our fiscal decline, only its most visible symptom. Embedded within the impasse are different approaches to closing deficits and prioritizing spending, different approaches to the role of government, and flights from reality on both sides of the political aisle.  

The Republicans believe we can cut our way out of structural deficits without considering new tax revenue; they misunderstand the popularity of increased education investments at every level of schooling, and they are far too cozy to the shale industry for the new populist America.

The Democrats think the pension fund mess will take care of itself; they are happy to continue running a state liquor store monopoly that is a ridiculous anachronism, and they believe the answer to every education problem is more money, even as they continue to deride outcomes accountability like high school graduation standards.  

Anger is fine in politics but it needs to be tied to strategy. If the art of politics involves relationship management, the State Capitol is in divorce court without an adult mediator.

Neither side is being fully transparent about the problem and potential solutions. Most of the Republican pension fund changes do nothing in the short term to alter the budget math, for example. And the Governor’s perspective on growing the overall budget at a 7 percent rate is not just about addressing a deficit. It reflects other priorities as well. Yet he is selling those priorities through the lens of addressing structural deficits.

I thought we would get a State budget passed prior to the end of December 2015. I was wrong. The Republicans in the House walked away from the so-called framework agreement and presented a $500 million smaller budget in its place. That budget got vetoed and a temporary spending bill got passed to keep school districts and social service agencies from going under.

Now we are in month eight without a budget. And the prospects are not good. Last week the Governor presented a 2016-17 budget, although the 2015-16 budget has not passed.  

To say Governor Wolf doubled down is an understatement. The budget address was part political lecture—telling Republican legislators to take their responsibility seriously or get another job—and part apocalyptic announcement: proclaiming the arrival of a deficit train wreck that will have cataclysmic consequences.

The speech fell flat. Even those who strongly support the Governor’s budget worried about its tone and lack of strategy. Read the editorial board reactions from around the State from papers generally supportive of Wolf. Without in any way letting the Republicans off the hook, a good many supporters are showing a little bit of buyer’s remorse, or at least some buyer’s anxiety.

Anger is fine in politics but it needs to be tied to strategy. If the art of politics involves relationship management, the State Capitol is in divorce court without an adult mediator.

Today the favorability ratings are lower for State legislators (15 percent) than for the Governor (33 percent) and more people blame legislators for the impasse. But that does not mean much. People often hold a legislature as a whole in low esteem but still support their own representative. Moreover, Governor Wolf is the most visible leader and the burden remains with his office.

It is hard to know how the budget issue gets resolved and to what extent any of the resolutions address either the operating deficits or the longer-term and much deeper pension fund liabilities.  In the short term, if there is no movement on a compromise, the Republicans will push legislation to exempt schools and social service contractors from losing revenue during a budget impasse. This would likely get some votes from Democrats as well, particularly in the western side of the state.

Or the Republicans will offer up their own budget once again and Wolf will use a line item veto rather than a full budget veto: from there we would move back into additional revenue and expense negotiations but at least schools, social services, and many other functions could gain a modicum of stability.

The inability to reach a budget compromise is one more step into public sector free fall in Pennsylvania. Over the past year, the State’s Attorney General was indicted and had her law license revoked; our elected Treasurer pled guilty to extortion charges; and several Philadelphia legislators were driven from office when they accepted bribes in a sting operation.  

Then there is porngate: the slow release of vulgar emails between state employees (including many in the judiciary), many of which are sexist, racist or homophobic. We have already had one suspended State Supreme Court Justice over the emails and other resignations from less prominent employees.

And through all this, it is hard to find prominent civic and political voices willing to take on the dysfunction in a bipartisan manner. There is no mechanism or consistent voice to call out the problem. Instead we have become a commonwealth of party hacks: left and right, Republican and Democrat, unwilling to offer workable solutions, staying out of the game, and costing us our economic future.

Header Photo: Flickr/Jim Bowen

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