With an eye beyond the next fiscal year, Pennsylvania Gov. Edward Rendell yesterday released his fiscal 2011 budget proposal and urged a broadening of the state’s sales tax and corporate tax to help address projected deficits in the billions for fiscal 2012 and fiscal 2013.
Fiscal 2011 begins July 1. This is Rendell’s final budget plan before he leaves office in January after serving for two terms. Historically, Pennsylvania’s fiscal budgets have hit political roadblocks. The state hasn’t passed a spending plan by the June 30 deadline in seven years.
The size of Rendell’s proposal is $29.03 billion, including $2.76 billion of federal stimulus funds from the American Recovery and Reinvestment Act. The $2.76 billion of federal funds includes $1.8 billion of Federal Medical Assistance Percentage funds, $848 million of which relies upon Congress extending FMAP funds through Sept. 30, 2011.
The $29.03 billion budget plan is more than $1 billion larger than the current $28 billion fiscal 2010 budget, though the proposal reduces spending by 1% in all areas excluding education, public welfare, aging and long-term living, debt service, prisons, and probation and parole.
The administration anticipates fiscal 2011 tax revenue collections to total $26.5 billion, a 3.9% increase from projected fiscal 2010 tax revenue collections of $25.5 billion.
In looking ahead, Rendell stressed that federal stimulus funds will expire by the end of fiscal 2011, creating a $2.4 billion deficit for fiscal 2012. In addition, that shortfall will grow to $5.6 billion in fiscal 2013 and $9.1 billion in fiscal 2014 due to rising pension costs, according to state budget documents for fiscal 2011.
Assuming investment earnings of 8%, Pennsylvania’s contributions to its Public School Employees’ Retirement System will increase to $1.88 billion in fiscal 2013 from $758 million the year before, an increase of $1.13 billion in just one year. The costs for school districts will increase to $1.86 billion from $658 million.
In addition, employer contributions to the State Employees’ Retirement System are expected to rise to $1.77 billion in fiscal 2013 from $531 million in fiscal 2012, a $1.24 billion jump.
To help offset the end of federal stimulus funds and the boost in retirement contributions, the governor proposes the state reamoritize both the PSERS and the SERS over 30 years. The plan also includes boosting fiscal 2011 contribution rates by 1% of payroll — a $200 million increase — with yearly contributions to increase by a maximum of 3% of payroll, according to the administration’s Fiscal 2011 Budget in Brief.
The total unfunded pension liability for both PSERS and SERS is $19.54 billion, according to Susan Hooper, spokeswoman for the budget office.
Along with the pension initiative, Rendell aims to generate $874 million of additional revenue in fiscal 2011 for the state by expanding the sales tax along with the business tax and implementing other taxes and placing those funds into a stimulus transition reserve fund. That fund would only be allowed to offset upcoming fiscal 2012 and fiscal 2013 deficits and would not be used for the fiscal 2010 or fiscal 2011 budgets.
The governor proposes cutting the sales tax rate to 4% from 6% while at the same time eliminating 74 sales tax exemptions to give Pennsylvania $531 million of additional revenue. In addition, the corporate tax would decrease to 8.99% from 9.99% while the state would end separate business reporting which allows corporations to shelter profits from taxation. The administration anticipates that initiative to generate $67 million.
Along with changes to the sales tax and business tax, Rendell believes the state could generate $160.7 million of new revenue by implementing a severance tax on natural gas extraction in the Marcellus Shale region. Taxing cigars and smokeless tobacco would give the state $41.6 million.
Total revenue initiatives would generate $2.3 billion for the state in fiscal 2012, including the $874 million from fiscal 2011.
“What I offer today is a comprehensive strategy to achieve these goals, a strategy that calls on us as elected leaders to make the long overdue changes to the state taxation system that will lower the rate and broaden the tax base and distribute the tax burden more fairly among all Pennsylvanians,” Rendell said during his speech. “I urge you to enact these changes this year, and put those funds into a newly created Stimulus Transition Reserve Fund that cannot be tapped until July 2011.”
In response to the governor’s speech, Senate Republicans, who control the upper chamber, said the sales tax initiative is “dead upon arrival” and that they would not consider reamoritizing pension payments without reforms to the retirement system. The GOP members also questioned the additional $1 billion of spending.
“Frankly speaking, I think the next governor should be included in this conversation going forward and as [Rendell] leaves after eight years in office, that’s not the time to radically restructure the state’s tax system,” Senate Majority Leader Dominic Pileggi told reporters after Rendell’s budget address.