Pennsylvania counties, school districts feel pain of state budget delay

Bloomberg News

Pennsylvania has been without a budget for four months.

Late budgets are nothing new for the commonwealth — it's Pennsylvania 13th late budget in 20 years, although this delay has dragged on longer than most. 

The impasse is straining counties, school districts and social services, pushing them into to cost-cutting measures and finding other sources of funding.

Pennsylvania Gov. Josh Shapiro held meetings with top lawmakers last week, so it's possible that a deal is on the horizon. But there are no guarantees until the budget is passed. 

The legislature

Budget negotiations have been dominated by disagreements over transit funding and taxes.

With a Republican-led Senate and a Democratic House, Pennsylvania is the only state with a divided legislature in the country. 

The budget proposed by Shapiro, a Democrat, in February, containing $51.5 billion of spending, was 8% bigger than last year's. It featured many of the same legislative priorities, and although it contains a deposit into the rainy day fund, it involves billions of dollars of spending from state reserves. 

Shapiro proposed two new revenue streams: legalizing and taxing cannabis and taxing slot-style "skill games" that have proliferated across the commonwealth. There's been no legislative agreement on either policy, so Republicans argue the proposed spending would necessitate raising taxes. 

The House passed a slightly smaller version at the beginning of October in an attempt to compromise. Republicans have passed several smaller budgets through the Senate, most recently a $47.9 billion budget that's barely bigger than last year's. 

Shapiro called that proposal a "joke."

"It doesn't actually meet the obligations of this commonwealth," Shapiro told reporters. "It's a gimmick, and it's not designed to be serious or get the job done."

Money isn't flowing

Amid Harrisburg's slow motion budget battles, the commonwealth's municipalities haven't received any state funding since June. 

Counties are required by state law to provide certain services, like Agencies on Aging, even when the state isn't contributing its share. 

The Pennsylvania Higher Education Assistance Agency isn't sending aid, straining the budgets of students and public and private universities.

And Pennsylvania owes school districts more than $5.3 billion, according to the Pennsylvania State Education Association. 

The median school district in Pennsylvania receives 34% of its funding from the state, according to Richard Ciccarone, president emeritus of Merritt Research Services.

The median district had 96 days of cash on hand at the beginning of the year, Ciccarone said. That's enough to ride out the state's budget delays in a normal year, but this year's impasse has lasted 125 days, which has schools — and counties — taking desperate measures. 

Counties have furloughed employees, cut funds to programs, and contemplated raising taxes. Schools have cut after-school programs and refused to pay overtime. 

Clarion-Limestone Area School district drew on state funds to pay debt service last month, which officially counts as a credit impairment, Municipal Market Analytics reported. 

"Schools in PA usually spend state money before property taxes are received later in the fall; hence the current widespread funding gap necessitating loans, taps, draws, etc." MMA wrote in its Oct. 15 default report. "Clarion-Limestone's 2022 bonds are insured as well, so a payment default is extremely unlikely here."

Local officials haven't hesitated to place the blame with the state legislature, like did as he defended the county's decision to furlough 175 employees.

"Northampton County taxpayers have already paid their state taxes," Northampton County Executive Lamont McClure wrote in a statement to Spotlight PA. "To demand that they pay again through county taxes, particularly by forcing the County to consider loans that will accrue interest we can never recoup, is unconscionable. County real estate taxpayers are not open wallets to be dipped into whenever the State Legislature fails to do its job."

In York County, the clerk of courts and register of wills reportedly announced they will be withholding payments to the state. They'll be withholding fees for services like marriage licenses and court filings that they usually pass along to the state until a budget is in place. 

For some entities, the situation is compounded by the federal government shutdown. 

Federal funding is minimal for most schools, according to Moody's analyst Baye Larsen, but a small segment of districts get up to 20% of their funds from the federal government. That aid is still flowing for now, as is Medicaid and transit funding, but if the federal shutdown drags on, it could create more problems. 

Turning elsewhere for funds

PSEA is aware of at least 27 public school entities that have taken out loans to cover their operations, or plan to do so, according to a news release from the organization. 

"Among the schools to take out loans so far are the Greater Johnstown School District ($10 million), William Penn School District ($10 million), Central Fulton School District ($7.1 million), Mahanoy Area School District ($6.9 million), River Valley School District ($5 million), and Uniontown Area School District ($5 million)," PSEA said. 

Philadelphia's school board approved borrowing $1.55 billion of revenue anticipation notes. That's $1 billion more than the district would have borrowed had the state passed a budget, according to the district's chief financial officer. 

Districts will be able to repay these loans when the budget is passed, but the state is unlikely to cover the interest costs. The School District of Lancaster, for instance, reports that its $35 million loan will cost $200,000 in interest and fees. 

Some districts can't take out loans. Because Scranton's school district uses a calendar year budget, it would need to repay its loans by the end of December, and there's no guarantee the state will send funding by then, its superintendent said. 

Westmoreland County, which receives roughly three-fourths of its budget from state and federal funding, has reportedly furloughed 125 workers but is still planning to take out a $14 million loan. The county's intermediate unit, which supports its school districts, took out a $2 million revenue anticipation loan on top of the $5 million it borrowed earlier this year, according to published reports. 

Established work-arounds

Pennsylvania's counties already had arrangements in place for budget impasses, Larsen said, because of the state's track record of late budgets. 

That experience "has allowed them the opportunity to put in place some institutional protections that ensure that they continue to make their debt service payments," she said. On the other hand, those policies reduce "some of the pressure to negotiate the budget timely."

Pennsylvania ensures that state employees will be paid during the impasse and sends school districts money so they can make debt service payments. 

This time around, Treasurer Stacy Garrity has launched a program to give loans from the commonwealth's reserves to organizations missing state funds during the impasse. 

Garrity, a Republican who's running for governor next year, has lent $21 million to 48 organizations, including social services providers, preschools, and one rape crisis center. 

Although Pennsylvania isn't facing the crises that its counties and schools are, the lack of a budget still damages the commonwealth, Larsen said. 

A prolonged impasse prevents the commonwealth from preparing for next fiscal year, Larsen said. If there's a dramatic change in Pennsylvania's economy or revenue, the government won't be able to respond. 

The shorter budget delays of the last 20 years have also taken a toll, Larsen said. Pennsylvania is rated Aa2 by Moody's and A-plus by S&P Global Ratings. 

"The history of repeated budget impasses is part of our credit assessment for Pennsylvania, and we do have a somewhat below average governance assessment score on the commonwealth," Larsen said. 

"Long term, if there is an interruption in those services, what does that do for economic stability in the commonwealth?" Larsen asked. "If before- and after-school programs are being interrupted, if provision of health care is being interrupted, or other social services, then that can affect the labor force. That can affect jobs."