Amid calm before an election-year storm, Pennsylvania Gov. Tom Wolf struck a quiet tone as he released $32.9 billion general fund executive budget for fiscal 2019.
Democrat Wolf’s plan contains no increases in sales or income taxes, although he repeated his call for a severance tax on natural gas drilling, which the Republican-dominated legislature has opposed in the past.
“It’s pretty much a plain-vanilla budget, so he’s trying to avoid some of the drama they had last year,” said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia. “That’s probably the way to go in an election year.”
The commonwealth is home to chronically late budgets, stop-gap revenues, political gridlock and rating agency pushback. Wolf and the legislature have yet to complete a budget on time since he took office in 2015.
The proposed spending marks a 3.1% increase from last year’s approved budget. It would boost education spending by 4.7%.
A handful of Republicans, notably House Speaker Mike Turzai, R-Marshall Township, are challenging Wolf’s re-election bid. All 203 seats in the House of Representatives and half the 50 Senate seats are for the taking. House Majority Leader Dave Reed, R-Indiana, is running for Congress.
Last year, the governor let the budget become law without his signature in July, prompting four months of give and take with lawmakers over a revenue package to cover a projected $2.2 billion deficit.
S&P Global Ratings during the impasse downgraded the commonwealth’s general obligation bonds to A-plus from AA-minus. Moody’s Investors Service and Fitch Ratings rate them Aa3 and AA-minus, respectively.
In late October, Wolf signed off on a revenue package that included casino gambling and tobacco debt. A scheduled $1.4 billion sale of tobacco-settlement bonds, originally scheduled for last week, is day-to-day. Market sources attributed the delay to a lawsuit that fireworks companies filed Jan. 19 contesting the commonwealth’s authority to issue the bonds. The firms are challenging last year’s law that authorized the bond sale, which also added a tax to the sale of fireworks.
The proposed budget includes $32.9 billion in the general fund, $3 billion in the motor license fund, $1.8 billion in the lottery fund, $29.6 billion in federal funds and $17.3 billion in fees and other special-fund revenues. It limits base expenditure growth to less than $685 million.
“We have finally begun to tame the fiscal beast that haunts Harrisburg,” said Wolf, who sported a Super Bowl champion Philadelphia Eagles cap at the start of his 20-minute speech.
“That’s a nice statement by the governor, but there’s more to be done,” said Schankel. “Pennsylvania still has a pretty deep pension hole that will take many years to fix.”
The Volcker Alliance, in a recent state budget practice report card, assigned Pennsylvania its lowest possible grade, D-minus, for its use of one-shot maneuvers to balance its budget in 2017, and a D average over three years. Pennsylvania also received a D-minus for its funding of legacy costs.
“Budgetary maneuvers include deferring recurring expenditures to future years, shifting expended future revenues into the current year, funding recurring expenditures with debt and using asset sales or up-front revenues to help achieve balance,” the organization said.
Villanova School of Business professor David Fiorenza warned about runaway expenses.
“What arouses my curiosity about this budget is the lack of goals for containing health care and pension costs,” said Fiorenza, former chief financial officer at Radnor Township, Pa. “I do not see any significant expense budget cuts.”
The budget fully funds new mandated pension contributions of $275 million for the commonwealth’s two main pension systems, the State Employees’ Retirement System and the Public School Employees’ Retirement System.
Pension debt for the state alone has spiraled to more than $65 billion. While SERS contributions have significantly leveled off, payments to PSERS will rise by $263 million next year. The combined payment increases for both systems during the past three years have totaled more than $1.4 billion, nearly half of increased general fund expenditures.
New hybrid benefit plans – combinations of traditional defined-benefit plans and 401(k)-style defined contribution plans, will take effect for SERS and PSERS employees Jan 1, 2019 and July 1, 2019, respectively.
Pennsylvania, now the nation’s second-largest producer of natural gas in the U.S., remains the only gas-producing state without a severance tax. Separately, the commonwealth does impose an “impact fee,” which it enacted in 2012 and which it allocated to affected communities and counties.
“Everywhere else … Texas, Oklahoma, Louisiana, Alaska … they’re bringing in billions from the oil and gas industries,” said Wolf.
Such a tax, said Fiorenza, would provide a consistent revenue source.
Still, he added: “The Republicans do not like the word tax so I believe the severance tax is dead on arrival once again.”