Pennsylvania’s multi-billion-dollar budget surplus will soon be cut in half, according to a forecast by the Budget Oversight Office. The reason for this is both a long-standing structural deficit and an ever-growing list of obligations competing for public funds.
The state’s most recent $47.6 billion budget increased spending by 6 percent. More than $1 billion in additional money went to public schools in response to a court ruling that Pennsylvania was underfunding poor districts.
However, the state only brought in $44 billion in net revenues last fiscal year, so to finance the budget, lawmakers are relying on the state’s sizable cash reserves, which stood at about $13.6 billion as of June 30, according to the Independent Fiscal Office.
That amount was roughly divided between the state’s nest egg – the equivalent of a long-term savings account – and the state’s general fund, the latter of which is essentially Pennsylvania’s checking account.
According to the IFO, lawmakers used $3.3 billion from the general fund to balance the most recent budget. That money will be spent over the course of this fiscal year.
Pennsylvania will completely use up its general budget surplus by the next fiscal year, the IFO estimated based on expected spending, ongoing tax cuts and revenue forecasts.
This will force parliamentarians to dip into reserves to balance the budget, which is due in less than a year, if they fail to raise new revenue or cut spending.
While the current surplus is based on fiscal success, Pennsylvania politicians have historically struggled to find new sources of revenue as the state budget grows each year. This year, Governor Josh Shapiro proposed regulating slot machines and legalizing recreational marijuana to raise millions of needed dollars, but the divided General Assembly failed to pass either proposal.
The emergency fund currently contains more than $7 billion, up from just $22 million a few years ago. That’s the amount that experts say states should keep on hand. Taking money out of this fund would require bipartisan support, which has not yet been achieved.
The IFO estimate assumes a 4% increase in government spending in the 2025-26 plan, much of which is to be used for collectively mandated wage and benefit increases for government employees, as well as government-mandated spending on social benefits. The estimate assumes that education spending would receive only a modest, inflation-adjusted increase of 2.4%.
None of the people involved in drafting the budget say anything about what will happen next year to maintain government spending.
Christina Fonseca, spokeswoman for House Budget Committee Chairman Jordan Harris (D-Philadelphia), said in an email that the IFO report made “certain assumptions in reaching its conclusions regarding the status of the emergency funds and general appropriations” with which the group disagrees.
Fonseca said the caucus supports a financial statement from the governor’s budget office, but she did not send the statement when asked to do so and did not respond to further questions about the assumptions, which the caucus has disputed.
Matt Knittell, executive director of the IFO, acknowledged the gap between his agency’s forecasts and those of the governor. However, the difference is a matter of magnitude, not substance.
“We both agree that there is a significant deficit,” Knittel said in an email.
For months, Democrats have downplayed the IFO’s latest forecasts by arguing that government revenues have been rising steadily. At a hearing on the budget proposal in the spring, Budget Secretary Uri Monson told lawmakers that government revenues have risen by an average of almost 4 percent per year over the past 25 years.
“We are very conservative in our forecasts, but the actual results are growing surpluses,” Monson said.
More spending is likely. Democrats wanted to provide $5.1 billion over several years for underfunded school districts in this budget, but were only able to pass $500 million.
Solving a looming crisis in public transit funding is a top priority for Shapiro and Democrats this fall. Public transit systems received a one-time $80 million injection of funds in the most recent budget; Shapiro had called for $1.5 billion over the next five years.
To finance these priorities, they need a lot of new money – either from new taxes, a booming economy or other sources – or they have to make cuts elsewhere in the budget.
Reducing the surplus will also have short-term consequences, said Republican Rep. Seth Grove of York, chairman of the minority group on the Budget Committee.
The government collects interest on its large surplus – when it spends those dollars, that revenue disappears. According to the Treasury Department, the government earned nearly $780 million in interest on its cash reserves in the just-ended fiscal year – nearly twice what was forecast.
If the general fund gets too low during the year, the state must borrow money to pay its employees and maintain other essential government functions. While the state is not currently in danger of running out of working capital, it has in the recent past, and this has resulted in consequences, including a credit rating downgrade.
Grove noted that deficits are less manageable for states than for the federal government. “Unfortunately, we can’t print money at the state level,” Grove told reporters earlier this month.
The structural deficit – where annual costs exceed annual revenues – is nothing new.
For over a decade, Pennsylvania has consistently spent more than it raised under both Democratic and Republican leadership, with neither party having the political will to find the right combination of spending cuts, tax increases or pro-growth policies to fix the problem.
Instead, the Commonwealth budget has raised one-off revenues by expanding gambling, taking on debt, or using budgetary tricks to shift costs in order to balance the budget each year.
Even the current surplus – which is based on economic stimulus funds and unexpectedly high tax revenues – has not led to a consistently smooth budget process: In divided Harrisburg, budget negotiations have been delayed three times in a row.
Republicans in the state Senate are typically more open to increased spending than their Republican counterparts in the state House of Representatives. That dynamic repeated itself this year, when the upper house passed the budget with a two-thirds majority. In the lower house, the plan fell a dozen votes short of the required majority, as Republicans widely opposed it.
Grove and his Republican colleagues from York County called the budget “reckless” in a press release shortly after its passage.
But his Republican colleague and budget negotiator Joe Pittman, majority leader in the state Senate, said the budget was a compromise – a product of the realities of a divided government.
Pittman had a recommendation for the dissatisfied Republicans in the state House of Representatives: “I think they need to secure a seat at the negotiating table by regaining the majority.”
