Let’s Not Let Cranky Uncle Mike Raid the State Budget

Marc Stier |

Last November we elected a President who reminds many of us of a cranky uncle who sits at the far end of the Thanksgiving or Christmas table, muttering under his breath about the “damn government” and “wasted taxes” and, quite often, “those people who cause all the trouble.” When you try to engage him in discussion, you find that he has a ready – and extremely simplistic – answer to every question, one that is lacking in any detailed understanding of what government actually does and that assumes that “it’s very simple to do x or y” if not for conniving politicians.

Right now, some Republican members of the House of Representatives in Pennsylvania, with the support of outside advocates, are readying a plan to borrow massively, perhaps up to more than $2 billion, from many of the 100 or so special funds that, along with the General Fund, are part of the state budget. Their justification for doing so is that, at the end of each year, many of these funds have a surplus. So it seems easy enough to shift those surpluses – money they are quick to say is “just sitting there not doing anything” – into the General Fund.

Why is this a bad idea? There are two general reasons.

First, raiding special funds to fill the hole in the General Fund can only provide, at best, a one-year fix for the state’s persistent budget deficits. Without new recurring revenues, a deficit will return next year.

And second, money accumulates in the special funds for a number of good reasons. The money raided from these funds almost always must be repaid with interest. Thus, the state budget deficit will get deeper in future years.

Beyond these two general points, the various special funds finish the fiscal year with a surplus for a number of good reasons. You can read about that in detail in our recent paper here. But we can quickly examine them by looking at some specific examples.

Take the Coal and Clay Mine Subsidence Insurance Fund. It receives revenues from premiums paid by policyholders for subsidence insurance and it makes payments to homeowners in mining areas whose homes have been damaged by subsidence. Setting up this fund was meant, among other things, to embrace the conservative principle that the burden for covering subsidence damage should fall on those most at risk for it, not the general public. Like any other insurance program, the fund keeps a balance so that it will have the funds to cover large losses in any year. If the $105 million accumulating in the fund – and earning interest – is used to balance the General Fund budget, monies paid by homeowners for this insurance won’t be available to pay for a major disaster.

Or take the Fish Fund, which receives revenues from fishing licenses and fines and the occasional federal contribution. The state promised to use those license fees to administer state fishing programs and to sustain aquatic life in the state. And, again, by drawing revenue for the fund mostly from those who fish, the general public does not have to pay for programs that benefit a much smaller group. The Fish Fund has a balance at the end of the year of about $60 million in part because expenditures take place in the summer months, early in the fiscal year before receipt of funds for that year. In addition, the costs of these programs vary from year to year depending upon weather and other conditions.

Or take the Growing Greener Bond Fund, which was established to receive $625 million in bond sales authorized by a vote of Pennsylvanians. Those funds are dedicated to various environmental projects such as watershed preservation, mine drainage remediation, flood control projects, brownfield remediation, and improvements in state parks. The fund’s balance is gradually being drawn down and now stands at $21 million, although it was far higher a few years ago. Bond funds like this one often have a high balance initially, as bonds are sold before the projects they are meant to fund are planned and completed. Raiding these funds inappropriately takes money dedicated to one purpose and uses it for another.

Or take the Persian Gulf Conflict Veterans’ Compensation Bond Fund, which was established to distribute funds from a $20 million bond fund approved by the voters of Pennsylvania to compensate Persian Gulf Veterans. If this fund is raided to support the General Fund, money may not be available to Persian Gulf Veterans this year.

Or how about one of the funds with a large end-of-year balance, the Property Tax Relief Fund, which receives revenue from casinos and distributes the money to reduce local property taxes (and wage taxes in Philadelphia). At the start of the fiscal year, it has a balance of almost $500 million. Why shouldn’t that “surplus money” be transferred to the General Fund? Well, the balance is kept so that the fund can makes payments in August and October each year to local governments and school districts before revenues are received from the casinos. If the General Assembly raids this fund to balance the General Fund, payments to local school may be delayed.

And, finally, consider the Public Transportation Trust Fund, which provides dedicated funding for public transportation systems all over the state – not only the big transit systems in Philadelphia and Pittsburgh, but the smaller ones in 12 other cities. The Public Transportation Trust Fund receives revenues from a portion of Pennsylvania Turnpike Tolls, motor vehicle funds, vehicle code fees, and other sources. And it provides both operating support – that is subsidies to make public transit more affordable – and capital funds for such things as new buses, new transit cars, and track upgrades.  Over the course of a year, about $1.5 billion flows into and out of the fund and, at the end of the fiscal year, it keeps a balance of about $250 million. (While the monies for this fund come from drivers, not public transit users, they do benefit because public transit reduces traffic on roads in our major and small cities.)

Why does the Public Transportation Trust Fund need to keep a balance? In part for the same reason as the Property Tax Relief Fund, to ensure that payments can be made early in the fiscal year before receipts come in. And, in part, because the fund pays for large capital projects. What will we tell transportation agencies around the state when a bill comes due for new buses and there is no money to pay for them?

There are many other state funds, most of which are quite small, and many of which are basically just bank accounts to receive and pay out funds for specific purposes. If one were to go through the larger funds one by one, you would find one or another good reason that they keep a positive balance in their account. We’ve seen many of those reasons in reviewing these funds:

  • To ensure that funds from bond issues or taxes dedicated to specific purposes only goes to those purposes.
  • To ensure that certain government activities are paid for not by (or not mainly by) the public as a whole, but by those who most benefit from them.
  • To have a reserve to make payments for specific purposes before the revenues dedicated to those purposes for that fiscal year are received.
  • To keep a reserve in case extraordinary expenses arise in one year.
  • To hold funds for major capital expenses – which do not come due at fixed intervals – until they are needed.

While calling these funds part of the “shadow budget” is a nice rhetorical move to convince people that politicians in Harrisburg have done something wrong in creating them, it’s also entirely misleading claim. There is no mystery about these special funds.

The plan to raid the “shadow budget” is based on a false understanding of how the state special funds work. And, more importantly, it is an attempt to do on steroids what Harrisburg has done far too often in the last decade, balance the General Fund budget by borrowing money from these funds.

Our cranky uncles are sometimes entertaining, especially when we are young. Their iconoclasm can be bracing and thought provoking. But as we get older, most of us conclude that they are far too cynical and uniformed to be taken seriously. Their simple solutions are almost always based on false premises and a lack of information. Most of us would never dream of turning our government over to our cranky, blustering, know-nothing uncles.

It sometimes seems to both Democrats and Republicans that we did that in electing the current president of the United States. And that’s one more good reason to be cautious in turning over our state budget to cranky Uncle Mike Turzai and his simple-minded solution for our current budget crisis.

Read the full policy brief here.