No matter where we live, what we look like, whether we are native-born or immigrants, or whether we are struggling or getting by, the COVID-19 recession is a threat to all of us. We need the state government to do more for families and small businesses to meet that threat. Yet the recession will cost the state at least $3.3 billion in revenues over two years.
Squaring this circle would be difficult at any time, but the General Assembly must act by November 30 when the stop-gap funding, enacted in June for about half of the General Fund, runs out.
Democratic and Republican senators appear close to a compromise that avoids a budget impasse at this dangerous time even as it leaves many problems unresolved. Our understanding is that it would fund a full-year General Fund budget at the same level as in Fiscal Year 2019-2020 with some adjustments to
- meet higher levels of Medical Assistance spending.
- pay the actuarially required contribution to pension funds.
- fund all debt service.
- meet contractually required government obligations to vendors and employees.
We have not seen any detailed estimates of the total expenditures included in a budget that does all this, but we estimate that it will be a total of somewhere between $35.75 and $36 billion.
Using the Independent Fiscal Office’s recent estimate that the state will receive $35.1 billion in revenues in the current fiscal year, and after adjusting for refunds and prior year lapses, we believe that revenues to meet the proposed expenditures will fall short by roughly $3.1 to $3.4 billion.
Where will these additional revenues come from? Our understanding is that they will come from some combination of
- using the remaining $1.3 billion of CARES Act funding.
- transfers from special funds.
- rely on enhanced federal funding of Medical Assistance, which raised the federal reimbursement rate by 6.2 percentage points, being extended for another quarter.
- rolling some community health choices payments from the current fiscal year to the next one.
- using roughly $300 million from the rainy day fund.
- (over)estimating revenues at somewhat higher levels than those proposed by the IFO.
This is not an adequate budget to meet the needs of the moment. As we show in this paper, the pandemic has harmed many Pennsylvanians, who need some kind of relief and support from the state government, not only to avoid an immediate humanitarian disaster but to enable the state’s economy to recover quickly and in a way that allows all Pennsylvanians to thrive. Among these needs are
- improvements in Pennsylvania’s public health infrastructure which was woefully unprepared for the pandemic and remains less prepared than it should be for dealing with the ongoing crisis;
- efforts to prevent a major housing crisis—between 881,000 and 1,762,000 individuals in Pennsylvania may face homelessness when the eviction moratorium ends;
- support for schools that are facing a shortfall in local revenues of roughly $1 billion and are losing funds to cyber charter schools that are funded in ways that undermine local schools;
- aid to small businesses that are badly hurting, especially in the hospitality and entertainment industries;
- appropriate wages and other benefits for front-line workers who are still without sufficient personal protective equipment and who have never received an increase in pay to compensate them for taking on the risks of keeping vital sectors of our economy going during the pandemic;
- additional aid for unemployed workers, especially if the federal government fails to provide it;
- closing the remaining gaps in funding for health care in the state, especially small hospitals and personal care facilities in rural and urban parts of the state.
The tentative agreement we are hearing about also fails to address the revenue shortfall. For one thing, it relies on economic forecasts that may be extremely optimistic, especially in light of the recent upsurge in COVID-19 cases. As we have recently pointed out, even without another round of government closures of businesses—which may be necessary—the rapid spread of the coronavirus will itself lead to economic decline.
The budget agreement also appears to rely on more than $3 billion in one-time revenues that will not recur in the next fiscal year, including the CARES Act funds, transfer from special funds, enhanced federal support for medical assistance through a higher FMAP rate, the use of the rainy day fund, and rolling Community Health Choices payments forward for one year.
We are also deeply concerned about transfers from special funds that may never be made whole and that are based on a right-wing fantasy we exploded two years ago that these funds are some kind of “surplus” rather than being dedicated to legitimate purposes approved by the General Assembly and in some cases the people of the state, and being held until it is appropriate to spend them.
We understand the rationale for using one-time funds to avoid disastrous budget cuts and believe that it makes sense to spread the pain of a once-in-a-lifetime disaster beyond the current year—especially when budget cuts will make the pain worse. And we do understand that there is some chance that the federal government might eventually take long-delayed action to provide state and local governments with the support they very much need and deserve and that this might either provide funds to meet some of the needs unmet by this reported budget agreement and / or allow us to avoid the consequences of an overly optimistic revenue forecast or of the over-use of special fund transfers and one-time revenues.
However, it is also clear that even on the most optimistic assumptions, our economy will not return to the state it was in before the pandemic for a few years meaning revenues will fall short again in the fiscal year beginning on July 1, 2021. And, given that the state budget has been balanced year after year with one-time revenues—and that the state had to borrow $1.5 billion to cover a deficit of that amount in Fiscal Year 2016-17—the General Assembly can’t avoid decisions about raising needed revenues for much longer.
As problematic as we find this agreement, we are even more troubled by reports that House Republicans are demanding deeper cuts to the budget. It is critical that Governor Wolf, Senate Democrats and Republicans, and House Democrats stand together to oppose the demands of House Republicans.
After a decade of austere budgets that have given us General Fund budgets 12% below where they were as a share of gross state product during the period from 1997 to 2011, we cannot cut the budget without
- undermining the education of our children and of college students or raising property taxes throughout the state.
- harming those who are ill, require long-term care, or suffer from mental illness.
- reducing the support people need to avoid eviction from their homes.
- making life immeasurably more difficult for those who are living with intellectual or physical disabilities.
- making it harder for people lucky enough to be employed to afford child care so they can keep their jobs.
- seeing our already dilapidated roads and bridges and our polluted air and water further decline.
In every one of these areas, we already invest too little. And deep budget cuts would not only make life harder for working people, children, and seniors, it would diminish the long-term economic prospects of our workers and businesses which depend greatly on investment in education.
Most importantly, we cannot drastically cut the state budget without undermining the already slow recovery of our economy from the Recession. House Republicans want to double down on the mistakes of the Corbett years when deep cuts to the budget during the Great Recession added tens of thousands of working people to the unemployment rolls, which hurt local businesses throughout the state and led Pennsylvania to have one of the slowest recoveries of any state.
Instead of cutting the budget, we would like to see our state fix an upside-down tax system that currently taxes the top 1% at half the rate of those in the middle and lets 73% of corporations escape taxes entirely. We can, and should, ask corporations and the richest Pennsylvanians—who have seen their income and wealth increase during the pandemic—to pay more while cutting taxes on working people.
There is an adage that says “don’t raise taxes during a recession.” But this applies mainly to the federal government, and it assumes that raising taxes during a recession will reduce consumption and investment and thus deepen the economic contraction. But that is not the situation we face today.
Consumption, especially on the part of the richest Pennsylvanians, is still almost 10% below where it was in January even though their incomes are higher than they were at that time. For obvious reasons, well-off Pennsylvanians are not going out to dinner or to shows or movies or sporting events. They are not traveling or going to hotels or doing much shopping at brick-and-mortar stores. And well-off people from around the country and the world are not traveling to our state and spending money here. Instead, the richest Pennsylvanians are saving their earnings at all-time record levels and many of them are saving even more money because they have refinanced their homes. Nor, in light of the pandemic-induced recession and the sharp decline in consumption, are businesses investing in the state at levels they were before it began, even though the cost of capital is at an all-time low.
If we want to lift the Pennsylvania economy out of a deep recession, the federal and state governments must be doing the spending and investment that the private sector cannot and will not do now. The federal government can run deficits, spending more than it received in revenue, to do that. But Pennsylvania can do so only by raising revenues—and now, when the richest Pennsylvanians are saving more and multinational corporations have cut back on their investments, is the ideal time to ask them to pay their fair share of taxes.
New revenues would enable the state to help small businesses, to ensure that families do not lose their homes, to help school districts make up for lost local revenues, and to ensure that everyone continues to have access to doctors and hospitals. And it would provide the revenues we will need once the immediate crisis is over to balance our budget and begin to meet our long-standing public investment deficit, especially in education at all levels and infrastructures—the investments we so need to generate increased productivity and economic growth in the future.
We understand that this is too far for Republicans to go. But if House Republicans are not willing to ask those of us doing better during the recession to help other Pennsylvanians, at the very least they should stop dividing Pennsylvanians from one another, harming us all by demanding irresponsible cuts to a budget that is already tight. At the very least, they must support a workable compromise upon which we can build for the future.