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Someone cue up “Stormy Weather.”
The sunny and mild spring Gov. Corbett predicted for the state in his budget address is turning out not to be mild or sunny. Clouds are on the horizon. Actually, now that I look up, clouds are overhead, and I can hear the rumble of thunder.
Cruel financial reality is intruding upon the governor’s narrative for this election year, namely that because of the tough decisions he made when he took office Pennsylvania is in better shape today than ever. In fact, in good enough shape for him to propose spreading about $900 million in new spending around for schools, health care and college aid.
“Things are coming together,” Corbett told legislators in his February budget speech. “All around us are the hopeful signs of a stronger Pennsylvania. We have work to do and commitments to honor.”
As it turns out, things are coming apart.
For starters, instead of ending this fiscal year in the black, it now looks like we will end with a deficit in the neighborhood of $800 million, due to a slump in tax collections.
Tax income was already falling below estimates early in the year. Then, the April numbers came out and the shortfall was $328 million in just one month. That figure made everyone in Harrisburg gulp.
Unlike other states, Pennsylvania doesn’t have a rainy-day fund, additional cash stashed away to shelter government from an economic downturn.
When it rains here, it pours.
So, instead of spending money on new projects, such as a $250-million education block grant program, the state may have to spend money to erase the deficit. Programs slated for increases will have to be scaled back. In fact, according to some gloomy estimates, the state may have to spend less in the next fiscal year, which begins July 1, than it did this year.
But wait, there’s more.
The big rating agencies—Standard & Poor’s, Moody’s and Fitch’s—have issued negative reports about state finances and S&P has threatened to lower Pennsylvania’s bond rating, saying that its budget projections are a result of one-time savings or other gimmicks.
One such gimmick (a very popular one) is to delay payments due to the state employee and teacher pension funds.
That seems unwise to the rating agencies because both pension funds are suffering from significant deficits and lowering the state’s contribution will make matters worse.
But, Corbett proposed to lower payments the state owes the funds based on his belief that the legislature will pass legislation to enact cost-saving reforms for the pension systems. In reality, the legislature has been unwilling to pass any of the reforms suggested by the governor, so there are no savings.
Still, it appears Corbett will lower state payments to the funds anyway, even if the legislature passes only a token ‘reform’ measure.
This is the kind of act that drives rating agencies crazy because it worsens the state’s “structural” problem—which is that its expenses exceed its revenue.
One solution to this structural problem would be to increase taxes. And there is talk in Harrisburg of raising the tax on conventional cigarettes and on the new and popular electronic cigarettes.
Several Republicans—note the party label—have even suggested that it may be time to levy a severance tax on natural gas drilled in Pennsylvania, an idea warmly embraced by the Democratic candidates for governor.
A severance tax could raise $400 to $600 million a year, depending on how it is structured, and that money looks awfully tempting to some legislators trying to work their way out of the hole they are falling into.
Of course, there is one problem with such a tax—Corbett opposes it. In fact, he’s practically staked his reputation as an anti-tax guy by refusing to agree earlier to a severance tax. (He would only accept an “impact fee,” which currently yields about $50,000 for each well drilled.)
Thus, the governor finds himself in a bind. Unwilling to sign tax bills, he may be left only with the option of cutting state spending. He’s already taking hell for cutting money for education, and then he must go ahead and cut again?
Not exactly an ideal scenario for a re-election campaign. It surely will result in partisan jockeying to and fro.
Those theatrics aside, we should listen to the rating agencies. They are the closest to neutral observers out there.
The truth is Pennsylvania does have a “structural” problem. It does have unfunded pension liabilities that will have to be paid somehow. Yet, the state’s potential for economic growth is limited. In terms of recovering from the Great Recession, it still lags behind most of the rest of the United States.
We only have so many arrows in our quiver. When a state faces these problems it must raise taxes, cut spending or do some combination of the two.
One suggestion making the rounds in Harrisburg is to solve the problem by postponing the day of reckoning: pass a budget for half a year and deal with it in January. Which means that if things don’t get better, we’ll have to double down on cuts or new taxes.
This idea is reckless and foolish and, therefore, hugely appealing to the political class.
A new state budget must be passed by June 30th, but it is unlikely the legislature will touch any of these issues until after the May 20 primary. This gives them a short time to make tough decisions.
And it gives Gov. Corbett time to hope that something happens soon to stave off the coming storm and salvage his political career. Otherwise, he’ll be singing the blues.
Cue up Etta for this one.