August 6, 2010
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State Budget Crisis Prompts Strategic Planning Sessions

Recently I held two strategic planning sessions with a broad cross section of leaders and community activists from the faith based, social service, arts and culture, health care, education, and economic development communities regarding the $5 billion shortfall that is projected in next year’s state budget.

This year the Pennsylvania legislature was forced to make some very difficult decisions to deliver a balanced budget on time. The impact of these decisions on the lives of families across the Commonwealth will be significant. However if we don’t begin to think and plan strategically now, next year’s fiscal forecast will be more dire and more devastating to millions of Pennsylvanians.

Below is the information that was presented at the meetings that were held at the Science Center and the Independence Blue Cross headquarters in Philadelphia.

Senator Hughes leads the discussion at the strategic planning session held at the Science Center. Senator Daylin Leach (far center) also was on hand to share his perspectives on the Commonwealth's fiscal challenges.	Senator Hughes and AIDS activists met at Independence Blue Cross headquarters to discuss strategies to ensure that AIDS/HIV programs and services continue to be a priority at the state level.

Budget Alert: Staving off a Budget Crisis

Making Ends Meet

• The ongoing national recession has severely impacted state government revenues and forced government leaders to prioritize spending, seek scarce new revenues, empty rainy day funds and make painful cuts to vital programs and services.

Spending Cuts

• Republicans and Democrats this year hammered out an on-time $28.05 billion austere budget that made steep spending cuts, but managed to hold the line on taxes.

Unsettled Piece of the Puzzle

• Part of the revenue for the 2010-11 state budget is an estimated $850 million in FMAP (Federal Medical Assistance Percentage) dollars. At press time, the U.S. Congress was still debating passage of these monies. If Congress fails to provide states with this funding, state lawmakers and the governor will need to either raise additional revenues or impose additional spending cuts.

Fiscal Problems on the Horizon

Transportation Crisis Looms

• The recent federal decision to prohibit the tolling of I-80 has left Pennsylvania with a gaping $470 million hole in our transportation funding net. Various proposals have been offered to close this gap including an oil franchise tax, gas tax or expansion of public-private partnerships.

• A May study by the state Transportation Advisory Committee revealed that Pennsylvania has $3.5 billion in unmet funding needs for highways and bridges, public transportation and local government. This funding need is expected to grow to $6.7 billion by 2020.

Pension Spike

• A significant decline in investment portfolio performance caused by the national recession, limited contributions and benefit enhancements will result in an explosion of public pension costs over the next several years. Pennsylvania has not fully contributed to the actual cost of pension benefits since 1998-99.

• Unless the legislature acts, state pension costs will jump from an estimated $915 million in 2011 to $3.93 billion by 2013. So far, the state House has passed bipartisan legislation that would address many of the pension issues. The Senate has yet to act.

Med-Malpractice Funding Quandary

• Commonwealth Court ruled earlier this year that the state erred in shifting $808 million in medical malpractice funds to the General Fund to balance the state budget last year. The funding in question is generated by a tax on tobacco and the funds earmarked to help defray some of the cost of medical malpractice insurance premiums paid by doctors. An appeal of this ruling is pending.

Structural Deficit Hobbles Future Fiscal Options

• As a result of the loss of federal stimulus funds and increased pension costs, Pennsylvania faces an estimated $5 billion structural deficit for next year’s state budget.

• This projected deficit amounts to 18 percent of what the state now spends. Trying to fill this looming deficit through cuts alone would result in laying off thousands of state, local and school district workers. Apart from the furloughs, the state would need to drastically cut what few discretionary line items remain.

• With nearly 80 percent of state spending already dedicated to “fixed costs” such as prisons, lawmakers would likely have to make drastic funding cuts to school, hospitals, college students, health care services for children, veterans services and other programs that benefit our most vulnerable citizens.

• Federal aid now under consideration in Congress may help stanch the flow of red ink. An extension of stimulus funding would help states bridge the huge fiscal chasm and fill holes left in key programs.

Solutions

More Cuts Are Not the Answer

• Pennsylvania cannot simply cut and slash its way out of its looming fiscal despair. There is not enough state leeway to cut funding lines to the degree necessary to adequately fund essential services. The solution lies in a combination of strategic investments that create jobs and tapping new revenue sources.

Pass the Jobs Bill

• In a down economy when men and women are struggling to find work, legislation that would create 40,000 temporary jobs should be passed. My JOBS legislative package would create both temporary jobs for adults and youth job opportunities.

• These community service jobs would employ Pennsylvanians through a nine-month contract paying $10 per hour for up to 30 hours per week for adults. A youth employment component creates six-week summer positions at $9 per hour for 25 hours per week.

• The jobs program would be funded by federal Temporary Assistance for Needy Families (TANF) block grant funding and by instituting a tax on the wholesale price of smokeless tobacco products. The TANF funding was allocated to Pennsylvania as part of a $5 billion emergency fund created by the American Recovery and Reinvestment Act. This funding needs to be re-authorized by Congress.

Pass the Tobacco Tax

• More than $80 million could be generated with a new tax on chewing tobacco. These other tobacco products would be taxed nearly equal to the percentage at which cigarettes are currently taxed (59.2 percent). The tax would be based on the wholesale price.

Close the Delaware Loophole

• Major businesses and global industries are able to take advantage of a corporate tax loophole to avoid paying their fair share of Pennsylvania taxes. An estimated 70 percent of Pennsylvania corporations do not pay the corporate net income tax. That would change if Pennsylvania lawmakers would close the so-called Delaware Loophole and adopt “combined reporting” of income. It is estimated that this accounting change would result in $500 million in additional annual state revenues. Plus, it would put large corporations on an equal tax footing with local Pennsylvania-based companies and create a better, fairer business tax system.

Marcellus Shale Tax

• In this year’s budget agreement, plans were made to create an energy tax that capitalizes on the massive natural gas reserves located throughout Pennsylvania. A new study suggests that in just one year the industry has the capacity to generate $652 million in state and local taxes and 72,000 jobs.

End the Retailer Incentive Discount

• This proposal would generate an estimated $74 million by eliminating the 1 percent "incentive" retailers get for collecting and submitting sales-tax money on time.

Small Games of Chance

• Legalizing small games of chance in certain bars and taverns would provide $100 million annually in state revenues under legislation recently introduced. A separate portion of the proceeds would go to local nonprofits and charitable organizations.

Broad-Based Approaches

• While the legislature has avoided raising broad based taxes in these difficult economic times, some believe this approach would be the most effective and equitable means for raising revenue. Each 0.1 percent increase in the state's 3.07%income tax raises an estimated $330 million. Each 1 percent hike in the state's 6 percent (7 percent in Philadelphia and Pittsburgh) sales tax raises $1.39 billion.