Budget nightmare: Revenue report shows $506M shortfall
HARRISBURG - An election year budget nightmare will confront Gov. Tom Corbett and lawmakers during the coming two months.
The closely-watched state revenue report for April shows a $506 million revenue shortfall with a liquor fund transfer factored in for the fiscal year ending June 30.
A key reason for this is that state personal income and corporate income tax revenue collections last month are $280 million below projections. The assumption is that a revenue shortfall this year will recur by a similar amount in the 2014-15 fiscal year so Pennsylvania really faces a $1 billion budget problem, said House Democratic Appropriations Chairman Joseph Markosek, D-25, Monroeville.
This sobering news will likely mean a rewrite of the $29.4 billion budget for fiscal 2014-15 proposed by Republican Gov. Tom Corbett in February. The governor's plan to add $240 million for a new education block grant for school districts focusing on reading and math readiness and science and technology courses could be in jeopardy as well as other proposals to boost spending for job training, state police and some health care initiatives.
Another piece of bad fiscal news came last week when the credit rating agency Standard & Poor's warned it could downgrade Pennsylvania's rating if it doesn't fix its budget problems and reduce public pension debt.
Corbett has proposed to ease budget pressure short-term for state government and school districts by temporarily lowering the minimum amount that each would pay through their employer contribution next year for public pensions for employees.
Despite the mounting fiscal woes, Senate Republican leader Joseph Scarnati, R-25, Jefferson County, said the GOP-controlled Legislature has an obligation to pass the next budget by the June 30 deadline.
All this hits the fan just days ahead of the May 20 primary as four Democrats vie for their party's gubernatorial nomination and a number of lawmakers in both parties face challenges. Corbett escaped a primary challenge only last week when the state Supreme Court knocked businessman Bob Guzzardi off the ballot.
Initial ideas for erasing the red ink include retracting Corbett's proposed spending increases, levying a state severance tax on natural gas production, agreeing to a full-fledged expansion of Medicaid to cover the uninsured and draw $400 million in federal aid, levying a tax on smokeless tobacco, expanding the cigarette excise tax to cover e-cigarettes and either privatizing more liquor or wine sales or allowing the state stores to operate more like private businesses.
Meanwhile, Corbett is pursuing federal approval of his proposal to wring savings out of Medicaid programs as an alternative to Medicaid expansion under terms of the federal Affordable Health Care Act.
The governor and lawmakers will weigh a number of options on both the revenue and spending sides, said Corbett spokesman Jay Pagni.
Rep. Mario Scavello, R-176, Mount Pocono, is drafting legislation to levy a 5 percent severance tax with revenue going to offset school district pension costs and a smaller portion to fix high-hazard dams. He started thinking about the bill as he became aware of the pending tax revenue drop.
A number of Northeast Pennsylvania lawmakers sit on the Senate and Appropriations Committee, which will have first crack on the budget bills surfacing in June that will reflect the new fiscal reality. They bring various perspectives.
Pennsylvania needs to enact a severance tax and implement Medicaid expansion to close the revenue gap, said Sen. John Blake, D-22, Archbald.
He also urged consideration of the Democratic caucus proposal to pay off a portion of the public pension debt by borrowing $9 billion from investors. This would involve issuing pension obligation bonds to take advantage of lower interest rates and refinancing long-term debt for both state government and school district pensions.
"We've packed a lot of work in a short space," added Blake, referring to the June session days.
Rep. Mike Peifer, R-139, Greene Twp., said he could consider a severance tax but hasn't signed on as a cosponsor to Scavello's bill. Peifer is concerned about what a final bill would look like in terms of the tax rate and revenue use.
"It's got to be reasonable and in the right place," added Peifer.
Sen. John Yudichak, D-14, Plymouth Twp., said cuts in state aid to public schools and higher education under earlier Corbett budgets have led to job losses in the public sector and less income that would be subject to taxation.
"That lack of job growth and lack of wage growth has crippled the state budget," he added.
The first priority should be maintaining state aid for basic education so school districts won't have to absorb additional cuts or property tax hikes, said Rep. Mike Carroll, D-118, Avoca.
"We are in no position to enact a new program or block grant," he added.
Carroll said the budget challenge will require a series of actions.
"I don't think you can point to any one solution considering the size of the problem here," he added.
Sen. Lisa Baker, R-20, Lehman Twp. said the revenue drop underscores the need for long-term solutions to address pension and Medicaid costs.
"The severity of the situation puts everyone on notice that, if long-term cost drivers such as pensions and Medicaid are not addressed, revenues are unlikely to keep pace and core responsibilities such as education are going to be shortchanged," she added. "A short-term fix to struggle through this budget will mean more serious difficulties in succeeding budgets."
There's been some discussion about why the fiscal picture has deteriorated so much since Corbett's budget address. Some Republican lawmakers suggested it's Washington's fault.
Congress enacted a higher federal tax rate for capital gains and dividends in early 2013 as part of a package to head off an impending crisis known the `fiscal cliff,' said Matthew Knittel, executive director of the Pennsylvania Independent Fiscal Office. Many businesses and individuals reported money from those sources in their 2012 tax returns to avoid paying the higher tax rate.
This shows how unanticipated national events can impact state tax collections and the Pennsylvania economy as a whole, said state Revenue Secretary Dan Meuser.
"We knew that the federal increase would cause some taxpayers to recognize capital gains and shift dividend payments into 2012, but the magnitude of that tax shift was not anticipated," added Meuser. "Despite having about the same number of tax returns this year as compared to last, we've received 22 percent less returns with payments."
Pennsylvania saw a tax revenue windfall due to the forwarding of those payments in 2012 and now it's balancing out, said Sharon Ward, executive director of the Pennsylvania Budget and Policy Center, a Harrisburg think tank.
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