Pa State Budget Proposal is out of Balance

Pennsylvania HARRISBURG – Governor Edward G. Rendell said today that he could not sign a proposed budget unveiled Friday by leaders of three legislative caucuses because it contains major revenue estimation errors that would render it unbalanced and, therefore, unconstitutional. The plan would create a deficit of more than $400 million in the current fiscal year and more than $600 million next year, setting the state up for a $1 billion tax increase in 2010.

The Governor pointed out that while the proposed overall spending of $27.9 billion is close to his goal, within that total, the plan makes unacceptable cuts to education and to economic development programs that are essential to job creation while Pennsylvania works to recover from the national economic downturn.

“The proposal outlined yesterday by legislative leaders fails to meet the fundamental constitutional requirement that it be in balance. I could not responsibly approve it,” Governor Rendell said. “They made their numbers work on paper, but the numbers won’t work in the real world.”

The Governor said he intends to meet on Sunday with caucus leaders to address the problems with their balance sheet, and to address his concerns over funding to education and economic development.

“We found 10 flaws in their revenue projections over two fiscal years, an inflated estimate that would add up to a billion-dollar deficit. It would also leave us poorly positioned to deal with future economic challenges that the state will face in the years following that. We must have enough recurring revenue to put us on solid economic footing in the future,” Governor Rendell said.

Concerning the revenue projections, the Governor cited the following errors for the 2009-10 fiscal year:

• The legislative budget projects General Fund revenue growth in the current fiscal year at 0.81 percent over last year, producing an estimate inflated by $206 million. Considering that July and August revenue collections were already below estimate by $22 million, the Governor considers it more prudent to expect no growth from existing revenue sources. Also, bond rating agencies Moody’s and S&P downgraded Pennsylvania’s outlook last month because of concerns about our future revenue generation under the current structure. The Governor noted that the budget secretary must certify a revenue estimate upon which the state budget is based. Budget Secretary Mary Soderberg has certified a no-growth estimate. That point alone makes the legislative budget unconstitutional.

• The legislative budget projects an additional $243 million this year from leasing state lands for natural gas drilling. According to an evaluation by the Department of Conservation and Natural Resources, it is impossible to lease the amount of acreage for drilling that the legislative budget envisions. The estimate is $40 million too high.

• The legislative budget overstates the amount to be gained by a tax amnesty program. It anticipates $100 million this fiscal year, but the state Revenue Department projects a maximum of $63.4 million, producing an error of $36.6 million. Further, increasing the amount of delinquent taxes collected under an amnesty program in one year decreases the amount of future collectibles in subsequent years.

• The legislative budget lists $100 million to be derived from taxing small games of chance, wildly overestimating the sum by nearly $96 million. Currently, less than one-third of fire companies and clubs that operate such games report earnings to the IRS, and based on those figures, the taxes would amount to just over $4 million in this fiscal year. Even if all 3,000 operators began remitting taxes on small games of chance, the amount to be collected would be only $9 million.

• The legislative budget relies on $60 million in savings from reduced errors in welfare eligibility. Considering that the Department of Public Welfare already recovers $138 million annually by attacking fraud and abuse, and has put numerous safeguards in place to prevent payment errors, any increased revenue is unlikely. Also, pursuit of these funds often involves court cases that require lengthy time periods to settle.

Those errors for the current fiscal year total $438 million.

Concerning the revenue projections, Governor Rendell cited the following errors in the legislative budget for the 2010-11 fiscal year:

• The General Fund revenue growth is too high by $263 million, because it carried over the inflated revenue estimate from the prior year.
• It overstates natural gas lease income by $65 million.
• The proposed 2009-10 tax amnesty program would result in lower collections in 2010-11, costing the state $31.8 million.
• Small games of chance taxes would bring in only $16 million; or $183.6 million less than anticipated.
• Reductions of welfare eligibility errors will not produce $60 million worth of additional revenue, beyond what is already recovered by DPW.

Those errors for the next fiscal year total $603.9 million, resulting in a two-year potential deficit of $1.042 billion.

“I simply cannot stand by and let the commonwealth go through that,” the Governor said.

“In addition to being short of funding, the budget is also shortsighted,” Governor Rendell said. “Pennsylvania has seen greater educational progress than any other state in the country over the past six years, largely because of the targeted investments that we have made to help children learn better. I won’t allow us to go backward. It is too important to each individual child, and it is crucial to our state’s future.”

The legislative budget calls for $147 million in cuts to education line items.

The Governor also said he could not accept the proposal’s damaging cuts to economic development programs that attract employers to the state, thus creating jobs.

“The efforts that we have made to help businesses locate and expand in Pennsylvania are critical, now more than ever. These are investments that pay for themselves many times over, because they widen our tax base and help our workers find good-paying jobs.” Governor Rendell said.

He noted the example of the Harley-Davidson plant in York County, which is scouting locations in other states for a potential move. Pennsylvania has prepared an incentive package to keep the company here, but cannot offer it yet because funds are not available due to the budget deadlock.

“If I would accept these cuts to our economic development grant programs, we would be unable to make a competitive offer to keep Harley-Davidson in south-central Pennsylvania. There are many similar examples around the state; Harley is just the most immediate one,” Governor Rendell said.

Rendell said he still hopes to use the recent efforts of legislators as the basis for an agreement.

“The legislative leaders did some good work. They arrived at a spending number that we believe is reasonable. We would like to restore funding in some areas and we could propose additional cuts in some areas. Clearly, we have more work to do on this budget. I want to see it resolved as quickly as possible, and I look forward to meeting with legislative negotiators to achieve a budget that is good for Pennsylvania. We must get it done soon, but – most importantly — we also must get it done right.”
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The Rendell administration is committed to creating a first-rate public education system, protecting our most vulnerable citizens and continuing economic investment to support our communities and businesses. To find out more about Governor Rendell’s initiatives and to sign up for his newsletter, visit www.governor.state.pa.us.

EDITOR’S NOTE: For a chart detailing the figures discussed in this news release, visit this link.