PMA Bulletin -- February 27, 2013

Corbett Budget Keeps Government Focused on Core Functions

Over the next two weeks, the House and Senate Appropriations Committees will continue holding budget hearings on the proposed FY 2013-14 spending plan Governor Tom Corbett unveiled on February 5.  

Here’s to trusting that when the hearings end on March 7, lawmakers conclude, as we have, that there’s a lot to like in the plan.

The Corbett budget not only restrains spending for the third year in a row, but it boosts economic development and public education efforts without raising taxes. The budget contains a transportation funding plan we desperately need to help spur economic recovery and move people and goods safely and efficiently. He’s also investing heavily in public education by adding a billion more dollars through the privatization of the state liquor system. Be mindful, more state education dollars were spent in the Governor’s previous two budgets than ever before in the history of the Commonwealth. On another front, he’s proposing a solution to a public pension crisis that, if not confronted now, could break future budgets and force certain and sizeable tax increases.

"Governor Corbett has again delivered a plan that keeps state government from overreaching its responsibilities,” said David N. Taylor, Executive Director of the Pennsylvania Manufacturers’ Association. “Keeping government focused on core functions is a prerequisite for our economy to flourish.”

Restraint in Spending

The Governor’s budget builds on his first two spending plans that combined to erase a $4.2 billion deficit caused by the recession and the end of federal stimulus money. It hasn’t been easy or painless.  According to his Budget Office, 260 line items in the annual budget have been eliminated since Governor Corbett took office.

Overall, the budget does ask for a slight increase in spending over last year, $28.4 billion in General Fund revenues compared to the $27.7 budget he signed in July. As the Governor noted in his budget address, however,  “Thanks to two years of fiscal restraint, we are now able to make responsible spending increases.” Some of those increases include the largest amount ever, for example, $5.5 billion for basic education subsidies.  He is also proposing increases in programs for children with mental and physical disabilities.

Transportation Funding

Our roads and bridges are not only costing us millions in delays and vehicle repairs but they are dangerous as well. Fifty years is the average age for a Pennsylvania bridge and PennDOT classifies more than 4000 bridges as structurally deficient. These deficiencies cause rerouting, shipping delays, and hazardous situations on a daily basis.

Traditional funding sources from the state and federal gas taxes have been falling behind for years. Cars are getting many more miles per gallon and the per-gallon taxes were never tied to inflation.

Governor Corbett proposes lifting a cap on the wholesale price of fuel, which was set at $1.25 a gallon in an age when no one imagined the price for gas getting higher than that. His Budget Office predicts that eliminating the cap will raise slightly less than $2 billion a year. To soften any increase at the pump (difficult to predict because the increase in the tax is on the wholesale level) he is asking for a 17 percent reduction in the 12 cent-a-gallon state tax levied at the pump.

The proposal is in line with what the business community supports, and one recommended by his own Transportation Funding Advisory Commission. Transportation infrastructure is a vital government function and an adequately funded system is needed to move people and goods safely and efficiently.

Health Care

Remarkably some have characterized the Medicaid expansion under the federal Affordable Care Act (ACA) as “free” for Pennsylvania because Washington “covers” the initial few years of cost. This, when the money to pay for the expansion still comes from the same pockets, ours, and the commonwealth will end up shouldering most of the costs in the down years anyway.

In his budget address, Governor Corbett said that Pennsylvania would not be expanding Medicaid under the ACA unless Washington enacts some reforms.

The Governor’s letter to Health and Human Services Secretary Kathleen Sebelius sums up the present and future costs: “The Medicaid program in Pennsylvania is on an unsustainable path. The cost of the current program is over 30 percent of the entire Pennsylvania General Fund budget and continues to grow. For fiscal year 2013-2014 the Department of Public

Welfare’s costs are projected to grow by over $400 million in new state-only dollars.”

In total, expansion under the ACA would add over 800,000 new enrollees into the program – resulting in approximately 1 in 4 Pennsylvanians being enrolled in Medicaid. “Our initial estimates show that a Medicaid expansion under the ACA would cost Pennsylvania almost $1 billion of new state taxpayer dollars through fiscal year 2015-2016… ultimately rising to a total cost of over $4.1 billion of new state taxpayer dollars by the end of fiscal year 2020-2021. Without reform, the only way to support these costs would be a large tax increase on Pennsylvania families.”

The Governor's office further notes that spending on Medicaid programs accounts for 75 percent of the Department of Public Welfare’s (DPW) $27.6 billion budget (including state, federal and other funds). DPW’s budget constitutes 39 percent of the state’s annual budget with Medicaid being the number one cost driver at 30 percent of Pennsylvania’s General Fund.

PMA commends the Governor for the decision to not expand Medicaid coverage as it pertains to the ACA.

Business Taxes

Only two states, Pennsylvania and New Hampshire, cap the net operating losses (NOL) business can carry over against their Corporate Net Income (CNI) taxes. Here’s why the other 48 don’t. The cap penalizes start-up and cyclical companies by significantly increasing their effective tax rate. Allowing for the deduction in net operating losses improves a business’s tax liability. Not allowing for uncapped NOL deductions puts Pennsylvania at a direct disadvantage in attracting or retaining jobs in these innovative industries.

Governor Corbett is asking to raise the cap on net operating losses (NOL) businesses can offset against their future Corporate Net Income (CNI) liabilities. The current cap is set at $3 million, or 20 percent of income - whichever is greater. The Governor’s proposal would raise the cap to $5 million or 30 percent of income.

On another front, the Governor is asking to continue and complete the phase-out of the Capital Stock and Franchise Tax, which taxes business even in years they make no profits.  By January 2014 the tax is scheduled to be reduced to 0.00. Additional legislation will be needed to completely remove the tax from the books. He also is asking for a gradual reduction in the state’s CNI; currently collected at 9.99 percent - the second highest in the nation.

CompetePA, a coalition of businesses working to get our tax structure competitive with other states says, Pennsylvania would have nearly 700,000 more jobs today if the economy had grown at the national average since 1990. Instead, the commonwealth ranks 43rd in job growth over that span. Employers consistently cite the corporate net income (CNI) tax as a major contributor to the poor business climate and a red flag that warns away companies that might otherwise consider locating or expanding in the commonwealth.

As tax rates are reduced and more business flocks to Pennsylvania, state revenues will surely increase allowing for the funding of essential government programs such as education, transportation infrastructure, and public safety. Without these reforms, more money will be taken from Peter to pay Paul - until Peter decides to move to Alabama.

Pensions

The unfunded liability for state employees and teacher pensions is $41 billion, and if something isn’t done soon we are on the hook for it. The Governor is offering a plan that will almost surely result in a tough political fight because part of it calls for adjusting the pension formulas of those currently employed. There may be no alternative. His budget office says that next fiscal year the costs for pensions will consume 60 percent of all new revenues, money that should be going to core government programs.

Governor Corbett’s proposal reduces the multiplier in the pension formula from 2.5 down to 2 percent for all current employees as of fiscal year 2015-16. New state employee hires would be required to contribute 6.25 percent of their salary to a 401(a) defined contribution plan and new teacher hires would have to contribute 7.25 percent. For its part, the state would input 4 percent into this same plan.

The governor’s office says members who “bought into” multipliers above 2 percent would not be affected by the change and those who wish to retain the higher multiplier would be required to contribute a higher, not-yet-determined amount each paycheck.

Another proposal changes the way a member’s “final salary” would be determined for pension benefits. If enacted, the amount would be calculated by averaging the member’s wage over the last five years of service. The pension amount is not to exceed 110 percent of that average.

Last July, Moody's Investor Service cut Pennsylvania's bond rating to Aa2 from Aa1, citing the Commonwealth's "large and growing pension liabilities and moderate economic growth," which "will challenge the return to structural balance, contributing to a protracted financial recovery.” 

Public Education

When he first took office, Governor Corbett walked into a public education funding gap. For over two years Pennsylvania’s school districts received a total of $1.7 billion in stimulus money. Over that same two-year period, public school employee salaries and benefits jumped by $1.3 billion.

Worsening the pain felt by the end of the stimulus money the Rendell administration diverted $554 million in state tax dollars from the basic education funding line and replaced and inflated it with federal stimulus dollars.

Limiting spending over his first two years in office has enabled the Governor to bridge that gap and then some. Among the highlights of the Corbett education proposal is a $90 million increase in basic education funds, bringing that line item to $5.5 billion. Overall, state support of public schools would be $9.8 billion, compared to $9.5 billion last year. Early childhood education aid would increase by $11.4 million, or 3.4 percent. This is the largest investment in basic education in the history of the Commonwealth- second being last year’s total.

The budget also calls for the creation of the Passport for Learning Block Grant, which would channel about $1 billion to schools over a four-year period for school safety initiatives, individualized learning, enrichment for elementary reading and math, and improving science, technology, engineering, and mathematics programs. The funding hinges on the legislature's agreeing to privatize alcohol sales.

If privatization of the PLCB occurs, add $1 billion in block grants for four major categories of funding:

  1. School safety – training for educators/administrators, enhanced security measures and partnerships with local law enforcement;
  2. Ready by 3 – promoting enhanced achievement in reading and mathematics in K-3 programming;
  3. Individualized learning – customized learning programs based on student proficiency and academic standards; and
  4. STEM initiatives – enrichment of science, technology, engineering and mathematics in grades 6-12.

Some argue that this one-time expenditure is similar to the stimulus money Governor Rendell doled out in his last budgets; but it’s not at all the same at all. No state monies are being rescinded in place of this one-time expenditure. Instead, this investment would be granted on top of what would already have been allocated. Additionally, districts will apply for these funds in the form of grants, not given the funds as a part of general operating expenses.

Overall, this budget proposal is promising. Because of fiscal restraint in previous years, essential government programs can become more fully funded and restored. Several obstacles such as pension insolvency and solutions to our transportation infrastructure funding woes loom, but Governor Corbett has taken the lead in tackling these tough issues. It will now be up to the legislature to improve upon these plans before June 30, 2013.