Budget Impasse: What’s next?

The war of words over the budget impasse continues and, for his part, Speaker of the House Mike Turzai (R-Allegheny) must be getting tired of repeating the obvious, or what should be the obvious.

At a Pennsylvania Press Club briefing on Monday, Speaker Turzai clearly felt it necessary to yet again say that the Governor has no votes for the tax increases he continues to demand. That fact should have been more than obvious to the Wolf Administration two months ago when the House flattened the Governor’s spending and tax plan under a 0-193 vote.

The Speaker also said that energy, sales, and personal income tax increases are off the table, and that the consideration of any other tax would need to be tied to ridding the state of the retail and wholesale liquor business. But he also indicated that the House could try to override the Governor’s veto if negotiations continue to fall short.

“It’s hard to know where to begin,” said PMA President David N. Taylor.  “It seems the Governor wants everything in his Letter to Santa, otherwise he’ll take his ball and go home.”

The budget approved a month ago closed the deficit and increased education funding by nearly $400 million. What it didn’t give Governor Wolf was a cent of the nearly $4.55 billion in tax increases he asked for over this fiscal year alone. The Governor says he needs that money for education -- even though the Republican plan keeps us in the top ten nationwide in basic education funding  -- and, in comments last week, he needs the money to get our fiscal house in order to please the big three rating agencies: Moody’s, Fitch Group, and Standard & Poor’s. 

In a KDKA interview, the Governor cited the five credit downgrades Pennsylvania received in the past three years that add a full percent to payments that cover $17 billion in debt.

His own words: "This isn't just Democrat Tom Wolf talking. This is people outside looking at us, and right now we're paying a premium of about 1 percent on our debt. That's $17 billion. That adds up to about $170 million a year we're all paying. It's not going to education. It's not going to roads and bridges. It's going to the pockets of people who have bought our bonds because we don't have a good budget."

However, what concerns the agencies is an unfunded liability of $53 billion that grows at $10 million a day. The cost of covering that liability this year alone is $2.4 billion, according to the Independent Fiscal Office

Standard & Poor’s analyst John Sugden said in a statement, when the agency recently downgraded Pennsylvania, “The downgrade reflects our view of the state’s diminished financial flexibility and growing expenditure pressures due to inaction on pension reform and limited revenue growth.”

“With each credit downgrade, the state’s pension obligations were named as a leading cause for the fall in the state’s credit rating,” said Senate Majority Leader Jake Corman (R-Centre). “The General Assembly took the significant step toward providing tangible reforms and sustainability to the state’s pension systems by passing Senate Bill 1 earlier this year. Restructuring the pension systems as we did would have provided Wall Street with the assurances it needed to help the bond ratings recover. Unfortunately, Gov. Wolf vetoed that plan in lieu of the status quo and his plan for more borrowing, which investors have indicated will not help the bond rating.”

The Wolf tax increases would ensure that Pennsylvania had plenty of money to make the payments for a very short time, but without reform of the pension system and a less competitive business climate, returns would diminish and obligations will continue to grow. In fact, ratings analysts say the sheer size of the proposed tax increases and the prospect of future increases are worrisome.

“We don’t get into the policy side of it, but in a hypothetical state, massive tax increases just like massive cuts in vital programs would certainly hurt a state’s rating,” Fitch Group’s Eric Kim said.

On the other hand, the Republican plan is a continuation of budgets approved over the past four years. Each year, they’ve been making strides to close a $4 billion deficit left by former Governor Ed Rendell. And they’ve accomplished it with no tax increases yet still managed to balance the operating budget each year and fund core services. For the rating agencies, and more importantly for the taxpayers, those are good budgets.

After the passage and the veto of the sensible budget, Republican lawmakers are left with three option: continue to attempt to negotiate with the Governor, attempt to override the veto, or send each of the 401 spending line-items as individual votes to the Governor. Only time will tell, as there is still much more to come in this ongoing story.