A Compromise Before the Storm

The basic law that forms the foundation for the study of politics and economics is quite simple–human desires are infinite, but societal resources are finite. This understanding illuminates human behavior and the consequences of that behavior. During our state and federal budget seasons, this maxim should not be forgotten.

Pennsylvania has a budget for 2010-2011. Indeed, it is the first budget that was passed on-time–by 1 July–during the eight years of Governor Ed Rendell’s tenure. Democracy is based on building consensus and on compromise. Indeed, our new state budget is a patchwork quilt of compromises, and the General Assembly and the Governor were willing to accept compromises in order to finally abide by our state Constitutional guidelines. The criticism and ridicule that the two branches of our Commonwealth’s government were going to face if they had not agreed upon an on-time budget this year was not an attractive prospect. Furthermore, both parties realized that they would rather not face that type of criticism in a gubernational election year. These factors combined, with the normal yearning of state legislators for a quiet summer vacation, to prod the two government branches to a budget agreement.

One finds upon close inspection of the new state budget that it is a compromise agreement that simply postpones confronting the gales of fiscal reality next year. Therefore, this will surely be a budget that both fiscal conservatives and free-spending liberals will criticize. In effect, we are opting to postpone tough budgetary choices and let a new Governor and a new General Assembly deal with them. Government by postponement?

As the Pennsylvania Business Council said in one of its updates on the budgetary process, "break out the vuvuzelas; it looks like Pennsylvania has a budget!" Yes, while the World Cup continues in South Africa, hard fiscal choices remain just over the horizon in the Commonwealth, but all parties to these budget negotiations claimed some trophy to take home and brandish before their constituencies so that they can proclaim some negotiating victories.

The Commonwealth’s budget for FY 2009 was agreed upon 101 days late, and since the Governor had yet to finish a budget on time, outside observers certainly did not expect this budget to be on-time. Pennsylvania was the last state in the Union to agree to a budget last year. The negotiating difficulties that the Governor and the General Assembly have had with one another over budgets combined with the starting points of the principals this year did not bode well for a successful and timely conclusion this year. Most Keystone State government observers and pundits have been surprised.

Governor Rendell had proposed a $29.3 billion budget for 2010-11 that would have increased business taxes, imposed new taxes on natural gas and tobacco, and expanded the sales tax to many services and goods that are presently exempt from them. The Senate Republicans, who have a 30-20 majority, have been stalwarts in defense of a no new taxes position. The Senate GOP believe that the state’s citizens are already overtaxed and that any new taxes will delay an economic recovery for the Commonwealth. Governor Rendell, on the other hand, wanted to leave office viewed as a staunch friend of education. So while the GOP fought off every new tax proposal, the Governor stood firm with his insistence that basic education funding should be increased by $250 million.

In the end, a $28.05 billion budget was agreed upon with no new taxes and with the Governor’s $250 million boost in basic education funding. The budget also calls for the establishment of a severance tax on natural gas extraction in Pennsylvania in the Marcellus Shale region that will be enacted by 1 October and effective in January 2011. The rate and the distribution of this revenue will be determined in the next few months. In the end, the Governor agreed to a budget approximately one billion dollars lower than he desired; while the Republicans were able to fight off any other tax increases and agree to a budget that increases spending less than one percent over the existing one.

While both sides can proclaim certain victories in this round of budget negotiations, this budget has not dissipated the storm clouds that loom ahead. The Senate Majority Leader Dominic Pileggi has identified a $5 billion structural deficit that will emerge next year. The budget also relies on an $850 million FMAP (Federal Medical Assistance Percentage) reimbursement that Congress has yet to approve. In fact, the U.S. Senate recently defeated a bill that contained these monies. If this payment is not forthcoming from Washington, the new Administration and General Assembly will have to turn to the new basic education money that Governor Rendell championed to make up the shortfall. This budget also assumes a three percent growth in revenues—a highly optimistic projection given the current national and state economic picture. In addition, the Commonwealth is anxiously awaiting a judgment from the Judiciary to see if Pennsylvania must repay the $800 million it took from the MCare Fund last year in order to balance its budget. Will we have to repay that amount as well?

Rather than investigate uncertainties about these questionable areas of the state budget, our political leaders and budget negotiators simply postponed our day of reckoning. The final numbers of this budget were far less important for the negotiators than the symbolic victories that both could claim.

While this essay began with the invaluable maxim surrounding all of economics and politics, another one needs to also be considered. This maxim has been attributed to many different authors over the generations from Ben Franklin to Alexis de Tocqueville to Alexander Tytler: "A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years."

Throughout the budget-making processes in Harrisburg and in Washington, all discussion has been about expanding services, serving new clients, and taking a greater percentage of society’s income for our three levels of government. One hears little discussion of wealth creation. For the last twenty years, we have seen the greatest transfer of wealth in history. This transfer has been between the United States and China and India. Our government and its leaders have been poorly informed, shackled by fragments of one ideology or another, or persuaded to "look the other way" for lavish cash payments so that a large percentage of our economy’s manufacturing sector could be dismantled and sent overseas for larger short-term corporate profits and larger political contributions. Today, the middle-class is disappearing, and few school students wish to enter the private sector. Most students desire to work for the government or be taken care of by the government. During this budget season, our Governor and General Assembly should work without ceasing to face the budgetary challenges that will be forthcoming and on restoring Pennsylvania’s manufacturing base. We should be focusing all of our energies on bringing new jobs and wealth to the Commonwealth instead of engaging in gladiatorial combat over the dwindling wealth of the Keystone State.