Avoiding State Budget Crisis
The first round Stanley Cup playoff series between the Washington Capitals and the Toronto Maple Leafs saw five of the six games decided in overtime. For hockey fans, this is excitement plus. Overtime is a lot less appealing to Pennsylvania’s citizens, however, when the game is the serious business of approving the state budget. Anxiety and anger are two prevalent emotions evoked.
The steep decline in the public approval ratings for state legislators can be chalked up to a variety of factors, but the messy, controversial, and contentious budget process is undoubtedly a contributing cause. The traditional guessing game, as to what will be in the budget and what will happen with state taxes, has been increasingly supplanted by a more pressing question: will it get done on time, or will there be another disruptive crisis?
Historically, when the national economy tanked, state revenues declined and budget crisis became unavoidable. The years of troubled budgets are seared in bitter recollection – 1971, 1977, 1983, 1991, 2003, 2009, 2015. To cadge a line from Tolstoy, every unhappy budget is unhappy in its own way. The specific woes varied, so the lessons from one miserable budget year did not necessarily apply to the next crisis. While the process of bringing an overdue budget to a close would be politically and economically brutal, it was usually a once and done occurrence.
Now it seems that every year threatens a budget crisis. Several factors play into this. Rising pension contribution requirements. Antiquated tax structures. Successive budgets balanced on rosy revenue predictions and revenue sources that fall short or fail to materialize. Multitudinous advocacy groups pushing for increased spending while taxpayers more aggressively resist tax increases. Mix these things together and it is a sure recipe for structural deficit.
In the past, budget crises were settled by adoption of a tax increase package that would carry the state through until the economy recovered and revenue collections rebounded. The final settlement would be injurious to the jobs climate, especially true of the infamous 1991 tax-and-spend package, but national growth would pick up and pull the state along.
What has changed? The last recession altered many principles and assumptions about the relationship between economic vitality and taxation. Taxpayer opposition to tax hikes is rising in intensity. As a result, the traditional method for resolving long running budget disputes has been rendered politically obsolete.
Only fans of political soap opera and legislative detractors collecting fresh criticism benefit from an extended budget crisis. The costs are clear. Desperation decisionmaking inflicts unintended and unfair costs on individual and business taxpayers. Entities forced to borrow funds rarely recoup the extra costs. Individuals who are laid off or who see services reduced or stopped suffer hardship. The collateral damage does not justify the politics.
Pennsylvania has a balanced budget requirement, as most states do. Taxpayers have figured out there is a big difference between a truly balanced budget and a facially balanced budget, one that pushes problems into the next fiscal year. An important audience never fooled by budgets balanced with baling wire and duct tape measures is the bond rating companies. When the state credit rating drops, borrowing costs rise. This exacerbates the revenue problem.
How to prevent a full-blown budget crisis? A menu of ideas has emerged over the years. Common suggestions include a continuing budget, intermediate deadlines, and penalties for failure to act on time.
The most promising of the reform measures would seem a continuing budget. This can be structured so as to avoid a lot of the pain without diminishing the obligation for eventual resolution. Set a percentage level of funding that would be automatically continued, say 75% or 80%. This would not be enough to carry the state through an entire fiscal year. A big advantage is that it takes away the sideshow distractions, such as determinations of essential versus nonessential employees and the court actions seeking to get specific funds released despite the absence of a budget. In short, the field of wrangling is narrowed considerably.
History provides a limited example showing the possibilities of this approach. In 2003, Governor Rendell vetoed politically sensitive education and human services funding but left the majority of the budget intact. There was a prolonged and nasty crisis, but the disruption was concentrated rather than widespread. Many programs proceeded unaffected by the dispute not settled until December.
How about putting more settings on the time clock? Amid all the complexities of the legislative process in Pennsylvania, the state budget stands out as an odd duck. It is the largest, most complicated, and most time-consuming of responsibilities. Yet, in the calendar year when a new budget is due, only two events are programmed. There is the day in early February when the governor unveils his budget plan (a new governor gets a month grace for his). Then the constitutional deadline falls at midnight, July 1st. In between, the players determine the schedule according to their strategic preferences and political needs.
Over the years, various bills have offered a series of intermediate deadlines or thresholds for action. The House and Senate must introduce a balanced budget proposal by a certain date. These proposals must be brought up for a vote after a specified interval for consideration and debate. With the creation of the Independent Fiscal Office, this is more feasible because the General Assembly is no longer so heavily dependent on the governor’s numbers and projections. Other bills would set a negotiation schedule.
Skeptics ask: what will prove compelling about statutory deadlines when the constitutional deadline is routinely brushed aside? Part of the answer is that a new process may provide additional opportunities for input on the part of the reform-minded individuals elected in recent cycles.
A popular remedy is financial penalties on state legislators, with extreme proposals providing for recall elections. The psychic appeal is obvious. But the practical implications are likely less attractive. It works to increase the leverage of the governor, who is already in a dominant position. Up against the deadline with lousy options to pick from, legislators would feel pressure to rush a phony budget to nominally comply, which works against the public interest in a responsible and balanced budget. A gubernatorial veto would then force the battling parties farther apart instead of bringing them together.
Whichever direction this discussion takes, three things can be said with relative certainty:
*Pick a remedy, or two or three, and it surely will help. But until the public pension problem is addressed in a substantial way, the budget process cannot truly be fixed.
*No matter how much reform is adopted, the politics of budgeting will remain volatile. Too many variables and too much conflicting pressure on spending and taxes ensure that. The state budget process will never be as carefully and closely calibrated as McDonald’s food preparation.
*The central budget players can be faulted for political gamesmanship and policy miscalculations in a given year, but the players change, the majorities shift, and still the problems persist. So the fundamental difficulty is structural, not just tactical.
There is one way apart from procedural tinkering to dramatically alter the budget dynamic. That is a concept debated for more than thirty years – state spending limits. That step requires a constitutional amendment, which gives the taxpaying public a direct say by way of the required ballot question. With a spending ceiling established, the debate then centers on the designation and distribution of available funds.
The intellectual and fiscal arguments for on-time budgets are easy winners. So why have reforms not gained traction? Simply put, the politics of the issue have not compelled legislative action. Governor Ed Rendell paid no discernable political price for going 0 for 8 in meeting the state budget deadline. Conversely, voters did not rush to the polls to reward Tom Corbett for getting budgets delivered by the deadline. Rather, much of the commentary involved public and commentator dissatisfaction with the contents of those budgets. This is before taking into account how much health care and education and the environment dominate the agenda.
Still, most Pennsylvanians would list a properly balanced, prudently constructed, on-time state budget as Job #1 on the checklist of state responsibilities. Public pressure for remedial steps to correct notable flaws in the budget process is needed to avoid the debilitating and discouraging spectacle of repeated budget crises. Absent action, Pennsylvania will continue to pay an economic price, suffer additional hits to reputation, and see public confidence in state government drop even lower.
David A. Atkinson is an Associate with The Susquehanna Valley Center.
Nothing contained here should be considered as an attempt to aid or hinder the passage of any legislation before the General Assembly.
The views expressed here are those of the author and not necessarily those of The Susquehanna Valley Center.
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