Governor Insults Legislators, Demands Higher Taxes

Member Group : PA Manufacturers' Assn.

PMA’s FY 2016-17 Budget Proposal Response

On Tuesday, Governor Tom Wolf brazenly scolded House and Senate Republican lawmakers instead of presenting a budget proposal to an equal branch of government. The budget fiasco now consuming Harrisburg, he said, is the result of Republicans playing politics and ignoring the math. He then went on a political tirade, saying throughout the address that lawmakers were risking the welfare, and even the lives, of the elderly and children.

The problem? He’s the one whose math is wrong.

"Governor Wolf and his senior aides are disconnected from reality," said PMA President David N. Taylor. "His untenable 2016-17 budget proposal is built on the budget that he wanted for the current fiscal year, as opposed to the one that passed, which makes his latest plan a compound delusion."

In his address, the governor shared no details of his proposed spending plan for FY 2016-17, however, a separate release revealed staggering numbers. Compared to the 2015-16 $30.8 billion "framework" agreement, which during the address he called the "compromise" plan, the governor’s 2016-17 plan is a 7.8 percent increase in spending. Compared to the $30.2 billion budget Wolf partially approved on Dec. 29, his 2016-17 proposal is an unprecedented 10 percent increase.

To pay for it all, the governor is proposing a total of $3.6 billion in new revenue spread over 15 new taxes. Among them: a large, retroactive, increase in the personal income tax from 3.07 percent to 3.4 percent, a tax increase that would be especially damaging to pass-through businesses; a 6.5 percent extraction tax on natural gas, a tax damaging to all businesses; and a broadening of the state’s sale tax.

The entire plan is contingent on approval of the "compromise" plan that is little more than spending wreckage from a plan that crashed in the General Assembly at the end of 2016.

Republican leaders say it’s time to finish the 2015-16 plan and restore the cuts that Wolf made.

"This retread budget proposal offers superficial changes to his sizable tax-and-spend plan that has already been soundly opposed by taxpayers," said Senate Majority Leader Jake Corman (R-Centre). "In asking for a $3.6 billion tax increase, it is appropriate that the governor delivered this proposal on ‘Fat Tuesday.’ The governor is doubling down on his failures to provide leadership on accomplishing a bipartisan budget agreement and is being disingenuous on the starting point for his ‘new’ proposal."

House Democrats applauded the governor’s speech but just the day before backed away from a floor vote on the "compromise" plan, on which –for the governor– two years of budgets depend. The House Democrats did the same thing last year when they put up zero votes for a key part of the framework: changes (minimal) in the state pension systems.

Meanwhile, the budget problems are almost sure to further erode Pennsylvania’s credit rating. This past October, Moody’s Investors Service on Friday revised its outlook for future general obligation debt issued by Pennsylvania from stable to negative. One key deficiency the credit agencies observe is the massive unfunded liability in the public sector pension systems. However, in his address on Tuesday, Governor Wolf failed to even acknowledge there was a problem. The unfunded liability for the two systems now total over $60 billion, and over next fiscal year the IFO predicts that liability will add over $700 million in state costs to the $2.4 billion in General Fund costs this year. The tragedy is that most of those funds should be going to education and other vital government services.

"Rather than address the real problem, the governor claims the threat is a ‘structural deficit,’" said Carl Marrara, PMA’s Vice President of Government Affairs. "This begs the question: if the budget crisis is so severe, why does he want to increase spending?"

The answer is simple. The governor continues to look for the answers on the wrong side of the equation. His math is wrong. Pennsylvania has a spending problem not a revenue problem.

The state’s Independent Fiscal Office (IFO) predicts that in the FY 2016-17 that begins July 1, revenues into the General Fund will increase by over $600 million. That’s thanks to businesses and individual paying more taxes because they are expected to earn more, not because of higher tax rates. But that amount and more will be quickly consumed by increased costs for human services and the old elephant in the room, the unfunded liability of the public pension system for state workers, SERS, and for public school employees, PSERS.

The Wolf response to all this is to kill the messenger. The Administration has shut off funding to the Pennsylvania Employee Retirement Commission (PERC), which oversees the actuarial health of the state and municipal public pensions. The announcement of the move only further ramped up tensions between the Republicans lawmakers and the governor.

"It is clear the governor, despite his lip service to the contrary, has no interest in protecting the taxpayers by supporting pension reform," said three Republican House members, Keith Greiner (R-Lancaster), Seth Grove (R-York) and Stephen Bloom (R-Cumberland), in a joint statement.

At the end of last year, PERC got caught in the middle of the pension reform and budget battle. Executive Director of PERC, James L. McAneny, said that his office discovered errors in the how much the proposed pension legislation would actually save.

"It was a difference of over $600 million," McAneny said. "In our view, the bill was more of a plan to shift risk than to save money," McAneny said. "We bent a little politically in 2010 (referring to a law, Act 120 of 2010) which resulted in few costs savings in the systems. But we just couldn’t do that this time around."

McAneny further said that PERC is needed not just to review PSERS and SERS actuarial studies but the ones for municipal pensions as well. Many of those plans are in deep fiscal trouble as well. PERC reviews the actuarial reports from the municipalities every two years — they are coming in now for review — and certifies their accuracy to the state’s auditor general. The state makes its payments to the local plans based on those reports. In 2013, the plans received $250 million in General Fund money.

Another added cost next year stems from the governor’s dismantling of a Corbett health care plan, HealthyPA, designed to limit the state’s exposure in covering more of those who can’t afford health care. The Wolf Administration simply expanded Medicaid. The state’s share of those costs will begin to kick in next fiscal year.

In the end, the governor’s lecture on Tuesday only further inflamed tensions in Harrisburg. There seems to be no end in sight for a Pennsylvania budget.

For decades, state government has grown faster than Pennsylvania’s private economy, locking in place our uncompetitive tax rates. A lack of economic dynamism leads to slow population growth, which diminishes Pennsylvania’s standing among the states ranks the top ten of all fifty states in school funding. But Pennsylvania already ranks 39th out of 50 when it comes to Wallethub’s "Best and Worst States to be a Taxpayer", 39th and falling in economic performance in the "Rich States, Poor States" competitiveness rankings, and 32nd in the Tax Foundation’s "Business Tax Climate Index.

The responsible approach now is for state government to refocus on core functions, set spending priorities, find savings, sell assets, and otherwise cut back rather than consuming more of the private economy. We must stop sacrificing tomorrow’s prosperity for today’s grasping political desires.

Responsible leaders must hold the line, get it right, and have mercy on the taxpayers so Pennsylvania can enjoy the better future that only a growing economy can bring.

At the Pennsylvania Manufacturers’ Association, we want to bring jobs back from China. The only way to do that is for our leaders to optimize conditions for growth, especially to maximize energy production from the Marcellus shale by deploying pipeline, building new markets, and using the natural gas and its byproducts to supercharge our manufacturing economy.

All of that is within our grasp. But we have to want it. And work for it. And not let government greed get in the way.

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