PA on Wrong End of Debt, Solvency Ranking

Member Group : PA Manufacturers' Assn.

Spending restraint and opposition to tax hikes by Republican lawmakers over the past five years have likely kept Pennsylvania from entering a fiscal death spiral. A new study by the Mercatus Center at George Mason University, which compares solvency and other fiscal health indicators among the states and Puerto Rico, places Pennsylvania near the bottom, floundering with the high tax and spend states of New York, California and Maryland. More spending and taxes over the past five years would have surely moved us closer to Puerto Rico’s bankrupt nightmare.

In short, Pennsylvania and other fiscally trouble states are being crushed by public debt. For many states, the attempts to tax and spend the way out fails – leaving an even steeper uphill climb.

The study, "Ranking the States by Fiscal Condition" profiles five categories of solvency, with a focus on short and long term debt. Pennsylvania’s steepest downfall includes our public pension liabilities. But there are other concerns as well: no cash on hand; revenues not covering expenses. The study also shows, no matter how painful to confront head on, the debt falls at the feet of all Pennsylvanians. Consider that our general obligation debt (mostly stemming from RACP borrowing in the Rendell years), our public pension liability, and post employment benefits for public employees equal 34 percent of state personal income. In other words, if every working Pennsylvanian turned over a third of their income to Harrisburg, we would be debt free.

"As this study shows in frightening detail, the debt crisis is real," said PMA President David N. Taylor. "Pennsylvania taxpayers – both individuals and employers, now and in the future – are on the hook for that debt. This is not an excuse for government to consume more of the private economy. It’s clearly a call to spend less. "

The grim statistics from the study: "On the basis of its fiscal solvency in five separate categories, Pennsylvania ranks 39th among the US states and Puerto Rico for its fiscal health. On a cash basis, Pennsylvania has between 0.75 and 1.38 times the cash needed to cover short-term liabilities. Revenues cover 99 percent of expenses, for a deficit of $56 per capita. On a long-run basis, a negative net asset ratio of −0.11 points to the use of debt financing. Total liabilities are 42 percent of total assets. Total debt is $17.66 billion. Unfunded pension liabilities are $169.64 billion on a guarantee-to-be-paid basis, and other postemployment benefits (OPEB) are $17.38 billion. These three liabilities are equal to 34 percent of state personal income."

Doing nothing is not an answer. The study cites a Government Accounting Office (GAO) report that Pennsylvania and many others states continue to suffer from a sluggish economy, an economy that has shown only a glimmer of life since the Great Recession. It’s hurt us perhaps more than some public officials like to admit, especially those backing higher taxes. If current tax rates remain in place (as they must or things just get that much worse), total tax revenues for state and local governments as a percentage of GDP will not return to 2007 levels until 2047. These aren’t alarmist projections. They are supported by an analysis from the National Association of State Budget Officers.

The combination of modest revenues and ongoing spending pressures for Pennsylvania, and some other states, includes out-of-control costs to cover welfare benefits and other programs that will continue to expand without reform. On the pension front, the House approved a pension reform bill that will begin to chip away at some of the costs, but will take time to make a difference. Meanwhile, the Independent Fiscal Office estimates the General Fund will have to expend nearly $3 billion next fiscal year to cover the costs of the public pension systems, much of it just to cover the unfunded liability. The money doesn’t pay down the debt but merely covers the cost of it, and it’s money that should be directed to essential services such as infrastructure, corrections, and education.

The gap between expenses and revenue keeps growing. In fact, to close the fiscal gap, the GAO projects that underperforming states would have to undertake and maintain a five percent cut in state and local spending each year for the next 50 years.

But controlling costs is manageable and in fact, some states have managed it. They limited spending, borrowing, and taxes throughout multiple administrations. Not coincidentally, the states are perpetually red, like Florida, Utah, Missouri, Alabama, and North Dakota.

Of the study’s ten most troubled states, eight are solidly blue. Not one of them is red. (Gallup labels states "solidly blue" if Democrats enjoy a 10-percentage-point-or-more enrollment edge over Republicans, and "solidly red" if it’s the other way round.) The very bottom states in the ranking spend far more per resident than the top states. Connecticut spent $7,720 per resident last year, more than all but 13 states. New York was right behind, at $7,091 per resident.

Blue states tend to be big spenders and face heavy long-term financial commitments, like pension and health-care costs for retired government workers. They invariably, like Pennsylvania, kowtow to public sector unions.

Florida, near the very top in the ranking spent just $3,724 per capita last year. The fifth-most solvent, South Dakota, spent just $4,530.

To pay for the spending, blue states are forced to raise taxes. Higher taxes in turn depress economic growth and with it tax revenue, and the cycle is set. Taxes are increased again to keep a bloated state government afloat.

The July 1 start of Pennsylvania’s fiscal year is less than two weeks away. By all accounts, negotiations between Republican leaders and Governor Tom Wolf are progressing much more smoothly than last year, when the budget was finalized in March, without the governor’s signature. Next year’s budget will be balanced as required by the state Constitution. But every day our debt grows, our programs frivolously expand, and our costs unnecessarily escalate. We can’t raise taxes to cover it. Something else has to give.

For a copy of the full study, click here.

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