A rainy day funding debate ensues as the budget deadline looms over lawmakers

At a time when nearly half of states are cutting spending to balance the books, Pennsylvania is doing the opposite.

Twenty-two states plan to reduce spending in their budget proposals for next year. According to the tax office, half of them forecast an augment in their funds, i.e. savings questionnaire.

But Governor Josh Shapiro budget plan presents a riskier strategy – one that increases spending by 5% and projects the rainy day fund to be depleted in two years.

Gov. Josh Shapiro begins the budget process with a $53 billion spending plan

The dispute over how to operate state savings – and how much of the risk is worth it – is increasing pressure on budget negotiations among House Democrats, who approved the Shapiro plan in April and Senate Republicans before the June 30 deadline.

Many states have chosen to hold spending steady to maintain balance in the face of stagnant revenues and changes in federal funding policies. The highest number of states have reported cuts to general fund spending from 2021 due to revenue shortfalls, according to a survey from the National Association of State Budget Officers.

However, Pennsylvania saw revenues nearly $1 billion above expected this year as a result of tax law changes, which House Appropriations Committee Chairman Jordan Harris (R-Philadelphia) pointed to as evidence the state can afford to spend more.

“We are very conservative in our estimates,” Harris said. “It kind of throws out any naysayers to the forecasts we made for certain revenue streams because we have always been conservative and we have always outperformed our forecasts.”

Shapiro’s budget proposal relies on still uncertain revenue sources, such as marijuana fees, that don’t yet exist become legalized and adjustable arcade games. Earlier this month, the Supreme Court ruled that arcade games are illegal, leading Democrats in the House of Representatives put pressure on Republican senators enact a high tax that could offset some of the state’s costs.

Despite this, five-year forecasts from Independent Tax Office project that the general fund surplus, which is just under $1 billion, will be exhausted in fiscal year 2026–2027. A nearly $8 billion rainy day fund would follow suit through 2027-28.

The IFO has not updated its long-term forecasts for structural deficit that has persisted for several decades because it depends largely on what is passed each year, the IFO director wrote, but it reached almost $5 billion in May.

Risk analysis

The state budget office does not rely on IFO reports in its forecasts. They independently forecast general funds and rainy-day funds and take demographic trends into account to better assess risk, according to a written comment from the Shapiro administration.

However, compared to other states, Pennsylvania has fewer standard practices for analyzing budget risk. AND Pew study report identified practices in states that assess emerging risks related to demographic, climate and technological changes.

Many other countries have specific working groups and plans entirely dedicated to analyzing future budget risks. Pennsylvania, however, relies solely on written reports and estimates submitted to the state budget office, most of which Pew found were prepared by IFO.

Caitlyn Wan Smith, a Pew staffer and author of the report, said it can be a challenge for states to account for long-term risks in the annual budget process. But she added that consideration should be given to whether budget officials review forecast analyses.

“Something I would look for when assessing a practice for soundness is (IFO) doing this analysis, are budget decision makers looking at this analysis and incorporating it into the budget process?” she said.

The IFO wrote that it only submits its reports to the budget office by making public documents available. Correspondence with the Shapiro administration does not augment before the budget deadline.

Party conflict

House Minority Leader Jesse Topper (R-Bedford County) said it should be up to lawmakers to assess future spending and the risks the state might take, but where to allocate the reserves is a point of contention between the parties.

Republicans would prefer to spend it on one-time expenses, such as: research shows can reduce variability, while Democrats advocate directing them to enduring services to citizens.

“I think that’s where you see the fundamental difference between the two sides,” Topper said. “We believe that if necessary, it should be done for a very specific purpose that will not jeopardize future budgets.”

The there is a budget proposal almost 80% of spending on the Department of Human Services and the Department of Education, and each will receive about $20 billion. About $1 billion in social services spending will go toward funding Medicaid.

Harris confirmed that services like public education and health care “are something that needs to happen” and for which a rainy day fund should be allocated – something he said fixed costs should be factored in as federal support declines.

“I’ve had people come into my office who I thought would have previously received federal support who are now victims of the draconian cuts that we’ve seen at the federal level, asking for the state to make up the losses,” Harris said.

But Topper along with other Republicans while limiting spending, it found it challenging to support the development of programs that the tax base would ultimately not be able to cover.

He also said that while the parties are trying to establish an acceptable level of spending, “there is still a long way to go.”

“(Democrats) see things a little differently,” he said. “If there is money available to them, they will find a way to spend it and use it for new programs that they think are necessary.”

The deadline for adopting the budget is June 30. Over the past two decades, legislators have implemented most of the state’s spending plans with delays.