And Then What? Reforms Beyond the Current Budget

• A balanced budget, defined as equality between cash in and cash out from the general fund, is the absolute minimum for fiscal stability. It is legally required, but it is not sufficient for fiscal soundness and resiliency. 
• Necessary reforms include a spending growth limit, intra-year spending adjustments, debt reduction, and consolidated reporting. 

Pennsylvania legislators will balance the budget one way or another this fall because the state constitution requires it. Granted, it won’t be pretty: they have achieved accounting balance in recent years only through gimmicks like self-borrowing, underbudgeting, and one-time revenue sources.[1] We have written numerous reports about how the legislature can balance the budget without recourse to such behavior (see Steps to an Honest Budget, How to Balance the Budget, The Gift That Keeps Taking, and Earmarks are Sneaky and Unconstitutional).  

In any case, the budget will get balanced. For Pennsylvanians, the real question is: “And then what?” Pennsylvania’s budget problems preceded the virus shutdown and will continue long after it without real reform. Listed below are areas where lawmakers should focus their attention beyond the current budget process to bring about such structural reform. 

Sustainable Spending Growth via Taxpayer Protection Act 

Budgetary balance consists of not simply current-year equality between expenses and revenue but a sustainable rate of spending growth. The Taxpayer Protection Act, currently embodied in House Bill 1316 (Rep. Warner) and Senate Bill 116 (Sen. Bartolotta), would limit general fund spending increases to the trend rate of population growth plus inflation. In a 2019 poll of Pennsylvanians, 84% of respondents supported the bill. 

Intra-Year Spending Transparency  

Mandatory intra-year reviews and adjustments to spending force government to adjust its programs to changing economic realities, just like a household. House Bill 855 (Rep. Struzzi) would require periodic updates to the administration's revenue projections and provide for budget reductions in the event of reduced revenue projections.  If Struzzi's bill had been law during the spring, the state government would have had to adjust immediately rather than pass a partial-year budget and hope that a rescue package from Washington would arrive before the next vote. 

In some cases, spending for the year will still exceed the budget, and supplemental spending will be proposed. Supplemental spending is an understandable emergency measure, but in recent years, it has become a regular political tactic. Last year, the legislature approved $673 million in overspending or supplemental appropriations, but the public never notices the supplemental amount because it is included as just one item in a much larger spending package. Overspending followed by supplemental appropriations has become standard procedure. House Bill 1861 (Rep. Grove) and Senate Bill 8856 (Sen. Phillips-Hill) have proposed a constitutional amendment to require supplemental spending to be voted on in a standalone bill, not tucked into the spending bill for the next year. The amendment would make budget overruns more visible and would put legislators on record as explicitly assenting to them.  

Sustainable Debt  

Pennsylvania’s balanced budget amendment requires that general fund cash outlays equal general fund revenue, but general fund cash flows are just one aspect of financial management.  In fact, short-term cash balance isn't even important if governments have reliable access to the money market. Long-term debt is what matters. By that measure, Pennsylvania is less fiscally stable than most states: it ranks #38 and #47, respectively, according to reports from the nonprofit organization Truth in Accounting and the investment management firm Eaton Vance.[2] These organizations’ surveys look beyond annual general fund budgets to consider the full picture of a state's finances, including expenditures outside of the general fund, especially liabilities (i.e., debts). According to Truth in Accounting, only 11 states have a balanced financial position (adjusted assets greater than adjusted liabilities). For each state, the organization calculated a taxpayer burden amount, defined as the asset-liability gap divided by the population: Pennsylvania's taxpayer burden by this calculation is $16,400. Our own report consolidates state debt across multiple government entities and comes to a similar conclusion: Pennsylvania has about $143 billion in total public debt.³ At a minimum, the commonwealth should prohibit new borrowing by the Commonwealth Financing Authority and PENNVEST, two public agencies with a history of funding subsidies and handouts to business with little accountability. 

Consolidated Reporting

State government spending is artificially divided up into “funds”: legal subdivisions each with their own set of revenue and expenses. The budget on which legislators vote, and which they are legally required to balance, includes only the general fund and parts of some other funds. At about $34 billion these amount to only half of state government’s overall spending, which was about $85 billion in 2019.  To further complicate the picture, transfers between the various funds are often used to equalize surpluses and deficits. If lawmakers are ever to produce a truly balanced budget for the whole of government, the various funds need to be consolidated and reported as one.  The State's Comprehensive Annual Financial Report (CAFR) contains the relevant data, but nowhere in its 300 pages does it present a fully consolidated picture. 

State governments are held to a different standard than private companies, which, regardless of size or complexity, typically produce three consolidated financial statements: a cash flow statement showing cash in and cash out, an income statement showing economic costs and earnings for the period (often noncash, such as depreciation), and a balance sheet listing assets and liabilities. State government financial statements mainly track just cash in and cash out for individual funds. Balance sheets are given for some funds, but not for others: no consolidated balance sheet is given for the entire government (for Commonwealth Foundation's review of all state liabilities, see Slicing State Finances, Part III: Debt).  

Ideally, the various government entities would be consolidated as a matter of legal fact, not just for reporting purposes. The General Fund Stabilization Act, House Bill 1988 (Rep. Grove), would consolidate numerous funds legally into the general fund. A proposed amendment to the state constitution, House Bill 1991 (Rep. Keefer), would prohibit the diversion of general fund revenue into outside funds. 

Timely Fiscal Information 

Information is a powerful tool for budgeting. Pennsylvania's 2018–2019 fiscal year ended June 30, 2019, and its CAFR came out December 12, 2019, six months later. This is the last complete picture of Pennsylvania's finances that the public has. Pennsylvania is in line with the standard 180 days to deliver a CAFR, but the private sector is held to a much higher standard. Johnson & Johnson, for example, a company whose total revenue is similar to Pennsylvania's total budget, released its annual financial report for the year ended December 30, 2019, just two months later.   

The Independent Fiscal Office and the State Treasurer provide some financial information in close to real time: in fact, the State Treasurer's disclosure portal gives the cash balances for a variety of state accounts. However, lawmakers can't make good fiscal decisions with just a check register: lawmakers and citizens need timely comprehensive financial statements.   

The coronavirus panic will end soon enough, but it is not a unique event: it is not even the first severe financial stress the state has faced in the last dozen years (that would be the 2008-2009 banking crisis).  After balancing the current budget, lawmakers should turn their focus to the long-term structural reforms detailed above in order to place the commonwealth in a better position to meet the inevitable next economic downturn.