Pennsylvania Gridlock: Neither Side Would Budge(it)

by Steve J. Allenson, CPA, Vito A. Cosmo Jr., CPA, CGMA, and Matthew D. Melinson, CPA | Mar 21, 2016

Pennsylvania CPA Journal

Pennsylvania’s 2015-2016 budget will be remembered as a historic budget impasse. Democratic Gov. Tom Wolf’s ambitious desire to make sweeping changes in his first year in office ran headlong into a Republican majority in both the Pennsylvania House and Senate. Negotiations were delayed by contrasting outlooks on what is best for the future of Pennsylvania.

In brief, Wolf gave his 2015-2016 budget address on March 3, 2015, where he proposed an increase in expenditures largely focused on an investment in education and property tax relief. It also included a decrease in the Corporate Net Income Tax rate and added a job-creation credit for manufacturing companies. A majority of the new revenue was proposed to be earned through an increase in the personal income and sales tax rates, an expanded sales tax base, as well as a new 5 percent severance tax. Overall, Wolf’s proposed expenditures would have increased taxes by $4.7 billion, increasing total expenditures to nearly $34 billion.1 The Republican legislators immediately dismissed the proposed budget, and a stalemate resulted. The budget impasse – the longest since at least 1971 (when personal income tax was first enacted) – has created numerous problems affecting the government and citizens of Pennsylvania.

A State without a Budget Is Not a State

When a state lacks a budget, the consequences are far-reaching. Businesses, nonprofits, schools, employees, and residents – with their financial advisers – all make decisions based upon the state’s budget. Without it, many Pennsylvanians are left in limbo. Businesses and residents cannot make crucial decisions without the necessary information or funding from the state. Those who rely on property tax relief, credits and incentives, and certain tax rates could be placed in peril if an unexpected law is passed last minute. Nonprofit organizations rely heavily on state funding, and they require an on-time budget to run as effectively. Schools are placed in a particularly difficult situation when budgets are not passed. Districts are forced to use cash reserves, suspend tuition payments to charter schools, or take out loans and incur interest charges. Some Philadelphia schools were unable to make payroll or pay bills though the end of January.2 Moody’s credit rating agency lowered its rating for Pennsylvania to “negative,” which will cause an increase in borrowing costs to the commonwealth.3

No Consequences

All of Pennsylvania has felt the crunch of a delayed budget passage, but surprisingly the governor and our lawmakers have to answer to no serious consequences. The Pennsylvania Constitution requires a balanced operating budget for the ensuing fiscal year in detail, proposing expenditures classified by department, agency, or program, as well as estimated revenues from all sources.4 Yet there is no prescribed penalty should lawmakers fall short of the requirement. Pennsylvania does not have any laws set in place to ensure accountability if a budget is not passed in a timely fashion. Any state would be severely affected when it does not have a budget, so it is astounding that Pennsylvania has no statutory guidance addressing this situation.

California had been notorious for missing budget deadlines. It has since added language in its laws to solve the issue. California does not pay any salaries or reimburse travel or living expenses for the legislature until a budget bill is presented to the governor. In addition, salary and reimbursement for travel or living expenses forfeited during a budget impasse will not be paid retroactively.5 In Ohio, if a budget is not delivered on time, all facets of government except for emergency services are shut down. New Jersey uses a nonpartisan negotiator to help settle budget disputes.6

Gov. Edward Rendell attempted to put pressure on legislators to make sure the 2008-2009 budget passed in a timely manner. (In the Rendell era, the governor’s budget was not passed on time in any of his eight years in office.) In the event the General Assembly did not enact a general appropriations act by June 30, 2008, the commonwealth would not make any payments to its employees.7 The Supreme Court of Pennsylvania’s decision in Council 13 v. Commonwealth of Pennsylvania deemed that not paying commonwealth employees if the budget was not passed by June 30 was unconstitutional, based on the Fair Labor Standards Act. The result of this decision seems to be that the one truly significant leverage point to ensure the timely passage of budgets does not exist.

Remedies

Pennsylvania has frequently missed budget deadlines over the years, and we may have fallen into a recurring habit due to a lack of consequences. Legislators and residents need to change their mindset and make sure every fiscal year begins with a passed budget, as mandated by our state constitution. What if others in the state try to adopt the approach that it is apparently acceptable at the highest levels to materially miss deadlines without consequence? Society is built on trust and a measure of predictability to ensure mortgage, rent, student loan, and tax payments are made on time, or significant penalties are incurred. Pennsylvania lawmakers do not appear to have to adhere to the same standard.

On Dec. 29, 2015, Wolf signed a $23.4 billion emergency funding budget which relieved some short-term financial pressure from many Pennsylvania schools, nonprofits, and counties.8 However, Wolf vetoed a large amount of the Republican-led budget saying that it did not balance and that it would increase the deficit and lead to more credit downgrades and fiscal instability.9 On Feb. 9, 2016, Wolf released his executive budget for the 2016-2017 fiscal year. Wolf’s proposed expenditures focus on education, human services, and pensions, which total $32.7 billion for the fiscal year. To pay for these, Wolf’s revenue package would increase the personal income tax from 3.07 percent to 3.4 percent and the cigarette tax from $1.60 to $2.60 per pack, would create a severance tax on natural gas drillers of 6.5 percent, and would expand the sales tax base. Yet, as this issue went to press, the 2015-2016 budget still had not passed in its entirety.

Pennsylvania legislators should follow the lead of states such as California, Ohio, and New Jersey, and enact laws that add pressure to pass timely budgets. Our elected officials should take heed and never allow a budget debacle such as the 2015-2016 budget to occur again.

1 Governor Tom Wolf 2015-2016 Pennsylvania Executive Budget (March 3, 2015).

2 Wire report, “Superintendent: Philly Schools Could Close After January Due to Budget Impasse,” (Jan. 26, 2016). www.nbcphiladelphia.com/news/local/Philadelphia-School-District-Money-Budget-Impasse--362555671.html

3 Tom Kozlik, PNC Pennsylvania Budget Update (Jan. 7, 2016).

4 Pa. Const., Art. VIII, Section 12 and Section 13.

5 Cal. Const., Art. IV, Section 12.

6 Sean Ray, How Do Other States Handle A Budget Impasse? (Jan. 26, 2016). http://wesa.fm/post/how-do-other-states-handle-budget-impasse

7 Council 13 v. Commonwealth of Pennsylvania, 986 A.2d 63 (Pa. 2009).

8 H.B. 1460, 2015 Sess. (Pa. 2016).

9 Id.


Steve J. Allenson, CPA, is a senior tax associate for Grant Thornton LLP in Philadelphia. He can be reached at steve.allenson@us.gt.com.

Vito A. Cosmo Jr., CPA, CGMA, is a managing director, state and local taxes, at Grant Thornton. He can be reached at vito.cosmo@us.gt.com.

Matthew D. Melinson, CPA, is a partner, state and local taxes, at Grant Thornton and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at matthew.melinson@us.gt.com.

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