Poor Fiscal Health Requires Better Fiscal Policy

June 5, 2019

As we enter June, Pennsylvania government becomes focused on budgetary matters as the Commonwealth’s fiscal year ends June 30. The annual budget is the most important public policy state government does. It defines the direction and financial health of the Commonwealth for the next year. A bad budget one fiscal year can, and has, led to a devastating budget the following fiscal year.

Here are how some nationally recognized financial rating entities ranked our state’s finances:

• American Legislative Exchange Council (ALEC), “Rich States, Poor States, 2019 Edition”:
  • Economic Performance (current): 33/50
  • Economic Outlook Rank (future): 37/50
• Volker Alliance, “Truth and Integrity in State Budgeting: Preventing the Next Fiscal Crisis, 2018 Edition”
  • Revenue Forecasting: B
  • Budget Maneuvers: D-
  • Legacy Costs: D
  • Reserve Funds: C
  • Transparency: B
• Mercatus Center at George Mason University, “Ranking the States by Fiscal Condition, 2018 Edition”:
  • 24/50
• Truth in Accounting, “Financial State of the States”:
  • 40/50
• Pew Charitable Trusts, “Fiscal 50: State Trends and Analysis”:
  • 50/50 for rainy-day reserve

As you can see, Pennsylvania’s fiscal health is not rated very well compared to other states.

I asked the Office of the Budget to provide a six-year look back on 13 data points from the Comprehensive Annual Financial Report (CAFR) to build a trend of how the state has been managing its finances. An obvious example is the public pensions for state employees which was only 57.8% funded in fiscal year (FY) 2017 after being 66.7% funded in FY 2014.

The Commonwealth’s general fund debt is stable, but much of the Commonwealth’s debt has been shifted to the Commonwealth Financing Agency and the Turnpike Commission. Both component units of the Commonwealth are financially laden with debt for which the taxpayers are ultimately responsible.

Some of the most detrimental data points are the comparisons of revenue and expenditures over the past six-years. Spending more than what you have is deficit spending, which over the long-term has negative implications. In theory, it should not be possible for the Commonwealth to deficit spend as we have a balanced budget requirement in our constitution.

Unfortunately, the Commonwealth’s CAFR shows a very different story. For the past six years, expenditures have outpaced revenues. In FY 2018 alone, state government spent approximately $100 more per person ($5,846 per person) than it received in revenue per person ($5,754 per person). In all six years of the data requested, Pennsylvania has never ended a fiscal year breaking even.

One might argue that it is lack of revenues driving this deficit budgeting. However, in FY 2013, the Commonwealth collected $59.3 billion in total operating revenues and in FY 2018 collected $73.6 billion in total operating revenues. That is a 24% increase in total operating revenues over six years, which is an average of 6% growth per year. To put it another way, the Commonwealth received an additional $2.3 billion per year for each of the six years and still has not been able to balance its budget.

Fixing these financial problems isn’t impossible. Here are five simple steps that are achievable this year:

1. Stop spending what you don’t have.
   
   
2. The governor’s administration needs to manage within the legally appropriated budget and stop overspending throughout the fiscal year.
   
   
3. Rebuild our rainy-day fund to improve our bond ratings and cash flow of the Commonwealth’s general fund by using surpluses and some special funds’ investment funds.
   
   
4. Start outcome-based budgeting as outlined in House Bill 93.
   
   
5. Implement a consensus revenue forecasting committee to eliminate fake revenues and unrealistic revenue projections as outlined in House Bill 93.

These five simple steps will improve our financial management and fiscal health. The sooner they are implemented, the sooner Pennsylvania will have a lower cost of operating. Financial decisions will be based on actual data, and fake revenues will be eliminated.

In 1968 Pennsylvanians approved a full-time legislature and an annual budget process as the voters felt the Commonwealth’s budget was too expansive for a part-time legislature with a biannual budget process. Furthermore, our current budget process was adopted in 1978. It’s time the Commonwealth modernizes its financial management policy and focuses on good fiscal budgeting like the people intended in 1968.


Representative Seth Grove
196th District
Pennsylvania House of Representatives
Media Contact: Greg Gross
717.260.6374
ggross@pahousegop.com
RepGrove.com / Facebook.com/RepSethGrove