Analysis of Proposed 2009-10 Pa. State Budget
February 4, 2009
The budget proposed by Governor Ed Rendell for the 2009-10 fiscal year manages to avoid the deep budget cuts that many observers feared just a few weeks ago, and that many states imposed in 2009.
The proposed budget includes $3.5 billion in federal fiscal relief over two years and $1.2 billion in new taxes and reprogrammed revenue. Pre-k to 12 education, Department of Public Welfare (DPW) and public safety programs -- including Corrections, Probation and State Police -- all receive increases, while higher education gets a cut. The Medical Assistance program will grow, but the budget includes new assessments on managed care companies and the prescription drug carve-out with a new name -- Smart Pharmacy. Both of these will be hard sells in the General Assembly.
Most state departments would see cuts, including Environmental Protection, Conservation and Natural Resources, and Labor and Industry. The Governor's perennial target -- the discretionary programs in the Department of Community and Economic Development -- take a $215 million hit. The Legislature has restored those funds in previous years, but that will prove more difficult in this economic climate. The Legislature takes a 7% cut, and the state courts' budget would be reduced by 6%.
Education and Health Care Initiatives
The budget provides second-year funding for education adequacy, $300 million in new funds, less than the $418 million appropriation that would meet the six-year implementation goal. Still, the increase was applauded by education advocates.
Despite an adultBasic waiting list that is expected to grow to 282,000 by June, the Governor proposed only a modest expansion in adult health insurance. The budget would increase adultBasic enrollment from 40,000 to 90,000 adults and add the prescription drug and behavioral health benefits necessary to secure a federal Medicaid waiver. The increased enrollment is proposed as a bridge to national health care reform and will sunset after four years.
The budget requires little from Pennsylvania businesses. The planned phase-out of the Capital Stock and Franchise Tax will continue. The Legislature enacted the phase-out, which has reduced state revenue by at least $2 billion dollars, without identifying replacement funds. The Governor did not propose closing corporate tax loopholes as he has in past years, leaving that matter to the Legislature.
State employment takes a significant hit in the budget proposal. The state's workforce complement would decline by more than 2,600 positions. While state workers are perceived as easy targets, a reduced workforce affects both productivity and service delivery.
One hundred one line items are eliminated, mostly small, targeted programs. Some are favorites of legislators that are funded year after year -- after the Governor eliminates them in his proposed budget -- and some are administration initiatives.
The budget includes few new initiatives. The most significant and likely the most controversial is a $550 million tuition assistance plan for students attending one of Pennsylvania's state system schools or community colleges, which would be funded through the licensing of video poker machines.
General Fund
Governor Rendell proposed a General Fund budget of $28.97 billion for 2009-10, an increase of 2.5% over the revised budget for 2008-09. The budget includes $2.4 billion in federal stimulus funds: $1.9 billion in additional Medicaid matching funds and $493 million from the more flexible State Fiscal Stabilization Fund.
State General Fund spending in 2009-10, without federal funds, is $65 million less than in 2008-09 and $406 million, or 1.5%, less than in 2007-08. In the absence of federal fiscal relief funds, the budget would likely include deep cuts in programs, particularly in DPW, that have been spared.
It is important to note that the current year budget remains uncertain. The $28.3 billion 2008-09 budget is balanced with a combination of federal funds, a transfer from the Rainy Day Fund, royalty payments from the Oil and Gas Lease Fund and budgetary savings. The deficit could grow larger during the course of the year if tax revenue fall below revised projections.
State General Fund Expenditures
State general fund expenditures by department are listed on page 35 of the Budget in Brief.
Total Funds
The total proposed operating budget for Pennsylvania in 2009-10 is $61.7 billion, a $192 million increase from 2008-09. State General Fund spending is $26.6 billion or 43% of the total. This is a decrease of $1.7 billion from the 2008-09 budgeted amount of $28.3 billion.
Federal funds are $21.1 billion, up from $18.6 billion in 2008-09. This reflects $2.5 billion in federal fiscal stimulus funding. Federal funds are 34% of the state's operating budget in 2009-10, up from 30% in 2008-09.
Other major state funds (Motor License, Lottery and Tobacco Settlement Funds) make up $4.7 billion or 8% of the total 2009-10 operating budget. All other state funds account for the last 15%, totaling $9.3 billion.
Taxes and Other Revenue Changes
See page C1.6 of the Governor's Executive Budget for a list of proposed revenue changes.
The Governor proposes revenue changes totaling $424 million in 2008-09 and $1.2 billion in 2009-10 to balance the two budgets. In the current fiscal year, the budget would draw $250 million from the Rainy Day Fund and transfer $174 million from the Oil and Gas Lease Fund (proceeds of leasing state-owned lands for oil and gas exploration). Both require approval by the General Assembly.
In 2009-10, the budget includes $1.2 billion in new funds coming from a number of sources, including transfers, specialty tax increases and administrative changes. The largest of these are transfers from other state funds ($375 million from the Rainy Day Fund and another $350 million from the state's Health Care Provider Retention Account). Two new taxes are proposed: a 5% severance tax on natural gas production ($107 million) and a $0.36 per ounce tax on other tobacco products ($38 million). The cigarette tax will be increased by 10 cents from $1.35 to $1.45 a pack, and the earmark of cigarette tax dollars to the Health Care Provider Retention Account will be eliminated, adding $260 million to the General Fund. Finally, the 1-percent discount currently offered to businesses for making timely sales tax payments is proposed to be eliminated, yielding $75 million.
State Fiscal Relief
The proposed 2009-10 budget anticipates $3.5 billion in federal fiscal stimulus dollars over the next two years, $1.08 billion in 2008-09 and $2.44 billion in 2009-10.
$1.08 billion will come in 2008-09 as a temporary increase to the Federal Medical Assistance Percentage (FMAP). This federal match for Medicaid increases to $1.92 billion in 2009-10. Also in 2009-10, the state expects to receive $493 million in State Fiscal Stabilization funds, which the Governor indicated is used to replace General Fund spending in the Department of Corrections, although the amount of this offset is unknown. The final pieces of federal stimulus in 2009-10 include $20.5 million in increased special education funding and $5.7 million to reduce the waiting list for the state's child care assistance program.
The anticipated federal stimulus dollars are not always identified in departmental budgets making them hard to track. Instead, they are listed as part of the state's General Fund expenditures. Including the federal allocation in the state's General Fund total and line items could give the Governor greater flexibility in programming the dollars.
Education
The Department of Education budget can be found beginning on page E14.1 of the Governor's Executive Budget. The total education budget is proposed to increase from $11.4 billion in 2008-09 to $11.56 billion in 2009-10, an increase of 1.5% or $170 million in total.
Pre-k to 12 education would increase by $265 million, or 2.8%, to $9.9 billion. The basic education subsidy would increase by $300 million. Accountability Block Grant and Education Assistance tutoring program funds are included in the basic education line item, bringing the total to $5.8 billion.
Special education is flat funded at $1.03 billion, an appropriation that includes $20 million in increased Federal IDEA funds. Local special education funding is budgeted to increase by $30 million to $439 million with federal stimulus funds.
Pre-k Counts would increase by 10%, while Classrooms for the Future, the Governor's initiative to put laptops in schools, would be reduced from $45 million to $22 million on 09-10. Pupil transportation would increase slightly to $520 million, while Early Intervention funding for 3- to 5-year-olds would increase from $185 million to $189 million.
Funding for higher education would decline from $1.6 billion to $1.5 billion--a 5.6% reduction. The community college subsidy would increase by $5 million to $241 million and capital funds would increase by $1.8 million.
The State System of Higher Education would be funded at the revised 2008-09 level, reflecting a 6.5% cut from 2007-08 levels. The state-related schools, Penn State, University of Pittsburgh, Temple and Lincoln, all sustain cuts as do the non-state-related institutions.
The state library subsidy is cut by $1.75 million or about 2.3%.
Public Safety
Pennsylvania's public safety agencies include the Department of Corrections, the Board of Probation and Parole, and the Pennsylvania State Police.
The General Fund budget of the Department of Corrections is proposed to increase from $1.64 billion in 2008-09 to $1.8 billion in 2009-10, an increase of $160 million, or 10%. This funding boost pays for 2,600 additional beds in five new housing units, as well as increasing health care costs across the system.
Funding of the Board of Probation and Parole would go from $115 million in 2008-09 to $123 million in 2009-10, an increase of $8 million, or 7%. This funding boost will allow the board to meet the increasing caseload, which is projected to grow by 1,600 ex-offenders.
The total proposed budget for the State Police increases from $830 million in 2008-09 to $877 million in 2009-10, an increase of $47 million, or 5.6%. $25 million of the increase comes from the Motor License Fund, $8 million from state dollars in the General Fund, $7 million in new federal dollars, and $4 million in additional funding from the State Gaming Fund. The new funds pay for an additional 22 officers, as well as increased demand for crime lab services and background checks.
Department of Public Welfare
The proposed federal FMAP increase has averted what would have been significant reductions in services to vulnerable Pennsylvania's delivered through the Department of Public Welfare. The budget presumes $1.1 billion in 08-09, $1.9 billion in enhanced FMAP in 09-10 and $1 billion in 2010-11.
Total DPW funding will increase by $475 million or 5%. Medical Assistance will increase from $4.6 billion to $4.9 billion, or 7.2%, and funding for Mental Retardation programs will grow by 4.2% to $1.25 billion. The overall mental health budget will increase slightly, but the budget proposes a 2% reduction in community-based mental health programs and the Behavioral Health Services Initiative (BHSI) programs in DPW and in the Department of Health.
The DPW budget is not without its challenges. The department started the year with more than $500 million less in revenue in the Medical Assistance budget, through the loss of Intergovernmental Transfer Fund (IGT) revenue and the phase-out of assessments on managed-care companies. Both revenue sources have been used to draw down additional federal matching dollars. Medical assistance enrollment surpassed 2 million people in December, and the budget assumes an enrollment of 2,022,000 in Fiscal Year 09-10.
The proposed budget moves Long-Term Living programs that are currently operated through DPW and the Department of Aging into a new department of Aging and Long-Term Living.
Other Initiatives
Video Poker & Tuition Aid Governor Rendell is proposing the legalization of video poker machines to fund college tuition grants for more than 175,000 students attending one of Pennsylvania's state system schools or community colleges. Students from families earning up to $100,000 annually could get grants of up to $7,600.
The Governor said that video poker is already a popular -- though illegal -- form of entertainment in Pennsylvania, with an estimated 17,000 machines in operation today. Through licensing fees and a 50-percent tax on all profits, the state would take in $550 million annually for tuition assistance.
Other Tuition Assistance The budget plan also includes a $35 million boost for tuition grants given by the Pennsylvania Higher Education Assistance Agency and an extra $10 million for community college grants.
Health Care for Adults AdultBasic enrollment would be doubled under a proposal to draw down federal Medicaid dollars for the program. Federal rules require that adultBasic provide prescription drug and behavioral health coverage to be eligible for the federal funds. The program would be funded through $28 million in Tobacco Settlement funds and contributions from the state's four Blue Cross/Blue Shield insurers. The Blues money is not entirely committed beyond 2010. In the last two years, a portion of the cigarette tax that currently funds the MCARE program subsidizing malpractice premiums for doctors and hospitals would also be directed to adultBasic. The expanded enrollment would end in 2013.
Covering More Kids The budget plan also includes a 13-percent increase in funding for the Cover All Kids program, for a total of $407 million in state and federal funding for the program. That will insure 206,836 children -- an increase of more than 23,000 from the current year.
Bridge Repair In the second of a multiyear plan to accelerate bridge repairs, Governor Rendell is proposing to repair 367 structurally deficient bridges with an additional $200 million in bonding -- which is in addition to Motor License Fund money earmarked for bridge and highway projects.
Other Infrastructure Projects The bridge repair funding is part of a larger proposal to bond $537 million for investment in public infrastructure that the Governor is terming "Rebuild PA." Other funding areas include $294.5 million for water, sewer, flood control and dam projects, and $42.5 million for rail and aviation projects.
Business Investments Governor Rendell is calling for $60 million in bonding to fund shovel-ready projects through the Business In Our Sites program and $40 million in bonding for water and sewer infrastructure projects intended to promote economic development. An additional $10 million is also proposed for the Infrastructure Facilities Improvement Grant Program, which has more projects in the pipeline than it has funding.
Alternative Energy State government will continue to make investments from a $650 million fund to promote alternative energy and conservation projects.
Utility Rates The Governor renewed his call for legislation to phase-in over three or four years electricity rate increases that are expected in the next couple of years for most energy customers as a result of the lifting of rate caps.
