May 1 2006

Pennsylvania’s annual state budget comes with strings attached – it must be balanced and it must be passed on time, or the state loses its power to spend state government dollars. Here’s an IssuesPA budget primer.

(May 2006) Pennsylvania’s Constitution requires the Governor to submit a budget annually and the legislature to formally adopt a budget each state fiscal year, which runs from July 1st until June 30th.

That adopted budget, essentially negotiated between the Governor and the legislature, establishes state government spending for a plethora of goods and services. The Constitution limits the amount of money that can be spent to revenues available during the fiscal year. This means, unlike the federal government, Pennsylvania’s state budget must be balanced.

So what’s in Pennsylvania’s state budget?

It’s much more than a spending plan. From the Governor’s perspective, it’s the vehicle for introducing and implementing major policy initiatives. Changing the direction of state government, even in modest ways, almost always involves a change in spending or how revenues are raised. Even for changes that don’t require dollars and cents, the Governor often introduces many of them as part of his budget message.

Annual spending authorized in the budget now exceeds $52 billion. This includes money from diverse sources such as taxes, federal grants and fees for services. The biggest piece of the pie is the state’s General Fund. Most taxes paid by individuals and businesses wind up in the General Fund, and in return, the General Fund is spent on familiar programs such as education, public welfare, and corrections.

What are the budget trends in Pennsylvania?

Not surprisingly, spending through the General Fund has been on the rise. From fiscal years 1995-96 through 2004-05, spending increased $6.5 billion to $23 billion (state revenue; doesn’t include federal pass-throughs), a 40% increase – outpacing the 23% increase in the inflation index during that same time period. Annual budget increases over that period averaged 4%. For more detail, see the IssuesPA Scorecard.  

It’s worthwhile to take a closer look at the spending patterns, because there have been changes in spending priorities. Budgeted expenditures for the departments of Public Welfare and Corrections are increasing faster than funding for the Department of Education and other agencies. For more detail, see the IssuesPA Scorecard. These changes reflect larger trends such as the national increases in health care costs pushing up the costs of state medical assistance and an increasing number of inmates due to tougher sentencing laws. In contrast, spending on basic education as a percentage of the state General Fund budget has been falling slightly for years. The Department of Education sends most of this money to local school districts.

Not only have spending patterns changed over time, but revenue sources have changed, also. Taxes are the biggest source of General Fund revenues. For decades, lawmakers have raised and lowered various tax rates; they’ve expanded and contracted the tax base; and the changing economy has caused growth and decline in various tax sources. The net result? An increasing dependence on the state’s personal income tax and less reliance on the state sales and use and business taxes.  The personal income tax is now the largest source of funds for the General Fund, followed by the sales and use tax.

What’s in store for the future?

State spending reflects the priorities of policymakers and lawmakers, past practice, and mandates. While the numbers are big, changes in spending levels in any one area are usually incremental at best, compared to the total. However, outside forces such as federal mandates can have a significant impact as well. They can impact the budgets of key agencies, and their demand for resources can sap the ability to make changes in other parts of the budget.

On the revenue side, estimating the amount of revenue far in advance has been as much art as science. And the issue of whether or not to raise taxes to support increased spending always has been a major source of disagreement.

Underlying all the decisions that must be made in finalizing a budget is the process itself. The existing process, while nominally governed by provisions in the Constitution, has come under extensive scrutiny and criticism. Concerns range from the openness of the decision-making processes to certain items deemed necessary to get enough votes for passage of the budget. These and other issues can undermine the integrity of the process – and, therefore, the end product.

Bottom line? State budgets can make or break Pennsylvania’s agenda for economic competitiveness. They involve negotiation and compromise. And compromise often means no one is entirely happy with the final result.