Governor Rendell unveiled his $29 billion budget for the 2010/2011 fiscal year last week. While the state is facing significant economic challenges, Pennsylvania seems to have weathered the economic crisis better than many. In fact, Pennsylvania's projected deficit of $525 million seems almost modest compared to neighboring New Jersey‘s $2.17 billion deficit. In his last budget proposal, Rendell has employed optimism and a bit of creativity to the task of balancing the budget and, of course, some spending cuts, freezes, and new taxes.
I'd like to highlight a few areas that will be interesting to follow through the approval process. If you are interested in more detailed budget analysis, you can find a good one here or review the document yourself and draw your own conclusions.
On the optimism front, the budget relies heavily on yet-to-be guaranteed sources to balance the budget and avoid cuts. These include $848 million in American Recovery and Reinvestment Act (ARRA) funds as well as an extension of the Medicaid Drug Rebate Program, both of which must be passed by Congress. Should the ARRA funds fail to materialize; state officials predict steep cuts to counties. Pennsylvania isn't the only state betting on more federal funds; Minnesota is also relying on additional ARRA money.
The budget assumes also that the Federal Highway Administration will approve the tolling of Interstate 80, which is expected to generate $470 million in revenues. The tolling application is currently in its third iteration; the original proposal was rejected in 2008. Without toll revenues from Interstate 80, mass transit will face severe funding shortages.
Perhaps the most interesting part of Governor Rendell's budget is the proposed creation of a stimulus transition reserve fund. The Governor is looking to enact several new taxes, the revenues of which would form a fund to be used after stimulus funding dries up, thus softening the landing after going over the "stimulus cliff." Some of the proposed taxes we've seen before. Cigars and smokeless tobacco are back on the table, as is the natural gas severance tax. New to the budget, though, is a restructuring of sales tax that is projected to increase revenue. Rendell is not alone in recognizing that federal stimulus funds will dry up before states have fully recovered from the economic crisis. A number of states are talking about this issue, as are many school districts, but to date, Pennsylvania seems to be the only state planning for it in its budget.
As we know all too well, the proposal is just the first step in the budget process. Rendell's budget will undoubtedly meet resistance, particularly the sales tax restructuring which would end exemptions for 74 separate items and services ranging from dry cleaning to legal services. The required federal actions will invite concern and potentially hold up passage. And if additional ARRA funding doesn't come through, we'll be back to the drawing board. Anyone want to bet on when we'll have a state budget?