As COVID-19 hurdles us towards a global recession, Pennsylvania will need to make difficult decisions about how to handle a possibly huge shortfall in state revenues as well as a mandated increase in state costs for such things as Medicaid. We are working to estimate how much state revenues will suffer due to the recession but there are many unknowns, especially because this is an unusual recession, one that is a product of deliberate and necessary policy choice. With no models for this kind of recession, we do not know how deep the recession will be, how long it will last, or how quickly the economy can recover. At this point, we can only give a wide range of possibilities. It is likely that state revenues will drop between $4.5 and $9 billion in the current fiscal year and the next one together. And it is possible that the revenue loss could be billions higher. Medicaid expenditures could rise as well, even after higher federal reimbursement contained in the Families First legislation.
So the budget shortfall over these two fiscal years is likely to be between $5 and $9.5 billion and could possibly be higher. And to put this in context, $10 billion is more than 10% of the planned $70 billion in General Fund expenditures in this and the next fiscal year. The federal coronavirus relief legislation will help in two ways—by sending the state a little more than $4 billion and by reducing the depth and length of the recession, thereby limiting the decline in state revenue. But given the extent of the difficulties we expect, we will need more help from the federal government to avoid an unusually large, and potentially devastating, budget shortfall.
As the governor and state legislators grapple with this expected new reality, they must take lessons from our own history. Governor Corbett’s response to the Great Recession is a lesson in what NOT to do.
In the first years of the Great Recession, the state relied on federal stimulus funds to avoid deep cuts to the budget. But when the Republican Congress rejected any renewal of this funding, the state faced a serious budget crisis. Governor Corbett’s response to that crisis was to reject any new taxes. Indeed, throughout his term, taxes were reduced both through his executive actions and the legislation he supported. Governor Corbett turned to drastic cuts to public spending to balance the budget. In 2011, with the approval of the General Assembly, Governor Corbett cut K-12 education spending by about 10%. He also made deep cuts to higher education, environmental protection, and other areas of the state budget. The state also fell short of its actuarially required contributions to Pennsylvania’s pension funds—these budget cuts weakened the state’s economy over the long term.
Education budget cuts in 2011 resulted in massive job cuts. Between 2011 and 2015, Pennsylvania school districts shed 32,000 workers, a decrease of 11% in school staff. These cuts are still felt in schools across the Commonwealth. As of 2018, employment in elementary and secondary schools remained 27,845 lower than in 2010, a decrease of 9.9%.
Pennsylvania’s economy lagged behind the rest of the country after 2011, in part as a result of our spending cuts. A Keystone Research Center (KRC) analysis in 2015 found that Pennsylvania’s employment growth and revenue growth all lagged behind the rest of the country. Between 2011 and 2015, total non-farm job growth in Pennsylvania was 2.6% compared to 7.6% nationally, a bigger gap than that between Pennsylvania and U.S. population and labor force growth. In sum, the state’s cuts-only approach to the budget crisis did not work.
Other studies of the impact of budget cuts on the economic health of states after the Great Recession provide additional support for KRC’s conclusions. The Center for American Progress showed that states that made steep spending cuts as a result of the Great Recession had weaker economic growth, rising unemployment, and fewer new private sector jobs than states that increased spending.
And these studies only look at the short-term impact of budget cuts. The long-term consequences on Pennsylvania’s economy of our public investment deficit—of not providing pre-K education to all 3- and 4-year-olds, of ranking near the bottom for state funding of K-12 schools leading to us having the most unequally funded schools in the country, of being fourth from the bottom in state funding of higher education—will be felt for decades. And the long-term consequences of cuts to environmental protection will be felt in diseases that manifest themselves over many years. We won’t see the consequences of our short-sighted public policy until it is too late to reverse their effects.
As the national recovery from the Great Recession began, tax revenue in Pennsylvania lagged behind other states, both because of our sluggish economy and because Governor Corbett and the legislature held fast to their failed austerity policies. We ranked 43rd in the nation in tax revenue growth between 2011 and 2014. Tax revenue increased by only 2.3% in Pennsylvania compared to 12.8% nationally. Low tax revenue growth not only exacerbated our public investment deficit but left little revenue available to replenish our “rainy day fund.”
A smart practice for states during times of economic expansion is to ensure that they have an adequate reserve fund, also known as a rainy day fund, to help buffer a state from hard times when a recession hits. A new report by the Center on Budget and Policy Priorities ranks Pennsylvania 46th in the nation for the total reserves balance as a percentage of General Fund expenditures. Budget experts recommend that states keep a rainy day fund balance at around 15% of General Fund expenditures. Pennsylvania, however, has a balance of only 2% in 2020.
Governor Wolf has called for adding to the rainy day fund in the last two budgets and the General Assembly has agreed. But his administration has been hampered by the deep hole created during the Ridge, Rendell, and Corbett administrations by unwarranted tax cuts and the failure to adequately fund our public employee pension systems. In the last three years, Governor Wolf and the General Assembly have begun to get the actuarially required payments in the pension systems back on track. But little money has been left for the reserve fund. If Pennsylvania had a rainy day fund of 15% of its General Fund—about $5 billion—it would be far easier to weather the pending storm. Furthermore, the General Assembly’s ongoing refusal to raise recurring revenues from large corporations and the rich have made it impossible to do this.
Pennsylvania must resist attempts to cut spending in the face of a COVID-19 recession. Nearly a decade later, the Corbett cuts are still being felt in our education system, economy, environment, and elsewhere. Spending reductions this year will deepen our public investment deficit. And it will place additional burdens on those already suffering because of the COVID-19 pandemic—the unemployed, frontline health care workers, people with low incomes, Black and brown people, women, and the disabled. The cuts necessary to balance the budget would reduce economic activity in the state, costing us even more jobs and deepening the recession. And the long-term consequences would be severe. Cuts to education would undermine the long-term economic prospects of everyone in Pennsylvania and would worsen our already inadequate and unequal education system. Cuts to environmental protection will worsen our health. We won’t see the consequences of our short-sighted public policy in all these areas until it is far too late to do anything about them.
Instead, if federal aid is not sufficient to avoid spending cuts, Pennsylvania should meet the coming budget crisis by raising taxes on those most able to afford them, finally fixing our upside-down tax system which taxes the richest 1% of families at only half the rate of families in the middle. The Fair Share Tax would raise billions through a tax on “income from wealth” that would mostly fall on the richest Pennsylvanians who are not bearing the economic brunt of the COVID-19 disaster. At the same time, the Fair Share Tax plan would decrease taxes on wages and interest to protect low- and middle-income Pennsylvanians as well as spur the consumption we need to limit the negative impacts of a recession.
We must not repeat the mistakes of the past and try to cut our way to a balanced budget during a recession, especially made necessary by public policies to protect us from COVID-19. The future of our state, and fairness to every Pennsylvanian who is suffering during this crisis, demands that we instead raise revenues from those who are most able to afford to pay more.