Lawmakers' Choice: Bogus Budget Borrowing or Serious Solutions

The start of the new fiscal year is less than two days away, but lawmakers have yet to nail down the specifics for the 2017-18 budget. Higher taxes and new borrowing remain in the mix—two options that will harm Pennsylvanians and guarantee another crisis in June of 2018.

However, there is a way to hold the line on taxes, balance this year's budget, and set Pennsylvania up for long-term growth.

Here’s a look at the choices before lawmakers:

Balancing the budget with borrowing and higher taxes

Lawmakers are considering a plan that would require the state’s pension systems to borrow money to invest in hopes that investment returns could be used to help plug the budget gap. In essence, the state would be gambling with pension funds to pay the state’s bills.

The plan is rather remarkable given the pension reform legislation agreed to just a few weeks ago. Lawmakers and Gov. Wolf both cited the mitigation of taxpayer risk as one of the reasons for supporting the legislation. Now it appears taking on more risk is acceptable.

While the proposal isn’t technically being described as a pension obligation bond (which are prohibited), the consequences are the same: delaying real reforms and pushing costs off to future generations. This is a point Moody’s made when analyzing pension bonds back in 2012:

“…pension bonds are often a red flag associated with greater rigidity of long term obligations, failure to find sustainable solutions to pension funding and a pattern of pushing costs off into the future. For this reason, most pension bonds have, at best, a neutral impact on our overall assessment of an issuer's credit quality."

In addition to this potential $6 billion loan is a plan to borrow from the state’s Tobacco Settlement Fund. Per a Capitolwire story (paywall), lawmakers are considering borrowing up to $2 billion from this fund to bridge the budget shortfall. Overall, total borrowing would reach approximately $8 billion—or more than a quarter of the current General Fund Budget.

Keep in mind, Pennsylvanians already owe more than $17,600 in debt and unfunded liabilities. There’s no reason to add to this burden with unpredictable borrowing proposals—especially when more responsible options exist.

This first option also includes approximately $325 million in tax increases. The proposals include taxes on alcohol and electricity markets. If adopted, these tax increases would come on the heels of a $650 million tax increase package passed last July.

Balancing the budget with liquor privatization and spending prioritization

As an alternative to higher taxes and billions in borrowing, lawmakers could embrace reforms that reinvent state government—one of which is liquor privatization. Getting government out of the booze business would help balance the budget and prevent tax hikes that threaten to cut the budgets of families across the commonwealth.

Several liquor reform options are available to lawmakers, ranging from full privatization to allowing retail stores to sell liquor. Revenue estimates for these proposals range from $1 million to more than $1 billion.

Prioritizing spending is also a critical component of any responsible budget. CF has called for the elimination of more than $800 million in corporate welfare and a thorough review of more than $50 billion of spending in the state’s shadow budget. Reducing or eliminating spending in these two areas would stabilize the state’s finances.

The two options above will take Pennsylvania down very different paths. The former will keep Pennsylvania mired in economic stagnation. The latter will bring renewed prosperity. The best path is obvious. The only question is, will lawmakers make the right choice?