Senate Appropriations Committee budget hearing with Governor’s Budget Office
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Senate Appropriations Committee budget hearing with Governor’s Budget Office (BH)
3/16/15, 9:30 a.m., 140 Main Capitol
By Mike Howells
The committee held a budget hearing with the Office of the Budget.
Budget Secretary Randy Albright offered opening remarks, thanking his staff for their work on constructing the proposed budget. Chairman Browne also congratulated Sec. Albright’s office for their endeavors.
Chairman Browne requested details on the cash flow of the current fiscal year, with revenues coming in above estimate and a lot of positive news related to home starts, consumer and industry confidence, wage gains and other economic indicators. Sec. Albright said he thinks the estimates the budget plan is premised upon are responsible and practical, “We have to be very careful that we are not overly optimistic,” he remarked, cautioning that is how previous administrations have gotten into trouble. Sec. Albright suggested they would “within limits” consider adjusting upwards their revenue projections if the big collection months are similarly positive.
Discussing the structure of the budget, Chairman Browne said the budget proposes an increase of $800 million in General Fund expenditure commitments accounted for by certain assumptions, including a contribution to the school district employees retirement fund shifted to a separate fund. He noted the “general rule” is if an expenditure doesn’t change its characteristics, there is no basis to shift it from the fund it is currently being serviced by. He suggested there is no basis on the expenditures side to perform such a move, and the only basis on which to shift it is if they are raising taxes to services it. Sec. Albright said they made that change for policy reasons, in particular to ensure it is fully paid in future years. “We have to start fully funding that obligation going forward,” he said, remarking the creation of a restricted account sends a clear message to the public and rating agencies that the obligation will be met. Chairman Browne indicated his opinion that the only way to do that is not to change how it is classified in the General Appropriations Act but to change the Pension Code. He suggested it is reasonable to conclude that it takes the spending to a $2.5 billion number.
Chairman Browne asked about the proposal to increase the state’s share to education funding through increases in various tax rates and deduction of property taxes. He said it is hard to see how the plan is not simply a cost increase for taxpayers. In terms of tax relief, Sec. Albright said, no changes are being made to how it is accounted for. He said the property tax relief fund contained in Act 1 of 2006 remains unchanged. Speaking to the disputed numbers related to the increase in the budget, he said they have a responsible spending plan in place that removes a variety of “structural gimmicks” used in previous budgets and have left a fair representation of the administration’s spending plan. Chairman Browne suggested a true apples to apples comparison would require taking out Public School Employees Retirement System (PSERS) spending from last year as well.
Chairman Browne spoke to the revenue side of the budget and cited budget materials indicating consumer spending may go down as taxes go up. He likened the situation surrounding the budget proposal to that of 1991, and said the broad reforms introduced by the governor present a “tremendous question” surrounding the state economy. He asked what offsets are included to account for changing behavior, particularly in the commercial sector. Sec. Albright agreed 1991 is the closest parallel to context surrounding the proposed budget. He contended the challenges facing Pennsylvania cannot be approached piecemeal.
Chairman Hughes suggested it may have been easier to construct a budget “by doing something traditional,” but said he is proud to see a transformative proposal. Citing news reports on education funding disparity in the state, he asked how the budget office approached the various problems facing the commonwealth, in particular education spending. Sec. Albright said the budget attempts to fundamentally address the inequity between rich and poor school districts. He said education cuts in recent years disproportionately affected the poorest schools in the state, and is why the first step is to create a new foundation for education funding, targeting resources to those districts that need them. He noted there is a basic education funding commission already in place taking testimony from around the state, and expressed hope that working together it can make recommendations that can be adopted as part of the final budget plan.
Speaking to pension reform, Chairman Hughes discussed the need for adjustments to the fee structure of the investment funds. Sec. Albright said they do think a conversation can be had on a more prudent investing strategy that would make for better and safer returns for the state. He said Pennsylvania is on the high end in terms of investment fees compared to the nation, and said reducing them to 60 basis points would reduce the annual management fee costs by more than $200 million annually across both systems. Extended out over the term of the unfunded liability, he said that comes to more than $2 billion in savings.
Sen. Folmer discussed the collective bargaining agreements for 14 labor unions expiring in June. He asked if the budget takes into account any potential increases resulting from fresh contracts. Sec. Albright acknowledged new labor agreements do need to be settled. He reported they are optimistic that most, if not all will be in place at the beginning of the next fiscal year and expressed hope the budget will be able to accommodate any changes. He informed the committee he cannot expand on his views given the ongoing nature of negotiations. Sen. Folmer asked what the total cost would be associated with a one percent increase, and its impacts on future budgets. Sec. Albright declined to engage in hypotheticals given their nuances.
Sen. Folmer cited a February RFP for representation in collective bargaining agreements with unions on behalf of the state with a due date of February 13. He asked if the contract was awarded yet. Sec. Albright said they have yet to decide whether they will need outside representation. Sen. Folmer said legislators have a constitutional duty to come up with a balanced budget, and asked how the Senate will know that the budget is fiscally responsible without more information on labor agreements. Sec. Albright said they will communicate as much as they can, when they can. Sen. Folmer noted he intends to pursue the matter. Sec. Albright said he would be happy to have further contact throughout the process. Chairman Browne agreed on the need to know the particulars of the labor agreements going forward.
Sen. Mensch asked about the Redevelopment Assistance Capital Program (RACP) and whether past programs will be continued. Sec. Albright said the budget office is trying as expeditiously as possible to review all the RACP projects in process, and reported the timeline for the 2015 RACP process is underway. He said discussions will be necessary on whether any changes will be required for awarding projects this year.
Sen. Mensch discussed the proposed changed to the corporate net income (CNI) and personal income taxes (PIT). He said he supports the proposed change to CNI but disagrees with enacting combined reporting. He also noted small businesses paying the personal income tax rate will be negatively impacted. Sec. Albright spoke to the CNI and combined reporting, and said 28 states that have a corporate net income tax use some form of combined reporting. He opined that is the right way to do things. He noted the immediate reduction to 5.99 percent puts Pennsylvania in the middle of the pack and the reduction to 4.99 in 2018 would put it fourth-lowest. To the PIT, Sec. Albright said the 3.7 rate would still be third-lowest of states that have a personal income tax and remain very competitive.
Sen. Vogel asked about the governor’s proposed severance tax. Sec. Albright acknowledged the plan does model that of West Virginia’s. He said that state imposes some local taxes that Pennsylvania does not, as does Ohio, and thus it would remain a very competitive levy. Sec. Albright said as the cost of natural gas has gone down, so too has the impact fee returns, noting the peak $225 million figure is from 2012. He emphasized that peak figure would be grandfathered for local impact spending out of the severance tax. Sen. Vogel noted some regions, including his, are only just seeing drilling ramp up, and said the grandfathered figure may not be enough. Sec. Albright deferred to the Department of Revenue for its overall revenue estimates from the severance tax, but speaking to the impact fee proceeds, he said he expects those communities will realize more.
Sen. Argall thanked the administration for focusing on property taxes. He suggested they have the votes in the Senate to eliminate the school property tax entirely. He asked if the governor would sign it. Sec. Albright said the governor would sign a comprehensive, reasonable budget that closes the deficit and meets local obligations to school districts. He indicated the administration would welcome discussing going further on property taxes given those parameters. Sen. Argall suggested his goal is to “put a stake through the heart of this archaic tax.”
Speaking to personnel costs in the state, Sen. Argall said they are hearing many more patronage hiring and firings than in recent administrations and asked if that is accurate. Sen. Albright said he does not think that is accurate and reported no one has been fired from his office. Sen. Argall requested an “apples to apples” comparison data for the first several months of the Wolf tenure compared to recent ones.
Sen. Scavello noted that in 1991 there was a $1 billion shortfall and $3 billion in tax increases. Sec. Albright agreed that is one perception of what happened, but said in living through it that is not his impression. He stressed Pennsylvania is a different state than it was, and is situated in a much more competitive environment. He said there was a huge structural imbalance in 1991 that was significantly more than $1 billion, and rectifying it involved steps including establishing the first capital fund to support mass transit agencies, for example. Sen. Scavello said he sees 2011-12 as a better comparison.
Sen. Scavello also credited the governor for attempting to address property tax reform. He noted the proposal is similar to legislation of his from 2005. Sec. Albright agreed that when trying to fashion the tax plan, they tried to learn from previous proposals from both sides of the General Assembly and parties. He said they feel all districts will receive significant tax relief, and those that need help the most, including third-class cities, will receive significantly more. He spoke to a variety of tax relief programs aimed at select communities and said in the long term doesn’t really help communities. “Ours is a plan that significantly…allows those communities to suddenly rebuild their tax bases and compete for jobs and new investment.” Sen. Scavello questioned it hurts the state if the tax dollars taken out are not delivered right back as property tax relief. Sec. Albright said they intend to provide the relief to school districts as soon as the funds are collected. He said the payments will be made in October 2016, trying to roughly mimic when property tax bills are paid and the revenues received.
Sen. Wagner commented, “This budget does nothing more than raise taxes and expands government.” Noting the budget adds 50 new employees at the Department of Environmental Protection, he said, “I think it is time for a fresh, radical approach.” Sen. Wagner suggested the administration consider installing GPS in all state-owned vehicles. According to Sen. Wagner, this increased productivity and decreased accidents in the private sector at UPS, FedEx and trucking companies. He asked Sec. Albright to provide a list of all new hires since January 20, 2015. Sen. Wagner said he agreed that “the education system has many challenges”. He suggested repealing the prevailing wage mandate for local school districts. Sen. Wagner asked Sec. Albright if he understands the underground economy and whether one exists in Pennsylvania. Sec. Albright responded that he understands what the underground economy is, which he defined as “the amount of goods and services that are not taxed nor go through the publicly accountable system.” When asked if there is an underground economy in the Commonwealth, Sec. Albright replied, “There will always be an underground economy in any state.” Sen. Wagner then asked about the numbers for the “above-ground economy.” Sec. Albright explained that Pennsylvania’s GDP is almost $600 billion. According to Sec. Albright, the total state budget is about $78 billion or about 12 percent of the state’s total GDP. He commented, “That means we can move the needle.” He continued, “What the state does in the way we manage those state dollars really can have a dramatic impact on what the state is able to accomplish.” Sec. Albright told the committee, “We have to keep what we do in the context of realizing that it is the private sector is the one who grows jobs, that provides the key to growth and the kind of state economy we really want to realize here.” He stated that the governor wants to create a business climate “that can be successful, that we can use to market and attract investment.” Sec. Albright said, “We can help the businesses that operate here now and … here is the future to succeed and prosper and again build and strengthen a growing middle class.” He encouraged lawmakers and the general public to offer their thoughts and suggestions on how to make government work better. Regarding the number of state employees, Sec. Albright recommended checking out the PennWATCH website.
Sen. Wozniak pointed out that Pennsylvania does not tax pensions. He wanted to know what states do tax all or a portion of retirees’ pensions. Sec. Albright responded that some states do tax pensions and he will provide a list of states to the committee. Regarding the sales tax, Sen. Wozniak asked what other states charge sales tax on the items that Gov. Wolf has proposed in his budget. Sec. Albright said he would provide the information to the committee. Sen. Wozniak asked what states currently have mandatory combined reporting. According to Sec. Albright, 28 states have mandatory combined reporting. He described the enactment of mandatory combined reporting as “the right thing to do” and is “part of a comprehensive tax fairness system.”
Regarding RACP, Sen. Teplitz explained that in his office when he is deciding whether to support or advance a particular project, he not only focuses on the number of jobs to be created and maintained but also the extent to which the project will include minority and women-owned businesses and other disadvantaged businesses. He wanted to know if this will be built into the program. Sec. Albright said the administration has not fully discussed that and he is not fully prepared to talk about how they will evaluate, judge and make final decisions on RACP commitments. He added that in many significant areas one of the budget strategies they have tried to employ is “to not be entirely prescriptive.” He repeated that the administration wants to work with the General Assembly to develop a comprehensive budget plan. Sen. Teplitz then wanted to know if there is dividing line where household income of x dollars annually will be better off and pay less net and households on the other side of the line will pay more taxes. Sec. Albright responded that if the state was to do a dollar to dollar shift and the state would take over the entire tax burden for the schools in the way they are currently funded the state would be providing a 33 percent differential to the wealthiest school districts versus the poorest school districts “when we all know that it is the poorest school districts in our state that face the greatest funding need.” He commented, “That would be unacceptable.” Sec. Albright asserted, “We have to provide significant state tax relief and do it in an equitable and responsible way.” He added, “We have to target that tax relief to the communities that need help and that is why we use the funding formula that the General Assembly put in place under Act 1 in 2006.”
Sen. Vulakovich argued, “There are so many taxes in this budget there is just no way this goes through.” He asked, “With all the taxes, is there any way anybody in the Administration that can say this will stimulate the economy in Pennsylvania?” Sec. Albright responded, “We can say without any equivocation that the tax plan we put before you and it is adopted in the comprehensive form we proposed it will absolutely and significantly increase the competiveness of this Commonwealth to go out and compete for new business growth among businesses that currently operate here and attract new business investment from outside our state.” He added, “For too many years we have struggled with an antiquated tax system and that system with a 9.99 percent Corporate Net Income Tax rate has been a blinking red sign on the wall saying we are not open to attract new business investment.” Sec. Albright also noted the completion of the phase out of the Capital Stock and Franchise Tax under the proposed budget. He emphasized that the tax rates in the proposed budget are competitive with all fifty states.
Sen. Vulakovich expressed concern with the proposed uniform combined reporting. He said that in the past he has asked both Democratic and Republican administrations how it would work. According to Sen. Vulakovich, he has been told that it is “one of the most litigated business processes” and “it will be a nightmare.” Sen. Vulakovich commented that the PIT and the sales tax are the two biggest generators of revenue for the budget. He said the PIT applies to about 90 percent of the small businesses in the Commonwealth. Sen. Vulakovich added that the CNI is third biggest revenue generator. He asked if daycare is going to be taxed. Sec. Albright responded, “Yes.” Sen. Vulakovich asked if diapers are going to be taxed. Sec. Albright explained that the method the administration utilized for expanding the sales tax was the same methodology found in previous legislation. He again repeated that this is a comprehensive budget proposal and plan and it will provide more relief to poorer school districts. Sec. Albright also indicated he will prepare for the committee members a one page summary of the proposed uniform combined reporting.
Sen. Rafferty pointed out that his area has been hurt for years because of hold harmless. He said his area pays more in sales tax and the personal income tax and gets back 23 percent. Sen. Rafferty commented, “Property taxes are killing us in my area and I am anxious to work with Sen. Argall and Sen. Schwank and some of the others to work with you on those issues.” He then expressed concern that he is hearing nothing about cost containment. On pensions, Sen. Rafferty said he and Sen. Eichelberger have met with an investment company in Chester County about the money they could have saved the state over the past ten years. He emphasized the need to be discussing changing the current pension system because it is not sustainable. Sen. Rafferty asked about the film tax credit. Sec. Albright responded that the film tax credit is retained at the $60 million annual allocation. Sen. Rafferty asked about cost containment in education. Sec. Albright said the administration has tasked the intermediate units (IUs) to work with the school districts in their regions to look at cost containment. Sen. Rafferty expressed concern that the IUs have “morphed into something they were never intended to be.” Sec. Albright argued that the IUs are in the position to drive service consolidation conversations. Noting he is a former school board member, Sec. Albright commented, “It is a conversation we should have.” He then discussed the importance of reforming how the state funds cyber charter schools versus “bricks and mortar” charter schools.
Sen. Schwank thanked Gov. Wolf for his proposed increases in funding for domestic and sexual violence programs. She then changed topics to Medicaid expansion and wanted to know how much money the Commonwealth lost with Healthy PA. Sec. Albright responded that Healthy PA, like the consolidated Medicaid expansion the administration will move forward with, will save substantial dollars in the current fiscal year and reduce state costs by more than $100 million by the fact the federal government will pick up the costs. He said that in the next year the proposed funding plan for 2015-16 the total savings will increase to $626 million in annual savings going forward. Sec. Albright told Sen. Schwank, “We could have realized those savings in prior years but we chose not to expand Medicaid as expeditiously as possible but I will give the prior Administration credit because they put a plan in place that moved us there in this fiscal year.”
Sen. Wiley commended the Administration for its “comprehensive, bold approach” to the budget. He also suggested the Administration look at his proposal to reform funding for cyber charter schools. Sen. Wiley asked about the proposed increased investment and reinvestment in the Department of Community and Economic Development (DCED). Sec. Albright said that administration wants to be careful that the incentive programs that are in place for the loan and grant programs that have traditionally demonstrated that they have a terrific track record are recapitalized.
Sen. Smucker said he appreciates the governor’s commitment to ensuring “a strong education system.” He noted the total spending of Pennsylvania’s schools on students from all sources, Pennsylvania spends more per student than most other states. Sen. Smucker wanted to know if the Wolf Administration wanted to spend more per student or more money coming from the state for the schools. Sec. Albright replied, “Our position is there is a critical need to spend education resources to guarantee that we have an equitable and adequate funding system.” He continued, “The disparity that is in place right now because of the over reliance on local taxpayers and funding system cannot be allowed to continue.” Sec. Albright explained, “If you look back at the previous decade and the previous administration invested heavily increasing the state’s commitment to public education and those investments had real results.” He argued the budget cuts in 2011-12 led to declining test scores. Sec. Albright asserted, “We need to restore those funding cuts to those programs that disproportionally took dollars away from the poorest most struggling districts that had the greatest need and that is why we need to put back and create within the foundation base of our basic education subsidy before we have any conversation about a new funding formula going forward.”
Sen. Smucker wanted to know if the administration would support a budget coming from the General Assembly that increases dollars from the state for education but at the same times provides a dollar for dollar decrease in property tax relief. Sec. Albright responded, “Our budget does that for $3.8 billion.” He commented, “Our budget provides the most dramatic, precedent setting school district property tax relief in our Commonwealth’s history.”
Sen. Eichelberger asked if the pension payment is based on a true arc or if it is a collared rate. Sec. Albright explained that “one of the most fundamental components of the budget plan is in 2016-17 fiscal year the state will meet the full pension obligations of both systems without any need for collars.” Sen. Eichelberger asked if the Administration is going to pay the pension obligation bond with increased profits from liquor stores. Sec. Albright said, “We would phase-in the use of increased liquor store profits in the 2016-17 fiscal year.” He added, “We would use $80 of that increased return to reduce the school districts’ PSERS payments and then in the 17-18 fiscal year when the state and the school districts start realizing significant additional savings from the bond refinancing then at that point those proceeds will pay the full cost of the debt service on the bond.” Sen. Eichelberger asked Sec. Albright if he expected the pension obligation bond to have any impact on the Commonwealth’s rating by the rating agencies. Sec. Albright replied, “No”.
Sen. Eichelberger mentioned that the financial news stories that he has read have not been favorable toward the pension obligation bond. He added that the stories have said that without significant pension reform to meet the long term obligation, the commonwealth would not be viewed favorably by the rating bureaus. Sec. Albright said the pension proposal in the budget is premised on the pension reforms put in place the General Assembly in 2010.
Sen. Leach expressed concern with the proposed expansion of the sales tax to include legal services. He said that “access to justice is already very difficult in our society.” Sen. Leach commented that it his understanding that the expansion applies to personal expenditures for legal services excluding criminal and family law. He asked if that is correct. Sec. Albright responded, “Yes.” Sen. Leach argued that it could be problematic in civil litigation if the state is a party and charges a tax for defending oneself. He also expressed concern that businesses would not be required to pay this expansion of the sales tax. Sen. Leach provided a hypothetical situation where a WalMart employee sues the corporation for sexual harassment or failure to pay wages, the corporation defending itself would not have to pay the sales tax but the person filing the complaint would be required to pay the tax. Sec. Albright suggested directing the question to the Department of Revenue for a response. Sen. Leach asked how much of a crisis the Commonwealth faces in the short and medium terms to continue to meet its pension obligations. Sec. Albright responded, “To put it simply, it is not a crisis. It is an obligation.” He argued if the state follows the additional funding plans the administration recommends for the pension system by the 2016-17 fiscal year “we have met the arc and we have met our full obligations and are able to fund them as they are actuarially determined.”
Sen. Smith praised the final elimination of the Capital Stock and Franchise Tax. He also praised the increase in funding for early childhood education programs. Sen. Smith asked about the discrepancy between the administration and the Independent Fiscal Office (IFO) regarding the commonwealth’s structural deficit. He wanted to know what the structural deficit means to the commonwealth and how it is defined. Sec. Albright explained that his predecessor outlined at his mid-year briefing in December a structural deficit of $2 billion of one-time expenditures moved to a different fiscal year or revenues that wouldn’t recur. He added that is eliminated in the proposed plan and budget. Sec. Albright pointed out there are cost drivers, cost increases that the Commonwealth will have to meet. He explained the structural deficit is based on those cost drivers minus the revenue growth of $600 million in the budget proposal. Sec. Albright indicated the IFO may be more optimistic about revenue growth so their projection on the structural deficit is lower.
Sen. Blake asked about higher education funding and Gov. Wolf’s request that schools put a tuition freeze in place. Sec. Albright said the proposal makes significant restorations and the administration plans to restore those cuts to the public higher education providers over two fiscal years. He said the governor requested a tuition freeze in response to the restoration of those cuts.
Sen. Tartaglione noted she has been pushing for combined reporting since 2000 and for an increase in the minimum wage tied into the consumer price index. She asked about funding for individuals with disabilities. Sec Albright pointed out the budget increases the funding for the Office of Vocational Rehabilitation. Sen. Tartaglione asked if there is any data on job bleed with people leaving Pennsylvania because it has a lower minimum wage than the neighboring states. Sec. Albright said that the commonwealth’s neighbors have increased their minimum wage above the federal minimum wage and the administration supports an increase. He pointed out the Commonwealth is 50th in job creation.
Sen. Ward had questions about the severance tax proposal. Noting the proposal includes a transfer for enforcement and monitoring, Sen. Ward wanted to know if there is a reason to believe it has been inadequate up to this point. Sec. Albright responded, “Rather than looking back and being critical, I think our view moving forward is that the additional safety inspection system that could be funded and put into place would be appropriate and simply guarantees all of the drilling activity is done in a safe and responsible way.” Sec. Ward then asked about the elimination of the current Marcellus Shale impact fee and capping it at $250 million. She wanted to know how that money will be disbursed if there is an increase in drilling. According to Sec. Albright, “It will work the same way it works now.” He explained that the language in the current impact fee is lifted into the proposed severance tax and the money will be distributed in the same manner.
According to Sen. Greenleaf the five counties in southeastern Pennsylvania pay 40 percent of the personal income tax and sales tax statewide. He said Montgomery County provides $1 billion and Bucks County provides $715 million in tax revenues. Sen. Greenleaf argued the need to address the issue of the “hold harmless” provision in the education funding formula. He wondered aloud if the schools are being asked to address what are basically societal problems that need to be addressed elsewhere. Sec. Albright said the proposed budget includes many important reforms. He also said there is a need to make sure school districts invest in proven methodologies.
Chairman Browne described the proposed revenue package as “particularly aggressive.” He also noted some of the neighboring states have enacted similar proposals which led to several companies leaving those states and relocating to Pennsylvania.
Sec. Albright repeated the administration’s willingness to sit down and discuss with legislators their ideas and suggested changes.
Robert Storm
Eastern Region Vice President
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