PHILADELPHIA – Pennsylvania Gov. Tom Wolf late Wednesday signed a $31.5 billion fiscal 2017 budget, after lawmakers filled a $1.3 billion gap through a patchwork of tax hikes and revenue assumptions.
While the spending plan is two weeks behind schedule, its passage avoids a repeat of last year's nine-month-late budget fiasco and helps deflect warnings of more bond-rating downgrades and possible legal challenges over budget imbalance. The state constitution requires a balanced budget.
"Today's passage of a revenue package means that we avoid another lengthy impasse, our budget is balanced this year, and we have greatly reduced the commonwealth's structural budget deficit," said Wolf, a Democrat at odds with the Republican-controlled legislature since taking office last year.
The breakthrough was also timely, with Pennsylvania intending to sell about $1.2 billion of general obligation bonds on July 19.
"The more conciliatory outcome of this year's negotiations is welcome respite from the gridlock of last year," said Alan Schankel, a managing director at Janney Capital Markets.
S&P Global Ratings on Monday put Pennsylvania's AA-minus rating on credit watch with negative implications, citing the unfinished budget.
Moody's Investors Service affirmed its Aa3 rating and negative outlook while Fitch Ratings maintained the stable outlook on its AA-minus rating. Rating agencies have downgraded Pennsylvania five times in the past three years.
S&P said it could remove that status if lawmakers passed a balanced budget within 90 days.
Just how balanced is the budget is open to question, given the hodgepodge of tax increases and revenue assumptions.
According to the Pennsylvania Budget and Policy Center, balance is a term of convenience; stop-gap measures amount to $709 million, or more than half the revenue package.
"As a result, the state's long-term structural deficit has not been closed," said the center's director, Marc Stier. "Next year will bring another debate about how to fund the government over the long term."
Margins in the House of Representatives and Senate were 116-75 and 28-22, respectively, after lawmakers met in caucus over three days. Wolf on Sunday had allowed the spending plan lawmakers sent him July 1 to become law without his signature. Wednesday's signing supersedes that action.
Revenue measures include borrowing $200 million from a surplus in a state medical malpractice insurance fund, which the commonwealth would repay over five years starting in 2018.
Officials say the $1-per-pack increase in the cigarette tax to $2.60 per pack could raise $430 million, while they target $50 million from a levy on smokeless tobacco. They also say the law passed in June to liberalize the sale of wine and liquor could generate $149 million.
Additionally, the budget bill eliminates the exemption from Pennsylvania's 6% sales tax on downloads of digital videos, books, games and music, with officials estimating a $47 million intake.
Rep. John McGinnis, R-Altoona, warned that the download tax could generate a huge voter backlash akin to 2005 after state lawmakers voted huge pay raises for themselves in the middle of the night.
The following year's election produced 54 new legislators despite repeal of the raises.
"The download tax is going to play like the pay raises. It's going to blow the whole thing open," McGinnis said in an interview Wednesday at law firm Ballard Spahr LLP in downtown Philadelphia, where he spoke at a Philadelphia Area Municipal Analyst Society workshop on public pensions. "People will be outraged across the commonwealth. Everybody's downloading."
McGinnis called his overall reaction to the budget bill "very negative."
"It's a patchwork of tax increases to our general appropriation fund, and it's targeting isolated groups and advocates," he said. "We have an appetite for spending that we have to curb, and we're in denial."
The revenue plan also assumes $100 million from fees related to the legalization of online gambling. Enabling legislation is on hold until the fall session. It also pegs $100 million from allowing tax delinquents to pay back taxes without penalty.
State officials also expect $23 million from raising the rate of the shares tax on bank and trust companies.
Richard Dreyfuss, a Hummelstown, Pa., actuary and an adjunct fellow with the Manhattan Institute for Policy Research, also called the budget too iffy.
"Anyone who considers this a balanced and sustainable budget needs to relearn the basic principles of sound financial management," said Dreyfuss, a retired Hershey Foods executive.
"None of the [taxation items] would seem to provide an incentive to live, work or invest in Pennsylvania," he said. "Perhaps that's why they sought to have wine and liquor more 'consumer friendly' – to help mollify any taxpayer concerns."
