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17 Questions and Answers About Spending Caps in Pennsylvania

• Here are 17 questions that Pennsylvanians should ask about setting automatic spending caps for Pennsylvania's state budget.

1. Does Pennsylvania have a spending problem?

No.  In 2003 (the most recent year for which Federal data is available), Pennsylvania ranked 26th in spending per capita, slightly below the average for all 50 states.

2. Doesn’t Pennsylvania already have a law that limits spending?

Yes. Article 8, Section 13 of the state Constitution requires a balanced budget.  The Constitution states that the General Assembly shall not make appropriations that exceed actual and estimated revenues and surplus available in the same fiscal year.  The Commonwealth of Pennsylvania cannot adopt a budget that exceeds its revenues.

3. Doesn’t the state constitution already give the legislature the power to limit spending?

Yes.  The General Assembly has the sole power to approve spending levels.  The Governor, through his line-item veto power, can reduce spending to a level even lower than what the legislature approves, but it is the legislature that sets the initial spending level.  A separate cap law or additional constitutional language is not necessary if the General Assembly believes that spending needs to be limited. 

4. Is Governor Rendell doing anything to reduce government spending?

Yes. Since taking office Governor Rendell has cut state spending on government administration by 9 percent.  In his first three years in office, Governor Rendell proposed fiscally responsible budgets with annual spending increases of just 2.1 percent, slightly below the rate of inflation.  The budgets finally adopted by the legislature increased overall state spending by an average of 5.4 percent.

Governor Rendell has reduced the state payroll by over 3,000 positions, reduced the state vehicle fleet by 660 vehicles (5%), eliminated 3,000 unnecessary phone lines and negotiated better rates to cut the state telecommunications budget by $5 million, consolidated departmental call centers for $2 million in savings, and cut procurement costs by $140 million.  In all, annual spending on state government bureaucracy is now $475 million lower than it was when Governor Rendell took office.  

5. How much growth is Governor Rendell allowing state agencies and departments in their 2006-07 budgets?

None.At the direction of Governor Rendell, all state agencies and departments under the Governor’s control have been told to hold the line on spending for 2006-07. They are to keep their operating budget requests for the upcoming fiscal year at 2005-2006 levels, despite anticipated increases in wages, health care costs, and pension benefits. This continues the Governor’s commitment to trim spending and increase the efficiency of state government.

6. Has Governor Rendell cut any taxes?

Yes.  To stimulate greater investment in education and economic development in Pennsylvania, Governor Rendell has cut business and other taxes by more than $603 million for tax years 2003-04 through 2006-07.

To eliminate a competitive disadvantage with other states, Pennsylvania is in the midst of a 10-year phase-out of its Capital Stock and Franchise Tax (CSFT).  The rate of this tax was reduced to 5.99 mills on January 1 2005, and is scheduled to decrease by an additional one mill each year.  If the CSFT were still at its previous 10.99 mill rate, an additional $745 million in revenue would have been collected by the state this year. 

Governor Rendell is continuing to maintain vital state services and keep the state budget balanced despite these significant reductions in state revenue.

7. How would legislatively-imposed spending caps impact state programs? 

Spending cap proposals now being considered in the state legislature would require annual reductions in spending that would get larger every year.  If these kinds of caps had been in place when Governor Rendell took office, the current $24 billion state General Fund budget would have to be cut by over $2 billion.

These reductions would get deeper every year.  Required cuts in the FY2003-04 budget would have been $671 million, and required cuts would have been $1.4 billion in FY2004-05, and $2.1 billion in FY2005-06.

8. How would the state legislature cut the state budget by over $2 billion? 

No one knows.  But cuts of this magnitude would not be painless.  Many types of spending are mandated by state and federal law, so cuts would have to be deeper in the remaining parts of the budget.  Some options for cutting $2 billion out of the state budget would include the following:

Complete elimination of all state funding for higher education ($1.9 million).

Complete elimination of all state funding for services to the mentally retarded ($957 million) and all state support for county services to protect abused and neglected children ($883 million).

Reducing the basic state subsidy for public schools by 46 percent ($2 billion).

Complete elimination of all state funding for: nursing home care for the low income elderly and disabled ($627 million), state public health programs ($299 million), state parks ($98 million), public libraries ($61 million), state veterans homes ($89 million), mass transit operating subsidies ($294 million), Department of Health drug and alcohol treatment programs ($39 million), cash grants for very low-income blind and disabled and elderly ($127 million), all other state-funded services for the disabled ($61 million), and all state funding for the Department of Agriculture ($81 million).

9. Would taxes go down if Pennsylvania had a spending cap?

It is equally likely that state spending caps would shift tax increases from the state level to the local level.   If a spending cap had been in effect when Governor Rendell took office, a $2 billion cut would be required in this year’s state budget.  Since one dollar out of every three in the state budget goes to public education, it is highly likely that spending caps would require large cuts in state funding for PreK-12 education. 

To make up for a $2 billion cut in state education funding, school districts would have to increase local property taxes by 25 percent.

10. Wouldn’t arbitrary spending caps encourage state government to finance operations through debt, thus burdening future taxpayers with a growing debt burden?

It could, since (a) an inflation-indexed spending cap is unrealistic, given the actual cost increases the government faces, and (b) the fact that debt service is exempt from the spending cap.

12. Are there areas of the Commonwealth’s budget that have to grow faster than the rate of inflation?

Yes.  In the overwhelming majority of cases, when state spending is increasing faster than the general rate of inflation, it is only because the number of people who need vital state services is increasing faster than the general rate of inflation, and/or because the cost of the things the government buys is increasing faster than the general rate of inflation.

For example, Pennsylvania’s Medical Assistance program provides health care services to 1.7 million Pennsylvanians (one out of every seven state residents). The entire U.S. has been experiencing double-digit health care cost inflation in recent years.  According to the Kaiser Family Foundation, growth in health insurance nationally was 13.9% in 2005 and 11.2% in 2005.  While Pennsylvania has negotiated the best deals it can with health care providers, there is no way that Pennsylvania’s MA program can be exempt from the overall national health care cost inflation trend.

Moreover, MA caseloads are currently growing nearly three times as fast as the rate of inflation (6.6% a year), because the elderly population of Pennsylvania is growing faster than the inflation rate, the disabled population is growing faster than the inflation rate, and the uninsured working poor are growing faster than the rate of inflation.

As a result of these trends, in fiscal year 2005-06 the Department of Public Welfare (DPW) budget was increased by $686 million – an 8.7 percent increase. This DPW budget increase represented nearly 60 percent of the increase in the overall General Fund budget.  In fact, in all areas of the budget other than Education and DPW programs, the state actually reduced spending in 2005-06 by 3%.

Health care is not the only area in which state costs are growing faster than the rate of inflation.  This year, for example, the state’s utility budget is projected to increase by 17 percent and costs for fuel by 34 percent. 

The state must also cope with reductions in federal funding for programs like Medical Assistance that are jointly funded by the state and the federal governments.  This year alone the federal government has reduced its share of funding for MA by over $780 million by eliminating the Federal Fiscal Relief program ($378 million) and reducing Long-Term Care Intergovernmental Transfer payments ($402 million lower, compared to 2002-03).

The federal government has also mandated that states make dramatic increases in spending for education under the No Child Left Behind Act, but is not providing states with additional federal resources sufficient to meet these obligations. 

The Administration and the General Assembly worked diligently during the past year’s budget process to reform aspects of the Medical Assistance program, while ensuring that health care would be maintained for our most vulnerable citizens. If the proposed spending-cap legislation had been in effect, significant reductions could have been required in the Medical Assistance program.

13. In the past three budget years, what has the Legislature done to reduce its spending?

Between the 2002-03 and 2005-06 fiscal years, the Legislature has increased its budget by nearly 35 percent – from $252.4 million to $340.4 million.  This compares to 5% annual growth in the overall budget, and a 9% cut imposed by Governor Rendell on state agency operating budgets.

14. Is it true that the General Assembly has been hoarding a substantial budget surplus?  Would this surplus have to be turned in to the Commonwealth’s Rainy Day Fund or given back to the taxpayers in tax cuts, as proposed spending cap legislation requires of the General Fund surplus?

At the end of the 2004-05 fiscal year (June 30 2005), the General Assembly had more than $186 million left over in its accounts from previous years.  While most state agencies are required to return any unspent appropriations to the General Fund at the end of the fiscal year, the General Assembly has exempted itself from this requirement.

All current spending cap proposals being considered by the General Assembly would continue to allow the legislature to retain its surplus reserves and not give them back to the General Fund.

15. How much additional spending has the legislature added to the budgets proposed by the Governor?

In each of the last three fiscal years, the General Assembly has added significantly to the Governor’s original proposed budgets.

During the 2005-06 budget enactment, the General Assembly added $432 million in additional General Fund spending on top of the Governor’s original proposed budget.  The legislature added $543 million to the Governor’s original 2004-2005 budget and $384 million to the Governor’s original 2003-2004 budget.

16. How much more would it cost taxpayers if the state had to fund all of the budget amendments and other spending legislation proposed by GOP lawmakers during the 2005-06 budget negotiations?

The House Minority Whip’s office has estimated that new legislation and budget amendments that were introduced by Republican lawmakers would have added an additional $7 billion to the current $24.3 billion FY2005-06 General Fund budget.

17. What would be a responsible plan for imposing spending caps on state spending?

If legislators are serious about capping spending, they should tell the public what state spending they believe should be curbed, and then they should seek to enact those spending cuts when they vote on the annual state budget. 

Before locking the state into spending cuts with unknown consequences, the General Assembly should hold public hearings on any spending cap proposal they are considering.  So far the House and Senate have not held a single public hearing on any spending cap proposal.  They have already taken votes on these important legislative proposals without a single opportunity for the public to comment on or question the cap proposals.  Hearings would allow the Administration and citizens affected by state programs to discuss the impact that caps could have on the state’s goals to increase educational attainment, accelerate economic growth, enhance environmental protection, and protect public health.

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