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A Pennsylvania Budget to Celebrate

By Budget Analysis, PA Budget, Policy Statement

A Pennsylvania Budget to Celebrate

Note: This is an initial review of the fiscal year 2024–25 budget proposed by Governor Josh Shapiro on February 6, 2024. As we delve deeper into the budget we may need to revise or modify the conclusion reached here. Also note that rather than providing one lengthy, in-depth analysis of the entire budget seven weeks or so after it is released, as was done by the previous affiliate of the Center on Budget and Policy Priorities, we will be rolling out our in-depth analysis over the next seven weeks in a series of reports.

Overview

Governor Shapiro took office a year ago at a time when there was a great deal of uncertainty about the economy and the fiscal state of Pennsylvania, and in the wake of a Commonwealth Court decision holding Pennsylvania’s system of funding public schools unconstitutional. There was little time for a new administration, led by a new governor and an entirely new set of cabinet members, to develop a long-term plan to address the school funding question. Accordingly, the administration said that its initial budget would be followed by a second-year budget that would fully address the constitutional mandate to fund K­­–12 education fully and fairly and other issues. When we reviewed the budget presented by the Governor last year, we concluded that it set forth the right priorities but did not provide enough funding to meet the needs it identified.

We are very pleased to say that the budget presented by Governor Shapiro today not only has the right priorities but provides the funding needed to meet them, at least in the next fiscal year. The investments the Governor proposes for public K–12 education, higher education, economic development, housing, and other priorities are substantial and bold. And as important as the new funding proposed is, the Governor’s budget also recognizes the need for Pennsylvania to do some things differently in all these areas.

If adopted by the General Assembly, the Governor’s proposal would put us on a path to answering the impassioned call for adequately and equitably funding schools made by our young people, their parents, and other Pennsylvanians who have long understood that equality of opportunity, prosperity, and democracy are intricately linked to the education the state provides our children.

The proposal is the first step in answering their prayers, and we applaud Governor Shapiro for embracing the BEFC report and including  the first year of its seven year plan in his budget. We think Pennsylvanians should celebrate this budget and work with Governor Shapiro to see it enacted this year.

Our only concern about this proposal in the Executive Budget book is that it proposes new investments in K–12 education for only one year. The administration embraced the Basic Education Funding Commission’s seven-year plan to lift state support of K–12 to a level that would meet our moral and constitutional responsibility to fund our schools fully and fairly. However, the long-term budget outlook in the Executive Budget plan release today only contains the first year of the seven-year plan needed to meet that responsibility. The statement of the governor’s priorities does say that the additional educational investment next year is just the “first year adequacy investment as recommended by the BEFC.” So, we are confident that Governor Shapiro intends to follow through on the commitment to the full seven-year plan made by his representatives on the Basic Education Funding Commission, as he is both personally committed and constitutionally required to adequately and equitably fund our schools. But the true cost of that plan—and the revenues needed to fund it—are not apparent in the budget documents submitted today. Pennsylvanians deserve a transparent budget process that allows us to consider the alternatives before us.

The Budget Overall

The Governor proposes a General Fund budget of $48.3 billion, 8.4% more than the current fiscal year budget of $44.6 billion. This is a substantial increase, but a necessary one. In evaluating the overall size of the budget, it is important to keep in mind two important things. First, looking just at the budget number can be misleading. As our economy and population grow, and inflation occurs, the state budget necessarily must grow. The best measure of the impact of the state budget on our economy is not the number of dollars spent but the proportion of the Gross State Product (GSP) of Pennsylvania that flows through state government. The Governor’s proposed expenditures, if accepted by the General Assembly, would equal 5.02% of the projected GSP of $940 billion.[1] This is higher than the average 4.36% of GSP in Governor Wolf’s budgets. But, it is in line with the 4.66% average during the fifteen years before Governor Corbett. Governor Shapiro is not proposing a major expansion of state government but, rather, a return to the historical path the state budget was on before the sharp budget reductions of the Corbett years.

The second key point to remember in evaluating the overall size of the budget is that Pennsylvania has been falling behind in meeting many responsibilities, not just the  responsibility to educate our children at all levels. We have suffered from a severe public investment deficit. For the last decade, our public schools have been among the most unequally funded in the country; we are fourth from the bottom in higher education funding (and near the top in the cost of public higher education); our public health spending is close to the bottom; we have cut funding for environmental protection even as the need to protect ourselves from the dangers of natural gas fracking has increased the demands for environmental inspectors; we provide less than other states in support for those with mental health issues; and so on. The result of the  public investment deficit is that inequality in our state has increased, and our economy has been growing too slowly. It is going to take higher budget levels this year and, in the future, to close the public investment deficit gap.

Education

Governor Shapiro’s recommendation for education funding closely follows the plan put forward by the BEFC. It calls for over $1 billion in new basic education funding to our five hundred school districts divided into three buckets:

  • $736,000,000 is targeted to school districts that are inadequately funded by the state’s own criteria and as established by the BEFC.
  • $136,000,000 is targeted to school districts that have higher-than-average property taxes because they have had to rely on local funds to make up for inadequate state aid.
  • $200 million will be distributed through the Fair Funding Formula to all five hundred school districts to ensure that state support keeps up with the inflation in education costs.

The Shapiro proposal also accepts the BEFC recommendation to update the current funding formula to improve predictability and stability of funding. The administration embraces the BEFC plan to smooth the poverty factors in the formula to ensure that temporary jumps or statistical anomalies in poverty rates do not lead to sharp changes in state funding. They also call on the General Assembly to reset the BEF base to the 2023–24 allocation. New education funding to school districts in future years would be added to the 2023–24 funding level rather than the 2014–15 level. This means that the school districts that see a decline in the number of students would be protected from a drastic reduction in state funding.

Altogether, total funding for basic education would reach $8.9 billion in FY 2024–25.

The Governor also calls for

  • a $50 million increase in special education funding, a 4% increase over FY 2023–24.
  • a $2.4 million increase for career and technical education, a 2% increase over FY 2023–24.
  • a $7 million increase for dual enrollment programs.

In addition, he calls for $300 million per year for repairing dilapidated and toxic school buildings.

The Governor also proposes to reform the way school districts pay for cyber charter schools. Currently payment rates range from $8,639 to $26,564 per student per year. These payment variations are not at all related to the actual cost of educating children in cyber charter schools. The Governor proposes a fixed $8,000 payment per student per year. This plan would save school districts, including many rural school districts, a total of roughly $262 million per year.

Early Childhood Education

Governor Shapiro proposes $32 million in new funding for early childhood education programs, including $30 million for Pre-K Counts, an 11% increase over FY 2023­–24; $2.7 million for Head Start, a 3% increase over FY 2023–24; and a $17 million increase for Early Intervention, a 5% increase over FY 2023–24.

These proposals are not only welcome but bold. But, as we mentioned above,  they are for one year only. The Basic Education Funding Commission proposal, which Governor Shapiro’s representatives voted for, made clear that reducing the adequacy gap in funding our 500 school districts, as well as addressing tax inequity, would require an additional investment at this scale seven years in a row. At the end of the seven-year plan, state spending on K–12 education would be $6 billion higher than it would have otherwise been. However, the five-year plan in the Executive Budget shows flat funding for education in the four years after FY 2024–25.

It is not uncommon for the out years in a governor’s budget proposal to project flat funding of many budget lines combined with a mixture of conjecture and fantasy about possible future initiatives and revenues. So, we are not concerned about what we don’t see in the future projections of education funding. We trust in the Governor’s endorsement of the BEFC report and the bold rhetoric in his speech today about the necessity of providing an adequate education to all the children of Pennsylvania. But, as we will show below, excluding future increases in education funding from the long-term budget outlook could create a misleading picture of the fiscal status of the Commonwealth and the eventual need for new recurring revenues to both balance the budget and fund education fully and fairly.

Higher Education

The Executive Budget calls for major changes in the way higher education is governed and funded in Pennsylvania. We can’t speak to the details of this proposal here as some of them are not clear and the impact of others requires more careful consideration than we can provide today.

The good news is that Governor Shapiro recognizes that our state has been disinvesting in higher education for thirty years with the result that tuition at PASSHE and community colleges are among the highest in the country, even relative to median income. Because of the high tuition, there has been a drastic decline in enrollment, far greater than is caused by the decline in the number of high school graduates. Pennsylvania has tens of thousands of open jobs that require higher education. Even worse, many Pennsylvanians leave the state to attend less expensive colleges in other states and, too often, they do not return.

To deal with these issues the Governor proposes both structural changes and new funding. He calls for consolidating the PASSHE and Community College systems under one board and administration. We will consider this proposal in greater detail later in the year, but we do think there are two points in its favor. First, it is vital to the success of higher education in Pennsylvania that students graduating from community colleges have a smooth path to finishing a four-degree at a state university. Combining the operations of the two systems may well make those transitions easier. And second, we believe that in the last forty years colleges and universities have spent too much on administration and too little on faculty members and vital support services. Consolidating the two systems would reduce the administrative overhead of both systems.

Recognizing the need for new funding to reduce tuition, the Governor proposes an additional $127 million in funding for the combined PASSHE-Community College system and $31 million for the state-related universities: Lincoln University, Temple University, The University of Pittsburgh, and Pennsylvania State University. Total higher education funding would rise from $1.54 billion to $1.7 billion. He also calls for changing the way the state-related universities are funded to remove the requirement that such funding receive a vote of two-thirds of the House and Senate. This important step is needed to reduce micromanagement of these universities by the General Assembly.

The consolidation and new funding proposals this year, and one promised for 2025–26, would allow the state to ensure that any student whose family income is less than the median family income in the state would be able to attend a community college or state system university for no more than $1,000 in tuition and fees per semester. Students attending state-related universities would see a $1,000 increase in their Pennsylvania Higher Education Assistance Agency (PHEAA) grant, bringing it to $6,750 per year. This bold plan promises to make a college education far more affordable, especially for families with low and moderate incomes, enabling our community college / state university systems to once again be the engines of economic opportunity they were in the past and thereby providing the education and training needed to drive our economy forward in the future.

Building a Strong Economy

Governor Shapiro has long recognized the importance of state support for economic development beyond that which is provided by a strong education system. He has created a new economic development strategy that promises not only to attract new businesses to the state but also help existing businesses expand. He proposes a total of $600 million in new and expanded investments to enhance the Department of Community and Economic Development work in this area.

This new investment would be distributed among a number of different programs, including

  • $500 million for the PA SITES program, which provides funds for on-site development for priority industries, including agriculture and manufacturing. It would be paid for by a taxable bond issue.
  • $20 million in new funding to leverage Pennsylvania’s research and development assets.
  • $3.5 million to create the Pennsylvania economic competitiveness challenge to encourage the creation of regional development strategies.
  • $25 million for the new Main Street Matters program that would build on the work of the Keystone Communities and Main Street and Elm Street programs that have helped local governments create vibrant downtowns.
  • $21.5 million in funding for tourism and business marketing.
  • $2 million in funding to support internships.
  • $10 million in new funding for the Department of Environmental Protection to hire new staff and improve IT systems to expedite permitting approvals.
  • $10.3 million in funding for agricultural innovation.
  • $5.6 million for the dairy industry.

While it is included in a separate category in the Governor’s budget, we want to note that the new investments in career and technical education discussed above are critical to any successful economic development strategy. We continue to believe that the best way forward to a strong future economy is to invest in people. Businesses come and go. But a well-educated and trained workforce is a major attraction to new businesses and those seeking to expand their operations in our state.

Minimum Wage

Raising the minimum wage is long overdue. At a time when every state around us is moving quickly to a $15 minimum wage, Pennsylvania’s minimum wage is not only a moral embarrassment but also a barrier to economic growth. The minimum wage has not been increased for 14 years. Many Pennsylvanians seek work in neighboring states to earn higher wages. And they spend some of what they earn in those states as well, depriving Pennsylvania businesses of their patronage. Indeed, low wages hold back economic growth and hurt local businesses all over the Commonwealth. So, we are glad to see Governor Shapiro again propose an increase in the minimum wage to $15 on January 1, 2025. It is imperative that the Senate follow the House in embracing this proposal. We would also like to see the General Assembly end the tipped minimum wage, allow local governments to set a minimum wage higher than the state level, and create an automatic cost-of-living increase in the minimum wage.

According to data from the Keystone Research Center, raising the minimum wage to $15 per hour would increase the wages of 1.34 million Pennsylvanians. More than 21% of Pennsylvanians would see their wage go up. This would lead to an increase in consumer spending of $5 billion dollars, giving our economy a strong push upwards. A majority of the people who would see their wages go up are women and full-time workers—and over a quarter of minimum wage workers have a child. About 21% of them live in cities, and 25% live in rural areas. An increase in the minimum wage to $15 would add $56 million to state revenues and would reduce state expenditures for Medical Assistance and other safety net programs by roughly 20–30 millions of dollars.

Public Transportation

Another important component of a successful economic development strategy, and especially one that seeks to expand opportunities for low- and moderate-wage workers, is public transportation. Public transportation is not just critical in our largest cities. Many smaller cities, and even some more rural counties, have public transportation systems that make it possible for workers to get to their jobs. Thus, we welcome the Governor’s advocacy for adding 1.75% of sales tax revenue to the Public Transportation Trust Fund, which would provide $283 million dollars for operating subsidies for transportation agencies across the state.

Child Care

Child care remains a critical priority for all parents with young children and yet is often not easy to afford. And child care jobs have historically paid too little to ensure that our most precious resource, our children, are well cared for. Governor Shapiro’s budget leverages a small state investment to secure $62 million in new federal funding that would increase reimbursement rates for child care providers taking part in the Child Care Works program, raising their pay to the 75th percentile of the current market costs of child care services.

Housing

Affordable housing is in increasingly short supply as the 2008 financial crisis and the pandemic recession slowed housing development. Governor Shapiro proposes two initiatives to make affordable housing more accessible. First, he calls for additional funding for the Pennsylvania Housing Affordability and Rehabilitation Enhancement Fund (PHARE), which helps people become homeowners, helps Pennsylvanians stay in their homes, and provides funding for local communities seeking to remove blight.

The Governor also proposes an additional $50 million for the whole home repairs program which provides funds for low-income Pennsylvanians  to repair and upgrade  their homes.

While these are important initiatives, we fear that they do not do enough to address a growing crisis—and not just in low-income communities. In the near future, we will be proposing additional ideas to deal with this crisis, such as expanding the Property Tax Relief and Rent Rebate program to low-income Pennsylvanians under the age of 65.

Revenues: Short-Term

The Governor’s budget is funded by a combination of recurring revenues and a drawdown of $3.2 billion of the more than $14 billion in the state surplus, which includes both the General Fund surplus and the Rainy Day Fund. Drawing down this surplus is entirely appropriate. The surplus came from our tax dollars and should be spent to benefit the people of our state. Those funds should not be left sitting in a bank account in Harrisburg.

The Governor also proposes two new sources of revenue: legalizing adult-use cannabis and new skill games. Legalizing adult-use cannabis is long overdue, both because it raises revenue and because it ensures that no one goes to jail for violating a law that is unevenly enforced and widely disregarded. The Governor proposes that some of the funds raised from a tax on cannabis use be returned to communities that have been disproportionately harmed by the enforcement of our cannabis laws. The tax on cannabis sales would not raise new revenues in the next budget year but promises to do so in the future. Indeed, we believe that the Governor’s long-term estimates of the revenue that can be raised are extremely conservative.

The Governor also proposes an expansion of video skill-based gaming that would generate $150 million in revenue in 2024–25, mostly through the sale of licenses to those who plan to offer these new gaming opportunities.

We do not support this gaming initiative. Gambling has repeatedly been shown to raise less revenue than expected. Even worse, it is a regressive way to raise state revenue. People with lower incomes tend to lose a larger share of their income than those with high incomes. We should be seeking revenue from people who gamble on stock and bond prices.

Revenues: Long-Term

Finally, we come to the long-term implications of Governor Shapiro’s budget plan. As we pointed out above, the Executive Budget does not provide any details about education spending beyond the next fiscal year. However, the Governor has indicated that his proposal for next year is, as the BEFC recommended, the first step in a longer term, seven-year project.

Even after drawing down $3.2 billion from the $13 billion dollar surplus, a large surplus would remain. And, even after leaving aside a significant amount in the Rainy Day Fund, the surplus would be large enough to support the second and third years of the full seven-year program. But after that, new and recurring revenues would be needed to complete the full program and meet our constitutional and moral responsibility to adequately and equitably fund K-12 education.

The Pennsylvania Policy Center will soon provide a detailed analysis of the cost of enacting the BEFC proposal over the next seven years and make some recommendations about how to fund it. Here we will simply say that the Governor’s long-term education program can be funded without taking a dime from the wages of any Pennsylvanian. All we have to do is enact what we call the Fair Share Tax Plan, which cuts taxes on earned income, wages, and interest, while raising taxes on unearned income—that is on income from wealth. Currently, the bottom 20% of families in Pennsylvania pay 15% of their income in state and local taxes, and the middle 20% pay 11.4% of their income in state and local taxes. This is all while the richest 1% of Pennsylvanians pay on 6% of their income in state and local taxes. We can fully and fairly fund K-12 and higher education in Pennsylvania just by asking the richest Pennsylvanians to pay the same share of taxes paid by the poorest Pennsylvanians.

[1] We are using the GSP projections in the Governor’s Executive Budget 2024–25, p. A1–23. These projections are slightly higher than those of the IFO, but we believe that both projections are quite conservative.