After legislators fail on revenue deal, Wolf will manage PA finances

As the latest attempts by the General Assembly to reach agreement on budget-balancing revenue broke down Wednesday, Gov. Tom Wolf announced he is stepping in to balance the commonwealth’s books.

According to the governor, he will seek a likely $1.25 billion securitization of future transfers from the Pennsylvania Liquor Control Board (PLCB) to the state’s General Fund to close out the FY 2016-2017 deficit. He would also manage the state’s finances for the current fiscal year through complement control, asset monetization and efficiencies to close the spending gap.

“The House Republicans had every opportunity to put a balanced budget on my desk – and they have continuously failed,” said Gov. Wolf. “In the absence of a compromise revenue plan making its way to my desk, I am taking action on my own to manage our state’s finances. I’m going to take immediate steps to address the deficit.”

According to the governor and Budget Secretary Randy Albright, the securitization needs to be done on the initiative of the PLCB and would likely take two months before the money flows from the transaction. While the details still need to be ironed out, the administration sees the amount being amortized over a 20-year period and costing roughly between $85 million and $90 million of PLCB General Fund transfers, which have run close to $200 million annually.

PLCB Chairman Tim Holden and board members Mike Negra and Michael Newsome jointly stated that while the board has not discussed the issue, they understand the appeal of monetizing future transfers to ameliorate the commonwealth’s difficult budget situation.

“Annual cash transfers to the General Fund – transfers of our own profit and operating capital – have not dipped below $80 million for more than a decade,” they said. “Although we have yet to discuss the proposal as a Board or begin to delve into details of a potential arrangement, we pledge to work collaboratively with the Governor’s Budget Office to explore a revenue-backed contract to deliver significant immediate revenue while capitalizing on the PLCB’s long-term profitability.”

According to House Majority Leader Dave Reed (R-Indiana), the need to securitize the transfers from the PLCB is a failure of honest brokering in the budget process and shows that responsibility for the current budget crisis falls squarely on the governor.

“If the governor has the legal authority to do this on his own, why would he not have done this a month ago to avoid the credit downgrade? Was he asleep at the wheel? I don’t know, but he apparently has the legal authority to do this. They’ve known it – he could’ve avoided a credit downgrade – and it looks to me like he created a crisis of his own making. A lot of Pennsylvanians are going to get hurt as a result of it,” he said. 

“The first we heard of that proposal was from the media today. It’s not like they gave us a heads-up before he gave a press conference, either. So, I think that begs a lot of questions about what has occurred this week – we’ve tried to be honest brokers, knowing we’ve had to give a little bit to get a little bit – but it doesn’t seem like some of the other players are in that same sort of arena.”

As to the rest of the governor’s plan for bringing the budget into balance, Wolf mentioned complement control by managing vacancies through attrition, monetizing state assets and looking at ongoing efficiency measures, but there were few specifics absent an agreed-upon revenue plan.

“This is not the way government is supposed to work,” he said, “but I have to make sure Pennsylvanians are not hurt, so I’m going to have to act to protect investments we all made earlier this year in Pennsylvania.” 

It was not clear Wednesday whether or not the governor’s announcement would be enough to allow State Treasurer Joe Torsella to restart short-term borrowing to deal with the commonwealth’s cash-flow issues. Torsella’s office declined to comment on the immediate implications – relative to borrowing – of the governor’s plan to manage the state’s finances into balance.

Elsewhere in the Capitol, finger-pointing was robust following the governor’s announcement and the inability of the House of Representatives to lift a revenue plan most recently comprised of an additional 5 percent tax on hotel rooms or – to the surprise of many – a discharge resolution to bring a natural gas severance tax bill to the House floor for consideration.

“If we’re going to meet in the middle, that means both sides put up votes; I’m not sure how else that can be interpreted,” said Reed. “On this particular item” – the hotel tax – “we tried to meet in the middle. On three different proposals, House Democrats failed to meet in the middle. The severance tax – the discharge – was their own proposal, for goodness' sake. They only campaigned on it for nine years and didn’t even have their entire caucus voting for it. I’m not sure what to say to that; that’ll be for them to explain to their own folks.”

House Minority Leader Frank Dermody (D-Allegheny) blamed House Republicans for not offering a plan that could get majority support in the House or cooperating with Democrats.

“Anything done here was their idea; they couldn’t put the plan together with their majority,” he said. 

“The House Democratic caucus is ready, willing and able to run this state competently. We will work with the administration, we will work with the Senate Republicans and we will work with the Senate Democrats. You’ve seen throughout this whole process: It was the House Republicans who could not do anything, could not pass anything and did not cooperate with anybody to solve the problems.”

Senate Minority Leader Jay Costa (D-Allegheny) also blamed House Republicans for not getting a revenue bill across the finish line – something he found especially galling, considering the Senate put together a revenue package that would have balanced the state budget for the current and coming fiscal years.

“I am extremely disappointed that we have put up multiple proposals that we simply cannot get the House Republicans to participate in and lift,” he said. “Probably most disappointing is that our Republican colleagues are choosing to stand with the Marcellus industry and not standing with the kids. That, to me, is the most disappointing and most unconscionable thing I can think of.”

He added that the governor’s likely choices for balancing the budget could be devastating for Pennsylvanians.

“I think it could have a very detrimental effect on services, but we have to allow him to manage what will happen,” he said. 

Senate Majority Leader Jake Corman (R-Centre) noted that the current state of affairs means the $650 million in funding for the state-related universities is now in jeopardy and would likely have an immediate impact on Lincoln University and a long-term impact on the other state-related universities – like Penn State, Temple, Pitt, Lincoln and the University of Pennsylvania Veterinary School – that have enjoyed over a century of state support.

“If there’s a decision not to fund them, obviously there will be a reaction by those universities at some point in time – clearly you have to find those costs somewhere,” he said. “So, the next shoe to fall will be what their reaction is; I’ll let that up to them. The presidents of those universities will make those decisions.”  

While the governor remains open to altering his plan to manage state finances should an agreement be reached on recurring revenue, it appears from legislative leaders that things will enter a cooling-off period, with talks restarting at some point yet to be determined.

“Over the last 24 or 36 hours, there has been a lot of stress on the other side of the building – so, maybe, cooler heads will prevail” given enough time, said Corman. 

“The governor has made his decision – he has put the budget in balance, and we’ll see. Every day is a new day around here and maybe a new idea will come up, but you do sort of get a sense that there’s a finality here.”

Reed agreed that nothing is likely to develop in the short term.

“I think it’s very difficult when you enter into negotiations, you reach what you think are agreements to get things done, and the other parties obviously have no concept of working to get those things done,” he said. 

“It seems to me that, once again, some folks cannot keep up their end of the bargain. They looked for the easiest way to get out of town. I think that’s unfortunate, because our members have worked very, very hard for almost a year to work through this budget process. I’ll say from a personal perspective that it’s very frustrating because, if I can’t take people at their word, then I don’t know how I can negotiate with them.”

In other budget-related news, the House did pass two pieces of legislation relevant to the process.

The Capital Debt Facilities Act legislation, passed by the House along a 117-80 vote, lowers by $250 million the amount by which the state is authorized to borrow over a five-year period with a $50 million reduction occurring every year. 

Also, the legislation would lower by $200 million the amount of debt service the commonwealth is required to pay.

The legislation now returns to the Senate for consideration.

Additionally, the House passed the so-called Human Services Code bill by a 116-78 vote.

The legislation contained several controversial provisions providing for Medicaid work requirements, a total population managed-care pilot program and requirements that the Department of Human Services seek federal waivers in certain areas.

According to Gov. Wolf's office, he is going to veto the legislation.

“For months, Gov. Wolf has voiced his strong opposition to these backdoor Medicaid changes that could have widespread and potentially life-changing effects on the health and well-being of millions of Pennsylvanians. Seniors, people with disabilities, individuals suffering from substance use disorder and low-income working families don’t need their lives to be made even more difficult by politicians in Harrisburg,” said press secretary JJ Abbott. 

“Beyond the substance of these changes, they would cost millions of taxpayer dollars just to implement. There was no input from stakeholders or families that would be affected. We need to support Pennsylvania families, not create more hoops for them to jump through.”

The House stands at recess until Oct. 16, and the Senate remains in recess until the call of the Senate President Pro Tempore. 

Jason Gottesman is the Harrisburg Bureau Chief of The PLS Reporter, a news website dedicated to covering Pennsylvania’s government.