PA’s structural deficit could shape budget battle for years to come

Speaking from the steps of the Capitol rotunda on Feb. 6, Gov. Josh Shapiro laid out an ambitious $48.3 billion spending plan that includes making sizable investments in public education, legalizing cannabis for recreational adult use, raising Pennsylvania’s minimum wage, and regulating so-called games of skill, among other priorities.  

He also called attention to the robust state of the state’s coffers – which should have roughly $14 billion in reserves by the end of this fiscal year – and proposed investing some of that money into programs and initiatives that help the state and its residents. 

“Look, it is not a badge of honor, nor is it something to be politically proud of for some lawmakers out there to say: ‘I took more money from the good people of Pennsylvania than I needed and then bragged about how I just kept it in some bank account here in the Capitol.’ Of course we need to prepare for an emergency and a rainy day – and this budget does that,” Shapiro said before making his pitch to state lawmakers, adding that “I don’t want to take any more from the people of Pennsylvania than we need to. Instead, I want to invest in them.” 

Under Shapiro’s spending proposal, Pennsylvania would have approximately $3.4 billion left over in the General Fund at the conclusion of the 2024-25 fiscal year, and the state’s Budget Stabilization Reserve Fund, more commonly known as the Rainy Day Fund, would finish the fiscal year with $7.9 billion – meaning the state would have roughly $11.3 billion in reserves left over.  

But complicating matters is Pennsylvania’s structural budget deficit – the state is expected to spend more than it collects in revenue over the next several years, according to both Shapiro’s executive budget and data from the state’s Independent Fiscal Office.

Matthew Knittel, the director of the IFO, told lawmakers in February that Shapiro’s financial projections, as well as the IFO’s own projections, both show a structural budget deficit. According to the IFO, which conducts fiscal, economic and budgetary analyses on state finances, that deficit – also sometimes referred to as an imbalance – is set to grow over the next five years. 

Knittel said during the IFO’s budget hearing that structural imbalances have been present in past projections released by the office. However, because of the state’s balanced budget requirement, Pennsylvania budgets cannot have expenditures that exceed revenues.

“Every time we’ve made a forecast, we find that we’re not in structural balance … that cannot occur – the budget has to be balanced,” Knittel told Senate lawmakers at a February budget hearing. “These past few years, due to the large infusion of federal monies, we’ve had a surplus. But by and large … we’ve had a structural deficit since I’ve been here.”

Marc Stier, the executive director of the Pennsylvania Policy Center, a progressive think tank, also noted that Pennsylvania’s structural budget deficit is far from new. The state has previously used what he called “budget gimmicks” to balance the state budget on paper. “This is not a new problem – it’s a problem the state faced before the pandemic,” he told City & State.

“If you look at what I call operating expenditures and revenues – the money that comes in every year and the money that goes out every year – we’re going to run about a billion-dollar deficit this year,” Stier said. “That’s going to increase to $3 billion next year, if the governor’s budget is enacted, and continue that way for a couple of years – and then decline in ’28-’29 to a little over $2 billion.

“At that point, basically, the surplus – which at the end of June was about $14 million – will be gone,” Stier continued.

Josh Goodman, a senior officer with The Pew Charitable Trusts whose work focuses on state fiscal health, told City & State that factors driving Pennsylvania’s imbalance include rising Medicaid costs associated with the state’s aging population, as well as recent tax cuts.

“Some of the factors driving the deficits in Pennsylvania are actually pretty similar to the factors driving deficits in other parts of the country,” Goodman said. 

Stier said state-level corporate tax cuts, both historic and recent, have worsened Pennsylvania’s long-term projections and contributed to its structural deficit. 

“We’re basically looking at a self-inflicted wound,” Stier told City & State. “We cut corporate taxes on the assumption that this would create economic growth, even though we haven’t seen much of a boost in economic growth and there’s very little evidence that cutting corporate net income taxes can have that kind of impact.”

The Shapiro administration has maintained that even if all of the governor’s policy goals are included in this year’s budget, the state will still have more than $11 billion in reserves at the end of the 2024-25 fiscal year, and that his spending plan won’t steer the state toward financial doom.

“To be clear: My budget is balanced,” Shapiro said during his budget address. “Consider this: Even if we funded every single one of the initiatives I talked about today and contained in my budget, we would still have an $11 billion surplus at the end of June 2025. $11 billion!”

Budget Secretary Uri Monson echoed that sentiment during the state budget office’s appropriations hearing. “We had another year of structural surplus where we actually brought in more than we spent,” Monson said. “And as a result, we are making the recommendations we are because, as the governor has stated quite clearly, he believes this is the time to invest in Pennsylvania and Pennsylvanians.” 

As lawmakers in the state legislature take part in budget negotiations over the next several months, some lawmakers and stakeholders have already raised concerns about Shapiro’s budget and how it would contribute to the state’s structural imbalance. 

Shapiro’s critics say his budget represents an inflection point – one where commonwealth leaders can either choose to spend or save.

Several weeks after the governor’s budget address, the Commonwealth Foundation, a right-leaning Harrisburg-based think tank, released its own analysis of Shapiro’s budget. Commonwealth Foundation Senior Vice President Nathan Benefield questioned the administration’s estimates. 

“Pennsylvania has lost nearly 65,000 residents to other states over the last two years – working adults are leaving the commonwealth. Yet, the Shapiro administration believes the economy will surge and state revenues will exceed the IFO’s calculations by more than $850 million in fiscal years 2024-25 and 2025-26,” Benefield said in a statement. “The governor’s math doesn’t add up.”

Republicans in the General Assembly seem to agree. “Gov. Shapiro’s budget spends more than it takes in every year. You can’t do that with your personal budget. People in the audience with us today can’t spend more than they earn … I can’t do that. No one can do that – especially not state government,” state Sen. Scott Martin, the chair of the Senate Appropriations Committee, said during this year’s budget hearings.  

While some are already sounding the alarm over the governor’s plan, Monson contends that the state’s present financial position, which he said is bolstered by the currently unspent reserves, makes the choice clear. 

“We can sit in a bunker surrounded by money, cans of food, whatever, and wait for all those bad things to happen – or we can try to invest and invest in our community,” he said.

This year’s budget cycle aside, Goodman said that failing to address a long-term structural deficit can have significant impacts, and pointed to Illinois as an example: The state had a $6 billion deficit and had amassed $14.6 billion in unpaid bills in 2017. 

“Eventually, what they were doing was simply not paying bills on time to a range of nonprofits (and) small businesses that contract with the state. That directly affected all those organizations that were providing services to people in Illinois; it also meant that they were paying more and more interest on those unpaid bills,” Goodman added. “So the problem was just getting deeper and deeper and deeper.”

He added that there are two primary ways states can address such a crisis: “Fundamentally, if you have a structural deficit, you either need more revenue or less spending to make the numbers match.”

Stier said there are “lots of options” for narrowing the commonwealth’s structural deficit. In the absence of budget cuts, he said, lawmakers could pass legislation to close tax reporting loopholes. He added that the state should reconsider planned cuts to the state’s Corporate Net Income Tax rate and touted a Democratic tax plan that seeks to change how the state taxes income, which bill sponsors estimate would generate between $2.6 billion and $6.2 billion annually. Regardless of how – and whether – lawmakers address the state’s imbalance of revenues and expenditures, Stier said that for the good of their fellow Pennsylvanians, they have no choice but to tackle the issue sooner rather than later.

“The longer you wait to address a long-term problem that is obvious to everyone,” he said, the harder “it’s going to be to address the problem.”