The budget surplus is projected to soon run dry in Pennsylvania

HARRISBURG — Pennsylvania’s multibillion-dollar surplus will soon be halved according to a projection by a state budget watchdog, the result of a long-running structural deficit combined with a growing list of obligations competing for public dollars.

The commonwealth’s recent $47.6 billion budget increased spending by 6%, with more than $1 billion in new money going to public schools in response to a court ruling that found Pennsylvania underfunds poor districts.

However, the state brought in just $44 billion in net revenue last fiscal year. So to afford the spending plan, lawmakers are reaching into the state’s sizable cash reserves, which sat at roughly $13.6 billion as of June 30, according to the Independent Fiscal Office.

That total was roughly split between the state’s rainy day fund — the equivalent of a long-term savings account — and the state’s General Fund. The latter is essentially Pennsylvania’s checking account.

Lawmakers used $3.3 billion from the General Fund to balance the recent budget, according to the IFO. That money will be spent over the course of this fiscal year.

Pennsylvania will completely deplete the General Fund surplus by the next fiscal year, the IFO estimated based on expected spending, in-progress tax cuts, and revenue projections.

That will force lawmakers to tap into the rainy day fund to balance the budget due less than a year from now if they don’t find new revenue or cut spending.

While fiscal good fortune built the current surplus, Pennsylvania’s policymakers have historically struggled to create new revenue sources as the state’s budget increases annually. This year, Gov. Josh Shapiro pitched regulating slot-like skill games and legalizing recreational marijuana to raise millions in needed dollars, but the divided General Assembly didn’t adopt either.

The rainy day fund currently contains more than $7 billion, up from just $22 million only a few years ago. This meets the level that experts say states should keep on hand. Pulling money out of that fund would require a level of bipartisan support that’s been elusive.

The IFO’s estimate assumes a 4% increase in state spending in the 2025-26 plan, much of which would pay for contractually required increases in state workers’ wages and benefits and federally mandated human services spending. It assumes education would get only a modest, 2.4% increase in line with inflation.

No one who helped draft the spending plan is saying much about what’ll happen next year to sustain the state’s spending.

Christina Fonseca, spokesperson for state House Appropriations Committee Chair Jordan Harris (D., Philadelphia), said in an email that the IFO report made “certain assumptions to arrive at its conclusions regarding the status of both the Rainy Day and General Fund balances” that the caucus disagreed with.

Fonseca said the caucus supports a financial statement from the Governor’s Budget Office. However, she did not send the statement when asked and did not respond to follow-up questions about what assumptions the caucus disputed.

Matt Knittell, executive director of the IFO, acknowledged the gap between his agency’s projections and the governor’s. Either way, the difference is a matter of degree and not of substance.

“We both agree there is a substantial deficit,” Knittel said in an email.

For months, Democrats have downplayed the IFO’s recent projections by arguing that the state’s revenue has consistently grown. Speaking to lawmakers during a spring budget hearing, Budget Secretary Uri Monson said the state has averaged almost 4% annual revenue growth over the past 25 years.

“We are very conservative on the projections of where we’re going to be but the actual results have been growing surpluses,” Monson said.

Further spending is likely. Legislative Democrats wanted to appropriate $5.1 billion to underfunded school districts over several years in this budget but only secured $500 million.

Addressing a brewing crisis in public transit funding is a top priority for Shapiro and Democrats this fall. Systems received a one-time boost of $80 million in the recent budget; Shapiro had called for $1.5 billion over the next five years.

To afford these priorities, they’ll need a lot of new cash — either from new taxes, a booming economy, or another source — or make cuts elsewhere in the budget.

Spending down the surplus has short-term implications as well, said state Rep. Seth Grove (R, York), minority chair of the Appropriations Committee.

The state collects interest on its big surplus — by spending those dollars, that revenue will disappear. The state earned almost $780 million in interest from its cash reserves in the just-finished fiscal year, according to the Department of Revenue — nearly double projections.

Meanwhile, if the general fund gets too low during the year, the state will have to borrow money to pay employees and run other key government functions. While the state isn’t currently in danger of running out of operating money, it has in the recent past. That came with consequences, including a downgraded credit rating.

Grove noted that deficits are less manageable for states than they are for the federal government. “Unfortunately at the state level, we can’t print money,” Grove told reporters early this month.

The structural deficit — where annual costs exceed annual revenue — isn’t new.

For a decade-plus, Pennsylvania has consistently spent more than it brings in under Democratic and Republican leadership alike. Neither party has mustered the political will to find the right combination of spending cuts, tax increases, or growth-inducing policies to correct the issue.

Instead, the commonwealth’s budget has raised one-time revenues by expanding gambling, taking on debt, or using budgetary tricks that shift costs around to balance the books each year.

Even the current surplus — built on stimulus dollars and unexpectedly high tax revenues — hasn’t led to consistently smooth budgetary sailing, with three straight late budgets in a divided Harrisburg.

State Senate Republicans are typically more open to increased spending than their GOP colleagues in the state House. That dynamic played out again this year, with the upper chamber passing the budget deal with more than two-thirds support. The plan fell a dozen votes shy of the mark in the lower chamber amid widespread GOP opposition.

Grove, along with his fellow York County Republicans, called the spending plan “reckless” in a news release soon after it passed.

But fellow Republican and chief budget negotiator state Senate Majority Leader Joe Pittman said the budget was a compromise — a product of the realities of divided government.

Pittman had a recommendation for unhappy state House Republicans: “I think they need to get a seat at the table by retaking the majority.”

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