Governor s Budget Proposal. Rep. William F. Adolph, Jr. Chairman

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1 Governor s Budget Proposal David Donley Executive Director Rep. William F. Adolph, Jr. Chairman Ritchie LaFaver Deputy Executive Director

2 General Fund Revenue o General Fund revenues for FY are estimated to grow by 1.5%. General Fund Spending o Proposed FY General Fund spending is $28.44 billion. General Fund spending at the proposed level represents a $678 million or 2.4 percent increase over available funds. The proposed General Fund spending growth falls below TABOR allowable growth rate of 2.54 percent. TABOR, or the Taxpayer s Bill of Rights, allows for budget growth that factors in inflation growth and population growth. The Governor s budget also contains three major policy proposals. o Transportation Funding o Liquor Privatization o Pension Reform (only plan tied to the General Fund budget)

3 FY Projected General Fund Revenues Capital Stock & Franchise Tax 1% Inheritance Tax 3% Non-Tax Revenue 2% Cigarette Tax 3% All Other Taxes 10% Sales & Use Tax 32% Personal Income Tax 40% Corporate Net Income Tax 9%

4 Corrections $1.93 Billion 7% Proposed FY General Fund Spending: $28.44 Billion Debt Service $1.17 Billion 4% All Other $2.66 Billion 9% PreK-12 Education $10.05 Billion 35% Public Welfare $10.97 Billion 39% Higher Education $1.66 Billion 6%

5 Policy Proposals

6 Pennsylvania s General Fund budget supports employer contributions for two pension systems: State Employees Retirement System (SERS) For state government employees Public School Employees Retirement System (PSERS) For Pennsylvania public school teachers/ employees Total number of members (employees and retirees) in each system: SERS: 228,000 PSERS: 589,000 Current actuarial assessments of the systems indicate there is an unfunded liability of $41 billion. This represents the amount of money that would be needed if we had to pay the total promised benefit to all 817,000 members at one time.

7 What Caused the Unfunded Liability? Poor market performance Post-9/11 downturn The Great Recession Inadequate/ Suppressed Employer Contributions Benefit Enhancements Multiplier increases Vesting period reductions All these variables together created an unfunded liability which requires higher mandated employer payments to meet the projected actuarial need. The state and school districts are responsible for employer contributions. The state pays approximately ½ of school district required employer contributions

8 The Governor s pension reform plan proposes: o No changes for current retirees. o Closing the current plans and moving all new employees to a 401(k) style plan. o A prospective change to future benefits for current employees by reducing the multiplier for future service from 2.5 to 2.0. o Allowing current employees to keep a 2.5 multiplier by paying a higher employee contribution amount. o Benefit changes would not apply until 2015 The Governor makes the above reforms so he can reduce rate collars on employer (Commonwealth of PA and school districts) pension payment obligations for FY The money left over from the rate collar reduction is then used in other areas of the budget.

9 In April of 2011, Governor Corbett issued an executive order that established a Transportation Funding Advisory Commission (TFAC) to review transportation needs in the Commonwealth. In August of 2011, the TFAC issued a report that outlined transportation needs and made some funding recommendations. PennDOT maintains: 40,000 miles of roads and 25,000 bridges TFAC identified an annual transportation funding need of approximately $3.5 billion. The funding need was created by: Underfunding transportation needs over a number of years Aging infrastructure Fewer fuel taxes collected due to better vehicle fuel economy Generally, the funds are needed to repair and maintain 5,200 structurally deficient bridges and 8,400 miles of road with a poor International Roughness Index score.

10 Source: TFAC Executive Summary CAFE: Corporate Average Fuel Economy

11 To address the transportation funding needs identified in the TFAC report, the Governor presented a funding plan in his proposed budget for FY The Governor's Transportation Funding Plan : Phases-out the cap on the Oil Company Franchise Tax (OCFT) over a five-year period. Reduces the flat liquid fuels tax assessed at the pump by one cent in and another reduction of one cent in This will reduce the current liquid fuels tax from 12 cents to 10 cents, a 17 percent reduction. Changes vehicle registration renewals to a biennial cycle, and moves driver s license renewals to a six-year cycle. Creates the Multimodal Transportation Fund to assist transit, freight railroads, airports, ports and waterways.

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13 Estimated Additional dollars for Roads, Bridges and Transit $509 million $993 million $1.148 billion $1.257 billion $1.446 billion Source: Governor's office

14 Pennsylvania and Utah are the only two states that have government-run liquor sales. The Commonwealth sells wine and sprits through 605 state stores operated by the Pennsylvania Liquor Control Board (PLCB). In FY the PLCB will provide approximately $550 million in the form of profits and taxes to fund state government programs in the General Fund as well as state police, and drug & alcohol programs. In addition to selling liquor and wine in Pennsylvania, the PLCB is charged with enforcing the Pennsylvania Liquor Code.

15 In his budget address, the Governor presented a plan to completely privatize the sale of wine and spirits in Pennsylvania. The plan would sell off both retail and wholesale operations starting with retail outlets first. The divestiture process would take approximately 4 years. The Governor s plan as presented is revenue neutral and is anticipated to produce $1 billion in one-time funds from the sale of licenses to sell wine, spirits and beer. The Governor s plan would auction off 1,200 licenses to sell wine and sprits. Within the 1,200 licenses, there would be licenses reserved for three categories: big box/grocery retailers, large chain retailers and small businesses. The plan would also sell 5,000 beer and wine licenses. Beer and wine licenses would be reserved for the following categories: big box retailers, grocery stores, convenience stores and pharmacies.

16 The Governor s plan proposes using the $1 billion in proceeds from the initial sale of licenses for public education. The proposal would create the Passport for Learning block grant program. The grant program would distribute $1 billion to school districts over four years. School districts can use the grant for four specific areas. School safety Early learning Ready by 3 programs for k-3 students Individualized learning programs for students Science, Technology, Engineering and Math (STEM) enrichment The Department of Education would monitor the use of funds to ensure they are used for one-time expenses and not used to create recurring expenses that would need to be backfilled after the four-year grant program ends. This grant program is not included in the General Fund proposed budget, but would rather be in addition to the budget that is adopted for FY

17 Analysis by Budget Area

18 Overall, K-12 education funds are increased by $338 million or 3.4 percent. $223 million of the increase is for the state s portion of increased pension costs. The proposal increases Basic Education Funding by $90 million. Subsidies for Pennsylvania s 262,000 special education students are level funded at $1.03 billion. Accountability Block Grants are level funded at $100 million. Funds for Pre-K Counts early learning programs are increased by $4.5 million or 5.4 percent.

19 All higher education appropriations are level funded. A total of $1.66 billion is dedicated for higher education-related programs. The proposed budget would provide the following amounts to Pennsylvania higher education institutions: Pennsylvania's 14 state-owned schools: $413 million Penn State University: $228 million University of Pittsburgh: $136 million Temple University: $ 140 million Lincoln University: $ 11 million On February 1, 2013 the presidents of all these institutions joined Governor Corbett and made a commitment to keep tuition increases as low as possible given the state s commitment to continue to support these institutions during difficult economic times.

20 Overall, the department s budget is proposed to increase by $ million or 3 % for a total of $10.97 billion. o The increase is largely driven by caseload and rate increases. Intellectual Disabilities: An additional $19.9 million is proposed for Community Waiver Programs to provide community-based services for an additional 380 individuals on the waiting list, 700 special education graduates and 100 individuals residing in state centers. Obstetrical and Neonatal Services; Home and Community-Based Services; Hospital- Based Burn Centers and Trauma Centers are level-funded. Autism Services: An additional $2.15 million is provided for a total of $15.15 million. The added funding will help serve an additional 118 individuals. Domestic Violence and Rape Crisis: Both programs receive a 10 percent increase.

21 Funding for corrections increases overall by $60.6 million or 3.2 percent. o A savings of approximately $22 million is realized as a result of closing the facilities at Cresson and Greensburg and the opening of a more efficient facility at Benner. o Savings are also realized as a result of the recently passed Justice Reinvestment Initiative. The program slowed the growth of Pennsylvania s prison population and directed offenders to programs that reduce the likelihood of recidivism. Source: Governor's Executive Budget

22 Department of Conservation and Natural Resources (DCNR) The agency is proposed to receive $52.8 million in the General Fund - an overall funding increase of $37,000 or 0.1% compared to FY The funds help the agency manage the 120 state parks under their jurisdiction. In the fiscal year our state parks registered 39 million park visits. DCNR will receive a total of $47.9 million from the Oil and Gas Lease Fund to support the agency. Department of Environmental Protection (DEP) The agency is proposed to receive $125.5 million in the General Fund in FY , an overall funding increase of $639,000 or 0.5%. Environmental Protection Operations increases by $1.9 million.

23 All Other Spending : $2.66 Billion All other spending amounts to 9 percent of the total budget and supports the operation of some 32 other departments. Some of the other major departments include: Agriculture Attorney General DCED DCNR Labor & Industry Dept. of State Emergency Management Health Revenue Military & Veterans Affairs Governor s Office Judicial Branch Legislature DEP

24 The House and Senate Appropriations Committees will review information obtained at budget hearings with executive branch agencies. After the budget hearings conclude, legislators will seek input from their constituents on the Governor s proposed budget. With the feedback from constituents, legislators will begin negotiations with the Governor to draft a final budget. Legislators and legislative budget staff will continue to monitor state revenues and the economy to see how economic conditions change. A final budget will be introduced and approved by the House, Senate and the Governor by June 30th.

25 Governor s Budget Proposal