OPED: State financial transparency in decline
Mistakes of past financial decisions continue to plague the Commonwealth. Status quo financial decisions need to end. Bringing back special funds into the light of the budget process has multiple positive aspects for taxpayers and the financial stability of the commonwealth. Special funds need to be brought back into the General Fund and the budget process this fiscal year. Every year we delay, means more short-term borrowing expenses.
Recently, the Fiscal Policy Subcommittee of the House Appropriations Committee held a hearing on the impact of the successful Federal Tax Cuts and Jobs Act and the impact to the Commonwealth. One of those providing testimony was economist Robert Strauss, PhD, who presented robust testimony on Pennsylvania’s tax structure and finances. One aspect of Strauss’s testimony was on the financial transparency of the Commonwealth.
A portion of Strauss' testimony: “Pennsylvania like most states was forced in the 19th century to promise, after defaulting on its debt, to balance its budget in return for renewed access to capital markets. However, while access in one form or another has continued, it is worth noting that the extent to which Pennsylvania state government practices financial transparency has varied over the business cycle."
He noted that Figure 1 compared the amount of the General Fund to the state's consolidated accounts as reported by the U.S. Census Bureau's Governments Division across the period 1970 through 2016. In 1978, 51 percent of overall state spending was through the General Fund; however, that proportion collapsed between 1994 and 1995 to roughly 40 percent, and has been about 31 percent since 2011.
Rep. Jason Ortitay (R-Washington/Allegheny Counties) asked Strauss if the special and restricted funds — appropriations which were part of the General Fund but were shifted off line and have been on auto pilot — should be placed back into the General Fund. Strauss responded with an emphatic “yes.”
On top of providing greater financial transparency, bringing special funds back into the General Fund will also provide more cash-flow stability. Several special funds not only have dedicated appropriations, but they also have dedicated revenue streams from various taxes. As the state government established these special funds, it also transferred tax revenue directly to the funds.
Instead of the normal appropriations process, tax revenue going into the General Fund and the General Assembly appropriating funds, the special funds operate on autopilot outside of the budget process. By moving special funds back into the General Fund and appropriating expenditures out under the normal budget process, which can easily stabilize the general fund by $1 billion. The redirection of General Fund revenue into special funds has negatively impacted the General Fund.
Ironically, when the Treasurer does short-term borrowing to stabilize the General Fund, he borrows from these restricted funds and charges the general fund interest. While this practice is cheaper than borrowing from the private sector, we are borrowing against our own funds. By moving special funds back into the General Fund, we end the increased cost of interest payments, thus reducing costs to taxpayers.
Special funds were also a focus of the past budget debate. The final budget directed the governor to transfer $300 million from these funds into the General Fund. Instead, the governor has decided to unilaterally borrow $200 million. Mind you, this is on top of $1.5 billion which was borrowed against tobacco settlement money. This fiscal year’s budget was balanced on borrowing $1.7 billion, which means debt payments will increase and another revenue stream will be removed.
It also means as future budget expenses continue to grow, revenue streams will not be available and once again Harrisburg will be looking at your wallets.