PA in deepest budget and debt mess since 1930s Great Depression

Gov. Tom Wolf and legislature ignore state constitution in budget fight, produce unbalanced budget

State lawmakers in 2016 are scraping bare the barrel of money, and law, going all the way back to the New Deal and the Great Depression

 

by Bill Keisling

This week Gov. Tom Wolf shocked the state’s political and financial communities by agreeing to allow a General Assembly-approved budget to become law without the revenues to support it.

This ignores not only of precedent, but also the state constitution, which requires a balanced budget.

As a result, much of this year’s budget, including its very legality and its nuts-and-bolts funding of government agencies and programs, remains up in the air.

Pennsylvania’s budget has not seen this much chaos since the days of the Great Depression, and the start of social programs in the 1930s.

Angry lawmakers in fact are threatening to sue Gov. Wolf and the legislature by invoking a 1932 New Deal-era state Supreme Court public welfare decision prohibiting appropriations not supported by funds in hand.

Making matters more precarious, no one is arguing that the budget is not balanced. It’s apparent that Pennsylvania’s GOP-controlled General Assembly and its Democrat governor are in violation of the state constitution.

What is not so apparent is what, if anything, Pennsylvania’s substandard and highly politicized courts can do to resolve what essentially are very bad political and economic circumstances, and a mountain of public debt.

GOP lawmakers are threatening to ask the court to order Gov. Wolf to cut expenditures by $1.2 to $1.4 billion across the board, in every program and department. (Part of the problem is that no one seems to know how much  revenue actually needs to be raised.) But should or can the courts be used to enforce what amounts to a political settlement on the state budget? What happens next year?

No one seems to have thought any of this out.

 

Balanced budget enshrined in state constitution

Article VIII of the Pennsylvania constitution, Section 12, reads:

“Annually, at the times set by law, the Governor shall submit to the General Assembly… a balanced operating budget (including) … proposed expenditures … and estimated revenues from all sources. If estimated revenues and available surplus are less than proposed expenditures, the Governor shall recommend specific additional sources of revenue sufficient to pay the deficiency and the estimated revenue to be derived from each source.”

Section 13 furthermore reads:

“Operating budget appropriations made by the General Assembly shall not exceed the actual and estimated revenues and surplus available in the same fiscal year.”

Even so, at a press conference July 10 announcing his intentions, Gov. Wolf oddly praised the legislature that is defying the state constitution. Wolf also praised the overdue and unfinished budget that most seem to agree is more than $1 billion in the red.

“This budget looks out for the bottom line,” Wolf said, “(by) only increasing spending where absolutely necessary. As has been said by Democrats and Republicans, this is a budget Pennsylvanians can be proud of. It puts us back on a path to fiscal responsibility, and a sustainable future.”

And that’s certainly putting lipstick on a very ugly pig.

The budget process this year, like last year, clearly is broken. Unlike last year, curiously, you wouldn’t know that by listening to Gov. Wolf.

Others were not so quick to praise.

Standard & Poor’s credit rating agency wasted little time threatening to lower Pennsylvania’s credit worthiness, which would drive up the commonwealth’s cost of borrowing.

In a press release dated this Monday, July 11, Standard & Poor’s wrote that its action “reflects recent developments that indicate that Pennsylvania will likely proceed into fiscal 2017 with a spending plan that is not supported by a revenue package or offsetting spending cuts to bring the budget into alignment.”

“Pennsylvania’s current revenue structure does not fully fund the spending plan, and assuming adoption of this plan, lawmakers would need to increase revenues by approximately $1.2 billion to balance the budget,” S&P wrote.

The credit agency continues, “If a revenue package is not achieved by the July 11 deadline, and as enacted, the budget would not be balanced, even assuming the use of reserves.

“We have previously understood that Pennsylvania’s constitution requires the state to approve balanced budgets each year, although there is no legal requirement that budget remain in balance during the year. However, the ability to enact a spending plan for fiscal 2017 in the absence of a balance revenue package would call the strengths of the constitutional balanced budget requirement provision into question. The provision has not previously been tested in this manner, and if the unbalanced budget were challenged in court, the outcome is unclear.

“If it is determined that the commonwealth can enact an unbalanced budget, we could lower our assessment of its government framework.”

In other words, Standard & Poor’s is saying, if the state’s written constitution and its laws are ignored, no one is going to trust loaning money to Pennsylvania.

So this is not just a political and a financial crisis. It becomes a constitutional crisis, and a crisis of confidence.

Passing an unbalanced budget also invites legal challenges.

A group of GOP lawmakers, angered at being shut out of the process, is threatening to sue Gov. Wolf and the legislature, citing a 1932 case, Commonwealth ex rel. Schnader v. Liveright.

The Schnader v. Liveright case dates from a time during the Great Depression and the New Deal when there were still constitutional prohibitions in place preventing social welfare programs and the encumbrance of public debt to address social ills.

In her book, Social Legislation (Appleton-Century, 1940) Helen Clarke writes, “Many of the states were cramped by constitutional restrictions which prohibited the appropriation of public money in aid of any individual and incurring indebtedness for such aid.” The constitutions of thirteen states, including Pennsylvania, “contained definite limitations on state aid to individuals.”

“The experience of Pennsylvania illustrates the problem the courts encountered with new types of assistance legislation,” Prof. Clarke writes. “Pennsylvania had long recognized its duty to care for the needy under its poor laws. In 1931 the Pennsylvania legislature passed an emergency relief law appropriating $10,000,000 to the state’s Department of Welfare for unemployment relief and assigning the distribution of funds to local poor-law authorities.

“A friendly suit was initiated in 1932 to test the constitutionality of this law.” (The full caption of the case is Commonwealth of Pennsylvania ex. rel. William A. Schnader, Attorney General v. Alice F. Liveright, Secretary of Welfare of the Commonwealth of Pennsylvania et al.)

The state Supreme Court shot down the law, leading to a 1933 constitutional amendment “to allow payment of assistance to aged persons without means of support.”

The other issue explored in Schnader v. Liveright involved the constitutional limitation of the state and localities to borrow funds for these programs. “The states found methods of circumventing constitutional limitations on borrowing by diverting moneys from one fund to another,” writes Clarke.

To the point of today’s budget crisis, writes Rosalind Branning in Pennsylvania Constitutional Development (University of Pittsburgh Press, 1960), in Schnader v. Liveright “the Pennsylvania Supreme Court ruled appropriations may not legally exceed official estimates of expenditures by more than one million dollars.”

From all this we see state lawmakers in 2016 are scraping bare the barrel of money, and law, going all the way back to the New Deal and the Great Depression.

The 1930s were a time when there was no income or sales tax in Pennsylvania. (There wouldn’t be a state sales tax until 1954, and there was no income tax until 1971.)

Lawmakers asked voters to approve a constitutional convention in 1935 to address these taxation issues, but a 56 percent majority voted down the proposal.

What happened next set the stage for modern Pennsylvania.

“The state resorted to a variety of ’emergency taxes,'” writes Branning. “Faced by the financial crisis resulting from mounting costs in spite of the constitutional compulsion of as balanced budget, state leaders discovered a means of evasion of the constitutional stricture on borrowing — the corporate authority. Thus the Turnpike Commission and the Pennsylvania State Authority were created and vested with the authority to borrow money on their own credit.”

But this week credit rating agency Standard & Poor’s signaled the party might be over.