2021/22 Budget-in-Depth

By House Appropriations Committee Staff , | 23 days ago

2021/22 Budget Package

The General Assembly passed a 2021/22 General Appropriations bill in late June. A day before the new fiscal year was set to begin on July 1, the governor signed SB 255, but line-item vetoed a portion of funds provided to the Auditor General.

Included with the General Appropriations bill were the “housekeeping” bills involving agencies such as the PUC, Gaming Control Board, Small Business Advocate, SERS and PSERS, and the non-preferred appropriations.

Gov. Wolf also signed the Fiscal Code, Administrative Code, Tax Code and Public School Codes into law, which have budget related implications.

The General Assembly did not enact a capital budget for 2021/22, which is required to be annually enacted by the Pennsylvania Constitution. The commonwealth last enacted a capital budget in 2020/21.

The 2021/22 budget package includes the following, which were all signed by the governor June 30:

  • General Appropriations (Act 1A/SB 255),
  • “Housekeeping” Appropriations (Acts 7A-15A/HBs 1508-1516),
  • Non-Preferred Appropriations (Acts 2A-6A/SBs 265-269),
  • Fiscal Code (Act 24/HB 1348),
  • Administrative Code (Act XX/HB 336),
  • Tax Code (Act 25/HB 952),
  • Public School Code (Act 26/SB 381).

Revenue

General Fund revenues for the 2020/21 fiscal year finished $3.44 billion above the official estimate, with total revenues of $40.39 billion. About $1.8 billion of total revenue collected this fiscal year were due to the pandemic-related timing shifts of due dates for PIT and CNIT final payments from April and May 2020 into July and August of the new fiscal year. These shifts will not recur in 2021/22.

The official revenue estimate for 2021/22 certified by the Secretary of Revenue and the Secretary of the Budget is $42.536 billion, an increase of $2.14 billion or 5.3 percent. This increase is driven by miscellaneous non-tax revenues, which includes $3.841 billion transferred to the General Fund from federal American Rescue Plan Act resources, as appropriated in the General Appropriations Act.

Tax revenues are projected to decline by $1.17 billion year over year, or -3.0 percent as the timing of payments returns to a more normal pattern.

Rainy Day Fund

The Fiscal Code amendments require a transfer of 100 percent of the 2020/21 General Fund ending balance to the Budget Stabilization Reserve Fund instead of the normal statutory 25 percent transfer. The transfer is estimated to be about $2.6 billion. The current balance in the Rainy Day Fund is $243.6 million, following a $100 million transfer out of the fund in Dec. 2020 to help balance the 2020/21 budget.

Pennsylvania’s Rainy Day Fund has ranked as one of the lowest among other states for many years following the Great Recession. The highest amount in the fund was $755 million at the end of 2007/08, which was transferred out in its entirety in 2009. The fund remained near zero, and there were no transfers into the account until 2018 when $22.4 million was transferred in, followed by an additional $316.9 million in 2019. At the start of 2020/21 the median amount among states was enough to cover 28.5 days’ worth of General Fund spending, or 7.8 percent according to Pew. This transfer of $2.6 billion would give Pennsylvania 27.1 days’ worth of spending, or 7.4 percent of expenditures. This is much closer to recommended levels for a Rainy Day Fund; however, these levels of savings are usually accumulated over many years.

Tax and Revenue Changes

Tax Code amendments that accompany the budget package include a variety of changes, but no broad-based changes to rates or base. The most notable changes are:

  • Sales tax exemption for computer data center equipment,
  • Sales tax exemption on helicopter simulators,
  • Sales tax exemption on breastfeeding supplies,
  • Tax credit integrity language in response to a 2019 grand jury investigation, and
  • An apportionment change to the Manufacturing Innovation and Reinvestment Deduction.

Additional changes include restructuring of internal qualifications of the film tax credit and concert tour tax credit, date changes to Keystone Opportunity Expansion Zones and several other minor changes and technical fixes.

The net cost of these changes is estimated at $33.9 million in 2021/22 and $92.9 million in 2022/23. For more detail, please see the Appendix for a Tax Code summary.

Transfers

The budget took steps to repay loans incurred by the General Fund from other special funds.

Workers’ Compensation Security Fund Loan Repayment

In January 2021, the General Assembly borrowed $145 million from the Workers’ Compensation Security Fund (WCSF) to support the Hospitality Industry Recovery Program (CHIRP) established by Act 1 of 2021 (SB 109), which provided grants to counties to provide support to hotels, restaurants, bars and taverns. The loan was initially structured to be repaid by 2029. With the supplemental appropriation, this loan is now fully repaid.

While the most recent loan will be repaid through the enacted budget, the commonwealth has two other loans from the WCSF outstanding. The first loan, $165 million that helped backstop the underfunding of the Medical Assistance budget by the General Assembly in 2016/17, has seen its repayment extended twice and is currently due by July 1, 2024. The second $185 million loan was part of a budget-balancing transfer package enacted with the second part of the 2020/21 budget in November 2020.

Underground Storage Tank Indemnification Fund Repayment

A loan of $100 million was made from the Underground Storage Tank Indemnification Fund (USTIF) to the General Fund on October 15, 2002, in accordance with Act 91 of 2002. Repayment of the loan was deferred several times, and Act 72 of 2013 changed the repayment of the $100 million loan to the General Fund to before July 1, 2029.

As of June 2021, $67.5 million was owed in principal and an additional $18.979 million was owed in interest. The budget included a $86.479 supplemental appropriation in 2020/21 for the full repayment of the $100 million loan and outstanding interest.

Special Fund Transfer Repeals

Before it became clear that tax revenues would recover strongly from the pandemic, the General Assembly included $431 million in transfers from special funds and $100 million from the Rainy Day Fund to help ensure the budget was balanced. The 2021/22 budget repeals $59.5 million of these transfers, specifically:

  • Historical Preservation Fund - $4 million
  • Racing Fund - $10 million
  • PENNVEST Fund - $10 million
  • PENNVEST Drinking Water Revolving Fund - $26.5 million
  • PENNVEST Water Pollution Control Revolving Fund - $9 million

As proposed in the executive budget, the amounts allocated from PENNVEST funds will still be used to assist in budget balancing. Instead of being transferred, they will accelerate debt service payments into the Capital Debt Fund. This lowers the debt service appropriation requirements for the 2020/21 fiscal year. The accelerated debt service payments will be recouped over four years back to the PENNVEST Redemption Fund (which pays the debt service on general obligation bonds issued for PENNVEST).

American Rescue Plan – State Fiscal Recovery

The American Rescue Plan Act included a total of $350 billion for state and local fiscal recovery assistance. Funds can be used in four domains:

  • To respond to the COVID-19 pandemic and its economic effects,
  • To replace revenue loss for the provision of government services due to COVID-19 relative to revenues collected in the most recent full fiscal year prior to the emergency,
  • To provide premium pay up to $13 per hour above regular wages for workers performing essential work, and
  • To invest in water, sewer, and broadband infrastructure.

Pennsylvania received $7.291 billion for State Fiscal Recovery and $6.149 billion was allocated to local units of government, either directly or indirectly, for their recovery activities.

Of the $7.291 billion, the 2021/22 enacted budget provides $759 million in relief, transfers $3.841 billion to the General Fund to replace lost revenues in the 2021/22 fiscal year, and reserves the remaining $2.691 billion to transfer to the General Fund in future fiscal years.

COVID-19 Response Restricted Account
American Rescue Plan Act Appropriations - SB 255
($ amounts in thousands)
Agency Appropriation Amount
State Fiscal Recovery Funds   7,291,328
Executive Offices COVID Relief - ARPA - Transfer to General Fund 3,841,000
Executive Offices COVID Relief - ARPA - Transfer to EMS Operating Fund 5,000
Executive Offices COVID Relief - ARPA - Pandemic Response 372,000
PASSHE COVID Relief - ARPA - State System of Higher Education 50,000
Human Services COVID Relief - ARPA - Long Term Living Programs 282,000
PHFA COVID Relief - ARPA - Construction Cost Relief 50,000
  Subtotal - State Fiscal Recovery 4,600,000
  Remaining Balance - State Fiscal Recovery 2,691,328

Education - Pre-K to 12

Pennsylvania’s school funding system suffers from inadequate and inequitable state support. The 2021/22 budget represents another incremental step toward fixing these issues, but many policymakers lament a missed opportunity to make the structural changes proposed by the governor.

Basic Education

Basic education funding is the largest state education subsidy, representing about half of all the funds the state sends to school districts each year.

The 2021/22 budget increases funding for basic education by $300 million, or 4.8 percent. The Public School Code (SB 381) specifies that $200 million of this increase will be added to the funds distributed through the fair funding formula. The Fiscal Code (HB 1348) distributes the other $100 million through a new mechanism, referred to as “Level Up”, that provides targeted funding for the 100 school districts (bottom 20th percentile) with the lowest spending per weighted student. Weighted students are a more apples-to-apples way to compare spending since it takes into account the fact that some students (e.g., those living in poverty or who speak English as a second language) require more resources in order to meet academic standards.

The Fair Funding Formula

Since 2015/16, new basic education funding has been distributed through the bipartisan fair funding formula. In 2021/22, $899 million, or 13.7 percent, of the $6.56 billion basic education funding total will be distributed through the fair funding formula’s annually updated factors (e.g., enrollments, poverty levels, and household income). The other $5.56 billion is subject to “hold-harmed,” where all the historical inequities that were in place in 2014/15 get locked into the distribution.

Generally, it is the school districts that have seen growing enrollments, have high taxes, or concentrated poverty that continually get shortchanged by the state not distributing all funds through the fair formula. Students of color disproportionately attend school districts not receiving their fair share of state funding. Redistributing all of the funding fairly without growing the pie would create significant winners and losers, which is the largest barrier to 100 percent fair funding.

In his budget proposal, Gov. Wolf called for a $1.3 billion, or 22 percent, increase to bypass the winners and losers predicament. An investment of this size would enable all existing basic education funding to be distributed through the fair formula while ensuring every school district would get an increase. By the end of 2020/21, with strong state revenues generating a surplus north of $3 billion, it was clear that the governor’s proposal could be implemented without the tax increase on which it was initially predicated.

Ultimately, the enacted budget only marginally increased the amount of funds being distributed through the fair funding formula. However, for the first time since the fair funding formula took effect, a new distribution method has been added to the mix.

Level Up

The Level Up supplement uses elements of the fair funding formulas for basic and special education to direct funding to the 100 school districts (PA has 500 total) that have the lowest spending per weighted student. Weighted student is defined as the sum of the following add-on weights in the basic education formula: acute poverty, poverty, concentrated poverty, English Language Learners, and charter school students; plus the three weighted tiers of special education students.

The Level Up funds are geographically dispersed, impacting rural and urban areas alike.

Other

The budget increased the Ready to Learn Block Grant by $20 million, or 7.5 percent, but there was no statutory distribution of these added funds. Per Section 2599.6 of the Public School Code, the $268 million total from 2020/21 will be distributed to school districts and charter schools in 2021/22 in the same amount as in 2018/19.

A note on the appropriation for School Employees’ Social Security:

The state reimburses school districts, Intermediate Units, Area Career and Technical Centers, and Community Colleges for at least half of their employer costs for social security and Medicare. Beginning in 2019/20, the school district portion of this reimbursement was folded into the basic education funding appropriation. There is no apparent benefit to this move, but the drawbacks include less budget transparency and added administrative hurdles.

According to a news report, the House Republican caucus insisted on this change, making the unsubstantiated claim that PA was not getting credit for this state spending in national comparisons. The methodology in the U.S. Census’ Annual Survey of School System Finances, a frequently cited national comparison for education funding that ranks PA as 45th nationally (6th worst) in terms of the state share of education spending, indicates that social security contributions by the state fall under “staff improvement programs” and are counted in revenue from state sources regardless of where they are appropriated.

Basic Education Funding (BEF) Appropriation
($ amounts in thousands)
Actual
FY18-19
Actual
FY19-20
Enacted
FY20-21
Revised
FY20-21
Enacted
FY21-22
21-22 Enacted
less
20-21 Revised
Basic Education Funding $6,095,079 $6,742,838 $6,810,389 $6,794,489 $7,066,773 $272,284 4.0%
BEF Portion $6,095,079 $6,255,079 $6,255,079 $6,255,079 $6,555,079 $300,000 4.8%
Social Security Portion $0 $487,759 $555,310 $539,410 $511,694 -$27,716 -5.1%
Note: 2020/21 amounts include $37.6 million to cover prior years' shortfalls; 2020/21 current year costs are $501.8 million.

Special Education

Special education is consistently identified as a top cost-driver for school districts. The state subsidy has simply not kept pace with the growing costs of providing services. Since 2008/09, local taxpayers have picked up 89 percent of the increased special education costs, and the state share has fallen from 32 percent to 22 percent. In order to reverse this trend, the $50 million, or 4.2 percent, increase in the enacted 2021/22 budget must be the start of a sustained investment.

Early Childhood Education

The enacted 2021/22 budget provides a $30 million, or 11 percent, increase in funding for high quality early learning. Under Gov. Wolf's tenure, the number of state-funded slots has more than doubled.

The enacted 2021/22 budget provides a $30 million, or 11 percent, increase in funding for high quality early learning. Under Gov. Wolf's tenure, the number of state-funded slots has more than doubled.  Actual Available Enacted Enacted Increase
FY21-22 Less FY20-21
Gov. Wolf's Record
FY21/22 Less FY14-15
FY14-15 FY20-21 FY21-22 Δ Δ
Pre-K Counts Funding Level $97.3 M $217.3 M $242.3 M $25.0 M 11.5% $145.0 M 149.0%
Estimated # of State-Funded Students 13,456 26,461 29,261 2,800 10.6% 15,805 117.5%
Head Start Supplemental Assistance Funding Level $39.2 M $64.2 M $69.2 M $5.0 M 7.8% $30.0 M 76.6%
Estimated # of State-Funded Students 4,781 7,790 8,261 471 6.0% 3,480 72.8%
Early Childhood Education Subtotal: Funding Level $136.5 M $281.5 M $311.5 M $30.0 M 10.7% $175.0 M 128.2%
Estimated # of State-Funded Students 18,237 34,251 37,522 3,271 9.6%