With PA Budget Deadline Approaching, Rainy Day Fund Debate Ensues

By Emily Scolnick | Pennsylvania Capital-Star

In a time when nearly half of states are cutting spending to balance the books, Pennsylvania is doing the opposite. 

Twenty-two states plan to reduce spending in their budget proposals for next year. Half are forecasting growth in their rainy day funds, or savings, according to a fiscal survey. 

But Gov. Josh Shapiro’s budget plan outlines a riskier strategy — one that increases spending by 5% and forecasts a depleted rainy day fund in two years. 

Wrangling over how to use these state savings — and how much risk is worth it — is adding pressure to budget negotiations between House Democrats, who approved Shapiro’s plan in April, and Senate Republicans ahead of the June 30 deadline. 

Many states have decided to keep their spending flat to stay balanced in the face of stagnant revenue and federal funding policy changes. The largest number of states since 2021 reported general fund spending cuts because of revenue shortfalls, according to the National Association of State Budget Officers’ survey. 

Pennsylvania, however, saw nearly one billion dollars more than expected in revenue this year from tax law changes — something House Appropriations Committee Chair Jordan Harris (D-Philadelphia) pointed to as evidence that the state can afford to spend more. 

“We are very conservative in our estimations,” Harris said. “It kind of kicks back any naysayers on projections that we’ve made on some of the revenue generators because we’ve always been conservative, and we’ve always outperformed our projections.” 

Shapiro’s budget proposal relies on revenue sources still up in the air, like fees on marijuana that’s yet to be legalized and regulated skill games. The Supreme Court ruled skill games as unlawful earlier this month, leading House Democrats to push Republican Senators to pass a steep tax that could offset some of the state’s costs. 

Still, five-year projections from the Independent Fiscal Office forecast the general fund surplus, which stands at a little less than one billion dollars, would be depleted for the 2026-27 fiscal year. The nearly $8 billion rainy day fund would follow suit by 2027-28. 

The IFO hasn’t updated long term projections for the decades-long structural deficit as it’s highly dependent on what’s enacted each year, wrote an IFO director, but it reached nearly $5 billion this May.

Risk analysis 

The state budget office doesn’t rely on the IFO’s reports for forecasting. They project the general and rainy day funds themselves and account for demographic trends to better evaluate risk, according to written comment from the Shapiro Administration. 

But compared to other states, Pennsylvania has fewer standardized practices that analyze budget risks. A Pew research report identified practices across the states that assess emerging risks among demographic, climate and technology changes. 

Many other states have tangible working groups and plans entirely dedicated to analyzing future budget risks. Pennsylvania, however, relies solely on written reports and estimations communicated with the state budget office, most of which Pew found to be written by the IFO.

Caitlyn Wan Smith, an officer with Pew and contributor to the report, said it can be challenging for states to incorporate long-term risks in a budget process that happens every year. Still, she said it’s important to consider whether budget officers examine forecast analyses. 

“Something that I would look for if evaluating a practice for robustness is, (the IFO) is doing this analysis, is that analysis being looked at by budget decision makers and incorporated into the budget process?” she said. 

The IFO wrote that they relay their reports to the budget office only through the release of public documents. Correspondence with the Shapiro administration doesn’t increase ahead of the budget deadline. 

Party contention 

House Minority Leader Jesse Topper (R-Bedford County) said it should be up to lawmakers to assess future spending and how much risk the state can take on, but where to allocate reserves is a point of contention between the parties. 

Republicans would rather use them for one-time expenditures, as research shows can reduce volatility, while Democrats favor putting them toward ongoing services for the people. 

“I think that’s where you see the major difference between the two parties,” Topper said. “We believe, if they do need to be used, it should be for a very specific purpose that is not gonna put budgets in the future in jeopardy.” 

The budget proposal pours nearly 80% of spending into the Department of Human Services and the Department of Education, each receiving roughly $20 billion. Roughly $1 billion in spending for Human Services would be put toward funding Medicaid. 

Harris affirmed services like public education and healthcare “are things that must happen” and what the rainy day fund should be used for — fixed costs he says need to be addressed as federal support falls. 

“I’ve had folks come into my office who, beforehand I think would have been supported by the federal administration, people who are now victims of these draconian cuts that we’ve seen at the federal level, and they are asking for the state to make up what has been lost,” Harris said. 

But Topper, along with other Republicans pushing back on the spending, said it’s difficult for him to support program expansions that the tax base will eventually not be able to support. 

He also said while the parties are trying to figure out an agreeable level of spending, there’s “a long way to go.” 

“(Democrats) see things a little differently,” he said. “If there’s money available to them, they will find a way to spend it and use that on new programs that they believe in their core are necessary.” 

The deadline to pass the budget is June 30. Over the last two decades, lawmakers delivered the majority of state spending plans late. 

Pennsylvania Capital-Star is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Pennsylvania Capital-Star maintains editorial independence. Contact Editor Tim Lambert for questions: info@penncapital-star.com.