Budget Roundtable Discussion

Budget Roundtable Discussion

Warmed-Over Budget Leaves Business Community Cold

a conversation with: Nick DiFrancesco, President/CEO, PACB; Matthew Brouillette, President and CEO, Commonwealth Foundation; Kevin Shivers, Executive State Director, National Federation of Independent Business; and David Taylor, President, Pennsylvania Manufacturers Association

Like a falcon without wings, Pennsylvania is limping into the second year of the Wolf Administration’s tenure without a full budget for the first year.

As the House and Senate Appropriations Committees hold three weeks of hearings in late February and early March on each departmental request for the 2016-2017 budget, the 2015-2016 budget idles in a state of purgatory, grounding efforts to spend money for schools, service providers and other vital needs.

Noting that “we are in uncharted waters,” PACB President Nick DiFrancesco asked the experts where the ship of state goes from here.

David Taylor, President of the Pennsylvania Manufacturers Association, was surprised to hear that Governor Tom Wolf delivered his second budget address on February 9 with a “striking” lack of “policy specifics.” Instead of outlining a broad vision for the future, Gov. Wolf used the opportunity to “scold the General Assembly,” which is a “strange negotiating tactic to berate the people whose support you ultimately need.”

Matthew Brouillette, President and CEO of the Commonwealth Foundation, said the governor’s fall from grace is particularly “disappointing” because the business community had “high hopes” for Gov. Wolf, expecting him to “bring private sector business principles to government.” As the CEO of his own company, Gov. Wolf had altered his own corporate pension system and balanced the books, and private-sector leaders were hopeful that business acumen would translate seamlessly to his role as CEO of the Commonwealth.

As a successful business person, Gov. Wolf was expected to possess the ability to work with others, collaborate, and reach agreements.

Instead, the governor seems to be stuck in gear in an unceasing quest to increase taxes, spending and the size of government, Brouillette, Taylor, and Shivers said.

In his second-year budget proposal, he is “doubling down,” offering “warmed-over policies that have, frankly, failed,” Taylor said. “It is very disappointing.”

Kevin Shivers, of the NFIB, agreed that there was such optimism and an expectation of collaboration in the beginning of Wolf’s term.

Instead, Shivers said, Wolf “ruled with an iron fist,” was “vindictive” and “dictatorial,” and crushed his opponents with “heavy-handed retribution.”

Shivers recalled that the sour tone began as early as the inaugural ball, when Gov. Wolf would not serve Yuengling beer because company principals had supported his campaign opponent.

The very next day, Gov. Wolf picked a fight with the Office of Open Records and the Senate, firing its popular Corbett-appointed director – former Senate employee Erik Arneson – and challenging the independence of the office. The courts have since reinstated Arneson.

The business community at first was ready to dismiss these moves as “freshman mistakes” that would soon be learned from, but regrettably, they carried through to policy – to this day.

Just recently, for example, the Administration demanded that Penn State University join Gov. Wolf in his campaign for higher taxes or face “significant repercussions.”

“This is off the deep end. This is purely partisan politics,” Shivers said.

Taylor said most businessmen and women learn from their mistakes or go under, but Gov. Wolf has not pivoted away from those first inaugural errors. He has still not risen above the “strife and turmoil” of his first year.

Because Gov. Wolf vetoed all of the June 30 budget and a “big chunk” of the budget passed in December, spectators wondered how the journey to his 2016-2017 budget would commence.

Remarkably, Wolf predicated his new budget for fiscal year 2016-2017 on $30.8 billion in spending. Significantly, the budget that passed the Legislature had $30.3 billion in funding – a full half a billion less. So after not getting what he wanted last year, he is asking for that and more.

Brouillette said Gov. Wolf must consider the historic majorities Pennsylvania now has in the General Assembly. The size of the majorities is the greatest it has been in 50 years, and is dominated by members of the opposite party, leading to today’s months-long impasse.

Consider that Pennsylvania has the 15th highest tax burden in the nation, Brouillette amplified. Despite that, Gov. Wolf still called for $4.5 billion in higher taxes in his first year in office – the largest proposed tax hike in the country. This request exceeded the tax increases of all other states combined, Brouillette expounded. Still, the Governor is not compromising at all on his call for income tax, sales tax, and severance tax hikes.

“There isn’t the appetite for this kind of spending and tax increases,” he said.

Taxpayers are saying thank goodness for the General Assembly for just saying “no” to these tax hikes.

The governor continues to perpetuate the myth of education underfunding, the policy experts agreed. By any objective measure, Pennsylvania ranks 10th highest in the nation in annual per pupil spending, 6th highest in spending at the local level, and 24th in the U.S. in state funds. Classrooms are not being starved for dollars.

DiFrancesco quoted Rep. Kerry Benninghoff, who recently said, “You don’t have to like me, but you’ve got to work with me.”

While Governor Tom Corbett had a notoriously rocky relationship with the Legislature, Wolf’s rapport may have sunk to even lower lows. DiFrancesco said Gov. Wolf started with a “wonderful rhetorical base” – “government that works,” “jobs that pay,” “schools that teach.” So what happened?

Now look at the rhetoric, Shivers pointed out, as Gov. Wolf has been employing words like “garbage” and an “exercise in stupidity” in rejecting the budget.

Taylor said, “We are at the proverbial fork in the road.”

The Commonwealth is witnessing a natural gas revolution. Trillions of cubic feet of natural gas reside under Pennsylvania, and we have the technology to remove it and harness it.

While Wolf has called for more taxes on natural gas, this is not about one tax versus another, Taylor stated. Instead, it is about the “total cost of doing business.”

The state is faced with “pernicious” lawsuit abuse, regulatory expenses, the costs of zoning and permits, the high corporate net income tax rate, and other suffocating costs for business.

Having affordable, available energy is an enormous opportunity, so it is imperative to “optimize conditions for growth,” Taylor said.

When Gov. Wolf warns of the dire consequences of not getting more money through taxes, he only talks about the effect on government, Brouillette pointed out. We have two choices, Brouillette said: grow government, or grow the economy.

“If Pennsylvania is the next state to tax itself to prosperity, it will be the first.”

This is not how we create Gov. Wolf’s much touted, oft-repeated “jobs that pay,” the analysts agreed.

Shivers pointed to a press release issued by Gov. Wolf just three weeks before his second budget address. Gov. Wolf touted government subsidies to a company that generated $5 billion in sales tax, leading Shivers to query – if it’s a successful company, why does it need government dollars?

“With subsidies, grants, abatements, and specially designated zones, the government is in the business of picking winners and losers,” he said – “crony capitalism” at its worst.

Let’s reduce the government tax burden overall, Shivers said.

Taylor agreed, emphasizing, “The key is competitiveness.”

It’s like the famous Winston Churchill quote about the man in the bucket: “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

Brouillette said the government is “masking the problem with these types of subsidies.”

Worse, “talk of new taxes renders the investment environment uncertain,” Taylor said.

Shivers said the budget impasse has “become about winning a political argument.”

Meanwhile, it hurts employers and entrepreneurs, who are in search of “predictability and stability” as critical factors to investment.

Therefore, we cannot afford “another unrealistic budget.”

Taylor said the governor inflicted “six months of unnecessary suffering” on taxpayers and the needy, and it was done “out of spite.” Gov. Wolf vetoed the entire budget on June 30. Then he line-item-vetoed parts in December, a move he could have done in July that would have at least given some money to pressing needs. Now, he has made non-controversial line-items like cancer screening, domestic violence prevention, and drug and alcohol treatment a political football.

“It’s a shameful thing,” Taylor said.

School districts also incurred tens of millions of dollars in added borrowing costs, and the vetoes have forced the closure of some human service agencies.

Shivers said private and community charter schools are also at the point of closure. Charters, unlike local public schools, cannot access local tax dollars.

Moreover, Taylor noted, “The public pension crisis is catastrophic.”

The debt is at least $55 billion, and climbing.

Brouillette said the Commonwealth Foundation sounded the alarms about unfunded pension liabilities a decade ago.

Scranton may go bankrupt over retirement benefits in the next year or two, the Auditor General has warned, and other school districts and municipalities may soon follow suit.

Shivers said this is not about “political will” anymore. It is not about Wolf’s insistence that “we had a deal,” referring to the Governor’s clinging to an October framework deal that fell apart.

It’s “a three-legged stool,” comprised of pensions, taxes and spending.

“Not a single Democrat voted for what I would call milquetoast pension reform,” Shivers said. The Governor failed to produce one vote, he underscored.

Brouillette added that the Governor never embraced liquor privatization, which could have produced hundreds of millions of dollars without raising taxes.

Pennsylvania is losing dollars to consumers crossing the state’s border for better prices, selection and convenience, Brouillette said, especially in the southeast.

Surveys show that an overwhelming majority of Pennsylvanians want government out of the liquor business. We should be regulators, but not purveyors, of alcohol, they conclude.

With Rep. Glenn Grell leaving the Legislature for PSERS, Reps. Warren Kampf, Mike Tobash, and John McGinnis have carried on the pension reform cause in the House, with Sen. Pat Browne leading in the Senate.

“Judgment Day is upon us,” Taylor said.

Brouillette blamed public sector unions, such as the FOP, AFSCME, SEIU and PSEA, for thwarting those efforts and warned that, “We are closing our eyes to an oncoming tsunami.”

The analysts said the plans would not alter the benefits of existing retirees.

Shivers warned that issuing pension obligation bonds is like taking out a loan and then going to the casino to gamble, in the hope that your return on investment will exceed your loan rate.

With education remaining Gov. Wolf’s main platform, the analysts noted a stunning fact: Gov. Wolf vetoed $3 billion in education spending in December, despite continually condemning Gov. Corbett for cutting $1 billion in education.

Brouillette explained that federal stimulus dollars were stopped under the final years of the Rendell Administration. Gov. Corbett wisely did not raise taxes to backfill those dollars.

Brouillette said Pennsylvania is spending more on public education than at any time in history, at more than $15,500 a student per year. Where is all that money going?

Most people are shocked to hear the $15,500 figure, and guess that it is more like $7,000 to $8,000 per student.

Noting that $15,500 a child translates to about $450,000 a classroom, he is unsure where the money is going.

Taylor noted this debate is more about the employment of adults than the rigorous education of children.

“Money does matter, but we also have to expect a return on that investment,” said Brouillette, a former high school and middle school teacher.

He said data reveals that there is no correlation between more money and better outcomes on the other side.

Preparation for the workforce is the key to competitiveness, Taylor said.

In the NFIB’s Small Business Economic Trends report, Shivers said, employers used to say that they were having a difficult time finding qualified workers. They were interviewing students without specific skills and a higher level of education. Now they are saying they can’t find students with soft skills, like punctuality, good appearance, and a willingness to follow directions.

Shivers said they have been measuring trends since 1974.

Brouillette lamented the fact that, “The public sector unions have a stranglehold on the policy-making process.” They profit from higher spending and bigger government, which in the end is “very short-sighted.”

PSEA is a $100 million a year operation, and that is just one of the public sector unions, Brouillette noted. They are against pension reform and liquor privatization, and are lockstep for more dollars for education.

“We need more Davids against these political Goliaths,” Brouillette advised, or problems “will metastasize.”

All three analysts urged taxpayers to contact legislators.

Taylor cautioned that government is “not a spectator sport.” Employees need to know the landscape, which is destined to affect their jobs and families.

“Be a voice for a pro-growth, pro-production agenda” in Harrisburg, he urged.

Brouillette said one person can make a difference – and they must to counter the unions’ power.

The entrepreneurs of today must become engaged to overcome the powerful union muscle.

He offered a relevant Samuel Adams quote: “It does not take a majority to prevail…but rather an irate, tireless minority, keen on setting brushfires of freedom in the minds of men.”

In the minds of the many who rely on state government, Harrisburg is already burning.