We are 9 days away from the Pennsylvania state budget deadline. Lawmakers are discussing what to spend money on— but also how much to spend.

On Thursday, Pennsylvania’s Independent Fiscal Office (IFO) released a report with the final revenue estimates for the 2023/24 fiscal year. The state brought in roughly $45.1 billion in revenues— but they spent more than that.

"There will be what we call a current year deficit. So when you add up all those numbers, you know, the revenues, the refunds, the spending, things we call lapses—“ said Matthew Knittel, Director of the IFO, “It’ll probably come out to about $500 or $600 million deficit.”

That said, Pennsylvania has around $14 billion in it’s savings account—a surplus. Pennsylvania got the savings boost from COVID, when the Federal government flooded the economy with money through stimulus checks. More people spending lead to higher tax revenue. This was also in addition to the state having to pay less for some programs as the federal government supplemented those cost burdens as well.

(here is a link to an overview of the 2023/24 expenditures)


The Purpose of Savings

Coming out of the 2008 recession, Pennsylvania struggled to maintain a surplus of any kind in their yearly budgets. Because of this, the state did not have great reviews from financial ratings agencies. 

“What they would like to see is enough in a rainy day fund that could carry you through a moderate recession,” said Knittel. "some savings to weather the storm and to get you through so you don't have to make a bunch of spending cuts or increases in taxes."

These ratings signal to companies the financial reliability of a state.

Knittel says rating agencies will estimate that a state should have 10-15% of it’s spending stored up in savings. For Pennsylvania’s current budget, 15% amounts to around $8 billion.

With $14 billion in surplus— $6.5 billion of that dedicated specifically to a rainy day fund— Pennsylvania’s credit ratings have improved drastically.

How to Give It Back

Even matching more conservative savings goals to keep good credit, the state has cash to spare. Both Democrats and Republicans are wrestling with what to do with the extra funds now.

“How is that money best used? How much do we need to save and keep in an account? Should it be returned to taxpayers or should it be invested in education, things such as that,” described Knittel.

Governor Josh Shapiro, with Democrat support, proposed a $48.3 billion budget for the 2024/25 fiscal year.

The IFO estimates state revenues for that year will be $45.8 billion. Adding on the overspending from last year… Shapiro’s plan would be around a $3 billion deficit. Democrats say investing in their proposed programs is the best way to give surplus money back to tax payers.

“Over time, politicians have taken $14 billion more of your money then they've invested back in,” said Shapiro at a press event this week highlight economic development policy. “I want to make those investments.

"And here’s the deal,” said Shapiro. "I know we're going to compromise, but just for argument's sake, even if the legislature were to pass every single investment I proposed, we'd still have an $11 billion surplus.”

In a report from February, the IFO estimated that enacting the Governor’s proposal would lead to a $4-6 billion deficit each year due to inflation.

Republicans say the surplus is better spent on tax cuts. They have proposed cuts to the Income Tax and Gross Receipt Tax that would reduce revenue in the 2024/25 fiscal year by $1.2 billion. That combined with last year’s overspending would be a $1.8 billion deficit. Future years would lose around $3 billion in revenue.

“If the policy decision in this building is that we have too much money in our bank account, then we have to recognize who gave it to us in the first place, and that's the taxpayer,” said Senator Joe Pittman, (R-41), the Majority Leader for the Senate. "We are reducing taxes not only on small employers, but on individuals.”

The Interest Factor

As the fate of $14 billion remains on the line in budget negotiations this week, the funds are not waiting idle.

“Currently those moneys are earning 5.25% interest, which is fairly good return by sitting there,” said Knittel.

From interest alone, around $800 million has been deposited in the PA General Fund, ready for spending.

“That’s a record setting amount. We’ve never had this high of a surplus that’s earned this kind of return,” said Knittel. "This is very unusual. It is unusual, not only the high rate but also the balance in there."

Interest rates that impact state savings are set by the FED. 

“That is an important consideration. If you were to spend the monies or if you were to cut taxes, its the same thing as far as the budget deficit goes. What is the alternative use of those funds?” said Knittel. "And right now the alternative use is they are sitting there and they are accumulating a return of 5.2%."