Without infusion of cash, state and local governments could face dire budget choices

Pa. cities hardest hit in country, national association says

• Benjamin Pontz
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  Ben Pontz covered state and local government for PA Post. He previously worked as an Associate Producer with Smart Talk. He is a graduate of Gettysburg College where he double majored in political science and public policy with a minor in music and he served as editor-in-chief of the campus newspaper, The Gettysburgian.

(Harrisburg) — State and local governments across Pennsylvania say they need a significant infusion of cash from the federal government to allow them to replace lost revenue stemming from reduced taxation due to the economic shutdown.

If they don’t get it, both Republican and Democratic leaders warn they will have to make painful cuts to personnel and government services in order to meet legal requirements that they balance their budgets.

But in Washington, D.C., a fight is underway over how much money — if any at all — to float to states and local governments.

The clock is ticking. The state legislature needs to pass a budget for the remaining seven months of the state’s fiscal year by November 30 — less than a month after the election — and some local budgets are due by the first of the year, which means there is not a lot of time for the state and local governments to figure out how much money they will receive and then how they will spend it.

Democrats in the U.S. House of Representatives passed the Heroes Act in May, which authorized $875 billion in direct aid with no strings attached for states, counties, and municipalities. Pennsylvania would stand to receive just under $20 billion if that bill became law. Senate Republicans have rejected that bill, and GOP negotiators have offered up to $125 billion, though a more recent package contains no funding at all for states and local governments.

Particularly for cities, that could spell fiscal disaster, including significant personnel layoffs and service cuts.

“If you strand us, you’re not going to have a recovery,” said Rick Schuettler, executive director of the Pennsylvania Municipal League. “There’s too many cities and population centers that are simply going to have nowhere to go, and you’re going to see layoffs of public safety personnel and cutting back services. They can’t go to the revenue side because there’s nothing there.”

The state has received a $3.9 billion block grant from the CARES Act and, separately, Pennsylvania’s seven largest counties received a little over $1 billion. Other federal aid, including more federal money towards Medicaid, put the amount of aid that has reached state government at around $8.1 billion, according to the Committee for a Responsible Federal Budget, which has released a tool to track federal outlays related to the pandemic.

That $3.9 billion is strictly for coronavirus-related expenses like buying PPE, aiding small businesses, and ramping up testing and contact tracing. It cannot be used to fill holes in state or local budgets. Pennsylvania has spent $2.6 billion, which includes passing $625 million on to the state’s other 60 counties.

The state is holding on to the remaining $1.3 billion, and legislative authorization is required to spend it. The state passed a partial budget in June that funded most agencies at existing levels for five months and provided a full year of funding for education. A budget for the remaining seven months is due Nov. 30, which is before new legislators elected in November will take office. Heading into the fall, the state is staring at a deficit of nearly $5 billion.

Local governments make their case for funding

In May, the National League of Cities projected that Pennsylvania municipalities could lose 40 percent of their annual revenue, a higher rate than any state in the country. That would amount to $6 billion in losses, the Pennsylvania Municipal League said. A July estimate from the legislature’s Independent Fiscal Office suggested the lost revenue could be less, perhaps in the hundreds of millions.

Regardless, strapped municipalities are bracing for potential budget cuts.

In Altoona, Mayor Matt Pacifico (R) said 70 percent of his city’s annual budget is personnel costs and, of those costs, two-thirds are police and fire. Blair County gave the city some money for coronavirus expenses, but he said there is “only so much PPE we can stockpile” and that, at the end of the day, he needs money to replace lost tax revenue so he can avoid having to cut positions in the police and fire departments.

In Lancaster, Mayor Danene Sorace (D) said that five of the city’s six revenue streams — earned income tax, local services tax, parking, building permits, and realty transfer taxes — are incredibly sensitive to economic downturns, and that her city is bracing for a recession that could slash that revenue. Without a federal lifeline, she said, “We will not recover.”

Schuettler said that without direct federal aid, more cities will have to enter the Act 47 program for cities in fiscal distress, cuts to local police will put additional strain on the State Police, and cuts to local fire departments may increase the demand for volunteer firefighters at a time when volunteer fire departments’ ranks have plummeted.

“It’s easy to say, ‘Government’s too big and bloated.’ The fact is that most of these folks have gone through all sorts of scaling back over the years. Nobody’s operating with a lot of fat in those budgets,” Schuettler said. “If you’re going to foster economic and community development in Lancaster or Carlisle or Harrisburg, you have to provide a level of government service, especially public safety, that, well, fosters that economic and community development. If we’re just going to have massive layoffs of public safety personnel, Pennsylvania is going to remain stuck in the mud. There’s no question about that.”

Pennsylvania’s congressional delegation split on what to do

Republicans in the U.S. Congress say the federal government needs to hold off on any new aid until the first round of aid is exhausted.

But many economists — even those who traditionally oppose large deficits — argue that if ever there were a time for aggressive deficit spending, it would be now.

“In ordinary times, responsible budgeting means borrowing as little as you have to so that your debt doesn’t get out of control so that you have the capacity to borrow when you need to,” said Marc Goldwein, senior vice president of policy at the Committee for a Responsible Federal Budget, a fiscal watchdog group that has been monitoring federal spending through the pandemic. “And ‘when you need to’ means either when the economy is weakened and depressed and needs fiscal support or when there’s a one-time emergency where you want to spread out the cost over a time, like a war. Right now, we have both.”

Goldwein said the federal money shouldn’t replace lost revenue dollar-for-dollar. But it’s not reasonable to expect state and local governments to have enough money in reserve. Because states and local governments have to balance their budgets each year while the federal government does not, Goldwein said, it makes sense for the federal government to help offset lost revenue associated with economic shutdowns.

“Even a state that was incredibly responsible and had a very large rainy day fund, they weren’t prepared for multiple monsoons, which is what they’re facing,” he said. “The last thing we want is for [states and localities] to be contributing to the recession rather than offsetting it.”

Pennsylvania’s rainy day fund, one of the smallest in the country according to Pew, contained $340 million after a deposit at the end of the last fiscal year.

Pennsylvania’s congressional delegation is split largely along partisan lines when it comes to state and local bailouts.

In an email, a spokesperson for Sen. Pat Toomey (R) said the senator wants to pump the brakes on additional federal funding, noting that Pennsylvania still has a significant portion of its allocation from the first wave of funding and that any money the federal government allocates is “either borrowed or printed.”

“If Congress is going to move forward with additional legislation, it should be narrowly focused and support economic reopening efforts,” said Toomey’s communications director, Steve Kelly.

Kelly also suggested that the U.S. Department of the Treasury could allow states to use existing federal money to plug budget holes. But rather than work with existing funding, Kelly said some state and local officials have been “vocal and hyperbolic” in petitioning for more aid, while others realize there is “no such thing as a free lunch.”

Sen. Bob Casey (D) told WITF that while he would support the Treasury Department loosening restrictions on existing funds, “it is not nearly enough given the severity of the losses these jurisdictions face.”

Rep. Matt Cartwright (D), who represents the northeastern part of the state including Scranton and Wilkes-Barre, accused Republicans of “governing malpractice” by refusing to inject significant additional money into the economy to help head off a recession.

“I am absolutely opposed to defunding police and fire companies that are paid for with municipal money, to defunding garbage collection, to defunding all the essential services that people count on,” he said. “It is the Republican crowd — not all of them, but the right wingers — who are screaming at the top of their lungs and at the height of hypocrisy that Democrats want to defund things when it is those Republicans themselves who are responsible for all sorts of defunding.”

Rep. Glenn “GT” Thompson (R), who represents much of the northwestern quadrant of the state stretching from Centre to Butler counties, said he is not necessarily opposed to giving more money to state and local governments.

“If there are urgent needs — and I have no doubt there are — use the money that we sent you, that we voted for, that we approved, and then measure the outcomes and then measure the remaining need so that we know how we can appropriately respond to this,” he said. “I’m not saying that there isn’t additional help that we need to do, but as opposed to just telling us that you need more money, period, while you’re sitting on money, that’s not helpful.”

The state of the state-level debate

At the state level, a debate is shaping up over whether to spend the remaining $1.3 billion now or to wait and see what happens with the federal government.

Gov. Tom Wolf proposed on Tuesday a blueprint for how to use the remaining money to help small businesses and frontline workers. House Republicans argue that state government should prioritize reopening the economy to allow the state to collect as much regular tax revenue as possible.

“Rather than take the track of the Wolf administration and continue to shut down large sectors of our economy like restaurants and small businesses, House Republicans will use our remaining session days to prioritize ways we can jumpstart our economy safely,” said state House GOP spokesperson Jason Gottesman.

He added that the GOP is also interested in making permanent some of the temporary regulation suspensions associated with the pandemic, and efficiency gains associated with state employee teleworking as ways to contain state costs and bring in more revenue.

State Sen. Vincent Hughes (D-Philadelphia), the minority chair of the Senate Appropriations Committee, laughed at the idea that the state could balance its budget without either a significant revenue increase or painful cuts to services.

Hughes sees two issues: pain Pennsylvanians are feeling from the economic shutdown and budgetary woes for state and local governments. To address the first issue, Hughes said the legislature should get the remaining $1.3B from the first wave of coronavirus aid out the door. To address the second, Hughes said the U.S. Senate should pass the HEROES Act.

“Let’s be clear: the $1.3 billion does not go anywhere close to dealing with that kind of problem, nowhere close, he said. “It just doesn’t touch those problems. It does touch the problems for people who need financial assistance at the threat of eviction and small businesses who need financial help.”

State Senate Appropriations Chair Pat Browne (R-Lehigh) said he would welcome federal aid in any amount.

Until it becomes clear what that aid might look like, though, he said he is not in favor of spending down the $1.3 billion that is in reserve in case that is all the state gets and federal guidance changes that would allow that money to fill holes in the budget. He said he hopes to have a clearer picture by the end of September.

“It wouldn’t make much sense to distribute those dollars to help those in need and then end up cutting our general fund in areas that help people with need,” he said.

The connection between state and local funding

As the state budget goes, so too will local budgets, which rely heavily on state funding.

For example, counties are still reeling from a 10 percent cut in state funding to human services in 2012 that was never restored, said Lisa Schaefer, executive director of the County Commissioners Association of Pennsylvania.

“We’ve been cutting absolutely everything that we can already, and we’ve been as innovative as we possibly can trying to make sure that we’re delivering services as effectively and efficiently as possible,” she said.

If state funding to counties takes another hit, most counties will have no choice but to cut personnel, Schaefer said.

“The thing about county services and human services is that it takes people to deliver them, and so trying to figure out where we’re going to go to make ends meet … it’s just so scary to think about,” she said.

Browne hears those concerns and, having served in the legislature for 25 years, said he will draw on lessons from previous fiscal crises, even if they don’t match this one in terms of scale.

“This will be, at least on a single year basis, the most significant [budget challenge] we’ve faced,” said Browne, who added that the solution can’t be imposing new burdens on working Pennsylvanians. “That would have to be the last available option for us.”

Federal reaction

WITF reached out to Pennsylvania’s entire congressional delegation to ask whether they support additional funding for state and local governments. The six responses not included in the body of the article are excerpted below. The other ten members of the delegation did not respond to our request for comment.

Dwight Evans (D) – PA-3

“State and local government is where the rubber hits the road. Many of the day-to-day services that are residents and communities rely upon are delivered at those levels. If we allow them to go bankrupt, as Sen. McConnell has suggested, we will only deepen our crisis … I believe Congress has a responsibility to support our citizens particularly through the services that state and local government provide — especially as the executive branch falls short.”

Mary Gay Scanlon (D) – PA-5

“I convened a meeting with the mayors in my district a couple weeks ago and their number one concern was whether the federal government could help them meet the additional expenses imposed by the pandemic, and help them meet payroll and other obligations given reduced revenues, also caused by the pandemic. When this administration has foisted the responsibility for meeting these crises upon our state and local governments, it is incumbent upon the federal government to give those agencies the resources they need to protect and serve our communities.”

Chrissy Houlahan (D) – PA-6

“Rep. Houlahan has heard from bipartisan state and local leaders across her community who are calling for additional relief to help with the cost of COVID-19 response and recovery, but also to help make up for lost revenue to the economic downturn that has accompanied this public health crisis. Alongside bipartisan members of the Pennsylvania delegation, she has urged that state and local governments get CARES Act funding rapidly … She is advocating for another relief package.”

Lloyd Smucker (R) – PA-11

“Congressman Smucker believes that the extraordinary funding provided by the CARES Act provided to state and local governments needs to be spent efficiently and effectively before providing additional funds is considered.”

Fred Keller (R) – PA-12

“Congress passed the CARES Act which gave $150 billion to state and local governments, including nearly $5 billion to Pennsylvania. Of that federal money, Pennsylvania has yet to appropriate $1.3 billion. Before Congress spends trillions more of taxpayers’ dollars, states must first drive out the already appropriated federal dollars so that we can get a clear picture of how much, if any, additional federal funding is needed.”

Michael Doyle (D) – PA-18

“State and local governments are expected to balance their budgets every year. Without additional federal relief, that means they’d have to lay off more workers, cut services, and probably raise taxes in the middle of an economic recession; such policies would hurt countless households, make the recession worse, and hinder an economic recovery. No one in their right mind wants that outcome, which means the federal government should certainly provide adequate additional relief to state and local governments … Unfortunately, Senate Republicans have refused to bring the Heroes Act, or any other legislation that would help state and local governments, up for a vote. It’s the height of idiocy and short-sightedness.”