How to Fix Pennsylvania’s Looming Budget Dilemma

Pennsylvanians just elected 228 state senators and representatives. These candidates-turned-lawmakers spent the past several months doing all the challenging work of campaigning: giving speeches, knocking on doors, and fundraising. However, their most challenging work lies ahead.

A few weeks after lawmakers take their oaths of office, Gov. Josh Shapiro will give his fiscal year (FY) 2025–26 budget address. The governor’s budget address formally begins the multi-month process of state budget negotiations. Last year’s FY 2024–25 negotiations created a $47.6 billion state budget that spent $3.6 billion more than revenues, creating a structural budget deficit.

Last year, the state had enough money in the General Fund balance, its version of a personal checking account, to cover $3.6 billion in overspending. Pennsylvania’s Independent Fiscal Office (IFO) projects the General Fund balance to hit zero during FY 2025–26 as the budget deficit expands to $4.7 billion.

Years of irresponsible spending have finally caught up to Pennsylvania. State spending has consistently outpaced state revenue over the past five years, and the gap continues to grow. Since FY 2019–20, state expenditures have increased by more than $12.5 billion, while revenue has increased by $9.5 billion. One-time temporary federal funds during the COVID-19 pandemic masked the severity of Pennsylvania’s structural deficit and incentivized uncontrolled state spending growth.

Unfortunately, there is no easy way to fix the state’s $3.6 billion deficit. The Pennsylvania Constitution requires the governor to sign a balanced budget where expenditures are less than or equal to expenditures and reserves. Shapiro’s initial budget proposal suggested raiding the Rainy Day Fund to cover budget deficits, which is explicitly illegal under state law. In past years, lawmakers have used budgetary gimmicks like delayed payments and intentional underbudgeting to pass deceptively “balanced” budgets.

These gimmicks will not work this time around. Due to demographic changes caused by an aging and out-migrating population, the IFO forecasts state expenditures to grow faster than state revenues. If lawmakers fail to address the root causes this year, the deficit will continue to grow. Put simply, a structural deficit requires structural reform.

Lawmakers will have to make a tough choice between cutting spending, raising taxes, or doing both to rein in the budget deficit. Lawmakers should also prioritize reforming top budget cost drivers. Three programs – Medical Assistance, Long-Term Living, and state support of public schools – account for 63% of all state expenditure growth since FY 2019–20. Additionally, lawmakers must resist calls to increase state support for failing mass transit agencies and ineffective corporate welfare programs.

Pennsylvania lawmakers must also ensure the state does not run another budget deficit. A guardrail on spending growth – namely, the Taxpayer Protection Act (TPA) – would have prevented the current budget dilemma. TPA, which some fiscally responsible lawmakers have proposed in the past, would index state spending growth to the three-year average rate of inflation and population growth or personal income growth, whichever was lower.

Enacting TPA would keep state expenditure growth in line with Pennsylvania taxpayers’ ability to pay. Moreover, TPA would not require spending cuts but rather slow the expenditure growth rate. Lawmakers can override the TPA spending limit with a two-thirds majority vote in the General Assembly.

Even when inflation is high, TPA could effectively maintain sustainable spending growth. Had TPA gone into effect in 2019 (right before inflation went off the charts), state spending for FY 2024–25 would have been $41 billion, and Pennsylvania would have a $2.8 billion budget surplus. Enacting TPA now would help prevent future budget deficits by ensuring that government spending grows responsibly.

Without such structural change, this problem will only get worse. Projections suggest this multibillion-dollar structural budget deficit will grow in the coming years. And rather than kicking the can down the road, Pennsylvania lawmakers must make some tough choices sooner rather than later.

Addressing the cost drivers and enacting TPA to slow the growth of state spending would help mitigate the chances of our fiscally irresponsible past repeating itself.

Pennsylvania needs TPA now more than ever.