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The Big Challenge: A $4 Billion Deficit

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By Tom Ferrick Jr.

Governor-elect Tom Corbett has said he'll deal with the financial problems in Harrisburg by cutting the administrative budgets of state departments, by downsizing the state's fleet of cars and trucks and by selling off the state stores to private operators.

That last item will be tough to pull off. For 25 years, various governor's have tried to do away with the state monopoly on wine and liquor sales -- with little luck. It's not something Corbett is likely to get done in his first six months.

As to the other proposals, they are far more doable.  But, the savings that result are just a drop in the bucket for a state that is facing a sea of red ink.

Estimates of the budget deficit Corbett will face in his first year on office range from a low of $4 billion up to $5 billion.

Corbett, who has pledged not to increase taxes, will have to cut government services to eliminate that deficit. And that won't be easy, as he will discover in the months ahead as he shapes his first budget.

For starters, the reality is that the state bureaucracy doesn't cost much, certainly not in relation to the total state budget. The total this year for central government operations is $760 million, out of a budget that totals $28 billion.

Cut the bureaucracy by 20 percent and you save $152 million - just a fraction of the billion-dollar deficit. 

To achieve real savings, Corbett will have to cut government spending for programs that mostly help local governments, school districts and individuals in need.

The best way to understand this is to consider state government not a a bureaucracy but as a redistribution machine that takes tax money in, sorts it, and sends it back out, mostly to local governments, school districts and individuals in need. 

As Sharon Ward, executive director of Pennsylvania Budget and Policy Center put it: "The money doesn't go to the central bureaucracy; it goes through the central bureaucracy."

For every dollar the state spends, 72 cents goes back to individuals and local entities.

To understand this reality is to understand the difficult task faced by Corbett in the coming months.

Surely, there is waste that can be eliminated. There are efficiencies to be achieved. If there is fraud, it should be uncovered and stopped.

Top 20.jpgBut, the fact is that any governor who wants to find $4 or $5 billion to cut from his first budget will have to take an axe many long-standing state programs that serve real needs.

The problem is illustrated by the list of the 20 most costly programs funded by the state, which appears in this article.  Scan it and you can see where the money Harrisburg spends goes. To summarize, most of it is spent on education and health and welfare programs.

These 20 programs total $19.6 billion and account for 78 percent of all state spending; the rest of government runs off the remaining $5.6 billion. 

There are some items the next governor is powerless to change.  He cannot cut or eliminate debt service ($974 million) because that money is used to pay off bonds sold under legal agreements that require payment. He cannot cut the state's share of social security for school employees ($399), or state payments to school employee's pensions ($399 million) because they are mandated by federal or state law.

It would be difficult to cut some welfare spending because those dollars often represent state matches to federal aid. Cut the state dollars, the federal dollars decline as well.  Others are payments mandated by federal law (the $482 million payment for the Medicare Drug Program is an example). Washington would not be amused if the state stopped making those payments.

There are cuts that can be made in a number of big-ticket programs, but beware of Newton's Third Law: for every action there is an equal and opposite reaction.

An example: Suppose the state decided to reduce basic state aid to local schools by 

20 percent.  It would certainly save money -- $1 billion - but it would also blow holes in local school district budgets.  The districts would be faced with eating the loss by reducing programs or raising local taxes to keep per pupil spending up.

The state could reduce its Medicaid fees to hospitals and doctors.  How would they respond? They could refuse to see Medicaid patients or they could, in turn, pass on the costs to paying customers.  This could trigger a rise in health insurance rates.

The state could slash money to the big state-related schools (Pitt, Penn State, Temple and Lincoln Universities) or to Pennsylvania's state-owned universities.  What would be the likely result? Higher tuition for students attending those institutions.

For every action there is an opposite and equal reaction.

Less money for public schools and secondary education. Less money spent for medical care for the poor, for child welfare, for mental health and mental retardation services.

These are the only ways to make a real dent in the deficit. Cutting cars from the state fleet won't get it done. 

These are the difficult choices facing not only Tom Corbett,  but also the people of Pennsylvania.



Tom Ferrick Jr is senior editor of Metropolis.



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