The Pennsylvania budget process proved less controversial this year when revenue exceeded estimates and provided the commonwealth with a budget surplus. Recent budget years with lower revenues forced elected leaders to solve significant revenue deficits in a highly partisan political environment.

This article highlights accomplishments this past spring as the budget for FY 2018-2019 was closing and new budget items for FY 2019-2020 (FY 19-20) were agreed upon. It also reviews nonbudget legislative proposals and other initiatives affecting municipalities. Some proposals were not adopted before the legislative summer recess and many will receive attention in the fall. Others will be dormant for some time.

Although not devoid of partisan debate, the budget process unfolded nicely in June. Leaders negotiated a no-tax increase budget of almost $34 billion and used nearly $900 million in surplus revenues for a supplemental appropriation to pay additional expenses incurred in FY 18-19. The remaining surplus of nearly $317 million was allocated to the budget stabilization reserve fund, also known as “the rainy day fund” for the second year in a row. Pennsylvania's great fiscal situation funded programs and initiatives that could have been reduced or eliminated. Cautious optimism for economic growth and another surplus is projected for FY 19-20.

The budget process affects private and public sectors differently through enactment of numerous laws and local government is especially affected by the FY 19-20 budget and related legislation. The process begins with the General Appropriation Act that is accompanied by additional legislation approved by the legislature and the governor that provide the fiscal and programmatic instructions for disbursement of state and federal funds. Special appropriation laws, called “preferred and nonpreferred laws” allocate monies to designated entities. Others, known as “code bills,” include provisions covering tax, fiscal and administrative provisions relating to state-supported programs, especially, education and human services.

The favorable budget picture for FY 19-20 occurred because of the FY 18-19 budget surplus so understanding how that happened is important. The Pennsylvania Independent Fiscal Office (IFO), created by the Pennsylvania General Assembly, credited several reasons for the surplus in its June 2019 report. The IFO underestimated the effect of the Tax Cuts and Jobs Act (FTCJA) passed by Congress in 2017. The tax base was expanded, and corporate profits and tax revenues increased beyond projections and boosted by a robust national economy. Deductions eliminated by the FTCJA resulted in higher tax liabilities for corporations and individuals.

Recent changes to Pennsylvania and federal laws on internet sales boosted sales tax revenues collected from online marketplace sales to more than triple the estimate. A 2017 Pennsylvania law allowed collection of sales tax from online sellers, who use third-party websites including Amazon Marketplace. A recent U.S. Supreme Court decision in South Dakota v. Wayfair allowed states to change their taxation of online sales. Pennsylvania subsequently expanded its interpretation of the law to allow the sales tax nexus, the basis upon which the tax was assessed, to include additional business and sales.

Finally, changes in Pennsylvania gambling laws allowing sports betting and fantasy sports contests provided increased revenues that totaled approximately $3.3 billion or approximately a 1.8% increase as of June 30. The good news is these revenue sources should recur each year and could potentially increase.

As revenues increased House Bill 790, the General Appropriation Act for FY 19-20, supports new funding for education, agriculture and workforce development initiatives. Pre-K-12 Education programs received increases of approximately $430 million. The state-related universities, State System of Higher Education, community colleges, Penn State Agriculture Extension Services and the University of Pennsylvania Veterinary School received 2% increases.

In addition, the legislature also increased funding for more openings for affordable day care, helping individuals with intellectual disabilities receive community services and get off waiting lists, and supporting families needing home-visiting services.

Agriculture received a boost with 12 bills that were passed to help improve the agriculture sector of Pennsylvania's economy. This includes funding of programs to help farmers with their businesses and planning needs, education initiatives regarding agriculture and awareness of agriculture's role in a healthy community and commonwealth as well as millions for grants, loans and tax credits for agriculture-business management purposes.

Affordable housing initiatives received additional monies and raised the cap on funding for the Pennsylvania Housing Affordability and Rehabilitation Enhancement Fund (PHARE) to $40 million. PHARE supports projects that a community decides is their priority. For example, affordable apartment renovations to building of homes for a targeted market in need. The budget addresses other housing concerns through the Historic Preservation Tax Credit (HPTC) that provides tax credits to qualified taxpayers completing the restoration of a qualified historic structure into an income producing property. Program funding is capped at $3 million per year for these tax credits, and awards to a qualified taxpayer may not to exceed $500,000 per application. The mixed-use development tax credit program administered by the Pennsylvania Housing Finance Agency authorizes $2 million of state tax credits to qualified taxpayers for eligible construction or rehabilitation projects.

Pennsylvania First (PA First) received a significant increase and now offers $32 million in assistance to municipalities and businesses with qualified projects to help a business expand within or relocate to Pennsylvania and create jobs. This program encourages municipalities and the private sector to collaborate in marketing the municipality's location and the economic benefits of new business projects. The Municipalities Financial Recovery Revolving Loan Fund was increased to $4.5 million for loans and grants to financially distressed municipalities that face an immediate risk of bankruptcy.

The failure to appropriate $12 million for the 2020 census may have enabled $32 million to be returned to the state's Keystone Fund for community financial support for parks, trails, green spaces and libraries.

Discussions among Republican and Democrat leaders continue about how to improve the transportation infrastructure and find revenues to pay for it. Any funding proposal will be controversial and difficult to negotiate. One example this year of a consequence of this funding solution impasse is the ongoing appropriation for municipal traffic signals (i.e., Green Light-Go), which was reduced by $30 million. This program provides state funds for the operation and maintenance of traffic signals along critical and designated corridors on state highways. This reduction assures the application process will be more competitive this year.

Other matters the final budget and code laws did not address are important for certain industries and the public sector. These include high-speed internet access, housing blight, manufacturing and energy infrastructure, and emergency preparedness. The governor's “Restore Pennsylvania” initiative and the House Republican majority's “Energize PA” initiative address these concerns in different ways seeking to maximize the state's energy resources and address infrastructure needs. Further legislative debate on these issues is expected when it reconvenes in September.

During the budget process the governor's request for a minimum wage increase and the nuclear energy companies' request for financial support in operating their facilities failed to attract consensus in the legislature for many reasons including their impact on businesses and consumers. The ongoing controversy about municipalities without police forces paying for state police coverage gained much attention but was not resolved in this budget. This issue has complicated budget negotiations for years as expenses for state police services have escalated. Municipalities without local police coverage continue to benefit from state police support without any extra fees or costs being passed on to their residents. Further discussion in future budgets is expected and may include legislative hearings.

Another subject that would impact local government involved potential changes to how local government should enforce the Uniform Construction Code. House Bill 349 and Senate Bill 486 impose changes on municipalities in their administration of the code's inspection process. These proposals lacked adequate support for many reasons, were opposed by many municipalities and are not expected to receive further consideration this fall. This outcome allows municipalities to maintain discretion on code compliance based on their community's needs rather than a statewide standardized process.

Although not addressed so far this session, property tax reform efforts will continue with a number of property tax reform proposals including House Bill 13 from Rep. Frank Ryan, R- Lebanon. He intends to soon introduce HB13 calling for full elimination of the school property tax. The bill benefits seniors, renters, property owners and school districts. It provides for new taxes that are intended to stay local, for no tax on Social Security income, and a new tax on retirement income.

In 2019 the governor signed into law 48 bills originating in the House, 39 bills originating in the Senate and vetoed two House proposals and one Senate proposal. Tax proposals affecting government revenues remain a constant focus of the legislature. Although four Senate tax bills were signed into law, another 64 passed the Senate and await consideration by the House.

Likewise, five House tax bills were signed into law and another 141 passed the House and await consideration by the Senate. The passing of so many bills by each chamber indicates to Capitol observers that more political jousting will occur when they return in September.

Kathleen Duffy Bruder is a member of McNees Wallace & Nurick's government relations, energy and environmental, public finance and government services, oil and natural gas, pipeline and oil/gas infrastructure, food and beverage, and state and local tax groups. Contact her at [email protected].

Jay Layman, president and co-chair of Capital Associates, a subsidiary of the firm. He is responsible for business development and client relationships for advocacy, lobbying, government relations and state grant opportunities for business and nonprofit organizations. Contact him at [email protected].