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1 HOUSE OF REPRESENTATIVES COMMONWEALTH OF PENNSYLVANIA 2 * * * * 3 Independent Fiscal Office * * * * 4

5 House Appropriations Committee

6 Main Capitol Building 7 Majority Caucus, Room 140 Harrisburg, Pennsylvania 8

9 Monday, February 22, 2016 - 10:04 a.m.

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11 COMMITTEE MEMBERS PRESENT: 12 Honorable William Adolph, Majority Chairman 13 Honorable Honorable Jim Christiana 14 Honorable Gary Day Honorable George Dunbar 15 Honorable Honorable 16 Honorable Honorable Warren Kampf 17 Honorable Fred Keller Honorable Tom Killion 18 Honorable Jim Marshall Honorable 19 Honorable David Millard Honorable 20 Honorable Jeffrey Pyle Honorable Marguerite Quinn 21 Honorable Honorable Mike Vereb 22

23 1300 Garrison Drive, York, PA 17404 24 717.764.7801

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Key Reporters [email protected] 2

1 COMMITTEE MEMBERS PRESENT:

2 Honorable Joseph Markosek, Minority Chairman Honorable Leslie Acosta 3 Honorable Honorable 4 Honorable Honorable 5 Honorable Madeleine Dean Honorable Maria Donatucci 6 Honorable John Galloway Honorable 7 Honorable Michael O'Brien Honorable 8 Honorable Kevin Schreiber Honorable 9

10 NON-COMMITTEE MEMBERS: 11 Honorable 12 Honorable Mark Gillen Honorable Brett Miller 13 Honorable Eli Evankovich Honorable Rick Saccone 14 Honorable , Chairman 15 Democratic Finance Committee

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1 STAFF MEMBERS PRESENT:

2 David Donley 3 Majority Executive Director

4 Ritchie LaFaver 5 Majority Deputy Executive Director

6 Curt Schroder, Esquire 7 Majority Chief Counsel

8 Miriam Fox 9 Minority Executive Director

10 Tara Trees, Esquire 11 Minority Chief Counsel

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1 INDEX OF TESTIFIERS

2 INDEPENDENT FISCAL OFFICE 3

4 Matthew Knittel Director 5

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14 REQUESTS FOR PRODUCTION OF DOCUMENTS

15 PAGE LINE PAGE LINE PAGE LINE

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Key Reporters [email protected] 5

1 MAJORITY CHAIRMAN ADOLPH: Good morning,

2 everyone. I want to welcome everyone to the 2016

3 Commonwealth of Pennsylvania budget hearing for the

4 House of Representatives.

5 Today begins three weeks of hearings for

6 this committee, and we'll try to drill down on the

7 specifics about Governor Wolf's proposal for the

8 upcoming 2016-17 General Fund budget.

9 First I'd like to go over a couple

10 housekeeping items. I would ask everyone in the

11 room, including members, if they would be

12 respectful and turn off their iPhones or iPads,

13 whatever electronic equipment that they may have,

14 because it does interfere with our telecast.

15 And if they have some conversations and

16 I know there are important conversations; and if it

17 cannot be done in a short manner, you can take

18 those conversations outside the room and come back

19 when you finalize your conversations.

20 As we're all aware, we are in

21 unchartered territory, with parts of the current

22 2015-16 general budget unresolved. Let me be clear

23 that it is my intention for these hearings to be

24 focused on the year 2016-17 as much as possible.

25 It is safe to say that we will discuss the '15-16

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1 budget in this room, and those discussions

2 hopefully will continue, but I don't know if we're

3 going to be able to come to any type of resolution

4 regarding this hearing.

5 That being said, there are certain areas

6 of the '15-16 budget that I'm sure some members are

7 going to have some questions on some of the cabinet

8 members that appear before us. But most of the

9 cabinet members are going to be appear before us

10 will be talking about the '16-17 proposal.

11 It is important to remember, for the

12 most part, that those state agencies we have a full

13 12-month budget in place. The following agencies

14 received their full funding as a result of House

15 Bill 1460; those being: The Governor's Office, the

16 Lieutenant Governor's Office, Attorney General,

17 Auditor General, Treasury, Probation and Parole,

18 Drug and Alcohol Program, Department of Insurance,

19 Department of Revenue, Department of State,

20 Department of Transportation, the state police, the

21 Health Care Cost Containment Council, as well as

22 the Department of General Services, Judiciary,

23 State Ethics Commission, Historical and Museum

24 Commission, Environmental Hearing Board, as well as

25 the Department of Aging.

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1 Before we begin today, I'd like to ask

2 each member to come to the mike and introduce

3 themselves and the area that they represent.

4 For the folks at home, I am state

5 Representative from the 156th

6 Legislative District in Delaware County. To my

7 right is Chairman Markosek, and I will let the

8 Chairman start off introducing himself, and the

9 Democratic members, and then we'll move to the

10 Republican members of the committee. Thank you.

11 MINORITY CHAIRMAN MARKOSEK: Okay, thank

12 you. Thank you, Chairman Adolph.

13 As Chairman Adolph mentioned, I am state

14 Representative Joe Markosek of the 25th Legislative

15 District. I represent a district in the eastern

16 suburbs of Allegheny County.

17 CHAIRMAN WHEATLEY: Good morning. I'm

18 state Representative Jake Wheatley. I represent

19 the 19th Legislative District in the City of

20 Pittsburgh, Allegheny County.

21 REPRESENTATIVE ACOSTA: Good morning.

22 I'm Representative Leslie Acosta representing

23 Philadelphia County.

24 REPRESENTATIVE SCHREIBER: Good morning.

25 Kevin Schweyer, representative of the 95th District

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1 from York County.

2 REPRESENTATIVE BRIGGS: Good morning.

3 Tim Briggs, representative of the 149th District in

4 Montgomery County.

5 REPRESENTATIVE ROZZI: Good morning.

6 Representative Mark Rozzi, Berks County.

7 REPRESENTATIVE SCHWEYER: Good morning.

8 Peter Schweyer, representing the 22nd Legislative

9 District, City of Allentown, Lehigh County.

10 REPRESENTATIVE DONATUCCI: Good morning.

11 Maria Donatucci, 185th District, Philadelphia and

12 Delaware counties.

13 REPRESENTATIVE DEAN: Good morning and

14 welcome. Madeleine Dean, Montgomery County, the

15 153rd District.

16 REPRESENTATIVE M. DALEY: Good morning.

17 Mary Joe Daley, Montgomery County, the 148th

18 District.

19 REPRESENTATIVE BULLOCK: Good morning.

20 Representative Donna Bullock, the 195th District in

21 north and west Philadelphia County.

22 REPRESENTATIVE KINSEY: Good morning.

23 Steven Kinsey, 201st Legislative District,

24 Philadelphia County.

25 MAJORITY CHAIRMAN ADOLPH: Thank you.

Key Reporters [email protected] 9

1 To my left, Dave.

2 MR. DONLEY: Hi. Dave Donley, staff

3 Executive Director for the Republicans.

4 MR. SCHRODER: Curt Schroder, Chief

5 Counsel for the House Republican's Appropriations

6 Committee.

7 REPRESENTATIVE KAMPF: Warren Kampf,

8 157th District, Chester and Montgomery counties.

9 REPRESENTATIVE QUINN: Marguerite Quinn,

10 143rd District, which is parts of central and upper

11 Bucks counties.

12 REPRESENTATIVE BOBACK: Good morning.

13 Karen Boback, House District 117, counties of

14 Luzerne, Lackawanna and Wyoming.

15 REPRESENTATIVE HELM: Good morning. Sue

16 Helm, 104th District of Dauphin and Lebanon County.

17 REPRESENTATIVE MARSHALL: Good morning.

18 Jim Marshall, 14th District, parts of Beaver and

19 parts of Butler counties.

20 REPRESENTATIVE MASSER: Good morning.

21 Kurt Masser, 107th District, Northumberland,

22 Montour and Columbia counties.

23 REPRESENTATIVE DUNBAR: Good morning.

24 George Dunbar, Westmoreland County, 56th District.

25 REPRESENTATIVE KILLION: Tom Killion,

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1 168th District, Delaware County.

2 REPRESENTATIVE MILLARD: David Millard,

3 109th District, Columbia County.

4 REPRESENTATIVE PEIFER: Good morning.

5 Mike Peifer, 139th District, Pike and Wayne

6 counties.

7 REPRESENTATIVE SONNEY: Good morning.

8 Curt Sonney, 4th Legislative District, Erie County.

9 REPRESENTATIVE DAY: Good morning. Gary

10 Day, Lehigh and Berks counties.

11 REPRESENTATIVE GREINER: Good morning.

12 Keith Greiner, 43rd District, Lancaster County.

13 REPRESENTATIVE GROVE: Good morning.

14 Seth Grove, 196th District, York County.

15 REPRESENTATIVE PYLE: Good morning.

16 Thanks for being here. Jeff Pyle, 60th Legislative

17 District, Armstrong, Butler and Indiana counties.

18 REPRESENTATIVE KELLER: Good morning.

19 Fred Keller, 85th Legislative District, Union and

20 Snyder counties.

21 REPRESENTATIVE GABLER: Good morning.

22 Matt Gabler, 75th Legislative District, Elk and

23 Clearfield counties.

24 MAJORITY CHAIRMAN ADOLPH: Okay. Thank

25 you very much. And which is customary, Chairman

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1 Markosek and I invite any of the standing committee

2 chairs that may be interested in the testifier this

3 morning. With us is the Democratic Chair of the

4 Finance Committee, Chairman Wheatley. It's my

5 understanding that the Republican Chair, Bernie

6 O'Neill, has an eye injury and could not make it

7 today. So, we hope Chairman O'Neill recovers

8 quickly.

9 Chairman Markosek for opening comments.

10 MINORITY CHAIRMAN MARKOSEK: Thank you,

11 Chairman. And good to be back again. I should

12 have and -- passed over for not any good reason,

13 but Miriam Fox to my immediate right is our

14 Executive Director of the House Democratic

15 Appropriations Committee. I wanted to make sure

16 she was introduced.

17 Welcome, Director Knittel. And today is

18 the first day of our three-week budget hearings,

19 and I look forward to this, of course. The budget

20 proposal is unique considering -- This 2016-17

21 budget proposal is unique considering the

22 circumstances we find ourselves in.

23 I appreciate the work that the IFO has

24 done, as an independent entity, to educate the

25 General Assembly and the public about the

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1 structural deficit. In your latest five-year

2 projections, you indicate that without new revenues

3 are significant cuts -- without new revenues or

4 significant cuts, the Commonwealth is facing a

5 1.9-billion-dollar structural budget deficit for

6 2016-17, growing to more than 2.6 billion in the

7 following years. Of course, this structural,

8 so-called chronic deficit, has plagued the

9 Commonwealth here for the last few years.

10 The continued use of one-time sources

11 to balance the budget, normal growth and

12 expenditures continue to outpace the growth in

13 revenues, the slow erosion of the Commonwealth's

14 tax base, all these have contributed to that, and

15 the failure of the General Assembly to take

16 corrective action, evidenced by the budget plans

17 sent to the Governor before he used his line-item

18 veto authority, and we saw where that -- It was

19 estimated to fall short by about 300 million.

20 The question I have, to get things

21 started here, if I may, Chairman.

22 MAJORITY CHAIRMAN ADOLPH: Chairman

23 Markosek, thank you so much, and I'm glad you

24 introduced your executive director. But, I'd like

25 to welcome the Independent Fiscal Office, okay. If

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1 you have an opening statement, okay, Chairman --

2 MINORITY CHAIRMAN MARKOSEK: Um-hm.

3 MAJORITY CHAIRMAN ADOLPH: -- we would

4 like to hear from you first, and then we'll go

5 right directly back to Chairman Markosek for his

6 questions. How's that?

7 MR. KNITTEL: That sounds very good.

8 MAJORITY CHAIRMAN ADOLPH: Okay. Thank

9 you.

10 MR. KNITTEL: Good morning to all. It's

11 a pleasure to be here today. I do have some very

12 brief opening comments. I think I can move through

13 them in about 5 minutes, and then I can take

14 questions.

15 Chairman Adolph and Chairman Markosek

16 and members of the committee, thank you for the

17 opportunity to testify before you today. For my

18 opening remarks, I would like to briefly discuss

19 the outlook for the Pennsylvania economy, General

20 Fund revenues and the long-term budget outlook.

21 Going to the economic outlook for 2016,

22 recent economic indicators provide very different

23 perspectives on the state and national economies.

24 Some national indicators suggest an increasing risk

25 of recession. Those indicators include, an S&P 500

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1 Index that has declined roughly 10 percent since

2 the start of December, a manufacturing index that

3 has declined in 10 of the past 12 months, and

4 declining corporate profits. However, many

5 underlying fundamentals remain solid, and for

6 Pennsylvania, those fundamentals include:

7 A stable labor market. For 2015, the

8 Pennsylvania economy generated 54,800 additional

9 jobs up from 45,800 in 2014.

10 Relative to income, consumer debt levels

11 have also declined dramatically during the past

12 decade. Moreover, we're starting to see a growth

13 in student loan debt.

14 Finally, there's a solid housing market

15 in Pennsylvania. The data suggests, for 2015, that

16 home sales were up roughly 10 to 12 percent over

17 2014.

18 Due to these solid fundamentals, the

19 forecast does not anticipate that the state or

20 national economies will enter recession in the near

21 future. However, the downside risks have increased

22 over the last six months, and many national

23 forecasts now place the risk of a mild recession at

24 15 to 20 percent. Internally, we think that

25 percentage is a bit lower; closer to 5 or 10

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1 percent.

2 Turning to the revenue outlook for this

3 year, for the midyear revenue update that we

4 released in January, the IFO increased its General

5 Fund revenue estimate for this fiscal year by 200

6 million, and a revised amount is 50 million higher

7 than the corresponding amount in the Executive

8 Budget.

9 Three factors motived the upward

10 revision to revenues. First, we had a very strong

11 growth in personal income tax payments; the

12 estimated payments that we received four times

13 during the year. Through the first seven months of

14 the fiscal year, the PIT estimated payments were up

15 17 percent over the prior year.

16 Second, we had very strong gains in

17 realty transfer taxes. They're up 18.1 percent

18 over the prior year.

19 And finally, we're getting still

20 continued gains in escheats. While the claim

21 payments are holding up relative to forecast, we're

22 getting higher deposits than we had expected, and

23 some of this is a leftover from the policy change

24 last year.

25 For next fiscal year, we're projecting

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1 General Fund growth rate of 2.0 percent. Technical

2 factors, such as the complete phase-out of the

3 capital stock and franchise tax, restrain revenues

4 from an underlying base growth rate of 3.3 down to

5 2.0.

6 Turning to the long-term budget outlook,

7 we recently released a five-year economic and

8 budget outlook as required by statute. Due to the

9 budget impasse, the report was re-released in late

10 January and was updated with certain expenditures

11 as appropriated by the General Assembly and

12 approved by the Governor.

13 Similar to past reports, the updated

14 report finds a modest deficit for the current

15 fiscal year and much larger deficits for succeeding

16 fiscal years. Prior budgets have employed various

17 temporary measure to address the funding

18 shortfalls. For example, the unexpectedly large

19 revenue gain from reducing the escheats holding

20 period generated roughly $380 million in new

21 revenues last fiscal year, and contributed to a

22 carry-forward balance of about $266 million that

23 could be applied against the projected shortfall

24 for this year.

25 Our report also assumes that temporary

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1 measures will be used this fiscal year. They

2 include, changing the timing of reimbursements for

3 school employees' Social Security and county child

4 welfare payments, about $260 million of savings;

5 and changes to the state reimbursement -- excuse me

6 -- and changes for the construction and renovation

7 projects, also known as PlanCon, a savings of 306

8 million. Although these measures significantly

9 close the projected funding gap for this fiscal

10 year, our report did find a residual gap of

11 $300 million.

12 Factors that contribute to the long-term

13 structural deficit include the following:

14 A decline in General Fund support from

15 special funds, such as the Lottery Fund and the Oil

16 and Gas Lease Fund;

17 Second, service populations that are

18 expanding at a faster pace than the underlying

19 labor force that supports the tax base;

20 And third, healthcare inflation that

21 outpaces general inflation and many sources of

22 revenue. The report assumes that trend will

23 continue into the future.

24 After this fiscal year, our expenditure

25 projections are based on reasonable assumptions

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1 regarding the growth of the service populations and

2 the underlying inflation. Based on those

3 assumptions, the report found that the long-term

4 revenue growth fell short of the long-term growth

5 in expenditures. Whether those future expenditure

6 levels are sufficient to adequately address the

7 program needs is a subjective determination, and

8 that report did not address that. Ultimately,

9 policymakers will determine the level of

10 expenditures that are necessary and appropriate to

11 serve the needs of the Commonwealth residents.

12 And to conclude, I'd just like to

13 briefly touch on four tables in your packet that

14 give you a good overview of the current situation,

15 both for the economy and the budget. The first is

16 on page 1, and it's looking at the U.S. economy.

17 Here we have annual growth rates for the last six

18 quarters and for the quarter we're currently in and

19 for next quarter.

20 At the top of the sheet, you can see the

21 underlying growth rates for real growth domestic

22 products for the U.S., the largest broadest measure

23 of the economic health. Going into the last

24 quarter, we had a bit of weakness. The GDP growth

25 was 0.7 percent, but the forecast has it picking up

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1 to about 2 and a half to 3 percent.

2 Down at the bottom half of the table,

3 you'll see some different economic indicators.

4 These are financial indicators, and we have a very

5 different story here, so you'll see a lot of red in

6 the bottom half of the table.

7 For example, corporate domestic profits

8 are declining year over year. The forecast has

9 them down by 12 percent in the fourth quarter. The

10 S&P Index also down; we think down by 10 percent

11 through February 15th for the current quarter. And

12 then the Industrial Production Index, that's

13 measuring the output of manufacturers of mining of

14 utilities.

15 It's very clear that the U.S. economy,

16 the manufacturing sector, the mining sector are in

17 recession, but the rest of the economy is holding

18 up very well. Then down below you have a drop-off

19 year over year in the energy prices.

20 Turning to page 2, a brief snapshot of

21 the Pennsylvania economy. Up top we have some very

22 broad indicators, and I'll just touch on them very

23 briefly. For 2015, we think the Pennsylvania

24 economy expanded by 1.8 percent. And if you look

25 historically, that holds up very well. Wages grew

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1 by 3.5 percent. The Philadelphia Consumer Price

2 Index was actually negative, 0.1, so there was

3 deflation in the Philadelphia metro region, and the

4 Pittsburgh CPI-U a bit higher, 0.7 percent.

5 Down at the bottom, we have the labor

6 market results. Again, the economy generated

7 54,800 jobs. Again, if you look historically,

8 that's a very solid number. For next year we're

9 expecting 52,600. So, overall, we do think the

10 general health of the Pennsylvania economy is

11 solid, and we are not anticipating a recession

12 going forward.

13 On page 5, I'd just like to briefly

14 touch on the inflation measure because it's an

15 important part of the story going forward. Here we

16 have a snapshot of the Philadelphia Consumer Price

17 Index, and I'll just focus on the December 2015

18 column.

19 As you can see, the prices fell year

20 over year by 0.2 percent. And if you look down at

21 the different items, you'll see some negatives

22 here; for example, the price of clothing falling by

23 2.9; transportation falling by 5.1. And then at

24 the very bottom of the table, you'll see negative

25 growth for the all goods category of 2.9 percent.

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1 So, due to various factors, due to low

2 energy prices, due to a strong dollar, the price of

3 goods are falling. However, the price of services

4 continue to rise. And if you look at the middle of

5 the table here in the dark blue, you'll see the

6 cost of medical care in December was up by 2.9

7 percent.

8 So, if you look historically, health

9 care inflation is outpacing general inflation by

10 about 1.5 percentage points, and we've assumed that

11 going forward in our budget projections. We've

12 assumed inflation would be 2.2 percent, and we

13 assumed underlying health care inflation is going

14 up by 3.5 percent. So it's growing faster than

15 many of the revenue sources and faster than the

16 underlying inflation.

17 Finally, the last table I'd like to just

18 touch on very briefly is on page 12. This is a

19 snapshot about the demographics in Pennsylvania.

20 These data were just released by the U.S. Census

21 Bureau for 2015. And the latest data show that

22 there are 12.8 million residents in the

23 Commonwealth.

24 I'll turn your attention to the bottom

25 half of the table on the far right. If we look at

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1 the change from 2015 to the projected amounts in

2 2025, at the very bottom you can see that our group

3 that we call students under age 19, there's no

4 growth there; down by 14,000. For our second

5 group, those aged 20 to 64, what we would call the

6 working-age population, we have actual contraction

7 of 222,000 individuals growth -- excuse me -- a

8 contraction of 0.3 percent per annum. And then

9 finally, the third group, those aged 65 and older,

10 expanding by 673,000 over the next decade, and

11 growth of 2.8 per annum.

12 So the inflation slide that I showed

13 you, the demographics slide that's here, that's

14 motivating a lot of our projections and a lot of

15 the structural deficit that we're encountering.

16 More of the expenditures are shifting over to this

17 age cohort, and it's being driven by higher

18 inflation than it's realized by the underlying

19 economy.

20 With that, I'll conclude and try to

21 answer any questions that you have.

22 MAJORITY CHAIRMAN ADOLPH: Thank you,

23 Mr. Knittel. It's my understanding that the K is

24 silent; is that correct?

25 MR. KNITTEL: That's correct.

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1 MAJORITY CHAIRMAN ADOLPH: I think it's

2 important that we get the pronunciation of our

3 testifiers correctly. I do a pretty bad job of

4 pronunciating some of the names that come before

5 us, and I just want to try to make sure we start

6 off correctly.

7 Okay. I'd like to turn the mike over to

8 Chairman Markosek for opening comments and

9 questions. Thank you.

10 MINORITY CHAIRMAN MARKOSEK: Okay.

11 Thank you, Chairman, and pretty much got ahead of

12 my opening comments already. So just a quick

13 question. You had touched on this a little bit on

14 the expenditure side. A lot of your reports and

15 things what you do is on the revenue side.

16 But on the expenditure side, for our

17 current budget situation, our current proposed

18 budget, what portion of the increased expenditures

19 are due, in your opinion, in your office's opinion,

20 to mandatory increases? I know we have mandatory

21 payments from the federal government and Medicaid,

22 pensions, et cetera, that by law we have to pay.

23 Can you talk a little bit about that and

24 expound on that a little bit, because, as you

25 mentioned, we've got a 1.9 -- minimum 1.9-billion

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1 dollar deficit; up to 2.6, perhaps, in the next

2 couple of years, and a lot of that is driven by

3 mandatory increases. Can you talk on that a little

4 bit?

5 MR. KNITTEL: Yes, I can talk about

6 that. Let me go to two sources. I'll first turn

7 to the Executive Budget and the projections there.

8 If you look at the Executive Budget, the

9 increase and the total spend going into FY '16-17,

10 we have a 2.5 billion. We've pulled off the

11 initiatives in there at 680 million, and that

12 leaves you with a residual of 1.8 billion, less the

13 initiatives.

14 The mandatory categories that you noted,

15 I would say there are four of them. That would

16 include pensions, debt, certain programs in DHS

17 such as Medical Assistance and long-term living,

18 and then finally, the Department of Corrections.

19 If we tally up those four, we'd have a total of 1.3

20 billion, and to that we add one-time funding

21 pickups that were used to reduce the deficit in

22 this year, and that's 260 million; total being 1.6

23 billion. The ratio of those two figures suggest

24 that about 88 percent of the amount is mandatory, a

25 cost-to-carry in the Executive Budget.

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1 Now, we can do the same computation for

2 the report that my office put out in January. And

3 that same computation suggests that about 80

4 percent of the increase in expenditures going into

5 FY '16-17 would be mandatory. So we think about 80

6 to 90 percent of these expenditures going forward

7 are, indeed, mandatory.

8 MINORITY CHAIRMAN MARKOSEK: Okay, thank

9 you. I know every member here on both sides of the

10 aisle want to have more efficient government. But

11 I think one of the things folks don't understand

12 all the time is the fact that there are certain

13 cost drivers that are evident in our society today

14 with our budget impact that we really can't help.

15 If I'm repeating you correctly, it

16 sounds like about 80 percent of the increases that

17 we're looking at now are things that we have to do,

18 through laws and other mandates, that we really

19 don't have a whole lot of control over. So we are

20 going to have -- Is it fair to say, we are going to

21 have a big deficit, a big number deficit, and we

22 can disagree on exactly what that number is, but a

23 big number deficit this year no matter what we do,

24 and we need to address that in some fashion?

25 MR. KNITTEL: Yeah. Our projections

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1 suggest the non-mandatory items were held flat, and

2 only the mandatory increased, it would suggest a

3 significant deficit for next year.

4 MINORITY CHAIRMAN MARKOSEK: Okay. One

5 other quick question, if I may, and it was in your

6 draft that you pointed out on page 1, the price of

7 oil. Does your office have any predictions on

8 where the price of oil is going for the next year?

9 MR. KNITTEL: We don't do those

10 internally, but our economic provider, Global

11 Insight, I believe has that relatively flat over

12 the next year; a slight increase, but very modest.

13 MINORITY CHAIRMAN MARKOSEK: Okay.

14 Thank you.

15 MAJORITY CHAIRMAN ADOLPH: Thank you,

16 Chairman. Good morning, again.

17 MR. KNITTEL: Good morning.

18 MAJORITY CHAIRMAN ADOLPH: During the

19 Governor's budget address, the Governor laid out

20 two roads; one significant increase in spending and

21 a significant increase in taxes; or, one that had

22 budget cuts that saw financial collapse of the

23 Commonwealth.

24 It's my opinion that there's a middle

25 road that we can take that does a combination of

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1 both, manage expenses and then take on the

2 structural deficit that is forthcoming.

3 The question is, I'd like the

4 Independent Fiscal Office to give the members of

5 this Appropriations Committee the difference

6 between a structural deficit and a budget deficit?

7 MR. KNITTEL: Sure. I would be happy to

8 do that. The structural deficit I would

9 characterize as having three components that are

10 necessary. The first one is --

11 Well, in general -- Let me give a

12 general definition first. It's the underlying

13 deficit that remains after you control certain

14 factors. The factors I would control for is normal

15 economic growth, and for Pennsylvania that means

16 about 2 percent growth of the economy; in real

17 terms, about 50,000 jobs a year. In our report, we

18 take it out to normal growth.

19 The second thing is that, we're

20 reflecting fundamental dynamics in the economy as

21 well. So that would include the demographics you

22 see here, the growth in the older population,

23 continued tax-base erosion. It would also include

24 that it would not reflect any temporary measures,

25 and it would have a full phase-in on policy. So,

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1 for example, Medicaid, Medical Assistance, this

2 increase in state share, the full phase-out of the

3 capital stock. So that would be the structural

4 deficit after all those are phased in, what's left

5 over.

6 MAJORITY CHAIRMAN ADOLPH: Okay. And a

7 budget deficit?

8 MR. KNITTEL: A budget deficit is just

9 the shortfall in a given year. It may include

10 temporary items. It may not reflect long-term

11 trends.

12 MAJORITY CHAIRMAN ADOLPH: And there's

13 some proposals that can be made by the legislature

14 and the Governor can sign. You had mentioned the

15 escheats revenue that came in last year, which was

16 a proposal that started, I believe, with this

17 committee, okay, and made a proposal that has

18 helped the revenue considerably for this year; is

19 that correct?

20 MR. KNITTEL: I would agree with that.

21 Last year we came in at 380 million. Again, a

22 large amount of that, one could characterize that

23 as being carried forward to this year. We were

24 only anticipating 150 million from it, so there was

25 a 230-million gain from that.

Key Reporters [email protected] 29

1 MAJORITY CHAIRMAN ADOLPH: Mr. Knittel,

2 unfortunately, Chairman Markosek and I, we seem to

3 always be facing fiscal catastrophes since we

4 became chairmen of the Appropriations Committee.

5 Fortunately, no one has blamed us personally for

6 this.

7 However, this is not the first time that

8 state government in Pennsylvania has faced what

9 would be called a structural deficit; is that

10 correct? Could you just give us some history of

11 this structural deficit, and where do you think it

12 all started?

13 MR. KNITTEL: I can speak generally to

14 that. My understanding, and this was before the

15 office was up and running--we started in 2011--

16 that there was some deficit issues prior to that

17 caused by the recession. I'm not familiar with the

18 magnitude of that, but there was challenges there

19 as well.

20 MAJORITY CHAIRMAN ADOLPH: Okay. Would

21 the loss of federal stimulus money have anything to

22 do with a structural deficit?

23 MR. KNITTEL: If those monies are

24 temporary, I would say no, because it's a temporary

25 funding source.

Key Reporters [email protected] 30

1 MAJORITY CHAIRMAN ADOLPH: And if the

2 state does not replace the loss of federal stimulus

3 money, how does that affect the structural deficit

4 if this money was used to start new programs, et

5 cetera?

6 MR. KNITTEL: Yeah. Again, if the

7 federal monies were temporary and they were

8 intended for that purpose, you know, long-term

9 computations, it would not enter into the deficit

10 projections.

11 MAJORITY CHAIRMAN ADOLPH: Okay. Would

12 it have a problem with the next year's budget

13 deficit?

14 MR. KNITTEL: If federal funds were

15 there and then they were removed --

16 MAJORITY CHAIRMAN ADOLPH: Yes.

17 MR. KNITTEL: -- I would think in the

18 next year it would appear as though there was a

19 deficit.

20 MAJORITY CHAIRMAN ADOLPH: Okay. Thank

21 you. I guess, next question, in trying to resolve

22 a structural deficit, how does increased spending,

23 non-mandatory expenditures affect a structural

24 deficit?

25 MR. KNITTEL: Well, it would factor into

Key Reporters [email protected] 31

1 it in the same way the mandatory would. In our

2 report, we're doing mechanical computations. We're

3 just implying an inflation factor to that

4 non-mandatory spending and the overall service

5 population. So, long term, in our report it's

6 having the same impact as the mandatory spending.

7 MAJORITY CHAIRMAN ADOLPH: Okay. So if

8 there was a necessity to find some recurring

9 revenue to continue -- to solve the structural

10 deficit that a Commonwealth was facing, would

11 increased spending cause increased revenue in order

12 to solve that?

13 MR. KNITTEL: If I could rephrase the

14 question so a higher spending reverberating through

15 the economy and increasing tax revenues?

16 MAJORITY CHAIRMAN ADOLPH: Yes. In

17 looking at some of your charts, and I know -- and I

18 certainly do appreciate you updating your charts,

19 okay, because I was following the proposed

20 structural deficit, and you updated your proposed

21 structural deficit after the Governor released his

22 proposed spending for 2016-17.

23 MR. KNITTEL: Yes. We had a report

24 originally in December, and we used the cost-to-

25 carry concept there. We have to put it out by

Key Reporters [email protected] 32

1 statute, so we had to go forward with the report.

2 Then upon partial passage of H.R. 1460, we used the

3 spend numbers in that bill.

4 MAJORITY CHAIRMAN ADOLPH: Okay. And

5 that increased your proposed -- the proposed

6 structural deficit as a result of that; is that

7 correct?

8 MR. KNITTEL: I believe it did. I'd

9 have to go back and check, but I believe that's

10 correct.

11 MAJORITY CHAIRMAN ADOLPH: All right.

12 Thank you. We'll go back and forth as far as the

13 questions. The first person to ask some questions

14 is the Chairman of the Democratic Finance

15 Committee, Chairman Jake Wheatley.

16 CHAIRMAN WHEATLEY: Thank you, Mr.

17 Chairman. And good morning.

18 MR. KNITTEL: Good morning.

19 CHAIRMAN WHEATLEY: First, I wanted to

20 just thank you for your presentation because it was

21 definitely helping me clarify some things in my own

22 mind. You mentioned 80 to 90 percent of our

23 increased spending would be based on mandatory

24 spending; things that we can no longer -- we don't

25 have a say in doing, but these are things that we

Key Reporters [email protected] 33

1 have to do to address our growing demographics in

2 the ways that you put it.

3 And so, putting the political realities

4 aside, and just from a purely fiscal perspective,

5 would you say it would be fiscally unrealistic to

6 employ only fund transfers or various spending cuts

7 and expect the revenue deficit growth to change?

8 MR. KNITTEL: If I could rephrase the

9 question. We're looking at different options to

10 address the projected shortfall.

11 CHAIRMAN WHEATLEY: Right.

12 MR. KNITTEL: And there's various

13 options, either revenues or spending or temporary

14 transfers.

15 CHAIRMAN WHEATLEY: As it relates to

16 your structural deficit.

17 MR. KNITTEL: Yes, in order to address

18 that. The temporary transfers, by definition, they

19 won't affect the structural deficit at all. So, it

20 has to either be a mix of the spending or revenue

21 enhancements.

22 CHAIRMAN WHEATLEY: When you say a mix

23 of spending cuts and revenue enhancements, if 90

24 percent of the spending is mandatory, there's not a

25 lot of cutting you can do to address the long-term

Key Reporters [email protected] 34

1 structural issue. So you have to, by the

2 calculations from a fiscal perspective, put more

3 revenue -- they are long-term, recurring revenue,

4 sustainable sources on the table.

5 MR. KNITTEL: Yeah. If our calculations

6 here somewhere between 80 to 90 percent are

7 mandatory, it does suggest that the residual, if it

8 was only to be done through expenditures, would

9 have to be significant, the reductions.

10 CHAIRMAN WHEATLEY: Significant

11 reduction in expenditures?

12 MR. KNITTEL: If those were only relied

13 on to address the funding shortfall.

14 CHAIRMAN WHEATLEY: And just so I'm

15 clear, because if 90 percent is mandatory, how do

16 you get the significant reductions on the cut side?

17 MR. KNITTEL: Just on that residual --

18 CHAIRMAN WHEATLEY: On the 10 percent?

19 MR. KNITTEL: Correct.

20 CHAIRMAN WHEATLEY: So cut all the

21 10 percent?

22 MR. KNITTEL: I'm not sure of the

23 magnitude that would be required to do that.

24 CHAIRMAN WHEATLEY: Okay. And so, the

25 other issue I have is, from our revenue --

Key Reporters [email protected] 35

1 sustainable revenue sources, can you tell me

2 outside of personal income taxes and sales tax, are

3 there any other sources of revenue that can help in

4 the magnitude of the structural revenue component

5 that could address the long-term structural -- that

6 has enough wherewithal to address the long-term

7 structural deficit?

8 MR. KNITTEL: Beyond those two revenue

9 sources, and they dominate--I believe they are 75

10 or 80 percent of the total revenues--it's difficult

11 to generate significant amounts of revenue from the

12 other sources at this point.

13 CHAIRMAN WHEATLEY: And then, just two

14 final questions, if I can. One, I know you

15 mentioned to the risk factors nationally, and you

16 suggested that Pennsylvania looks as if it is doing

17 well enough to weather whatever mild recession that

18 might come nationally.

19 Do you think it's prudent upon us to

20 also anticipate, sometime in the near future,

21 having to put money to the side, maybe, actually,

22 put money into our rainy-day fund for any downturn

23 nationally that we may not be anticipating?

24 Because, I'm assuming, in 2006, 2007, we never

25 anticipated the 2008 recession either, but we had

Key Reporters [email protected] 36

1 wherewithal to kind of brace ourselves for it.

2 It's my understanding that right now, if a downturn

3 happened unexpectedly, Pennsylvania does not have

4 the resources necessary to weather that, even a

5 mild one.

6 MR. KNITTEL: Yes. If it's possible and

7 manageable, it's always a good policy to set some

8 additional funds aside for a recessionary downturn

9 to stabilize the economy, stabilize the spending.

10 CHAIRMAN WHEATLEY: So, as part of our

11 kind of addressing the structural budget deficit,

12 we probably also should be looking to figure out

13 ways to have our rainy-date fund or some component

14 to handle any mild recession or major recession in

15 the future?

16 MR. KNITTEL: If that could be managed,

17 that's always a good thing if the money can be set

18 aside.

19 CHAIRMAN WHEATLEY: And then, my last

20 question is, we've been working over the last

21 several months to try to actually figure out a way

22 to help eliminate the school property tax portion

23 of folks' bills. One of the concepts, of course,

24 is to switch to a different revenue source, which

25 you've heard of before and you've done some review

Key Reporters [email protected] 37

1 of. Ours is a phase-in over three years' approach

2 to get the 50 percent, 75 percent, and then total

3 elimination in the third year and shifting to a

4 higher PIT.

5 And as you know, whenever we talk about

6 shifting and higher tax conversation, it's harder

7 for us in the legislative body to actually

8 comprehend those. Would your operation, if given

9 the authority --

10 First, do you have any objections to

11 being given the authority, based off of your

12 ability to assess and actually raise the rate based

13 off of our direction; meaning, if we want in a

14 three-year period to get a hundred percent total

15 elimination and to replace our current funding of

16 our state system, using the fair funding system

17 that we all agreed to as the formula of

18 distribution, would you be able and capable to

19 drive that from your shop in operation, or do you

20 anticipate any regulatory changes that would have

21 to be necessary, outside of giving you that

22 authority?

23 MR. KNITTEL: Regarding the estimation

24 of what would be required to replace the revenues,

25 my office could certainly do that. We've done it

Key Reporters [email protected] 38

1 in the past with other proposals, 1776, and we

2 could do such computation.

3 Regarding the administration or the

4 writing of the statute, or anything like that, we

5 wouldn't have the expertise to do that end of it.

6 CHAIRMAN WHEATLEY: But you would be

7 able from year to year to adjust the rate based off

8 of what is needed to get you 50 percent, 75

9 percent, and finally 100 percent elimination and

10 redistribution of funds?

11 MR. KNITTEL: I believe if the data were

12 made available to us and we could consult with the

13 right people needed to make that computation, that

14 we could probably do so.

15 CHAIRMAN WHEATLEY: Thank you. Thank

16 you, Mr. Chairman.

17 MAJORITY CHAIRMAN ADOLPH: Thank you,

18 Chairman Wheatley.

19 I'd like to acknowledge the presence of

20 members of the Appropriations Committee that have

21 arrived since introduction. That's Representative

22 Vereb of Montgomery County; Representative

23 Christiana of Beaver County. Also with us today is

24 Representative Miller of Lancaster and

25 Representative Gillen of Berks County.

Key Reporters [email protected] 39

1 MAJORITY CHAIRMAN ADOLPH: Chairman

2 Markosek.

3 MINORITY CHAIRMAN MARKOSEK: Oh, yeah,

4 thank you. We have some members that have arrived

5 as well: Representative Bradford of Montgomery

6 County; Representative O'Brien of Philadelphia

7 County, and Representative Galloway of Bucks

8 County.

9 MAJORITY CHAIRMAN ADOLPH: And

10 Representative of Bucks County has

11 joined us.

12 It is customary that the Chairman and I

13 allow the standing committee chairs more latitude

14 as far as time is concerned. But because of the

15 size of our committee, the largest committee in the

16 State Capitol, we'd like opening questions and

17 comments to try to be limited to 5 minutes; and, if

18 necessary, we'll go to a second round. I'm putting

19 that out there, at first, so everybody understands

20 it.

21 The next question will be by

22 Representative George Dunbar. Thank you.

23 REPRESENTATIVE DUNBAR: Thank you, Mr.

24 Chairman.

25 Thank you, Mr. Knittel, for being here.

Key Reporters [email protected] 40

1 And I will try to adhere to your five-minute rule

2 there, Chairman.

3 So far we've heard, as expected, a lot

4 of discussion about the structural deficit and the

5 Governor's desire to increase taxes to address this

6 deficit and to avoid Armageddon in the state of

7 Pennsylvania. In your January 2016 Economic and

8 Budget Outlook, on page 49 it reads: The

9 Commonwealth has operated with a structural

10 imbalance in the General Fund for several years,

11 largely due to the 2008-2009 recession and the

12 tepid recovery.

13 Also in your November 2014 report, on

14 page 37 you indicate: The structural imbalance for

15 2008-2009 was more than $3 billion. That's without

16 including the stimulus funds.

17 And following up to Chairman Adolph's

18 questions, the difference between a structural

19 deficient and a budget deficit, we're talking about

20 a structural deficit of at least $3 billion from

21 2008-2009, correct?

22 MR. KNITTEL: That number I can't

23 confirm. We didn't do a -- that computation in

24 '08-09. Whether it was structural or not, I

25 can't --

Key Reporters [email protected] 41

1 REPRESENTATIVE DUNBAR: Okay. And just

2 as a point of contention, in response to the

3 Chairman's question about a stimulus fund, should

4 they be included as part of a structural deficit,

5 you said no. But if those funds were used to

6 reduce regular operating costs, would they not then

7 be part of the structural deficit going forward

8 because that's a baseline cost?

9 MR. KNITTEL: I would, again,

10 characterize that, if the funds were injected into

11 the state economy and they were temporary funds

12 intended for a temporary purpose --

13 REPRESENTATIVE DUNBAR: But if they

14 weren't a temporary purpose, they were used.

15 MR. KNITTEL: If they were not

16 temporary, then I would say yes, because it would

17 be included.

18 REPRESENTATIVE DUNBAR: In that regard,

19 I would say then our structural deficit may have

20 been closer to $4 billion in 2008-2009.

21 Following through on that, if our

22 structural deficit in '08-09 was $4 billion, and

23 every year we've had a budget since then and the

24 budget has been in balance, we've addressed that

25 through budget deficits, getting back to what

Key Reporters [email protected] 42

1 Chairman Adolph was saying about the difference

2 between a budget deficit and a structural deficit.

3 So make sure I understand this, so every

4 year we address our budget deficit, but it doesn't

5 always fix our structural deficit.

6 MR. KNITTEL: Yes, I would agree with

7 that.

8 REPRESENTATIVE DUNBAR: And Armageddon

9 hasn't taken place. We're still here. Okay. I'll

10 take that as a yes.

11 So, if our structural deficit was close

12 to $4 billion in '08-09, and we're projecting

13 $1.9 billion, I believe Chairman Markosek used that

14 term. 1.9 billion, Joe, is that where we --

15 MR. KNITTEL: Yes, next year.

16 REPRESENTATIVE DUNBAR: Okay. He called

17 it a structural budget deficit, which is combining

18 both terms, so I'm a little bit confused. But,

19 anyway, we've gone from 4 billion down to 1.9. But

20 since '08-09, we have reduced our structural

21 deficit.

22 MR. KNITTEL: Again, if it was, indeed,

23 4 billion, I -- We haven't done that computation.

24 REPRESENTATIVE DUNBAR: Okay. We've

25 done it every year through temporary measures,

Key Reporters [email protected] 43

1 budgetary techniques, but we used that to address

2 our budget deficit, but we've also reduced our

3 structural deficit since then.

4 MR. KNITTEL: Again, I'm not sure what

5 the base is in that year; what the deficit number

6 is.

7 REPRESENTATIVE DUNBAR: So, I guess,

8 really, what I'm getting at is, there's more than

9 just one answer to how we fix this problem.

10 MR. KNITTEL: Well, there could be many

11 approaches for addressing a structural issue.

12 REPRESENTATIVE DUNBAR: Thank you.

13 That's really all I had. And I think I got under

14 five minutes there, Chairman.

15 MAJORITY CHAIRMAN ADOLPH: You did very

16 well. Representative Mary Jo Daley.

17 REPRESENTATIVE M. DALEY: Thank you, Mr.

18 Chairman.

19 And thank you, Mr. Knittel. My question

20 really has to do with the student debt. Over the

21 last few years, your office has provided some

22 really important statistics on student loan debt in

23 Pennsylvania. But, unfortunately, our students

24 still have some of the highest debt load when they

25 graduate and are looking for their first job.

Key Reporters [email protected] 44

1 Can you give us an update on this issue?

2 MR. KNITTEL: Sure, absolutely. As you

3 know, on page 3 of the handout, we have some data

4 on student loan debt, and these data are all put

5 out by the New York Federal Reserve. They do an

6 excellent job.

7 And the student loan debt currently in

8 Pennsylvania, they have it at $57.2 billion, and

9 Pennsylvania is one of the higher student loan debt

10 states. I believe it's second in the nation on a

11 per capita basis.

12 The good news is, that appears to have

13 been moderating very recently. It just started to

14 come down a bit. The levels are still very high,

15 although the growth rate has been moderating.

16 We think, going forward, it's going to

17 continue to be an important issue. We think the

18 debt burdens that have been occurred have, indeed,

19 slowed economic growth, and we've seen some of

20 that. It's also delayed things such as household

21 formation and the buying of large purchases such as

22 cars.

23 We are seeing a lot of enrollment in

24 some of the relief programs, like, pay as you earn

25 and debt forgiveness for individuals who work for

Key Reporters [email protected] 45

1 the public sector that can enter into these

2 programs, which are very important and do provide

3 significant relief. And, hopefully, everybody is

4 aware of those programs and are signed up who

5 qualify.

6 REPRESENTATIVE M. DALEY: I just had a

7 couple of very brief questions to go along with

8 this. Looking at the Pennsylvania demographic

9 trends, they're broken down in age groups with

10 pretty flat growth. So I'm just wondering, if

11 Pennsylvania has a reputation for high college

12 debt, is that affecting the number of students we

13 see coming -- I mean, is there any way to break

14 those down so they're college age growth in

15 demographics in Pennsylvania?

16 MR. KNITTEL: Oh, certainly. We can --

17 I don't have it right here, but we can certainly do

18 that just to focus.

19 REPRESENTATIVE M. DALEY: And then the

20 other question I had was, would you be able to

21 break down the number of jobs that recent college

22 grads are filling and what kind of salaries they're

23 earning? Because if we've had job growth, it would

24 be interesting to know how many of those are first

25 jobs for college grads so what they're seeing in

Key Reporters [email protected] 46

1 terms of moving into Pennsylvania, because, we're

2 also one of the older states, age-wise. It would

3 be good to know that there were things that are

4 attracting younger people to either come to college

5 here, stay here, get a job here. So I'd be very

6 interested in that breakdown.

7 MR. KNITTEL: Absolutely. We'll look

8 into that.

9 REPRESENTATIVE M. DALEY: Great. Thank

10 you.

11 MAJORITY CHAIRMAN ADOLPH: Thank you,

12 Representative. Representative Keith Greiner.

13 REPRESENTATIVE GREINER: Thank you, Mr.

14 Chairman.

15 And, Director Knittel, thank you for

16 being here. I'm going to focus on the structural

17 deficit also, as many have before me. During the

18 most recent budget negotiations, there was an

19 understanding by all the caucuses and the

20 Administration of the Commonwealth, and the

21 Administration -- that the Commonwealth was facing

22 a structural deficit of about $1.25 billion for

23 '15-16. That was an agreement among all of us.

24 And in December of 2015, your office

25 released its Economic and Budget Outlook Report

Key Reporters [email protected] 47

1 which concluded that projected expenditures, well-

2 paced revenues through the year 2021 under current

3 laws and policies. The structural imbalance does

4 grow each year, as the tax-base expansion has been

5 insufficient to maintain the level of current

6 services. This report identified a structural

7 deficit of 1.52 billion for 2015-16 and growing to

8 about 2 and a half billion in '16-17.

9 But after this report was published, the

10 General Assembly sent House Bill 1460 to the

11 Governor's desk. Governor Wolf signed this into

12 law as Act 10(a) with specific line-item vetoes.

13 H.B. 1560 (sic) reduced the General Fund spending

14 level to $30.2 billion, and it anticipated the need

15 for about $300 million of new revenues to balance

16 the budget.

17 That 300 million, I think you had

18 mentioned at the start of your presentation and so

19 did Chairman Markosek alluded to that. We as a

20 caucus had looked at that. We had determined that

21 there were several ways to do that through liquor

22 privatization and other nonbroad-based taxes.

23 Then in January your office released an

24 updated Economic and Budget Outlook which was based

25 on the spending levels contained in that House Bill

Key Reporters [email protected] 48

1 1460. And while the analysis still concluded that

2 projected expenditures will outpace revenues

3 through the year 2020 and '21 under the current law

4 and policies, the level of structural deficit was

5 reduced to 760 million in '15-16 and 1.9 billion in

6 '16-17 under that budget, which gives rise to the

7 fact that controlling spending is a means to

8 helping to solve part of our structural deficit

9 problem.

10 Furthermore, requiring the lapsing of

11 unused monies and adding the beginning balance for

12 2015-16 reduced the budget deficit to approximately

13 $300 million, which is the amount, as I said, that

14 H.B. 1460, is soon to be generated from, we were

15 looking at liquor privatization and other nonbroad-

16 based taxes.

17 Therefore, while the Governor has been

18 touting that H.B. 1460 is out of balance, your

19 analysis has proved that our General Fund budget

20 would have actually been in balance.

21 Then through discussions and listening

22 to the Governor, and I thought what Chairman Adolph

23 might be alluding to this, it appears that the

24 Governor, he looks like -- he's looking to two

25 paths; one that seems to -- in order to close the

Key Reporters [email protected] 49

1 structural deficit. One is large tax increases on

2 businesses and working families in Pennsylvania; or

3 two, unprecedented cuts in Commonwealth

4 expenditures that will decimate public education,

5 human services and higher education.

6 I understand you're a nonpartisan body,

7 and I'm glad that you're there doing what you do.

8 But from a 10,000-foot level, isn't there really a

9 third path that we need to look at, other than

10 those -- You know, the doom and gloom we hear of

11 the cuts or these excessive tax spikes on the

12 working class that --

13 Don't we have an alternative that can be

14 employed, such as H.B. 1460, which is a path of

15 minimal increases? You know, we would balance the

16 budget -- I understand --

17 I thank you for the definition between

18 the budget deficit and the structural deficit. But

19 can't we do something other than those alternatives

20 that we're hearing from the Administration?

21 MR. KNITTEL: Well, in regards to

22 addressing the structural deficit going forward,

23 all options are available, whether they're on the

24 expenditure side or the revenue side.

25 REPRESENTATIVE GREINER: So I guess what

Key Reporters [email protected] 50

1 you're saying is -- I mean -- But I'm saying those

2 alternatives, the extremes. I would say there's

3 probably a happy medium that we can strike

4 in-between. Like I said, maybe as an independent

5 body maybe you don't wanna -- you're afraid to say

6 that.

7 But, I mean, that's kind of the way I'm

8 looking at it, and we need to work together as a

9 legislative body and through the branches to try to

10 get this accomplished. That's all I'm asking.

11 MR. KNITTEL: Sure, absolutely. We

12 cannot make recommendations, but we can say, both

13 options on the revenue and expenditure side are

14 open to address the issue.

15 REPRESENTATIVE GREINER: Well, like I

16 said, it's a serious issue, but I think we need to

17 be objective looking at it. Once again, I

18 appreciate your time.

19 And, thank you, Mr. Chairman.

20 MAJORITY CHAIRMAN ADOLPH: Thank you,

21 Representative. Representative Dean.

22 REPRESENTATIVE DEAN: Good morning, and

23 thank you, Director, for your economic outlook and

24 the update and the trends and the demographics.

25 It's all very interesting and a perfect place for

Key Reporters [email protected] 51

1 us to start this conversation about the upcoming

2 budget.

3 As I look at the 2015-2016 official

4 estimate; if you take a look at sales tax and

5 personal income tax, that makes up about 73 percent

6 of the General Fund revenues. Corporate tax coming

7 in, if you added that in, it would be about 82

8 percent of the general revenues.

9 So what I'm interested in is, can you

10 give me some sort of an assessment of the trends in

11 revenues in Pennsylvania that you see from the past

12 moving forward? Where are our revenues outpacing

13 expenditures or expectations, maybe? Where are

14 they lagging behind, and how does that affect our

15 structural deficit?

16 MR. KNITTEL: Sure. Absolutely.

17 Clearly, the one that's growing in pace with the

18 overall economy is the personal income tax.

19 That's -- The growth rate that we're seeing right

20 now is pretty much right in line with the overall

21 growth rate of the Pennsylvania economy, and that's

22 been true for a number of years. When the

23 recession hit, that did not happen, but then it

24 recovered quickly.

25 The other two that you mentioned, the

Key Reporters [email protected] 52

1 sales and use tax, clearly, it's been lagging.

2 That's been going on for quite a while due to these

3 tax-base erosion issues; folks buying more

4 services; demographics are in play; Internet sales,

5 many issues there.

6 Corporate net income, we had a very good

7 year last year; a significant growth unexpected.

8 This year we're projecting a decline in corporate

9 income tax revenues; about 2 or 3 percent. I think

10 the Department of Revenue is on the same page with

11 us regarding that, so we're seeing a slow-down

12 there.

13 And, in general, corporate net income

14 has not kept pace with the economy either, and

15 there's base erosion there as well because, over

16 time, more of the activity is taking place in

17 pass-through businesses. So, pass-through

18 businesses in Pennsylvania pay a tax of 3.07, a

19 corporation at 9.99, and as the business activity

20 is shifting over to the lower tax rate, it's

21 reducing the revenue capacity.

22 The other major revenue sources are

23 fairly modest. Of course, cigarettes is even

24 declining. Inheritance tax, very dependent on the

25 stock market. Reality transfer, a nice gain this

Key Reporters [email protected] 53

1 year, but that's general growth, too. Usually, the

2 home appreciation is fairly flat. So of all of

3 them, the personal income tax keeps up with the

4 overall economy growth rate best.

5 REPRESENTATIVE DEAN: And I see the

6 connection between that and the job growth that you

7 have identified for the past year and the projected

8 50,000 jobs growing. Unfortunately, in your

9 demographics, you show the working-age is -- the

10 working-age folks are possibly leaving us a little

11 bit.

12 MR. KNITTEL: Yes.

13 REPRESENTATIVE DEAN: And I think maybe

14 the central question that you can see a lot of us

15 talking about, and wanting to understand best, is

16 the impact of all of this on the structural

17 deficit. If we talk about -- It's pretty clear

18 this structural deficient is a bipartisan problem.

19 It most likely dates back to well before I was here

20 to, maybe, the Ridge Administration with the

21 increase in employee benefits -- state employee

22 benefits. No one administration seems to own it.

23 But I think we're hearing now something

24 very critical, which is, whether you call it a

25 half-a-billion-dollar structural deficit or 300 and

Key Reporters [email protected] 54

1 some million dollar, you are projecting. You, the

2 Independent Fiscal Office, is projecting a near

3 2-billion-dollar structural deficit moving forward.

4 What does that look like come next year?

5 Or, maybe the flip side is, how would a smart

6 government move forward so that we avoid that

7 2-billion-dollar structural deficit?

8 MR. KNITTEL: Again, I would -- It is

9 about 2 billion, 1.9, but then continuing to grow

10 after that point, and going out to 2.6 billion.

11 And, again, a lot of this is due to the underlying

12 fundamentals. It's due to demographics; things

13 that are hard to address; tax base erosion.

14 Regarding on the revenue side, as you

15 noted, a lot of the revenue sources are not keeping

16 pace with the economy. It's not keeping pace with

17 the needs on the expenditure side.

18 And without making a recommendation one

19 way or the other, and coming at this from a purely

20 revenue neutral standpoint, the best way to enhance

21 revenue capacity is to expand basis and lower

22 rates; again, going at it from a revenue neutral

23 standpoint. And if one does that, then it will

24 mimic the growth rate of the economy more than it

25 does currently.

Key Reporters [email protected] 55

1 REPRESENTATIVE DEAN: Thank you for your

2 answers. And I'm also optimistic. I hear folks on

3 the other side of the aisle saying there's a middle

4 way. That must mean to me some increase in

5 revenues to deal with our increasing expenditures.

6 So, I thank you.

7 MAJORITY CHAIRMAN ADOLPH: Thank you,

8 Representative. Representative Jeff Pyle.

9 REPRESENTATIVE PYLE: Thank you,

10 Chairman.

11 And thank you, Mr. Knittel. I have some

12 questions on the revenue end of things and the

13 Governor's budget proposal. And I know one of his

14 hallmarks on this thing is a tax on natural gas, a

15 severance tax. I noticed within his proposal he is

16 asking for a 6.5 percent.

17 What I'm curious about is, we already

18 have an impact fee in place. How does the impact

19 fee work out numerically versus what this severance

20 tax is, And how are we calculating -- What is the

21 number he's projecting? 185.5 in 2015, they see

22 that going to -- Or pardon me. It was 185.5 in

23 2015; down from 22 point 3 point 5 (sic) in '14.

24 That's a pretty precipitous drop.

25 I've noticed his projections for

Key Reporters [email protected] 56

1 severance actually go the opposite direction, an

2 increase in the gross amounts when we've shown

3 revenue falling. I'm not a financial guy. Please

4 explain this to me.

5 MR. KNITTEL: Sure. Absolutely. The

6 proposal is at 6.5 percent. In your packet, we had

7 included at the very end the impact fee update, and

8 we're expecting 185 million in impact fee revenues

9 this year.

10 Going forward, we think that will be

11 largely flat. It won't come up too much. The

12 number of wells drilled is falling off. And, quite

13 frankly, there are a lot of wells that are shut in

14 that are ready to produce but are not producing

15 right now because of the very low price.

16 Regarding the Administration's estimate,

17 we're going to, hopefully, in about a month, month

18 and a half, put out an analysis of the revenue

19 proposals. We're required to do that by statute.

20 So, at that time we'll take a look at the

21 Administration's estimate, and we'll contact them

22 and try to work through the figures.

23 REPRESENTATIVE PYLE: Okay. In arriving

24 at that 185.5 number you're projecting out this

25 upcoming year, I'm curious as to the point at which

Key Reporters [email protected] 57

1 you're measuring the value of that gas. Are you

2 measuring it at the wellhead where it enters the

3 trunk line at the market? What are we doing here?

4 MR. KNITTEL: When we compute our

5 effective tax rates, we measure it at the valve at

6 the wellhead. So we take the Hub price and we

7 deduct off the post-production costs.

8 REPRESENTATIVE PYLE: The Hub price and

9 the wellhead price are different.

10 MR. KNITTEL: Yes.

11 REPRESENTATIVE PYLE: When it comes out

12 at the wellhead, it is raw natural gas containing

13 about 36 other compounds and elements that have to

14 be separated out from the actual product that is

15 burned.

16 Are we not low-balling ourselves,

17 getting it at the wellhead, because the price of an

18 Mcf for gas, the wellhead is going to be

19 significantly lower than what it is at the market.

20 What I'm asking is, are we using the market price

21 to calculate this revenue, but really we're getting

22 the wellhead price?

23 MR. KNITTEL: My understanding is that

24 the proposal in the Executive Budget is using the

25 Hub price. Most states will use the value at the

Key Reporters [email protected] 58

1 wellhead, so they'll allow the deduction of the

2 post-production costs. And we've assumed in our

3 write-up here that the post-production costs are

4 about 82 cents per Mcf. And if your price right

5 now at the Hub is about a dollar 50, it will

6 comprise about half of it; half the value.

7 REPRESENTATIVE PYLE: Okay. Thank you,

8 Chairman. For your information, the price at the

9 Hub in Kentucky this morning is around 88 cents,

10 and it keeps falling. Until the pipelines are down

11 and we can move this to market, it's an inert;

12 inert quantity.

13 Thank you, Chairman.

14 MAJORITY CHAIRMAN ADOLPH: Thank you,

15 Representative. Representative Kinsey.

16 REPRESENTATIVE KINSEY: Thank you, Mr.

17 Chairman.

18 Good morning, Director Knittel. The

19 question that I have is going to center around

20 economic and consumer outlook. I think in your

21 report you mentioned that Pennsylvania has a stable

22 labor market. I think you said the economy

23 generated about 54,000 additional payroll jobs.

24 When we take into consideration the

25 effect of cost of living, does your office look

Key Reporters [email protected] 59

1 into the types of jobs? Like, are these good-

2 paying jobs, and how does that impact the overall

3 economy?

4 MR. KNITTEL: We haven't done an

5 analysis of the distribution of the jobs created.

6 I can say, if you look at the underlying detail,

7 the largest industries generating jobs are,

8 typically, the health care sector and what we call

9 leisure hospitality; so, restaurants, hotels,

10 things such as that.

11 REPRESENTATIVE KINSEY: And I guess part

12 of the reason that I'm asking this, because I

13 believe in the Governor's proposal, the Governor is

14 proposing an increase of minimum wage, from 7.25 to

15 $10.10 per hour. And I think --

16 Again, I'm not a -- You know, my degree

17 is not in mathematics or anything of that nature,

18 but I think with the addition of the jobs that you

19 mentioned and the continued growth of 54,000 plus,

20 at least for the next five or 10 years, I was

21 trying to get a sense of the impact -- or the

22 greater impact that that revenue would produce for

23 our state.

24 But, in addition, I was also trying to

25 tie in with the demographic trends. You know, with

Key Reporters [email protected] 60

1 the demographic trends, we talked about students

2 between ages zero to 19, sort of leveling out or

3 actually showing a slight decrease; workers between

4 the age of 20 to 64, again, level out and showing a

5 slight decrease. And then we have the retirees, 65

6 and plus, which shows an increase.

7 So, I think what I was trying to do was

8 trying to see if there was a correlation between

9 the types of jobs that are being introduced in

10 Pennsylvania and then looking at the targeted

11 population. Are these jobs going to retirees who,

12 simply because of the economy and lack of

13 resources, are they the ones that are taking these

14 types of jobs?

15 MR. KNITTEL: Um-hm.

16 REPRESENTATIVE KINSEY: So I was trying

17 to see if there was any type of tie-in between the

18 demographics, as well as the types of jobs, and

19 then also the actual wage that these jobs are

20 paying, and then trying to tie it in with the

21 overall outlook for our economy.

22 MR. KNITTEL: While it's not included in

23 the packet, those data do exist regarding the age

24 of resident and the industry they're working in --

25 REPRESENTATIVE KINSEY: Right.

Key Reporters [email protected] 61

1 MR. KNITTEL: -- and there's even some

2 wage data. What we're finding -- I mean, as you

3 noticed, the folks over 65, we have them here as

4 retirees but many of them are still working. In

5 fact, about 20 percent of them are still part of

6 the labor force and are working.

7 Again, we can take a look at that to see

8 where those individuals are working and what

9 industry they're located in and what the average

10 pay is.

11 REPRESENTATIVE KINSEY: Great. I

12 appreciate that.

13 And just to sort of tie this up, has the

14 IFO looked into current minimum wage versus what

15 the Governor's proposal to sort of get a sense of

16 the projected additional revenue that might come

17 about from the Governor's proposal, the increase in

18 the minimum wage?

19 MR. KNITTEL: We have -- We did put out

20 a report in November that looked at the impact; how

21 many people would benefit from or how many people

22 might lose employment. We put that out in

23 November. But we have not yet looked at the

24 revenue-generating capacity of a higher minimum

25 wage.

Key Reporters [email protected] 62

1 REPRESENTATIVE KINSEY: Okay. I'd just

2 be curious to see how that impacts the overall

3 budget in regards to what the Governor is

4 proposing. But thank you very much, Director.

5 Thank you, Mr. Chairman.

6 MAJORITY CHAIRMAN ADOLPH: Thank you,

7 Representative. Representative Sue Helm.

8 REPRESENTATIVE HELM: Thank you, Mr.

9 Chairman.

10 In addition to this committee, I'm also

11 a member of the Gaming Committee. In 2015, we had

12 25 hearings to determine if we wanted to extend

13 gaming and what the revenue would be to

14 Pennsylvania.

15 My question is regarding the Governor's

16 proposal to tax casino promotional play. I'd like

17 to know, are you aware of any other states that

18 impose a tax on promotional play at casinos? And

19 if so, how many other states impose such a tax, and

20 what is the rate of taxation?

21 MR. KNITTEL: That issue we haven't

22 looked at currently, what the typical practice is

23 and if other states are, in fact, taxing

24 promotional play. I do believe those data are

25 available and we can submit them to the committee.

Key Reporters [email protected] 63

1 REPRESENTATIVE HELM: Okay. I'll look

2 forward to it. Thank you.

3 MAJORITY CHAIRMAN ADOLPH: Okay. Thank

4 you. Representative Rozzi.

5 REPRESENTATIVE ROZZI: Good morning,

6 Secretary. Thank you for being here.

7 Over the last couple weeks, I had the

8 pleasure of doing my own corporation taxes. I met

9 with the accountant on Saturday. Saturday night

10 when I got home, I started looking over my revenues

11 that were coming in, and I noticed some disparities

12 where one section of my revenues wasn't producing.

13 So, I decided to go back and see when I

14 graduated college back -- high school back in 1989,

15 and I saw that the budget was roughly about $11

16 billion. I noticed that corporation taxes roughly

17 were about 2.7 billion collected. I say all the

18 people's taxes that were collected, the PITs, the

19 sales tax, and the other taxes were roughly about

20 8.5 billion, all right?

21 Since then our budget has basically

22 tripled. Our taxes that the people pay roughly has

23 tripled from about 8.5 to about 25.5. Corporation

24 taxes were roughly about 2.7 and are currently

25 about 5.2. It hasn't even doubled. It hasn't even

Key Reporters [email protected] 64

1 kept pace with what the people are paying.

2 I know Madeleine, Representative Dean,

3 had asked a question about the changes in the tax

4 base over time. But, are corporations getting

5 less, I don't want to say a free ride, because I

6 don't mind paying business taxes. I'm a business

7 owner. I don't mind paying taxes, contributing,

8 getting services back. But it just seems like the

9 corporation taxes are not keeping up to par with

10 everything increasing.

11 Has there been policy changes that have

12 dramatically -- keeping corporation taxes in check?

13 MR. KNITTEL: I'm not aware of any

14 significant policy changes. The NOL thresholds

15 have been adjusted numerous times. But, as we had

16 noted previously, there is erosion in that revenue

17 source. It is not keeping pace with the economy.

18 There are various factors causing that.

19 One of the primary ones I would point to

20 you is just the rise of pass-through business

21 entities, S corporations, partnerships.

22 REPRESENTATIVE ROZZI: Right. Believe

23 me, I know that over 70 percent of the businesses

24 don't pay corporation taxes. That's just a fact.

25 We definitely need to do a better job of making

Key Reporters [email protected] 65

1 this a fair tax system for everybody. We're asking

2 the people to contribute. We need to also have our

3 businesses contribute as well. Thank you.

4 MR. KNITTEL: Sure.

5 MAJORITY CHAIRMAN ADOLPH: If I may,

6 since Representative Rozzi has graduated from high

7 school or college, I'm not sure which it was, in

8 '89 --

9 REPRESENTATIVE ROZZI: 1989.

10 MAJORITY CHAIRMAN ADOLPH: 1989.

11 REPRESENTATIVE ROZZI: High school.

12 MAJORITY CHAIRMAN ADOLPH: Yes, high

13 school. Okay.

14 REPRESENTATIVE ROZZI: Young buck.

15 MAJORITY CHAIRMAN ADOLPH: Yes, okay.

16 Very good. It is my understanding, it is my

17 understanding that back in 1989, even though there

18 was S corporations here in Pennsylvania,

19 Pennsylvania's corporate tax law did not allow

20 pass-through income. Sometime, and maybe when the

21 Secretary of Revenue comes later on today, we'll

22 get the exact year.

23 But what has happened since the

24 Representative has graduated from high school, the

25 corporations that used to pay corporate net income

Key Reporters [email protected] 66

1 tax now pays PIT on pass-through income because,

2 sometime in the mid '90s, I believe it was, and

3 Secretary McNulty will know the exact year that

4 took place, but an awful lot of our corporate net

5 income tax that used to be paid at 9.9 percent is

6 now being -- that same income is now being taxed at

7 3.07, which actually -- I remember and I supported

8 it, we were one of the last states in the nation

9 not to go with the S corporations being

10 pass-through entities.

11 So, there may be someone else on the

12 committee that knows that exact year that we

13 changed that tax law. But I can tell the

14 Representative, that's one of the biggest

15 differences; that corporate officers are now paying

16 profits that pass through to their PA-40s rather

17 than paying it on 1120. I hope that helps the

18 Representative on that.

19 Representative Quinn.

20 REPRESENTATIVE QUINN: Thanks, Mr.

21 Chairman.

22 And thanks, Mr. Knittel, for being here

23 with us today. I'm thinking in terms of janitorial

24 supplies, paper, pens, business equipment, chairs,

25 desks, you name it, all things that businesses

Key Reporters [email protected] 67

1 consume and continually to buy, aren't taxes paid

2 on them?

3 My point is, what I'm trying to get at

4 is, businesses -- Or the people, as my colleague

5 has just talked about, the people paying these

6 taxes aren't the only ones paying sales and use

7 tax, correct?

8 MR. KNITTEL: Yeah, businesses do pay on

9 the items that you mentioned, such as paper and

10 pens. They're exempt from other purchases like

11 machines and manufacturing equipment. But there

12 are items that they do pay tax upon.

13 Most of the studies that we're familiar

14 with, done by Ernst & Young or some other research

15 groups, suggest that maybe 35 percent of the SUT

16 receipts are from business entities.

17 REPRESENTATIVE QUINN: So when we see

18 your numbers with the sales and use tax, it's 35

19 percent of that?

20 MR. KNITTEL: Roughly. I --

21 REPRESENTATIVE QUINN: I've heard it up

22 to 40 percent. That's why I'm asking the question.

23 MR. KNITTEL: It could be up to 40

24 percent. We're in that range. Depending on what

25 year you look at, it could be closer to 40.

Key Reporters [email protected] 68

1 REPRESENTATIVE QUINN: Thank you.

2 MAJORITY CHAIRMAN ADOLPH: Thank you,

3 Representative. Representative Schweyer.

4 REPRESENTATIVE SCHWEYER: Thank you,

5 Chairman.

6 And thank you, Director, for being with

7 us today. We heard some conversation earlier of

8 the possibility of a third way to address our

9 2-billion-dollar structural deficit, roughly.

10 However, back home in the districts,

11 I've heard it here in Harrisburg--I've actually

12 even heard it on the floor of the House--sometimes

13 folks talk about a potential fourth way to balance

14 a deficit, which is -- balance the budget, excuse

15 me, which is to grow your way out of it.

16 As I'm looking at your projected and

17 real economic numbers, 55,000 jobs created in '15

18 with projected 53,000 additional in '16.

19 Pennsylvania gross domestic product was 1.8 percent

20 increase in '15 and 2 percent in '16. Salaries and

21 wages went up 3 and a half percent in 2015, with a

22 projected almost 4 percent increase in 2016, and a

23 nice increase in housing sales.

24 So you call that normal and good

25 economic growth; is that correct?

Key Reporters [email protected] 69

1 MR. KNITTEL: Yes. It probably feels

2 slow, but it's --

3 REPRESENTATIVE SCHWEYER: But compared

4 to our historic trends, those are good numbers

5 that --

6 MR. KNITTEL: Those are solid.

7 REPRESENTATIVE SCHWEYER: And that

8 doesn't indicate any sort of bubble. It seems like

9 -- There's no major recession coming on, at least,

10 as it would impact Pennsylvania. So with good

11 solid historical increases in our economic

12 performance, we're still not able to grow our way

13 out of the budget deficit in which we find

14 ourselves, correct?

15 MR. KNITTEL: That's correct. And our

16 projections, it's just normal straightforward

17 historical growth.

18 REPRESENTATIVE SCHWEYER: So in able to

19 -- If we were able to grow our way out of this, the

20 magical fourth way, which sometimes feels like

21 we're chasing a unicorn, that would be 1 point --

22 we'd have to find $1.6 billion of additional

23 dollars for the state through this growth, which

24 would mean 50 percent increase in job creation;

25 some astronomical and completely, and totally

Key Reporters [email protected] 70

1 unrealistic means, correct?

2 MR. KNITTEL: It would be substantial to

3 generate that figure.

4 REPRESENTATIVE SCHWEYER: Okay. So it's

5 fair to say it's part of the solution, but it's

6 probably a very small part of the solution as we

7 look to move forward in 2016 and beyond?

8 MR. KNITTEL: How large it is, I can't

9 be sure.

10 REPRESENTATIVE SCHWEYER: Fair enough.

11 So, I just wanted to dispel the notion that that

12 alone is a realistic way for us to get out of this

13 deficit. Thank you, sir.

14 Thank you, Mr. Chairman.

15 MAJORITY CHAIRMAN ADOLPH: Thank you

16 very much, Representative. Representative Warren

17 Kampf.

18 REPRESENTATIVE KAMPF: Thank you, Mr.

19 Chairman.

20 Maybe in line with that set of

21 questions, Director Knittel, you referred to

22 mandatory increases. When you talk about that, is

23 that another way of talking about cost-to-carry?

24 MR. KNITTEL: Yes. That's the big

25 synonymous with that, those four items.

Key Reporters [email protected] 71

1 REPRESENTATIVE KAMPF: Could you just

2 repeat those four items for me? I'm sorry, I

3 didn't write them down.

4 MR. KNITTEL: Sure. Those four items

5 would be pensions, debt service, certain DHS

6 programs such as Medical Assistance, long-term

7 living, intellectual disabilities, and finally,

8 Department of Corrections. So it's just those

9 items.

10 REPRESENTATIVE KAMPF: Okay. For

11 '15-16, what was that increase total, roughly?

12 MR. KNITTEL: In the budget -- Both --

13 '15 or '16-17?

14 REPRESENTATIVE KAMPF: I asked for

15 '15-16. You can give me '16-17 because that's my

16 next question.

17 MR. KNITTEL: Okay. Well, I don't have

18 the '15-16 in front of me, so I'll just give you

19 what I have. If you were to include the

20 initiatives, then the total spend is 2.5 billion

21 increase -- excuse me.

22 The mandatory increase is 1.3 billion,

23 and to that amount we added the one-time payment

24 delays, and we counted that as mandatory because

25 they need to be made, and that's 260 million. So

Key Reporters [email protected] 72

1 we have the total, quote unquote, cost-to-carry or

2 mandatory in the Executive Budget at 1.6 billion.

3 REPRESENTATIVE KAMPF: Okay. But the

4 overall spending increase is north of 2 billion,

5 right?

6 MR. KNITTEL: Yes, that's correct. If

7 you include the initiatives, it's 2.45 billion.

8 REPRESENTATIVE KAMPF: So, just looking

9 at this subject of increased cost-to-carry, or

10 mandatory cost-to-carry, if you crafting a budget,

11 wouldn't you try to tackle the cost-to-carry

12 increases or the structural deficit increases

13 without increasing spend priorities over those?

14 MR. KNITTEL: I have to say, we can't

15 make any recommendations, but I would say I would

16 look at all available options.

17 REPRESENTATIVE KAMPF: And just to

18 follow up on that, so the cost-to-carry, or the

19 mandatory increases, you said that was about 80

20 percent of the overall spend increase. You're not

21 saying that our spending mandates are 80 percent of

22 our budget. You're just saying that the increase

23 --

24 MR. KNITTEL: Yes.

25 REPRESENTATIVE KAMPF: -- is 80 percent

Key Reporters [email protected] 73

1 mandatory; is that right?

2 MR. KNITTEL: That's correct; the

3 incremental portion.

4 REPRESENTATIVE KAMPF: So, for example,

5 in 1460 when we proposed a new way of doing school

6 construction through bonding, that wasn't a

7 mandatory piece that we had to have in the budget,

8 and we were able, through that process, to

9 eliminate 300 million from 1460, correct?

10 MR. KNITTEL: Yes. In our projections,

11 we assumed that the 306 million would not be there,

12 so it's reducing the deficit.

13 REPRESENTATIVE KAMPF: So in a 29 or

14 30-million-dollar budget over the years, as we have

15 demonstrated, there are significant impacts that

16 you can have on the spend number without increasing

17 revenue; is that correct?

18 MR. KNITTEL: There's that potential.

19 REPRESENTATIVE KAMPF: For example,

20 escheats is 260 million. This PlanCon concept is

21 300 million. Pretty big numbers, right?

22 MR. KNITTEL: Yeah, those are

23 substantial.

24 REPRESENTATIVE KAMPF: Thank you.

25 MAJORITY CHAIRMAN ADOLPH: Thank you,

Key Reporters [email protected] 74

1 Representative. Representative Maria Donatucci.

2 REPRESENTATIVE DONATUCCI: Thank you,

3 Mr. Chairman. And, thank you, Director, for your

4 testimony.

5 We've been talking about structural and

6 budget deficits, revenue taxes, demographics, et

7 cetera. Can you tell us how Pennsylvania's economy

8 looks compared to the nation's economy and also

9 compared to neighboring states?

10 MR. KNITTEL: Yes. In fact, in your

11 handout, if I could refer to it, we have a table

12 that addresses just that issue, and if I can find

13 it here. Bear with me a second.

14 On page 7 of the handout, we have an

15 economic comparison comparing to the contiguous

16 states and to the United States. I'll just quickly

17 run through these. In terms of gross domestic

18 product for 2015, Pennsylvania was at 2.0 percent,

19 slightly lower than the U.S., but in mid-range of

20 the other states that surround us. Wages, 3.6

21 percent, clearly lower than the U.S. and some

22 surrounding states. Down at the bottom, payroll

23 employment in Pennsylvania growing by 0.9 percent,

24 quite a bit slower than some surrounding states.

25 West Virginia was negative. They had reduction in

Key Reporters [email protected] 75

1 employment. And then finally, manufacturing in the

2 middle as well.

3 So, a lot of the -- The economics that

4 you see here in the Mid-Atlantic and the northeast

5 region, they're always slower than the U.S. due to

6 demographic factors. Our labor force is not

7 expanding as much. I would characterize it, as

8 compared to surrounding states, Pennsylvania is in

9 the middle of the pack; not at the very lower end

10 and not at the very top end.

11 REPRESENTATIVE DONATUCCI: Thank you.

12 MAJORITY CHAIRMAN ADOLPH: Thank you,

13 Representative. Representative Seth Grove.

14 REPRESENTATIVE GROVE: Thank you,

15 Director Knittel. I just applaud your organization

16 for doing a fine job on addressing concerns we may

17 have; whether it's a study or analysis. Please

18 pass it along to your entire staff for doing a fine

19 job.

20 First question, is it possible to close

21 a structural deficit by increasing spending?

22 MR. KNITTEL: To my knowledge, no,

23 that's not possible.

24 REPRESENTATIVE GROVE: Okay. When you

25 talk about mandatory spending, that's based off

Key Reporters [email protected] 76

1 current policy. So you have federal mandates. You

2 have laws and statute that passed by the General

3 Assembly. So your projections are based off

4 current policy. If we would change policy, that

5 would change the direction of that, quote,

6 structural deficit moving forward, correct?

7 MR. KNITTEL: Yes, that's an option.

8 REPRESENTATIVE GROVE: So the Governor

9 signed Executive Order 2015-03 which placed a

10 moratorium on new leases for drilling in state

11 parks and forests. So, by us not allowing to have

12 more drilling in the Commonwealth, it took off

13 revenue to the Oil and Gas Lease Fund or putting

14 that money into the General Fund, whatever. That

15 pulled money out of the state, so that would add to

16 the structural deficit because we were expecting a

17 hundred million this year and that did not occur.

18 MR. KNITTEL: Yes, that would contribute

19 -- There's weakness in the Oil and Gas Lease Fund,

20 that would contribute to the underlying deficit.

21 REPRESENTATIVE GROVE: Okay. Within

22 your analysis, the Economic and Budget Outlook,

23 Commonwealth of Pennsylvania, the January update,

24 there's a line that says, as part of the imbalance,

25 the expenditures are, quote, non-pension personnel

Key Reporters [email protected] 77

1 expenditures increased by $125 million.

2 What is that and why are they growing by

3 125 million?

4 MR. KNITTEL: If I could, what page is

5 that?

6 REPRESENTATIVE GROVE: Page 50. It's on

7 the right-hand side. It's the January 2016 one.

8 MR. KNITTEL: I see it. Non-pension

9 personnel expenditures increased by 125.

10 REPRESENTATIVE GROVE: 125, yeah. What

11 is that?

12 MR. KNITTEL: I believe that would be

13 underlying wages and health care for employees.

14 REPRESENTATIVE GROVE: And that's --

15 Those are done contractually through the Governor's

16 Office, correct? So whatever they contract with

17 state employees for increases would affect that,

18 that amount.

19 MR. KNITTEL: That is correct.

20 REPRESENTATIVE GROVE: And then their

21 hiring practices. So, the more they hire, the more

22 that cost would increase moving forward.

23 MR. KNITTEL: That's correct.

24 REPRESENTATIVE GROVE: And there's no

25 mechanism for them to come to the General Assembly,

Key Reporters [email protected] 78

1 besides these appropriates hearings, to ask for

2 additional dollars to support the Governor's

3 decision to increase spending through those

4 mechanisms, correct --

5 MR. KNITTEL: That's my understanding.

6 REPRESENTATIVE GROVE: -- that you're

7 aware of? Okay.

8 In going through this, I know my good

9 friend, Warren Kampf, highlighted the four cost

10 drivers. Since you've been in office, have those

11 four cost drivers changed?

12 MR. KNITTEL: My experience has been

13 that the four we highlighted have been there for

14 quite some time, and every year they're the same

15 cost drivers.

16 REPRESENTATIVE GROVE: So, really, if we

17 don't attack -- to really attack the structural

18 deficit, you need to attack those four expenditures

19 through policy changes to really make a difference

20 moving forward. Even if you increase revenue,

21 increase spending, if those cost drivers still

22 prevalent and present within your budget, you're

23 still going to have structural issues in the

24 out-years.

25 MR. KNITTEL: I would say it's one

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1 option that should be considered, along with the

2 other ones, on non-mandatory spending and revenues.

3 REPRESENTATIVE GROVE: Okay. Thank you

4 very much. Thank you, Mr. Chairman.

5 MAJORITY CHAIRMAN ADOLPH: Thank you,

6 Representative. Representative Matt Bradford.

7 REPRESENTATIVE BRADFORD: Thank you,

8 Chairman.

9 Director, I wanted to get to a point

10 that I think needs a little bit of clarity, which

11 is, what is the admitted shortfall in House Bill

12 1460? I believe your office pegged it. You costed

13 it out about 300 million short. The Administration

14 had it about 500 million short.

15 What's the distinction between those two

16 views of 1460?

17 MR. KNITTEL: I believe the main

18 distinction is a different take; slightly different

19 on revenues and refunds as well. So the spend

20 number is roughly the same, and I think that's

21 driving that 200-million-dollar difference between

22 the two estimates.

23 REPRESENTATIVE BRADFORD: One of the

24 issues I noticed was kind of a different way of

25 looking at the accounting in terms of the

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1 accounting of human services. One was looked at in

2 an accrual basis and one as a cash basis. It's

3 obviously an accounting technique. It didn't do

4 anything with the cost driver. Just how you scored

5 that I think made an impact. Is that a fair

6 assessment?

7 MR. KNITTEL: Yeah. In our analysis, we

8 move to the different basis of counting for them so

9 they reduce spending by $170 million for the

10 current fiscal year.

11 REPRESENTATIVE BRADFORD: And one of the

12 things -- And this may be more commentary than a

13 question is: Obviously, when we change the

14 accounting technique, we didn't really deal with

15 the cost driver. And I think we need to be honest

16 with folks about what is this structural deficit

17 and how we have it. And I know Representative

18 Kampf, who's a great guy and understands these

19 issues, but one of the different accounting

20 techniques was how we look at PlanCon, and that was

21 kind of held up as something really creative.

22 We, obviously, have an obligation -- a

23 current obligation that's on the books to deal with

24 school construction. The idea that was proposed,

25 or at least was implicated in House Bill 1460, is

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1 that we were going to bond; we were going to

2 borrow, so we weren't going to make that payment

3 today. We were going to spread that payment over

4 30 years.

5 Again, I think you score that and give

6 them the benefit of that in your view of 1460. The

7 Administration did not give the benefit of that.

8 Is that a fair assessment, again,

9 between how you looked at the PlanCon proposal?

10 MR. KNITTEL: Yeah, it's a policy

11 choice. We did assume the elimination of that.

12 That did result in $306 million of savings in this

13 year that was used to reduce the deficit.

14 In our projections, we did allow that

15 amount to come back up to something approaching

16 $300 million. So that's -- it's built in to the

17 long-term projection.

18 REPRESENTATIVE BRADFORD: And I guess,

19 again, that's how you look at the accounting unique

20 as opposed to -- We still have to pay for those

21 schools. And I guess what I'm saying is, if we

22 decide to just put everything on the credit card

23 and make the minimum payment this year, we can

24 drive down our spend number and have a balanced

25 budget.

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1 But, we do nothing to deal with the

2 structural deficit. We just put off to future

3 budgets, or our children or our grandchildren, the

4 cost of paying for today's schools. I don't think

5 there's anything really unique in that PlanCon

6 proposal. It's simply a borrowing against our

7 future to reduce today's cost to manage our schools

8 and build our schools.

9 Is that a fair assessment of what the

10 PlanCon proposal does?

11 MR. KNITTEL: Well, what it does, I

12 can't comment on. I can say that we have assumed

13 that the cost in the future would increase due to

14 that debt obligation.

15 REPRESENTATIVE BRADFORD: Because you're

16 making a debt payment in the future because we

17 didn't pay today.

18 MR. KNITTEL: Yes.

19 REPRESENTATIVE BRADFORD: I mean, that's

20 kind of the pay-me-now, pay-me-later problem of

21 borrowing, which we're dealing with. I mean, you

22 mentioned this is a cost driver. I think you put

23 pension and debt as 1 and 2 respectively, and I

24 don't think anyone can argue those cost drivers are

25 real and they continue.

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1 The former Governor, I think, absolutely

2 correctly said, it's a tapeworm. It continues to

3 cannibalize our ability to do anything in the

4 budget, and I think we need to be bipartisan and

5 recognizing that is very true.

6 One of the other points that I wanted to

7 look at, and Representative Rozzi had talked about

8 kind of the tax equity, tax fairness between the

9 individual taxpayer and our corporate taxpayers in

10 Pennsylvania. And there's a lot of argument

11 nationally right now, a lot of anger, Donald Trump,

12 among others, Senator Sanders have tapped into this

13 idea of, who's really paying and who is getting a

14 free ride?

15 One of the major business changes, and I

16 think Representative Adolph was kind enough to give

17 a free accounting lesson to my good colleague and

18 friend, was, the C&I rate is 1.9, but the

19 Chapter S flow-through is, I guess the current

20 3.07. So, those who were able to take advantage of

21 that received some tax relief, obviously, we're

22 happy for that individual, but the Commonwealth

23 lost revenue as a result of that transaction.

24 Is that a fair assessment?

25 MR. KNITTEL: Yes. The rate

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1 differential is nearly seven percentage points.

2 REPRESENTATIVE BRADFORD: Right. So,

3 obviously, the corporate taxpayer, there's fewer of

4 them. A lot of guys were able to go under Sub S,

5 and that's great for them. But as a Commonwealth,

6 we did nothing to deal with our structural deficit.

7 In fact, we exacerbated it.

8 Would that be a fair assessment?

9 MR. KNITTEL: I would say that the long-

10 term erosion of the corporate income tax due to a

11 switch-over from corporate to pass-through is one

12 factor contributing to the long-term deficit.

13 REPRESENTATIVE BRADFORD: And a lot of

14 the anger that so many of Pennsylvanians and,

15 frankly, nationally feel, they feel their taxes

16 going up. In fact, we have a Governor, to his

17 credit, is taking the bull by the horns and saying

18 taxes have to be dealt with, and there's going to

19 have to be revenue increases. He's talking about

20 that.

21 But, at the same time, the capital stock

22 and franchise tax has been phased out again,

23 Democrat and Republican administrations. It feels

24 good to say we're going to cut taxes. But, again,

25 the Commonwealth, as a result, exacerbated a

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1 structural deficit because we gave away a corporate

2 tax cut. At the same time, we've been unable to

3 deal with individual tax rates or school property

4 tax rates.

5 Is that again a fair assessment of the

6 tax equity situation in Pennsylvania?

7 MR. KNITTEL: I wouldn't comment on the

8 tax equity portion of it. I will say, like any

9 other revenue source, regardless of which one it

10 is, the phaseout or the reduction of it is a

11 contributing factor to the situation going forward

12 because that revenue source is no longer available.

13 REPRESENTATIVE BRADFORD: Right. I

14 guess I would just sum up. To a lot of the folks,

15 and again, we're as irate as anybody about what's

16 going on in tax policy, we can't pass a real

17 severance tax in Pennsylvania.

18 To the average Montgomery County

19 resident where I reside, where Representative Dean

20 and Daley are from, we bring in about a dollar per

21 Pennsylvania resident under the local impact fee,

22 which is so herald by some. We pay -- We're one of

23 the highest tax states. We pay a lot of taxes, and

24 we want good services; we want good schools.

25 But, to see that the fracking industry

Key Reporters [email protected] 86

1 continues to get a free pass; to see that corporate

2 taxes get cut and Wall Street gets a break, while

3 we have to talk about increasing taxes on regular

4 people because we're unwilling or unable to

5 increase taxes on multi-national corporations who

6 continue to engage in tax dodges like the Delaware

7 Loophole and such. It is absurd that we talk about

8 having an imbalanced budget when we won't take

9 advantage of obvious tax loopholes, tax dodges that

10 are out there. It's a head scratcher that we have

11 to talk about these types of revenue increases when

12 there are obvious revenues that should be derived

13 from that.

14 I won't ask you to comment on that.

15 That's obviously commentary. But thank you,

16 Director.

17 MAJORITY CHAIRMAN ADOLPH: Thank you,

18 Representative. Representative Mike Peifer.

19 REPRESENTATIVE PEIFER: Thank you, Mr.

20 Chairman.

21 And thank you, Director Knittel, for

22 being here today, and thank you for your wonderful

23 data. I, too, had a question on the consumer

24 spending side. Several of my colleagues have asked

25 those questions, and you've answered them.

Key Reporters [email protected] 87

1 When you look at the -- On the ride down

2 here this morning, we talked -- I listened to a

3 national radio show talking about business and the

4 worldwide economy, and the risks that are

5 associated with that national risk that's out there

6 today; basically, the unpredictability of oil and

7 governments and what have you.

8 You know, when you look at Pennsylvania,

9 however, it's a brighter picture. You look at the

10 job growth, the job gains. You look at lower

11 energy costs. I'm looking at page 3 of your

12 analysis where you talk about the Pennsylvania

13 consumer, and it's a 10-year historical data.

14 We looked and see there's spending on

15 auto loans. They've increased 10 percent for the

16 two years. We look at personal and other debt has

17 increased. So it looks like our consumers are

18 employed. They're saving money on their energy

19 costs, and they're spending it.

20 But then when you look at consumer

21 expenditures on goods, there's like no growth.

22 Could you explain that? I mean, are people -- How

23 can they be increasing their debt on auto loans,

24 but not buying autos I guess is my question?

25 MR. KNITTEL: Yeah. The paradox there,

Key Reporters [email protected] 88

1 as you note, the goods are not growing as fast as

2 the services. Part of that this year was the low

3 inflation and was only hitting goods. So they

4 might be buying more goods, but the price across

5 all of them is actually falling; whereas, for

6 services, such as health care continues to

7 increase. So that's part of the underlying dynamic

8 here.

9 REPRESENTATIVE PEIFER: So it's not to

10 say they're not paying more goods. It has to do

11 with where their dollars are being spent.

12 MR. KNITTEL: Yeah, the allocation of

13 the dollars and how fast the prices are increasing.

14 REPRESENTATIVE PEIFER: Staying within

15 my 5 minutes, I know you've talked about this a

16 little bit, too. On page 2 of your testimony you

17 talk about long-term budget outlook. And you talk

18 about -- I guess I'm asking you where your starting

19 point is, is my first question.

20 But then you talk about adjustments that

21 are made, and we just heard the gentleman talk

22 about PlanCon, and we just talked about changes in

23 reimbursements offsetting some growth projections.

24 But your last sentence talks about the

25 report found that the residual shortfall of roughly

Key Reporters [email protected] 89

1 $300 million. So, where is that shortfall,

2 $300 million? Are we talking -- I guess, where is

3 the starting point, and where do you end at that

4 $300 million?

5 MR. KNITTEL: Well, the 300 million is

6 the balance after we take over the carryover from

7 last year, and we have some lapses.

8 REPRESENTATIVE PEIFER: Where is that?

9 What budget are we using? Are we using a budget

10 that was passed by the House and the Senate that

11 was blue-lined by the Governor, and are we

12 including the expenditures that were blue-lined,

13 that weren't blue-lined? Maybe just help me out

14 there a little bit.

15 MR. KNITTEL: Sure. Absolutely.

16 For the purpose of our report, we did

17 mainly rely on 1460. Items that were blue-lined,

18 we assumed that they would be at that level at

19 1460. There are some exceptions to that where we

20 used the framework agreement prior, but that's

21 relatively minor. Most of it is based on 1460.

22 REPRESENTATIVE PEIFER: So all last year

23 we heard about the billion dollars of shortfalls,

24 of structural deficits, 2 billion, 2.5, 1.2,

25 $1.4 billion. And at the end of the day; at the

Key Reporters [email protected] 90

1 end of the day, we have a 300-million-dollar

2 shortfall.

3 I guess my question is this: Do you

4 think that we would need a 2.5-billion-dollar tax

5 increase if, at the end of the day, we only had a

6 300-million-dollar shortfall? I mean, you're a

7 very smart man. Do you think you would vote for

8 that tax increase?

9 MR. KNITTEL: I can't -- I defer comment

10 on that.

11 REPRESENTATIVE PEIFER: Okay. So the

12 first budget that the Governor introduced, there

13 were no votes for that; no votes. There were no

14 votes for the Governor's first budget last year,

15 because most people were smart enough to realize

16 that they didn't want to vote for $2.5 billion in

17 taxes when, in fact, our shortfall at the end of

18 the day was $300 million.

19 My other point is this: The gentleman

20 very, you know, explained that he really didn't

21 agree with the PlanCon process and what we were

22 doing there. I completely disagree; completely

23 disagree.

24 PlanCon, we had promised all these

25 schools substantial amounts of money that were

Key Reporters [email protected] 91

1 promised to them; capital expenditures that we were

2 going to pay off to them over time. I think

3 there's nothing better to do than to leverage that

4 money, pay our schools, and pay it off over time

5 because they are capital in nature. They're not

6 repairs and maintenance. We're talking capital;

7 buildings, large investments. So I disagree there.

8 And the gentle -- lady talked about the

9 Ridge Administration increasing human benefits, and

10 they did. The pension was 120 percent funded. But

11 the Administration for the eight years afterwards

12 forgot about pension payments; just forgot about

13 those payments. So they're telling us that we're

14 mortgaging our children.

15 For eight years, that Administration

16 forgot that they had a pension obligation to meet,

17 even when we had surpluses of hundreds of millions

18 of dollars, we could not put them in the pension,

19 and we couldn't even put the federal stimulus money

20 in the pension. So it's a little disingenuous to

21 hear today they're all worried about our children,

22 when, for eight years they didn't even fund their

23 employees of this Commonwealth.

24 Do you have any comment on that?

25 MR. KNITTEL: No.

Key Reporters [email protected] 92

1 MAJORITY CHAIRMAN ADOLPH: You don't

2 have to answer that.

3 REPRESENTATIVE PEIFER: Thank you, Mr.

4 Chairman.

5 MAJORITY CHAIRMAN ADOLPH: Thank you,

6 Representative. Representative Acosta.

7 REPRESENTATIVE ACOSTA: Thank you,

8 Chairman.

9 Director, I have a question in regards

10 to the tax base, the Commonwealth tax base.

11 Obviously, the GDP nationally is at 3.7. Here in

12 the Commonwealth of Pennsylvania is at 2.

13 In terms of the tax base here in the

14 Commonwealth of Pennsylvania, how is that changing?

15 It seems to me it's shrinking instead of growing.

16 How does that impact the structural deficit that we

17 have, and what is the long-term problem if we don't

18 improve the Commonwealth tax base?

19 MR. KNITTEL: The tax base, as you

20 noted, I wouldn't say it's shrinking. It's just

21 not expanding as fast as the underlying economy.

22 It's increasing at a slower pace. There are

23 various reasons for that. Some talked about the

24 sales tax; people buying more services, the

25 corporate net income, pass-through entities, and

Key Reporters [email protected] 93

1 even the personal income tax.

2 Over time, more of the total income in

3 Pennsylvania is non-taxable because it's pension

4 income or Social Security, and the demographics

5 show that that will continue into the future.

6 It's a difficult issue and it's not

7 unique to Pennsylvania. All the states, in

8 particular with the sales and use tax, are

9 grappling with this issue because people are

10 continuing over time to shift their purchases to

11 services. And now this year, we even have the

12 price of goods falling, so that's even contributing

13 to it as well.

14 REPRESENTATIVE ACOSTA: How does that

15 impact the structure deficit?

16 MR. KNITTEL: The erosion over time will

17 exacerbate any underlying structural deficit.

18 REPRESENTATIVE ACOSTA: And can you talk

19 about the long-term effects of that?

20 MR. KNITTEL: Long term, and you can see

21 in the results, after we get by this year, the

22 reason it's increasing is -- one of the reasons is

23 due to tax base erosion. So it's, that factor is

24 contributing to the growth in the underlying

25 structural deficit.

Key Reporters [email protected] 94

1 REPRESENTATIVE ACOSTA: Is it safe to

2 say, then, that House Bill 1460 doesn't really

3 actually balance the budget?

4 MR. KNITTEL: That I can't comment on.

5 I believe -- I don't have it in front of me, there

6 was still a residual shortfall. Again, I don't

7 have the figures in front of me.

8 Long term, I can't speak to what they

9 would have assumed. We took their spend number and

10 our revenue numbers and took them out. And under

11 those assumptions, it does suggest a long-term

12 structural deficit.

13 REPRESENTATIVE ACOSTA: Thank you. No

14 further questions.

15 MAJORITY CHAIRMAN ADOLPH: Thank you,

16 Representative. Representative Jim Christiana.

17 REPRESENTATIVE CHRISTIANA: Thank you,

18 Mr. Chairman.

19 Director, thank you for your testimony

20 and your patience today.

21 When I look over the Independent Fiscal

22 Office's major responsibilities, I notice that some

23 of them are to convene a revenue conference;

24 provide a preliminary revenue estimate; provide a

25 final revenue estimate. But Act 120 of 2010 didn't

Key Reporters [email protected] 95

1 create an independent revenue office. It created

2 the Independent Fiscal Office, and it was created

3 to provide non-partisan fiscal analysis of

4 budgetary issues. We would agree the budget is

5 made up of expenses and revenue. We've talked a

6 lot about your responsibility and your tasks

7 associated with the revenue side of the budgetary

8 issues as it's described here.

9 My question is, what level of access

10 does your office have to data so that you can

11 analyze spending decisions; looking at employee

12 compensation; where money is being spent; compare

13 that to other states, to give just as thorough

14 analysis on the spending decisions of the

15 $30 billion as you do the revenue; the level of

16 detail that you go to for a revenue analysis.

17 Since you have such a legal

18 responsibility, can you maybe talk about the level

19 of data that the Administration provides you?

20 Obviously, those mandatory expenses you mentioned

21 come from contracts. So if they're going into

22 contract negotiations, do you get to analyze that

23 to assess the impacts that it's going to have on

24 future budgets?

25 MR. KNITTEL: As you noted, most of our

Key Reporters [email protected] 96

1 resources are devoted towards the revenue side of

2 the budget. We do have access to the state

3 accounting system, so we can observe at a high

4 level the expenditures and, to a certain extent,

5 cash flows. But I would characterize that, it's at

6 a high level. We can't see the underlying detail.

7 REPRESENTATIVE CHRISTIANA: Right. So

8 $30 billion, and it's almost like we just assume

9 that everybody is making the most responsible

10 decisions. But, the independence of your office is

11 a value to us. I think that's why we created it,

12 and I think you've done a tremendous job on the

13 revenue side.

14 But, I would really like to maybe work

15 with you in the future about ways that we could

16 empower the office to also have the level of

17 analysis on the expense side, because I think it is

18 absolutely missing. And tools like PennWATCH that

19 was put in place for you and the media and

20 everybody else to analyze the spending, let's just

21 say has not met those goals as we sought when it

22 was passed.

23 I would like to talk about one thing in

24 your testimony. It mentions that the fiscal year

25 that we just came through, so on July 1st, when we

Key Reporters [email protected] 97

1 came into this fiscal year, you mentioned that we

2 had a carry-forward balance of 266 million. So

3 when we ended the year, we had $266 million more

4 than we spent, correct?

5 MR. KNITTEL: That is correct.

6 REPRESENTATIVE CHRISTIANA: Folks back

7 home in Beaver County, they'd call that a surplus,

8 so I'm just going to refer to it as a surplus. So

9 $266 million in a surplus last year. You mentioned

10 in your testimony that that was as a result of

11 unexpected large revenue gains, correct; these

12 one-time transfers or sources of funds, correct?

13 Some of it?

14 MR. KNITTEL: Many of it, yes. But I

15 would say -- I would point to the escheats'

16 proposal being particularly unexpected.

17 REPRESENTATIVE CHRISTIANA: And over the

18 last five years, we've ended the year, we've had a

19 surplus of 260 last year, 83 million the year

20 before, 540 million before, 672 million the year

21 before, and a billion the year before. We ended

22 the last five years with a surplus, roughly, a

23 total of about $4 billion.

24 Now, we can credit that, a large part of

25 that to these one-time sources that have been

Key Reporters [email protected] 98

1 almost -- there's been a lot of critics of those

2 one-time sources. But, if we didn't have those

3 transfers, that money likely would have came from

4 some tax increase, correct?

5 MR. KNITTEL: Assuming that revenues

6 were needed, they'd have to come from some source.

7 REPRESENTATIVE CHRISTIANA: Right. So

8 let's assume there weren't spending cuts to offset

9 that 4 billion, and they had to spend that level,

10 we would need to increase taxes, there's

11 consequences for every tax increase, correct? I

12 mean, there's economic consequences if we were to

13 raise just about any tax in the books, correct?

14 MR. KNITTEL: Taxes do affect behavior

15 in the economy.

16 REPRESENTATIVE CHRISTIANA: So if we

17 invested $4 billion in what we think are noble

18 programs, and we've done it without a tax increase,

19 I would characterize that as responsible budgeting;

20 in that, we've delayed taking more money out of the

21 economy; yet, invested $4 billion.

22 Would you characterize that as a

23 responsible first step before we raise taxes; that

24 you should look at means to increase funding that

25 does not have the consequences that a tax increase

Key Reporters [email protected] 99

1 would?

2 MR. KNITTEL: I would characterize it as

3 a tax increase as one option that should be

4 considered, and all options should be open.

5 REPRESENTATIVE CHRISTIANA: But not

6 taking those transfers and those one-time sources

7 that have been criticized extensively over the last

8 five years; by not doing that, we would, therefore,

9 just be leaving that money, let's say in a savings

10 account or somewhere else, not getting invested,

11 correct?

12 MR. KNITTEL: Presumably, it would

13 remain in an account and collect interest.

14 REPRESENTATIVE CHRISTIANA: I think it

15 would be irresponsible to raise taxes without those

16 one-time sources. That's my opinion.

17 I appreciate the work that you do in

18 your independence. And I would encourage us to

19 give you as much flexibility, whether it has to be

20 statutorily, let's introduce a bill and get it

21 passed, because your level of analysis and your

22 independence on the revenue side is exceptional and

23 a tremendous asset to the General Assembly. We

24 also need it on the expense side.

25 Thank you, Mr. Chairman.

Key Reporters [email protected] 100

1 MAJORITY CHAIRMAN ADOLPH: Thank you,

2 Representative. Representative Bullock.

3 REPRESENTATIVE BULLOCK: Thank you, Mr.

4 Chairman.

5 Thank you, Director, for your testimony

6 today. As we know, Pennsylvania ranks second among

7 the states in natural gas production, and if we

8 looked at Pennsylvania as a nation, it would rank

9 8th globally in its natural gas production. And

10 last year we seen a 13.6 percent increase in that

11 production. Yet, as your report says, we have seen

12 a decrease in the impact fee of about 17 percent.

13 Now, when we're comparing the impact fee

14 to the severance tax, which most Pennsylvanians are

15 in favor of, I want to make sure we're comparing

16 apples to apples. And what I notice in your

17 calculation of the impact fee, which you have at it

18 5.5 percent, that you calculate the effective rate

19 by deducting 82 cents to account for

20 post-production costs.

21 Could you explain to me or elaborate

22 what that effective rate would be if we didn't

23 deduct 82 cents and just calculate it based on the

24 market price?

25 MR. KNITTEL: Yes, I can do that for

Key Reporters [email protected] 101

1 you. As you noted, when we computed it in this

2 handout, we computed it at the wellhead, so we left

3 off the 82 cents. If you were to include the 82

4 cents so it was the value at the Hub, that same

5 computation, the ETR would fall from 5.5 percent

6 down to 2.6 percent.

7 REPRESENTATIVE BULLOCK: Thank you.

8 MAJORITY CHAIRMAN ADOLPH: Thank you,

9 Representative. Representative Gary Day.

10 REPRESENTATIVE DAY: Thank you, Mr.

11 Speaker.

12 Thank you, Director, for being here.

13 When you get to this point in the hearing, very

14 short, two questions very short, because a lot of

15 the larger parts of the questions have been

16 answered, but there's still two components.

17 My colleague had talked about the

18 expense side, and I'm interested, you had answered

19 about the access you have to the state system. So,

20 when I look at it, and I think about your mandatory

21 responsibilities of assessment, of fiscal condition

22 of Pennsylvania, I think about the different --

23 your whole role is to provide information and

24 knowledge to us policymakers in order to make

25 better policy decisions, and I appreciate what

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1 you've done and your office has accomplished.

2 I'm interested -- So I wanted to ask you

3 the question. Does your office track the spending

4 by the Administration or -- Go ahead and just

5 answer that.

6 MR. KNITTEL: Yeah. We really only do

7 it once a year when we're putting out our five-year

8 outlook report. We don't constantly monitor it.

9 REPRESENTATIVE DAY: Thank you. And is

10 the data available? You had talked about you have

11 a high-level view, not a more ground-floor view of

12 this. But, are you able to track where the

13 authorization came from; whether it was legislative

14 through that budget year, or maybe through another

15 part of a statute that health and human services --

16 you know, the health and safety of Pennsylvanians?

17 Do you track authorization for the spending?

18 MR. KNITTEL: Let me -- Mark, would you

19 -- check with my deputy director. Deputy, do you

20 know?

21 MR. RYAN: We have a very broad --

22 MR. KNITTEL: We can't track the

23 authorization?

24 MR. RYAN: We know the general

25 appropriations, but beyond that --

Key Reporters [email protected] 103

1 MR. KNITTEL: We don't. Again, it's at

2 a very high level. We know the appropriated amount

3 and what department is spending it and the amount.

4 But beyond that, currently, we don't have the

5 detail.

6 REPRESENTATIVE DAY: So I tried to

7 listen to his responses. I was listening to him as

8 well, and I started to hear that you might have the

9 information is what it sounded like to me. If you

10 could check --

11 Like, I think about it like this. You

12 would have the authorization, and then there'd be a

13 column where we would mark and track where the

14 authorization came from. So, I want to give you an

15 opportunity maybe to go back --

16 MR. KNITTEL: Sure.

17 REPRESENTATIVE DAY: -- and take a look

18 at that to see if you have the ability to say, this

19 was out of this year's budget; this was out of last

20 year's budget, the year before; you know, something

21 you still open, so that was spent out of a previous

22 year. Or maybe you'll find that the authorization

23 --

24 You know, I want to eventually ask any

25 Administration to be able to say, here's where we

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1 believe we have the authorization to make this

2 spend.

3 The other question I had was about

4 structural deficit. My colleague, Representative

5 Christiana, really talked about this again, and

6 many others did as well before me. So my short

7 question is, I look at structural deficit as being

8 thrown around. It's being confused with structural

9 budget deficit. We've talked a lot about that.

10 To me, the structural deficit formula

11 equals structural revenue taxes. Structural

12 revenue taxes would be existing taxes. And in the

13 case when expenditures are higher, you'd have a

14 structural deficit when you subtract structural

15 expenses from structural revenue.

16 So, structural revenue is existing taxes

17 allowed to be enacted on the people of Pennsylvania

18 minus structural expenses, which we project what

19 they will be based on labor contracts; based on

20 anything that seems to be contracted by the state

21 or by our people to be an expenditure.

22 So, I always have believed that if you

23 want to take a look at changing the structural

24 deficit, that a bipartisan way would be to look at,

25 you know, not just look at increasing taxes, the

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1 structural revenue part of that formula, but also

2 look at the expenditures, which include

3 liabilities.

4 So my question is, do you believe that

5 any structural deficit can be affected by changing

6 structural spending and liability moving forward?

7 MR. KNITTEL: I would say that is an

8 option. We have made assumptions. We assume

9 current policy, and that we assume that's projected

10 forward. That could be one option in the long

11 term.

12 REPRESENTATIVE DAY: One option. Okay.

13 So it would? The answer is, it would, but you're

14 trying not to say that you think that's the only

15 way, right?

16 MR. KNITTEL: Correct. That's not --

17 REPRESENTATIVE DAY: I want to try to be

18 fair to your answer.

19 MR. KNITTEL: Sure. We have several

20 options.

21 REPRESENTATIVE DAY: And that would be

22 one of them?

23 MR. KNITTEL: Even those could be

24 changed by statute.

25 REPRESENTATIVE DAY: Last question, Mr.

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1 Chairman, and I'm trying to keep these short.

2 If we save a hundred million this fiscal

3 year, will that reduce our deficit?

4 MR. KNITTEL: In the current fiscal

5 year, yes.

6 REPRESENTATIVE DAY: And if we save a

7 hundred million and spend it, would that reduce our

8 deficit?

9 MR. KNITTEL: It would net out. It

10 would not.

11 REPRESENTATIVE DAY: I'm sorry. I tried

12 to ask these as quickly as possible. Kind of

13 short-cheating you a little bit on those questions,

14 but I appreciate your answers.

15 And thank you, Mr. Chairman.

16 MAJORITY CHAIRMAN ADOLPH: Thank you,

17 Representative.

18 Director Knittel, I want to thank you

19 for your appearance today and for your testimony

20 and for work that you do for the Commonwealth. I

21 know a lot of the questions were asking for

22 professional opinions, and I think some of those

23 questions are good questions and need to be

24 answered, and I'm sure they're going to be directed

25 at some other cabinet members later on.

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1 For the members' information, this

2 committee will reconvene at 1 o'clock with the

3 Secretary of Revenue. Thank you again for your

4 testimony.

5 MR. KNITTEL: Thank you.

6 MAJORITY CHAIRMAN ADOLPH: Thank you.

7 (At 12:05 p.m., the hearing concluded).

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1 C E R T I F I C A T E

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3 I, Karen J. Meister, Reporter, Notary

4 Public, duly commissioned and qualified in and for

5 the County of York, Commonwealth of Pennsylvania,

6 hereby certify that the foregoing is a true and

7 accurate transcript, to the best of my ability, of

8 a public hearing taken from a videotape recording

9 and reduced to computer printout under my

10 supervision.

11 This certification does not apply to any

12 reproduction of the same by any means unless under

13 my direct control and/or supervision.

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