Highlights of Governor Wolf’s Proposed 2015-2016 Budget

Budget Numbers

  • 2015-2016 budget proposal: $29.884 billion.
  • Most of the tax revenue to come from the Personal Income Tax (40.8%) and the Sales and Use Tax (31.1%).
  • The largest proposed expenditures would be for Human Services ($11.9 billion), Education ($10.1 billion), Corrections ($2.3 billion), and Treasury ($1.2 billion).
  • Federal funds that contribute to the total operating budget of the state would be $27.9 billion.

The following have been proposed as part of Governor Wolf’s 2015-2016 budget plan.

Government Savings and Efficiency

  • Establishes GO TIME (Governor’s Office of Transformation, Innovation, Management, and Efficiency)–an initiative designed to save taxpayers more than $150 million in the next year.
  • Merges the Department of Corrections with the Board of Probation and Parole to eliminate duplicative administrative oversight and provide better outcomes after offenders return to the community.
  • Re-integrates Medicaid into a single delivery system with a goal of realizing $500 million in additional state savings next year.
  • Allows Pennsylvania to enter into Pay for Success projects (also known as Social Impact Bonds) in five areas: 1) early childhood care and education; 2) education, workforce preparedness, and employment; 3) public safety; 4) health and human services; and 5) long-term living and home-and community-based services.

Liquor Store Modernization

  • Modernizes the liquor delivery system to make it easier and more convenient for customers by including Sunday hours, identifying the most convenient locations for customers, and establishing competitive pricing.

Pension Reform

  • Provides for pension investment reforms: reducing management fees and over reliance on high-risk investment strategies.
  • Eliminates “double dip” payments to charter schools in the Public School Code.
  • Guarantees that all actuarially required employer (meaning the government) pension obligations are paid in full.
  • Builds on the pension changes of 2010 (Act 120 of 2010).
  • Establishes a restricted account to ensure that all future employer obligations are paid in full.
  • Refinances a portion of the unfunded liability of the Pennsylvania State Employees’ Retirement System (PSERS) through the issuance of a $3 billion bond (which would be paid for by increased profits from the state liquor store system beginning in FY 2017-2018).
  • Realizes new revenues through the modernization of the current state-run wine and spirits system that would be allocated to school districts to reduce their pension debt.

Tax Changes

  • Provides for the complete elimination of the Capital Stock and Franchise Tax, effective January 1, 2016.
  • Provides for a reduction of the Corporate Net Income Tax from 9.99% to 5.99% in FY 2015-2016; within two years, the rate would drop to 4.99%.
  • Requires combined reporting for corporate taxpayers; companies would file a single return for all subsidiaries at the state level.
  • Decreases the cap on net operating losses from $5 million or 30% of income to $3 million or 12.5% of income.
  • Provides for $3.8 billion of property tax relief effective in the 2016-2017 school year– paid for by an increase in the Personal Income Tax to 3.7%, an increase in the Sales and Use Tax by 0.6 percentage points (to 6.6% statewide), and the elimination of certain exemptions under the Sales and Use Tax (commonly referred to as broadening the base of this tax); this property tax relief incorporates $600 million in revenue from gaming that is already dedicated to property tax reduction.
  • Provides for a severance tax on natural gas extraction to help finance new debt for publicly financed economic development initiatives and for the Pennsylvania Education Reinvestment Act, which would be established to finance the education spending provided for in the governor’s budget plan.
  • Institutes a 1.25% Bank Shares Tax, retroactive to FY 2013-2014.
  • Increases the Cigarette Tax by $1.00 per pack effective October 1, 2015.
  • Imposes a tax on all other tobacco products at 40% of the wholesale value of these products (effective October 1, 2015).

Public Financing for Economic Development Programs and Projects (includes transportation and water and sewer infrastructure)

  • Provides $5 million for a new initiative that combines the Industrial Resource Centers with technological advances of higher education.
  • Provides a $5 million tax credit to manufacturing companies (this tax credit would be funded through the elimination of “under-performing” tax credits).
  • Provides $100 million to the Pennsylvania Industrial Development Authority.
  • Provides $250 million to Business in Our Sites for site development, business expansions, and business relocations.
  • Provides a $1 million increase for World Trade PA.
  • Provides a $2 million increase for Marketing to Attract Tourists.
  • Includes a $1 million increase in Marketing to Attract Business.
  • Includes a $25 million increase for PA First—to facilitate job creation through Opportunity Grants, Infrastructure Development, and Customized Job Training programs.
  • Provides a $15 million increase in Keystone Communities for Main Street, Elm Street, and Core Communities Development projects.
  • Provides an additional $11 million for the Infrastructure and Facilities Improvement program.
  • Includes $775,000 to preserve Pennsylvania’s military communities (Base Realignment and Closure).
  • Provides a $4 million increase to Public Television Technology.
  • Includes $15 million for a Mixed Use Development Program through the Pennsylvania Housing Finance Agency.
  • Supplements revenue generated by Act 89 of 2013 (transportation funding) with $145 million in bonds scheduled to be issued in FY 2014-2015 under Act 89 of 2013.
  • Leverages more than $500 million through the issuance of PennVEST revenue bonds to address deteriorating municipal water and sewer systems.

Public Financing for Energy Projects

  • $30 million for Combined Heat and Power (Cogeneration).
  • $20 million for Wind Power.
  • $20 million for Green Agriculture.
  • $30 million for the Pennsylvania Energy Development Authority.
  • $25 million for “Last Mile” Natural Gas Distribution Line Development.
  • $50 million for PA Sunshine (solar investments).
  • $50 million for Energy Efficiency.
  • $100 million for Technology Investment.

Basic, Special, and Early Childhood Education

  • Provides for a $400 million increase in the Basic Education Subsidy.
  • Includes a $100 million increase in the Special Education Subsidy.
  • Includes a $120 million increase in early childhood education for additional enrollment in Pre-K Counts and the Head Start Supplemental Assistance Program.
  • Includes a new Basic Education Formula that contains four goals: 1) adequacy, 2) equity, 3) predictability, and 4) accountability.
  • Includes accountability measures that address academic and fiscal performance in schools.

Charter Schools

  • Sets the regular education tuition rate for cyber charter schools at $5,950.
  • Applies the formula recommended by the Special Education Funding Commission to cyber charter schools.
  • Makes permanent in law the policy of stopping charter and cyber charter schools from being paid twice for the same employee pension costs.
  • Includes a requirement for an annual reconciliation whereby charter and cyber charter schools would refund money to their sending school districts if the charter school’s audited expenditures were less than its tuition revenue.

Higher Education and Workforce Development

  • Provides $15 million to support and modernize career and technical education.
  • Provides $5 million for Career and Technical Education Equipment grants.
  • Provides $9 million from Pennsylvania Higher Education Assistance Agency (PHEAA) proceeds to re-establish the state’s Dual Enrollment Grant Program.
  • Provides $8 million for career counselors for middle and high school students.
  • Provides a $15 million increase to community colleges.
  • Provides a $45.3 million increase to the Pennsylvania State System of Higher Education.
  • Provides an $80.9 million increase to State-Related Universities (i.e., Penn State University, Temple University, the University of Pittsburgh, and Lincoln University).
  • Calls on community colleges and the universities of the State System of Higher Education to freeze tuition during the next academic year.
  • Recommends $7.5 million from PHEAA proceeds for STEM—Science, Technology, Engineering, and Math.
  • Provides a $10 million increase to offer additional scholarships under the Ready to Succeed program.
  • Provides a $5 million increase for grants to independent colleges and universities (known as Institutional Assistance Grants).
  • Provides $8.5 million from PHEAA proceeds to expand the state’s loan forgiveness program for primary care physicians in medically underserved areas.
  • Provides a $10 million increase for Industry Partnerships.
  • Provides $8 million in funding for the Workforce and Economic Development Network of Pennsylvania (WEDnetPA).
  • Provides a $1.2 million increase for the Pennsylvania College of Technology and an $863,000 increase for the Thaddeus Stevens College of Technology.
  • Provides an increase of $466,000 for scholarships to graduates of Lincoln and Cheyney Universities who pursue graduate and professional degrees at state-related universities.
  • Provides a $475,000 increase for grants to offset tuition and other expenses for gifted students who attend Cheyney University.
  • Provides an increase of $4.6 million for Adult and Family Literacy programs.
  • Provides a $5 million increase for Vocational Rehabilitation.

Health Care

  • Expands Medicaid into a single consolidated system.
  • Expands coverage of the Children’s Health Insurance Program (CHIP) to an additional 15,881 children.

Drug and Alcohol Treatment

  • Provides a $2.5 million increase to Behavioral Health Services.
  • Provides a $5 million increase to the Department of Drug and Alcohol Programs to address heroin use and opioid addiction throughout the state.

Public Safety

  • Funds four classes of Pennsylvania State Police Troopers (or 350 new cadets).

Care for Vulnerable Citizens

  • Expands home-and community-based long-term care by providing an additional $31 million to the Department of Human Services (previously called the Department of Public Welfare) and $7.3 million to the Department of Aging to allow more individuals to obtain care in their homes.
  • Provides for the implementation of managed long-term care within three years.
  • Implements an online home care registry for workers to find jobs in the field and for consumers to find competent care.
  • Provides $45.9 million to reduce waiting lists for individuals with physical and intellectual disabilities (and expands services for these individuals).
  • Provides an additional $19.3 million for home-and community-based care for individuals with intellectual disabilities and autism (and includes $12.8 million to fully annualize the 2014-2015 program expansion).

Labor and Employment

  • Provides for an increase in Pennsylvania’s minimum wage from $7.25 to $10.10 and ties it to inflation.

Note: The information contained in this document is from public materials made available by the Pennsylvania Office of the Budget.   This document serves as a condensed summary of the provisions of Governor Wolf’s proposed budgetIt is not an official source on the Governor’s proposed 2015-2016 budget.

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If you have questions please contact Michelle Vezzani at MVezzani@cohenlaw.com or the public affairs professional with whom you work.

Social Impact Bonds: A Public-Private Solution to Social Problems

What are social impact bonds (SIBs)?  They are a relatively new tool in the field of social finance–public private partnerships that have been established in the United States and throughout the world to address recurring problems associated with all kinds of social issues, including, but certainly not limited to, low-income students’ access to early childhood education, juvenile delinquency, unemployment, homelessness, and prison recidivism.  The goal of SIBs, sometimes referred to as “pay-for-success” financing, is to transition from government-funded remedial activities to government-funded preventive activities in the delivery of social and educational services. SIBs cannot be used to address every social ill, but they provide a results-driven, data-based approach to solving social problems that government has struggled to solve on its own.

The following is a brief step-by-step explanation of how SIBs work in practice, provided by McKinsey & Company:

  1. A governmental entity contracts with an intermediary to broker a SIB.
  2. The intermediary raises capital from private investors.
  3. After raising the necessary capital, the intermediary transfers funding to one or more non-profit service providers.
  4. The non-profits then provide their preventative services targeting a specific social problem in a larger population.
  5. Throughout the process, an evaluation advisor monitors the progress of the intermediary and non-profit service providers and recommends adjustments that may need to be made.
  6. At the end of the process, an independent assessor determines whether agreed-upon performance measures have been met and how much the governmental entity needs to repay the private investors, who are repaid only if the SIB meets its performance targets.*

Since 2010, when England launched the world’s first official SIB aimed at reducing recidivism among nonviolent, short-term prisoners, SIBs have become increasingly popular at all levels of government in the United States.  According to Social Finance, a leading organization in SIB development, the following social impact bonds are being considered or are currently underway in the United States:

  • In Pennsylvania, the City of Philadelphia in July of 2014 released a request-for-proposal for a feasibility study to explore a pay-for-success initiative to reduce recidivism and support at-risk youth.  During the 2013-2014 legislative session, state legislators introduced, or proposed to introduce, legislation dealing with SIBs–ranging from the establishment of social public private partnerships to a study on SIBs by the Legislative Budget and Finance Committee to the utilization of state funds for a SIB pilot program and study. This legislation will probably be re-introduced during the next legislative session (beginning in January of 2015), as well as additional social impact bond legislation.
  • In California, Santa Barbara County approved a feasibility study on the potential use of pay-for-success financing to reduce prison recidivism; and Santa Clara County is looking to use SIBs to address homelessness and acute mental illness.
  • In Colorado, Denver is pursuing a SIB to provide housing and case management to chronically homeless persons who struggle with mental health and substance abuse issues.
  • Connecticut has a pay-for-success initiative designed to help families involved in the Department of Children and Families that have a history of adult substance abuse.
  • Illinois state government is pursuing a SIB aimed at increasing support for at-risk youth involved in the child welfare and juvenile justice systems.
  • Massachusetts is engaged in a $50 million SIB designed to reduce recidivism among justice-involved youth and to house chronically homeless persons.
  • In New York State, New York City in 2012 became the first jurisdiction in the United States to undertake a SIB project, which allocated $9.6 million to reduce recidivism among young men exiting the Rikers Island prison facility. New York State has also appropriated $30 million for SIBs over five years, and it recently announced four pay-for-success projects for the Nurse-Family Partnership, Montefiore Medical Center/Children’s Aid Society, Hillside Children’s Center, and the Primary Care Development Corporation and its partners.
  • In Ohio, Cuyahoga County has recently launched a pilot SIB project to help homeless mothers with children in foster care.
  • Oklahoma has established a pay-for-success revolving fund to provide payment to social service providers for the delivery of predefined criminal justice outcomes.
  • South Carolina is engaged in a SIB that will serve up to 4,000 mothers to improve birth, health, and self-sufficiency outcomes.
  • Utah has launched a SIB to improve early childhood education outcomes, and the governor recently signed legislation creating the Utah School Readiness Initiative, which allows the state to pay for outcomes.
  • Washington, DC is developing the nation’s first SIB designed to reduce teen pregnancy and increase educational attainment for high school-aged youth.**

Most recently, the City of Chicago announced it will engage in a $17 million SIB over the next four years to provide pre-K learning to 2,620 children.***

In addition, at the federal level, President Obama has included $300 million in his 2014-2015 budget to incentivize the use of SIBs at the state and local level; and Representatives Todd Young (R-Indiana) and John Delaney (D-Maryland) have introduced H.R. 4885—bipartisan legislation that would “direct $300 million in federal funds to SIB feasibility studies, evaluation, and outcomes payments on contracts executed with state and local governments.”**** Senators Bennet (D-Colorado) and Hatch (R-Utah) have introduced similar legislation (S. 2691) in the Senate. Both pieces of legislation await consideration before the United States Congress.

*“An introduction to Social Impact Bonds.” McKinsey & Company, May 15, 2012, https://www.youtube.com/watch?v=E6GrQtCh83w

**The United States, State and Local Activity: A Snapshot, Social Finance, November 19, 2014, http://www.socialfinanceus.org/social-impact-financing/social-impact-bonds/history-sib-market/united-states.

***Elizabeth Campbell, “Chicago Will Use $17 Million in Social-Impact Bonds for Pre-K,” Bloomberg, October 8, 2014, http://www.bloomberg.com/news/2014-10-08/chicago-will-use-17-million-in-social-impact-bonds-for-pre-k.html.

****The United States, State and Local Activity:  A Snapshot, Social Finance.

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If you have questions please contact Michelle Vezzani at MVezzani@cohenlaw.com or the public affairs professional with whom you work.