Pennsylvania governor would tap reserves to fund education, economic priorities

Pennsylvania Gov. Josh Shapiro wants to tap the commonwealth’s surplus revenues for his wide-ranging budget agenda.

The Democrat proposed sweeping changes to Pennsylvania’s K-12 and higher education systems and $500 million of borrowing to fund his new economic development plan in his budget address on Tuesday. 

The budget proposal was $48.34 billion, an increase of more than $3 billion, or 7%, over the 2024 budget. Shapiro received a mixed reception from the commonwealth’s divided legislature, which is infamous for budget impasses.

“I know that’s a bold vision, and some will reflexively be opposed, saying ‘we can’t afford that,'” Shapiro said in his address. “But I would argue we can’t afford not to invest right now. We have a $14 billion surplus.”

Pennsylvania accumulated its $6 billion rainy day fund — plus another $8 billion in its general fund surplus — rapidly over the last four years, through repeated surpluses and federal pandemic-related aid. Shapiro’s requested budget would leave $11 billion in reserves, he said. He framed the spending as a necessary investment into the commonwealth’s economy.

“In fact, even the ratings agencies have said that there’s too much money sitting in surpluses around the country – instead of being driven out into our communities,” Shapiro said.

“I wasn’t sure which rating agency he was referring to,” said Tammy Gamerman, Fitch Ratings’ lead analyst for Pennsylvania. “From our perspective, we see these surpluses as one-time funds. So, general best practice is to use these one-time funds for one-time purposes.”

Pennsylvania’s fiscal health and flush reserves earned the commonwealth a Fitch upgrade in 2023 and upgrade boosts to positive from Moody’s Investors Service and S&P Global Ratings.

 Fitch rates Pennsylvania AA with a stable outlook. Moody’s rates the commonwealth Aa3, and S&P A-plus. 

Shapiro’s budget proposal contains plans to continue depositing into the rainy day fund for the next few years, Gamerman noted. The current fund is around 14% of its budget, which Gamerman called “a healthy amount.”

The biggest item in Shapiro’s budget proposal is education; the governor plans to spend $1.1 billion more on schools, a 14% increase, and restructure the K-12 funding system. 

Pennsylvania’s Supreme Court found the commonwealth’s school funding system unconstitutional last year, and last month, a commission chartered by the state legislature released a report on a more equitable funding scheme.

Shapiro said his budget proposal follows “the general contours of that report,” and “makes sure no school gets less than they did last year as we drive these dollars out in a more equitable manner.”

The proposal would also change how the commonwealth funds online charter schools and set aside $300 million in the next fiscal year for repairs to school facilities. 

In his budget address last year, Shapiro declared that Pennsylvania’s higher education system was “broken,” and his 2025 budget proposes structural changes and a 15% funding increase.

 Pennsylvania ranks 49th in state investment in education, Shapiro noted in his address, and enrollment in the commonwealth’s public colleges is steadily dwindling, according to Fitch higher education analyst Akiko Mitsui.

Pennsylvania has 15 community colleges; ten state-owned universities, which operate under the Pennsylvania State System of Higher Education, or PASSHE; and four state-related universities, some with satellite campuses of their own; and countless private colleges, all competing for students as the college-aged population of Pennsylvania declines, Mitsui said. 

PASSHE recently merged three of its campuses in the western half of Pennsylvania and three of its campuses on the eastern half to try to avoid competition and redundancies, Mitsui said, but there is still a “dramatic oversupply.”

Shapiro’s budget seeks to merge the community college system and the PASSHE system under one system of governance, and increase the funding to those schools by 15%. The state-related universities — Penn State, the University of Pittsburgh, Temple University and Lincoln University — would receive a 5% funding increase. 

Funding for state-related universities has held up budget negotiations annually for years. The legislature must approve these universities’ funding with a two-thirds majority. Shapiro proposed changing this to a simple majority vote. He also called for a performance-based funding system for higher education.

Shapiro’s budget also includes the funds for his new economic development plan, which he announced last week. The budget would provide $20 million for innovation and research, $18 million for tourism and $25 million to establish a Main Street Matters program, which would help municipalities fund small businesses, downtowns and main streets.

“Pennsylvania has had some more challenging economic trends, slightly slower growth than some other states,” Gamerman said. “So it’s certainly good to be thinking about what are the investments and things that the commonwealth needs to do to try to grow the economy and change their current trends.”

The governor also announced a new plank of his economic development plan: half a billion dollars of bonds for site development to entice companies to move to Pennsylvania.  

“And when it works,” Shapiro said, “we’ll use the added revenues we get from the companies that move to these sites to pay back that bond.”

Shapiro also proposed legalizing and taxing cannabis, programs for healthcare and housing and $283 million in new funding for public transit. 

“The thing that stuck out to me is just the combination of all those proposals,” Gamerman said. “It was striking to see all these different proposals and spending increases without any tax revenue increases at the same time. Just thinking about, how is the commonwealth going to be able to fund all of these new needs over the long term in a way that is sustainable?”

Of course, it’s possible that many of the proposals won’t be passed in the final budget. Pennsylvania, unlike any other state in the country, has a divided legislature, with a Republican majority in the state Senate and a Democratic-controlled House of Representatives. The House has a 101-100 Democratic majority after the resignation Thursday of a Republican member, with a special election coming Tuesday to fill another vacant seat.

The commonwealth is infamous for budget dysfunction, with 13 late budgets over the past 20 years. In 2015, then-governor Tom Wolf vetoed the Republican legislature’s entire budget, which led to a record-setting nine-month impasse. 

Last year, the legislature passed part of the budget in August, two months after the June 30th deadline, but didn’t finish the rest of the package until December. Shapiro’s new proposal contains some of the factors that caused last year’s fights, such as private school vouchers and higher education funding.

It’s not yet clear how the plan will change, but Republicans in the legislature have already criticized the budget as too expensive.