Pennsylvania Executive Budget Address 2007

HARRISBURG, Pa., Feb 6. - Following is the prepared text of Gov. Ed Rendell's (D) 2007 executive budget address.

Good morning.  Thank you very much.  Mr. Speaker, Madame President, Members of the 190th Legislature, distinguished guests, my fellow Pennsylvanians.

It has become a solemn tradition for all of us over these last five years to pay homage to the tremendous sacrifices of those Pennsylvania service men and women who are deployed outside our Commonwealth, particularly in Iraq and Afghanistan. 

The words that I will say here today and the things that we do here, important though they will be to the daily lives of our fellow citizens, pale in comparison to the life and death decisions that confront our fellow Pennsylvanians on patrol in Iraq and Afghanistan each day.  To date, no state has sent more National Guardsmen and women to fight the global war on terror.  Seventeen thousand Pennsylvanians have served there.  Thirty-five of our guardsmen have died there.  Sadly, since the war began, 159 Pennsylvanians from all branches of the military have lost their lives in this fight.

So I ask you now to join me in a moment of silent tribute to these courageous Pennsylvanians.  Let us remember them and their families in our prayers.  Let us also keep those Pennsylvanians serving there in our hearts each day, and most of all, let us pray for their safe return.

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We are gathered today to talk about the choices that we will make together, this year and over the course of the next four years, as we continue to put Pennsylvania on the road to enduring progress.  As I said in my Inaugural Address last month, there is no question that we have come a long way together already, making the difficult decisions that were long overdue on a wide range of issues.  Those decisions brought change to Pennsylvania and the promise of a better life for our citizens. 

As we gather in this chamber, we all share the belief that much more remains to be accomplished.  But I think it is important to pause for a few moments today to recall briefly what we have achieved, for two reasons: first, as a reminder that we have demonstrated the ability to tackle issues that the naysayers said were just too difficult to address.  And second, because it should remind us how much we can achieve if we put the people’s interests ahead of personal or partisan agendas.  I want to be clear about that point, too – the accomplishments of the last four years were the product of the work we did together.   

I don’t recite these points to pat ourselves on the back, but think about it for a minute.  We passed legislation expanding access to our terrific PACE/PACENET program.  For seniors and all homeowners, we enacted the most significant reduction in property taxes in the history of our Commonwealth.

We have made it possible for 55% of the students in this state to attend full-day kindergarten, to begin modernizing every high school classroom and to help over 315,000 struggling students get the tutoring they need to achieve.  And today, Pennsylvania’s public school students are making gains like never before – better prepared than ever to join the workforce and make a future for themselves and their families right here in Pennsylvania.

We invested $3 billion in an economic stimulus package that offered a lifeline to many of the Commonwealth’s smaller cities and towns, places that had not seen real economic growth in decades.  These investments have triggered a significant economic recovery.  As a result, today more Pennsylvanians are working than at any point in the history of the Commonwealth.  And IBM Global Services recently reported that there was more foreign and domestic investment in Pennsylvania in 2005 than in any other state in the Nation.

At a time when government spending seemed destined to spiral out of control forever, we acted together to control the costs of health care, social service programs and the day-to-day administration of the government.  In a process that is still ongoing, we’ve achieved reductions of $1 billion in the cost of operating state government.

Together, we took a stand on the growing energy crisis that impacts the cost of almost everything else we do in Pennsylvania.  As a result, we have made the Commonwealth a national leader in the development of bio-fuels and alternative energy sources.  Pennsylvania is leading the states in this growth area of our nation’s economy.

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Last fall, the people of Pennsylvania sent a strong and very clear message that they support the progress we have made over the last four years, and that they want this progress to continue.  They also demonstrated their desire for reform of both the election and legislative process.  They want accountability, transparency and a greater say in the work that goes on here.  But we should make no mistake, the people’s feelings about how that work gets done range from suspicion to outrage.

Led by the spirit of the fifty-four new legislators who sit among us today and new leadership on both sides of the aisle, both Chambers have established impressive committees that are already hard at work on defining the steps that could be taken to improve our political and legislative process and meet the expectations of our citizens.  I look forward to these committees reviewing my proposals for political reform that I outlined in my inaugural address.  For today, let me applaud the seed of reform that has taken root in this building.  I urge both Chambers and all Caucuses to let it grow into real change.

The voters also resoundingly approved of the progressive agenda that we have developed together.  We must continue to move forward through the new Agenda for Pennsylvania Progress, a comprehensive strategy to address the long-term challenges that still confront us.  And with this budget, I intend to deliver on that Agenda.

Four years ago, when we began to make the tough decisions that would shape Pennsylvania’s future, we took action because we were in crisis – a projected $2.4 billion budget deficit, an education system that was critically and chronically under-funded, an economy worn threadbare for lack of investment, an environment desperately in need of a renewed commitment to the protection of our natural resources.

Because we did these first things first, we turned a corner in Pennsylvania.  But in many cases – on the budget, on public education, and on controlling the spiraling costs of health care and other social services – the sense of crisis made the short-term choices clear, if no less difficult.  In that sense, the times were “on the side of progress.”  We had to act immediately in every case, and because we did, Pennsylvania made great strides.  

Having achieved a great deal already, the question now is whether we will demonstrate the commitment to make Pennsylvania great for years to come?  Can we sustain our momentum and avoid the detours of special interests and partisan politics that threaten Pennsylvania’s future?

If we do, I believe that Pennsylvania’s best days lie ahead of us but the challenges ahead are formidable indeed.  My proposed budget takes aggressive action to address these challenges.  They include: funding the cost of our recent successful collective bargaining agreements with the Commonwealth’s public employees; the rising cost of our prison system; coping with continued devastating cuts in federal support for our social safety net programs; and the looming crisis of rising state pension obligations. 

Our pension obligations continue to grow, and if we do not act soon, they will spike so high in four years that they may undermine the foundation of fiscal stability of this state and of our school districts.  If we do nothing, in five years we will be paying an additional $1.6 billion per year to meet our pension obligations and our school districts will be paying over $800 million more each year.  We have a plan to meet this challenge, and we need to begin to work this year to change the course we are on.  I will be reaching out to the leadership of each caucus to select members of the Legislature to review our plan and to work with us to develop a long-term solution to our pension problems that can be acted on this fall.

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And we face other challenges that are not of our own making.  These challenges threaten the Commonwealth’s long-term fiscal health and could have a catastrophic impact on Pennsylvania’s social service and transportation funding needs.

They are focused in two major areas: first, funding for programs required by federal mandates from Washington, which force us to pay for programs even as the federal government continues the cruel practice of cutting funds for many of these same services.  And second is the spiraling cost of mass transit and highway and bridge repair – problems, as we all know, that have loomed on the horizon for years, and for which the day of reckoning has finally arrived. 

As I said, these challenges are largely not of our own making, though that does not relieve us of the obligation to address them.  Let me briefly detail them for you:

The growing list of unfunded federal mandates – cases in which Washington “passes the bill and then passes the buck” to the states to pay for it – represents at least $700 million in additional obligations in the FY2007-2008 state budget.  Among others, we have been forced to cover the cost of these mandates:

Since 2003, we have absorbed a loss of $1 billion in federal IGT transfer funds and a shrinking federal match for medical assistance and child support programs.  This budget absorbs an additional $209 million to compensate for severe federal funding changes.  Like most states, Pennsylvania has historically used its IGT funds to maintain nursing home payments and to address critical funding needs for health care for the indigent. 

Next year’s budget also includes $369 million to pay for federally-mandated services, increased rates for managed care, and increased Medicaid utilization services on top of $41 million of these federal costs built into our budget over the last four years.

We must also fund $118 million in federally-mandated services for disabled and special needs children and the increased child care costs necessary to meet the federal welfare requirements.  Again these state funds are on top of $221 million already built into the budget this year to absorb the cost of these federal mandates over the last four years.

And, for the second year in a row, we must fund part of the cost of the Medicare Part D program.  The federal government created this program and now, unbelievably, is requiring states to help pay for its cost.  This so-called “clawback” payment – which a number of states are challenging in federal court – cost Pennsylvania $338.5 million in this fiscal year, and the federal government expects us to pay another $325 million this coming year.

Now, no one is suggesting for a minute that we should reduce or eliminate these services.  Conscience and compassion demand that we provide services for these most vulnerable Pennsylvanians.  And by federal law, we must do so.  But the point is clear: to meet the combined impact of these federal cuts and under-funded federal mandates, Pennsylvania taxpayers have been required to shoulder over $2 billion in costs since 2003.  This is an extraordinarily heavily load for us to bear, and it is the direct result of decisions made in Washington, which is trying to balance the federal budget – and the projected $319 billion federal deficit – by foisting on the states the difficult choice between cutting services to citizens or raising state revenues, while at the same time taking credit for cutting federal taxes.

That said, we have only one real option.  By law, we must fund these obligations in the FY2007-2008 state budget and we must expand our revenues to do so.

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I also propose today to expand our revenues to achieve another critically important objective.  We can accelerate the delivery of property tax relief and begin to reduce property taxes for millions of Pennsylvanians this summer, a full year ahead of schedule. 

Without any additional revenue, the property tax relief fund balance will be $450 million by this summer.  Current law permits property tax relief to all Pennsylvania homeowners only when sufficient funds are available to cover the required reserve and there is at least $400 million for homeowner tax relief.  That means that no distribution can happen until at least $570 million is in place.  So if we don’t add money to the fund, all non-senior homeowners will have to wait another year for property tax relief.

I am proposing that Pennsylvania enact accelerated property tax relief through a fundamental tax shift implemented through an increase of one percentage point in the Pennsylvania sales tax.  The FY2007-2008 state budget proposes to use $420 million of additional sales tax revenues to fund accelerated property tax relief.   

The tax shifting plan I am proposing today will provide nearly $720 million in property tax relief this summer, in addition to the $199 million of relief already planned to go to senior citizens.  That’s a full year ahead of schedule, and it finally gives all Pennsylvania homeowners real cuts in their property taxes.

Most importantly, this is not a one-year benefit.  I am asking you to agree to allocate $700 million of the increased sales tax revenues to permanently reduce the Commonwealth’s reliance on property taxes.  This reduction would be over and above the relief that will arrive once Pennsylvania’s new gaming facilities are fully operating and generating an estimated $1 billion per year in additional property tax relief funds.  Under the plan I am proposing today, property tax relief in Pennsylvania will double to at least $1.7 billion a year.

The remaining portion of the sales tax increase collected in FY2007-2008 is required to meet the cost of the federal mandates that I have detailed today.

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Like you, I fully appreciate the difficulty of any decision to increase taxes.  I share the reluctance of everyone in this Chamber to do so, but ladies and gentlemen, I believe we have no choice.  We must put our own house in order, regardless of the fact that others are responsible for damaging it.  We must fund the obligations imposed on us by federal law.  And we must continue to provide services to our most vulnerable citizens.

How we respond to this challenge will define us for years to come.  We can either lament the difficulties that confront us, hoping against hope that Washington will ride to our rescue.  Or we can decide to meet the problem head-on, by developing an effective, long-range Pennsylvania strategy to address this issue.  And so with this 2007-2008 state budget, I propose to implement a long-term plan to assure Pennsylvania’s progress for generations to come.

As you know, I have already announced two important elements of this plan: the Prescription for Pennsylvania, a major new health care initiative designed to improve the competitiveness of all businesses throughout the state while simultaneously providing health insurance coverage for an additional 800,000 Pennsylvanians; and the Pennsylvania Energy Independence Strategy, which builds on our progress in developing alternative energy sources that offer a Pennsylvania solution to America’s energy crisis.

Thanks to our collective effort last fall, every child in this state is eligible for health insurance and every parent in this state can purchase that insurance affordably.  The eyes of the nation are upon Pennsylvania and a few other states because of the recent steps we have taken to eliminate the moral stain of hundreds of thousands of uninsured residents.  Our approach differs from most of the states embarking to solve the health care crisis.  We not only address the need for universal access to coverage, we also address the major cost drivers that are making health insurance less affordable for all of our residents and our businesses.

The Prescription for Pennsylvania seeks to improve the competitiveness of businesses throughout the state by reducing the crushing burden of skyrocketing employee health care costs.  In fact, the Prescription for Pennsylvania is both a health care and an economic development initiative.  If we can successfully reduce employee health costs, we can greatly improve the bottom line for companies throughout the state.

Consider these facts:  Over the last six years, the cost of health insurance premiums increased by 75.6 percent.  Inflation in the same period rose by 17 percent, and median wages rose by 13.3 percent. In other words, health care premiums rose nearly five times higher than wages and the overall rate of inflation.  Ladies and gentlemen, if these trends continue we will face a disaster for Pennsylvania businesses and working families.

The cost of inaction is far too great, and the Prescription for Pennsylvania charts a long-term course for reform that promises greater affordability, greater access, and improved levels of care for all of us, while improving the competitiveness of Pennsylvania businesses.

And while it is not a formal part of the Prescription for Pennsylvania, any serious effort to improve the health and safety of our fellow citizens must also include a comprehensive effort to address the epidemic of gun violence that is occurring throughout the Commonwealth.  Just last week, the front page of The Pittsburgh Post-Gazette reported, “Pa.’s black homicide victim rate leads nation.”  A new report from the Violence Policy Center in Washington revealed that Pennsylvania’s homicide rate among African-Americans is more than one and one-half times the national average, and that nearly 86 percent of these homicides involved handguns.

Gun violence is not just a Pittsburgh problem, or a Philadelphia problem. In fact, in 2005, the rate of gun violence rose twice as fast in the rest of the state than it did in Allegheny and Philadelphia Counties.  Gun violence is destroying the sense of community that connects us all.  Ladies and gentlemen, is this the way we want to lead the nation?  As a national homicide headline?

As Governor, I have attacked the problem of gun violence on several fronts.  Together, we have increased state funding to support the efforts of local police departments and law enforcement agencies to fight violence in our cities, with a particular focus on cities dealing with rising gun violence.  We have also dramatically increased resources in public education, helping young people understand the consequences of violence and the need to make better choices.

But we must do more.  I urge the General Assembly to address the issue of gun violence in the following ways:  first, by upgrading possession of a stolen gun to a felony, so that the penalties can be significantly upgraded.  Today, the penalty for possession of a stolen television is more severe than the penalty for possession of a stolen gun.  Second, I urge passage of legislation making it mandatory to report the loss or theft of a gun to police, which will have a dramatic impact on illegal gun trafficking in Pennsylvania.  We require you to report the theft of a car; we should do no less for the theft of a gun.  Third, I will support legislation that enables local communities to enact their own restrictions on the flow, distribution and use of handguns.  Fourth, it is time for this state to end gun trafficking by enacting a one handgun a month law.  Such legislation will put a stop to gun runners who sell so many of our crime guns and will put no burden on lawful gun owners who can still purchase 12 handguns a year – or 24 handguns if they are married. 

In a recent column in The Philadelphia Inquirer, an unnamed Pennsylvania legislator said that in a secret ballot the General Assembly would pass one gun a month by a three to one margin.  So I call on you to show the courage of your convictions and rid Pennsylvania once and for all of the devastation of gun trafficking.

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Last week, we unveiled a second element of the Agenda for Pennsylvania Progress, one that proposes to build on our status as a national leader in the development of alternative energy.  The Pennsylvania Energy Independence Strategy will save consumers $10 billion in energy costs over the next decade.  It calls for the expanded use of “smart meters” that conserve energy, greater use of solar energy, incentivizing consumers through product rebates to swap their old air conditioners and refrigerators for new, more energy-efficient replacements, helping large industrial users  purchase cheaper energy and lock in more stable energy prices, and finding new ways to reduce energy consumption during peak periods.  And we will require that all fuels sold in the Commonwealth must include bio-diesel (up to 20 percent) or ethanol (up to 10 percent), which are made from the coal and agricultural products that we have in abundance in Pennsylvania.

Our goal is to ensure the use of one billion gallons per year of renewable fuels, which is enough to replace all of the fuels we currently import from the Persian Gulf.  If we can achieve this goal, we will have gone a long way towards achieving energy independence.  I am so pleased that Bob and Seth Obetz are with us today.  Worely & Obetz opened the first retail pump site for bio-diesel in the entire Northeastern United States, right here in Lititz.  Their vision has led other wise entrepreneurs to follow in their footsteps.  By the end of 2009, Pennsylvania companies will be able to produce 230 million gallons of bio-diesel and 340 million gallons of ethanol.  To put that into perspective, current national production of bio-diesel amounts to only 225 million gallons a year.  Bob and Seth, would you please stand and be recognized? 

The Energy Independence Strategy also calls for expanding our commitment to the development of a “clean energy” industry right here at home, helping local companies create and bring to market a whole range of energy products and technologies, creating thousands of jobs for Pennsylvanians in the process.  We are already off to a great start by attracting Gamesa, Conergy and Iberdrola, who are among the world’s leaders in the production of wind and solar energy

The centerpiece of this strategy is the creation of an $850 million Energy Independence Fund, which will fuel this expanding market through strategic investments that provide access to critically-needed seed money or venture capital, working capital, loans and limited grants. 

We propose to support the Energy Independence Fund without any impact on the state budget.  The Fund will be financed through the issuance of state bonds, and the interest on the bonds will be paid through a small “clean energy” assessment on the electric utility bills of all residential, commercial and industrial customers.  This assessment will cost the average household 45 cents per month – less than $6 per year, while the program will save the average household $70 per year.  It will provide the opportunity for Pennsylvania to promote the development of energy alternatives that will reduce energy costs, boost the production of reliable energy products, and promote a clean energy economy.  

The Energy Independence Strategy is a win-win for Pennsylvania.  It provides strategic investments to support the development of alternative sources of clean energy, thereby reducing our dependence on foreign energy even as we create a growing clean energy industry that produces jobs and new opportunities for Pennsylvania residents.

In public education, this budget continues our policy of making strategic investments in the future of our children.  This budget expands the Accountability Block Grant with $75 million to help Pennsylvania move closer to the goal of universal access to pre-kindergarten.  This first installment will make pre-k available for more than 11,000 additional children next year.  And I propose we also add $25 million to the block grant to drive us closer to the goal of full day kindergarten for every student.  Study after study has proven what parents all over Pennsylvania already know: quality pre-kindergarten and full day kindergarten give young children the early skills they need to prepare them for a lifetime of achievement. 

In addition to proposing a greater focus on very young children at the “front end” of our educational system, this budget also calls for a Classrooms for the Future investment of $90 million to modernize our high schools and prevent older students from dropping out of school.  In the next few weeks, we will see another example of the progress that Pennsylvania is making in this regard, as Punxsutawney High School, the pride of Punxsutawney and the home of House Minority Leader Sam Smith, becomes the latest Pennsylvania school to install laptops on the desks of its high school students.  

Sunday night, after the Super Bowl, I watched our new President Pro Temp of the Senate, Joe Scarnati, on PCN.  He said that his top priorities for Pennsylvania are economic development and jobs.  I share those priorities, which is why we must continue to make investments in education to build a well-educated and highly skilled workforce, allowing us to attract companies that compete in the increasingly high-tech global marketplace.  

I also ask that you fully support the terrific recommendations made by the Governor’s Commission on College and Career Success.  I ask you to enact into law the Commission’s recommendation that Pennsylvania join the vanguard of states that have adopted graduation requirements for every student.  It sets the bar high – but I believe that Pennsylvania students will reach as high as we ask them to go. 

Let me introduce to you Alexander LaBant, a 12th grader at Greenwood High in Perry County who served on that Commission.  At a tense moment when it seemed as if the Commission was going to issue weak recommendations, Alex turned the tide when he spoke up and said, “We need to make sure that all students are prepared to succeed after high school graduation.  The best way to do this is to set a single statewide graduation requirement.  Children from across Pennsylvania are counting on policymakers to be courageous enough to make this change.”  Alex was absolutely right then, and his words have even more importance today.  Alex, would you please stand and be recognized?

This budget also proposes additional strategic investments to continue the momentum generated by Pennsylvania’s growing economic recovery, including the enactment of the Jonas Salk Legacy fund, a $500 million initiative to fund capital investments in bioscience research under the auspices of the Pennsylvania Biosciences Institute.  This fund, commemorating the memory of the man whose groundbreaking work in polio research has saved millions of lives, will support a renewed effort to recruit the nation’s best researchers to Pennsylvania’s leading university and private bioscience research facilities.  Funding also will be used to upgrade these facilities, with the goal of creating truly topflight research capabilities among Pennsylvania’s academic medical centers and our research centers and universities.

As I said last year, the Salk Legacy Fund will catapult Pennsylvania to the top of the class in scientific research, with the goal of supporting groundbreaking medical and scientific research while fostering dramatic growth in the business of science as well.  The Fund would be established without any impact on the operating budget by securitizing only a small portion of the Tobacco Settlement proceeds.  In short, we can leverage the power of the Tobacco Fund proceeds to create the chance for Pennsylvania to become a world leader in the field of scientific research.  For all of these reasons, I once again call on the Legislature to support the groundbreaking Salk Legacy Fund.

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All the initiatives that I have outlined today will keep the Commonwealth on the road to progress and our citizens on the road to prosperity.  But one major roadblock remains – the need to develop a comprehensive plan to fund mass transit and to repair the Commonwealth’s massive network of highways and bridges.

To be sure, the need for new transportation funding strategies is not news to those of us who are gathered in this chamber; nor for that matter to the riding and driving public.  From my first day in office, transportation funding has been an issue that has defied easy resolution.  During that time, there has been a growing gap between the funding on hand and the amount required just to keep from falling behind.  Over time, the true magnitude of the problem emerged, particularly in the area of mass transit, as we faced the threat of massive service cuts, major fare increases, and layoffs.

Less obvious, but no less critical, has been the growing gap between our resources and the pressing need to repair our bridges – we have the third highest number of bridges in the nation – and our over 44,000 miles of road.  We have spent more on paving and repairing roads and bridges over the last four years than at any time in Pennsylvania’s history.  We have paved or repaired more than 19,000 miles of Pennsylvania highways during that time, at a cost of almost $16 billion.  We have increased our overall spending on highways, roads and bridges by nearly a billion dollars a year. 

Yet the gap between what we can afford and what still needs to be repaired continues to widen, primarily because of the dramatic increase in the cost of basic road construction materials.  PENNDOT estimates that the cost of highway construction has risen over 36 percent in the last two years alone.  So even though we’re doing more than ever before, the rising cost of repair makes it increasingly difficult to keep pace with the growing demand for repair and reconstruction.  And that doesn’t include the growing backlog of road and bridge repair needs. 

Today, despite the fact that we have increased yearly spending on bridge repairs from $259 million in 2002 to $558 million this year, we still hold the dubious distinction of having more bridges in critical need of immediate repair than any other state in the nation – more than 5,900 in all.  The bill for repairs to these bridges alone is nearly $8 billion, and we just don’t have the money.

That said, today we have a choice.  We can continue to put off the day of reckoning, prioritizing the roads and bridges scheduled for repairs, waiting for someone to rescue us, or at the very least waiting long enough to make this somebody else’s problem.  We could continue to allow regional differences to cloud the issue of providing a comprehensive funding solution for mass transit, or simply leave the transit systems to fend for themselves, which would almost certainly result in dramatic service cutbacks and fare hikes as local governments struggle to assume the Commonwealth’s obligations to fix the problem.

Or we can act to put our own house in order, fix the transportation funding mess, and create a sensible long-term solution to the problem.

As many will remember, in 2004 we were able to temporarily infuse funding into both our transit and highway programs by taking advantage of some unexpected sources of funds at the federal level and some here in Harrisburg.  But as I said at the time, our momentary good fortune only put off the day when we would have to pay the piper.

To prepare for that day, in 2005 I created the bipartisan Transportation Funding and Reform Commission, whose members included Senators J. Barry Stout and Roger Madigan and Representatives Rick Geist and Keith McCall.  For the better part of a year, the Commission studied our transportation funding needs, both for mass transit and road and bridge repair. 

The conclusions were sobering.  To keep pace with current wear and tear on our vast network of roads, bridges and transit systems while also addressing the backlog of outstanding repair needs, the Commission concluded that Pennsylvania should be spending an additional $965 million each year on roads and bridges, and $760 million per year on transit, for a total of $1.7 billion in new investment, each and every year.

For funding, the Commission focused on the state’s Oil Company Franchise Tax, a tax paid by gas stations in Pennsylvania.  To cover our infrastructure repair costs, a 12.5 cent per gallon increase in this tax would generate the $965 million per year needed for roads and bridges.  And while this tax is not collected directly from motorists, our prior experience demonstrates that any such hike in the Oil Company Franchise Tax would be passed on to motorists already reeling from the high cost of gasoline in the post-Katrina marketplace.  It would make our gas tax – paid for by our citizens – currently the eighth highest in the nation, the highest in the nation.  This would be clearly unacceptable.

That is why in December I authorized PENNDOT to accept expressions of interest from parties with new ideas concerning the operation of one of Pennsylvania’s most undervalued assets, the Pennsylvania Turnpike.  Specifically, the question was whether and to what extent we could use the Turnpike to address our long-term transportation funding needs.

As we all know, the highways operated by the Turnpike Commission span 514 miles, making our turnpike system one of the longest and most heavily-traveled toll roads in America.  Recently, two other publicly-owned American toll roads have gone down the lease path: one owned by the City of Chicago, and the other owned by the State of Indiana.  I wanted to see if this was an option for Pennsylvania as well, and I had two specific questions: First, could the Turnpike generate enough revenue to meet our funding needs?  And second, could we get a deal with terms that we would find acceptable?

The answer to the first question came through loud and clear.  PENNDOT received nearly 50 responses from private firms.  Without exception, these firms told us that the private sector would offer significant value for the right to lease the Turnpike, with estimates averaging between $10 and $12 billion and some as high as $16 billion.  At this level, the Commonwealth could invest this sum to provide an annual income stream that could meet our funding target for roads and bridges of $965 million per year.

But these responses did not provide an answer to the second question; that is, could such a transaction be structured to guard against spiraling toll increases while also ensuring acceptable maintenance and repair standards, worker protections and other important policy goals?  I believe we can make an arrangement that will allow us to maintain control over Turnpike operations, but we will not know for sure until we begin to negotiate a transaction.

To be clear, there has been no final decision.  Such action requires more investigation, considerable dialogue with members of the Legislature and the general public, passage of enabling legislation, and an aggressive negotiation with any potential future operator.  But I am also certain that the plan holds tremendous potential with respect to funding our huge backlog of road and bridge repair needs without a tax increase.  For this reason, I believe that the time has come for the Commonwealth to take the next step in this process: to define a specific set of terms and conditions for future management of the Turnpike that maximize public protection of the asset, and then offer this plan to the market to see if we can get enough value in a long-term lease or some other financial arrangement to make the deal worthwhile for taxpayers and the driving public.

I will soon submit for your consideration a draft piece of legislation that will set forth the means by which the Turnpike transaction could be structured and approved.  I know some of you are enthusiastic about this  prospect, and I know some of you are skeptical.  But I hope all of us will agree on two things: first, given the amount of money at stake we owe it to ourselves to take the next step; and second, that we should look before we leap.  I look forward to working with you as we carefully consider the prospect of leveraging the value of the Turnpike.

Even if we decide to pursue a transaction involving the Turnpike, such a transaction likely would cover only the $965 million annual cost of highway and bridge repair.  It is unlikely to offer a solution that resolves once and for all the estimated $760 million annual cost necessary to reliably operate mass transit systems throughout Pennsylvania.

In every corner of the state, our mass transit systems simply cannot fund operations through the fare box alone.  And let’s be clear about the impact of this problem:  Mass transit is not simply somebody else’s way to get to work in the morning.  Nor is it a southeastern or a southwestern problem.  It affects all of us, in every region of Pennsylvania.  Without mass transit, many of Pennsylvania’s largest companies have no way to get their employees to and from the job.  And if that happens, those companies can’t generate the tax revenues that are vitally important to the Commonwealth.  Mass transit matters to all of us.

The Transportation Reform Commission concluded that local transit agencies must step up and continue to implement cost cutting measures.  I support that recommendation and I am pleased to report that Allegheny County Chief Executive Dan Onorato has proposed measures that do exactly that.  Of course these are not without controversy, but the end result will be appropriate and significant belt tightening by the Port Authority of Allegheny County.  We need to apply the same principles to mass transit agencies throughout the Commonwealth.

But the Commission pointed out that reforms alone would not close the funding gap.  With respect to transit funding, the Commission proposed two actions to raise needed revenue: a 0.9 percent increase in the Realty Transfer Tax, a tax paid on the sale of a house, which would yield $576 million per year; and a contribution from local governments generating $184 million per year.   Neither option is very appealing since both add to the tax burden of Pennsylvania citizens.  But I believe that we have a credible alternative that does not burden them at all.  To the contrary, it requires that those who profit handsomely from the operation of motor vehicles on Pennsylvania roadways must pay their fair share of our transportation funding obligations. 

We propose a tax on gasoline, but for the first time, we propose to tax those who make gasoline rather than those who buy it.

Here’s how it works.  In theory, Pennsylvania already has a method for taxing the profits of oil companies, because these companies are subject to the Corporate Net Income Tax.  But the reality is that only a tiny fraction of the profits earned by the nation’s major oil companies in Pennsylvania are subject to this tax.  Like many other big corporations, the oil companies have gotten very good at structuring their profit reporting so that our taxes don’t apply, even if the money they make comes directly from the pockets of Pennsylvania consumers.

It is nothing more than a sophisticated shell game and we need to stop this practice.  This budget includes a proposal that excludes oil companies from the CNI, but makes them subject to a new Oil Company Gross Profits Tax.  This new tax is structured on a “combined reporting” basis, under which companies that operate in multiple states must provide us with data on all their profits so we can determine what portion of their profits come from Pennsylvania.  The Pennsylvania profits would be taxed at a rate of 6.17 percent, or more than 33 percent lower than the current CNI rate of 9.9 percent.  Even at this greatly reduced rate, however, the new tax will generate $760 million per year as opposed to the approximately $71 million we collect annually from the seven oil companies that pay the CNI. 

What’s more, I believe that the imposition of this tax places the burden squarely on the shoulders of those who enjoy tremendous benefits from the Commonwealth’s operation of state highways and bridges. America’s oil companies have earned record profits in the past few years, and these profits come from one source: the pockets of the American people. Since 2004, the oil companies have reaped $368 billion in profits nationwide.  Last year, ExxonMobil’s profits alone – $39.5 billion – were almost 50% larger than the entire $26 billion Pennsylvania budget.  And, even more amazingly, ExxonMobil profits in each of the last three years have been the highest ever earned by any corporation in American history.

These numbers are mind-boggling – think for a second about the implications of Exxon making a $4.5 million profit, each and every hour of each and every day, 365 days a year.  More importantly, the numbers remind us that instead of asking our citizens to pay yet again to fund our transportation needs, it is time for the oil companies to finally pay their fair share of the transportation tax burden in Pennsylvania.  The enabling legislation we will propose will grant to the Attorney General the power to ensure that these taxes are not passed on to our citizens at the pump.


Taken together, these two ideas – a Turnpike lease and the enactment of a new Oil Company Gross Profits Tax – have the potential to fund our transportation needs in a way that does not unduly burden the average Pennsylvanian.  For too long, the public debate has been about choosing between funding transit or highways and bridges.  It has pitted region against region, ‘urbs against ‘burbs, Democrats against Republicans.  On transportation funding, the time has come to put aside special interest in favor of common interest.

The challenges that we face in meeting our transportation funding responsibilities undoubtedly will require us all to make difficult decisions in the months ahead.  I ask you to weigh the options I have proposed and others that have been discussed but I want to make it abundantly clear that we must choose one of them.  I also want to emphasize that the Transportation Reform Commission option would place all of the burden of new taxes on Pennsylvania citizens.  The option I am proposing places no new burden on our citizens.  And the option of doing nothing will destroy both our economy and our quality of life.

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The budget that I have introduced today charts a course for long-term growth, and I believe it positions Pennsylvania to regain its rightful place as a leader among the states.  I have outlined the challenges that confront us, this year and in the years to come, and I have set forth a detailed plan to address these issues.   

The Agenda for Progress that I have set forth today includes many new initiatives that will no doubt stir considerable debate among the members of the General Assembly, as well as among opinion leaders throughout Pennsylvania and the general public.  I enthusiastically embrace the opportunity to engage on all of these issues.  I pledge to you and the public the complete cooperation of the Administration in providing as much information and detail as possible in support of your comprehensive consideration of the budget.

I am confident that regardless of our political differences, we can all carry out our respective duties in the spirit of civility and collegiality that has long been a hallmark of state government.  Let’s work together, and not let our differences pull us apart.

The people of Pennsylvania expect no less from us, because like us, they realize that the stakes are enormously high with respect to the opportunities and challenges embodied in this budget. 

Proud of our progress, yet mindful of the difficult challenges that lie ahead, our fellow citizens know that Pennsylvania is poised for greatness, if only we have the courage to try.  Let us resolve to do exactly that, recognizing that together, we cannot fail.

Thank you.

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