Pennsylvania’s Budget is Balanced – But Only on Paper
Pennsylvania’s newly enacted budget has been described as balanced. Legally and technically, that may be true but economically, it is not. It is potentially a landmine that future legislatures will have to navigate. All potential solutions are disastrous, and our citizens are facing a cleanup bill that will boggle the mind.
As a CPA, former member of the Pennsylvania House of Representatives, and someone who has spent much of my career helping organizations confront financial reality before it becomes a crisis, I have learned that budgets can balance without being financially sound. In reality, government budgeting is the watershed moment in “creative” (not a compliment) accounting.
The Commonwealth’s 2026-27 budget is a troubling example and should become a gold standard in how to manipulate a budget with few the wiser – until it is too late.
It relies on delayed Medicaid payments, one-time transfers, redirected gaming revenues and a new pension obligation that is being separated from the normal employer contribution process. Each decision may have an explanation. Taken together, however, they create the appearance of financial stability while pushing substantial costs into future years.
That is not fiscal balance. It is fiscal postponement.
The most obvious example is the decision to delay Department of Human Services payments. Pennsylvania is postponing two monthly Medical Assistance payment cycles—one in the prior fiscal year and another in the current fiscal year. Each delayed payment is approximately $1.32 billion. Together, they create $2.64 billion of temporary budgetary relief. No mention of the impact on those not paid!
Nothing was saved. In fact, an illusion was created that the budget was miraculously balanced. Using that logic, perhaps all payments for 2026 should be delayed by 1 year and then cut the tax rate to zero! Absurd!
The services were still delivered. The obligation still exists. The Commonwealth simply changed the date on which the payment will be made. This distinction is important because government budgets and audited financial statements do not always tell the same story.
A state budget is prepared under statutory budget rules. The Commonwealth’s audited financial statements, however, must follow governmental accounting standards. If a Medicaid obligation has been incurred before the end of the fiscal year, it may need to be recorded as a liability even if the cash payment is delayed.
The payment schedule can change. The underlying cost cannot.
The Commonwealth’s own Independent Fiscal Office estimates that spending without the payment delay would be approximately $52.17 billion—not the $50.85 billion shown in the enacted budget.
That difference should be plainly explained to taxpayers and future bond investors to prevent allegations of fraudulent presentation of the Commonwealth’s financial position.
The larger concern is the structural deficit. The Independent Fiscal Office estimates that Pennsylvania has a structural deficit of approximately $5.03 billion. That means recurring expenditures exceed recurring revenues by more than $5 billion even during a relatively stable economy.
The gap equals roughly 10 percent of annual General Fund revenue. That is not a temporary cash-flow issue. It is a fundamental imbalance between what the Commonwealth collects and what it spends.
Pennsylvania currently has a substantial Rainy Day Fund. That is an important financial strength, and the Commonwealth deserves credit for rebuilding it. But a reserve is not a substitute for a balanced operating plan.
The risk becomes far more serious if Pennsylvania enters a recession. During a downturn, personal income tax, sales tax, corporate tax and investment-related revenues may decline. At the same time, demand for Medicaid, unemployment assistance and other safety-net programs increases.
A modest 5 percent decline in General Fund revenue could add nearly $2.4 billion to the existing structural deficit. The resulting gap could exceed $7 billion before accounting for additional recession-related spending.
At the same time, falling investment markets could weaken the funded position of the Commonwealth’s two major pension systems: the Public School Employees’ Retirement System and the State Employees’ Retirement System.
That brings us to another significant budget concern.
Pennsylvania recently approved a cost-of-living adjustment for certain retirees who retired before July 2001. Many of these retirees have gone nearly 25 years without a benefit increase. Helping them is understandable and compassionate.
But compassion does not eliminate cost. The new benefit is expected to require approximately $100 million annually for PSERS and $45 million annually for SERS for ten years. Additional money will be needed for certain municipal police and firefighter pension plans.
The total annual obligation may approach $188 million. The unusual feature is how that cost will be funded. Rather than include the new liability in the normal employer contribution rates calculated by PSERS and SERS, the legislation directs that gaming revenues be used to make the payments. This may reduce the appearance of pension cost in employer contribution rates, but it does not reduce the pension liability. It merely places the obligation somewhere else.
That “somewhere else” is also important. The gaming revenues being redirected have supported Local Share and Commonwealth Financing Authority programs used for water systems, sewer projects, roads, public safety, community facilities and economic development. When those funds are diverted to pension payments, local governments may receive fewer grants.
The Commonwealth’s obligation does not disappear. The cost may simply move to counties, municipalities and local property taxpayers. Local governments may have to delay projects, increase taxes and fees, borrow additional money or defer maintenance. Deferred maintenance, of course, usually becomes more expensive maintenance later.
Once again, the budget may look better at the state level while the financial pressure reappears somewhere else.
This creates a serious disclosure issue for future bond offerings.
Pennsylvania’s general-obligation bonds remain investment grade, and the Commonwealth retains meaningful financial strengths. But bond investors are entitled to understand the complete financial picture. Future bond documents should disclose the Medicaid payment delays, the $5 billion structural deficit, the use of one-time transfers, the new pension liability, the reliance on gaming revenues and the reduction in funding available for local economic-development projects. Officials should also clearly distinguish between a legally balanced budget and an economically balanced budget.
Describing the budget simply as “balanced” without explaining the delayed payments and temporary measures could leave investors with an incomplete understanding of the Commonwealth’s recurring financial condition.
That does not mean anyone has committed fraud or intentionally deceived the public.
Most difficult budget decisions are made by people attempting to reconcile competing priorities with limited resources. But good intentions do not remove the obligation to disclose financial reality.
Every financial decision has a cost. Almost always, the people who ultimately pay that cost are not the people who made the original decision. Future governors and legislators may face the consequences. School districts and municipalities may be forced to raise taxes. Retirees may depend upon funding streams that prove less reliable than expected. Taxpayers may discover that today’s balanced budget was financed with tomorrow’s revenue.
Pennsylvania still has time to act.
The Commonwealth should publish a multi-year plan to eliminate the structural deficit, restore Medicaid payments to a normal schedule, fully identify the pension liability created by the new COLA and disclose the effect of gaming-revenue diversions on local governments.
It should also stress-test the budget against a recession, a decline in gaming revenue and a major pension investment loss.
The greatest danger is not that Pennsylvania lacks resources. The greatest danger is that temporary financial strength may allow policymakers to postpone decisions until those resources are gone.
A budget should not merely make the numbers balance for one year.
It should tell taxpayers the truth about what government costs, who will pay for it and whether the promises being made today can be sustained tomorrow.
Pennsylvania’s 2026-27 budget does not yet meet that test.
Frank Ryan is a CPA, retired U.S. Marine Corps Reserve Colonel, former member of the Pennsylvania House of Representatives, and former Vice Chair of the Pennsylvania Public School Employees’ Retirement System (PSERS).
