HARRISBURG — A rainy day is looming over the state Capitol.
As Pennsylvania lawmakers approach the June 30 deadline to pass a budget, they’re facing mounting costs for obligations like healthcare and education. There’s also a multibillion-dollar gap between how much the state expects to spend and what it expects to bring in, even with new revenue options, like taxing soon-to-be-illegal skill games, on the table.
That means lawmakers are likely to target the state’s last-ditch reserve fund, commonly called the rainy day fund, to balance the 2026-27 budget.
The fund is intended for emergency use only. Lawmakers have painstakingly built it up since 2018, with a current balance of roughly $8 billion. Before that, it sat almost empty during a period of post-recession turmoil.
Matthew Knittel, executive director of the Independent Fiscal Office, said in an email it’s “technically” possible to avoid taking money out of the fund to balance the budget. The state “would need either a very large revenue infusion, a very large spending cut, or some combination of the two.”
“Based on current dynamics,” he added, “that appears highly unlikely.”
Lawmakers could also paper over the deficit with one-time measures, such as moving money from off-budget accounts known as special funds, or shifting expenses to different fiscal years. These methods fulfill lawmakers’ duty to a balanced budget on paper, but keep underlying financial problems intact.
Harrisburg is deeply familiar with this fiscal sleight of hand. The Volcker Alliance, a nonpartisan fiscal analysis group, previously gave Pennsylvania a D- rating for such “budget maneuvers" — its lowest among the 50 states.
Gov. Josh Shapiro’s office projects the state will need to use about $4 billion from the rainy day pot and drain other reserves to fund his February budget proposal, which includes little new spending. The projection assumes lawmakers will embrace two new revenue sources — legalizing adult-use marijuana and taxing skill games.
Legalization efforts have stalled in Pennsylvania. However, there is a possibility that lawmakers, energized by a recent state Supreme Court ruling, will pass a regulation scheme for skill games in the coming months.
Without any new revenue, based on its most recent estimates, the IFO projects that Shapiro’s budget comes with a $5.6 billion deficit.
Rosie Lapowsky, a spokesperson for Shapiro, noted that the governor’s pitch includes new sources of revenue. She added, “We remain committed to working with the General Assembly to pass a fiscally responsible budget that continues growing Pennsylvania's economy while protecting taxpayers.”
A spokesperson for state House Democrats, who are backing Shapiro’s plan, said they “have always been open to discussing bringing in new revenue funding streams during budget negotiations.” However, Republicans who control the state Senate “have yet to show the ability to put together 26 votes” for a tax on skill games, which is seen as the likeliest new revenue option.
A spokesperson for state Senate Republicans didn’t return a request for comment.
Harrisburg has been moving toward needing to tap the rainy day fund for a few years. The state’s total reserves — the rainy day fund, plus the general fund surplus — hit an all-time high in 2022 after an influx of pandemic-related stimulus dollars. Still, the structural deficit that has dogged Pennsylvania for decades remained in place; in an average year without stimulus money, the state often spent more than it made in tax revenue.
The state pulled $2.6 billion out of its surplus for the 2024-25 budget. For the current fiscal year’s plan, it pulled out another $4 billion. Now, the general fund surplus is down to under $800 million, according to the IFO this week. This year, state revenues are almost $1 billion over projections. But that’s still not enough to balance the budget without tough choices.
Disagreement over total spending was among the main reasons for last year’s four-month budget impasse. In the end, legislators wound up preserving the rainy day fund even as they drained billions from other reserves.
It’s possible that an effort to tap the rainy day fund this year could also lead to a serious standoff.
State Senate Majority Leader Joe Pittman (R., Indiana) told reporters after Shapiro’s February budget address, “It's going to be a difficult task to not have any conversation about the rainy day fund.”
That “type of conversation, we have to make sure we're again stretching every taxpayer dollar we can and bring the cost of government down as much as possible,” he said.
‘Not inherently good or bad’
With the nearly $8 billion currently in the rainy day fund, Pennsylvania has enough money to completely fund operations for roughly 57 days, which is above the national average.
On paper, the law governing the money is strict. It dictates that lawmakers can only spend these reserves to respond to “emergencies involving the health, safety or welfare of the residents of this Commonwealth, economic downturns leading to unpredictable revenue shortfalls,” or to continue “vital public programs in danger of being eliminated or severely reduced.”
Drawing from the fund also legally requires support from a two-thirds supermajority — a difficult margin in Harrisburg’s divided legislature. But, as with their creative budgeting to fill revenue gaps, Pennsylvania legislators have found ways to bend that rule.
At least one previous budget deal, passed in 2020 by the then-GOP-controlled legislature and signed by a Democratic governor, skirted the two-thirds requirement with language appropriating money out of the fund within a budget-enabling code bill. Eight out of ten of the General Assembly’s current top legislative leaders voted for that bill.
Drawing from a rainy day fund is “not inherently good or bad” for a state’s fiscal health, according to Page Forrest, associate manager of the Pew Charitable Trusts’ Fiscal 50, which analyzes states’ finances. If done responsibly, it won’t cause ratings agencies, like Moody’s, to penalize a state’s bond rating, she said, because the funds are “designed to be used” and are not the only factor taken into account during grading.
“States have a series of tools or levers that they can pull on when they need to balance their budget,” Forrest said. “They have a lot of options in their toolbox, including drawing on their rainy day fund, cutting services, raising taxes, and all of these different options can be used in different combinations.”
Where could new revenue come from?
Budget talks got an injection of energy last week when the state Supreme Court gave the legislature a four-month window to regulate skill games before enforcement begins. The devices have proliferated across the state in taverns, gas stations, and corner stores despite existing in a legal gray area. An estimated 70,000 machines are operating in Pennsylvania.
The decision could be enough to motivate lawmakers to break their longstanding impasse over how to tax and regulate the games. In the past, they’ve been at odds on a specific tax rate, where to direct the revenue, and other details of a regulation scheme, like how many machines to allow to operate across the state.
Shapiro has proposed a 52% tax rate, which the IFO has projected could generate around $1.2 billion annually, while the administration believes it would eventually bring in $2.1 billion annually.
Though Knittel said a skill games tax could “potentially reduce the structural deficit,” he noted that “more permanent policy changes would be needed relatively soon.” It would also take time to implement the tax, Knittell said, to ensure the state has the ability to vet licensees and collect the revenue.
Other tax policy shifts, whether a broad-based hike or eliminating industry-specific carveouts, have failed to gain traction in Harrisburg due to special interest opposition and fear of electoral consequences. This year, due to budgetary pressure and voter outrage, that dynamic has shifted but has yet to yield results.
For instance, state lawmakers in both parties support taxing big tech firms and killing a state sales tax exemption for data center components.
The tech tax approach “chips away at [the structural deficit], but really doesn't make a big dent,” Nathan Benefield, chief policy officer of the conservative Commonwealth Foundation, told Spotlight PA.
Lawmakers are also considering tax cuts, further complicating the math. When weighing a bill on utility profits this week, members added a GOP-authored amendment that would eliminate a tax on these companies, pitched as a way to reduce energy bills. The legislation passed the state House unanimously. The state would forfeit more than $1 billion annually if it eliminates the tax, according to a House Democratic analysis.
That loss of revenue was not accounted for in the $53.4 billion spending plan passed by the state House in April. Majority Leader Matt Bradford (D., Montgomery) told Spotlight PA that the plan, which matches Shapiro’s budget proposal, “reflects House Democrats' priorities.”
The proposal would send an additional $565 million to school districts with an “adequacy gap” and $300 million to public transit agencies, while creating a $1 billion debt-funded infrastructure program for housing, energy, and other capital projects. It would increase state spending by approximately 6%.
Meanwhile, the Senate GOP has not yet advanced a budget proposal through its chamber. Leaders have openly discussed their goal of slashing spending on some key social safety nets, like Medicaid and SNAP. Republicans have not provided much detail on how those cuts could come to fruition.
A reduction in spending shouldn’t be on the table this year, said Felicity Williams, executive director of the left-leaning Pennsylvania Policy Center. She said the commonwealth falls in line with the national average of what it spends per resident, and in some key areas, like education and childcare, it is actually lagging.
Williams also said much of the “flexibility” in the budget involves human services for people who are “suffering the most right now in this affordability crisis.”
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