Budget Deadlock in Harrisburg: Implications for Public Services and Fiscal Stability of Pennsylvania’s Local Governments

Pennsylvania’s state budget for fiscal year 2025-26 (beginning July 1, 2025) remains in a protracted impasse and is beginning to have materially negative impacts on the financial conditions of Pennsylvania local government units (LGU).

The deadlock has resulted in the freezing of billions of dollars in state payments to townships, boroughs, counties, cities and school districts across the Commonwealth, causing them to deal with significant cash flow difficulties and the risk of service disruptions, as well as threatening the fiscal condition of those local government units going forward.

Key Impacts on Local Government Units

The frozen funds affect core local government services such as education, child welfare, mental health, substance use treatment and transit. LGUs face immediate cash shortages since payments from the Commonwealth (e.g., for reimbursements and grants) are unavailable so long as the budget impasse persists. While essential state functions like debt service, Medicaid for recipients, prisons and state police continue, support to LGUs does not. This has resulted in a number of significant negative outcomes for local government units:

1. Financial Strain and Borrowing Costs

• Billions of dollars otherwise due from the Commonwealth in reimbursements are withheld, including over $2 billion for counties in August alone for human services. Schools await $526 million in proposed “adequacy funding” to address a $4.5 billion court-mandated gap.
• At least six counties are securing lines of credit, with interest costs funded by tax revenue. A number of Pennsylvania school districts have or are considering issuing tax and revenue anticipation notes (TRANs) to finance payroll and other working capital expenditures.
• Reserves built post-COVID (via ARPA funds) are depleting, exacerbating the “ARPA cliff” as federal aid ends. The Commonwealth proposed a $10 million boost to a hardship fund for distressed LGUs, but funding from this program has also stalled.

2. Service Reductions and Operational Disruptions

• Certain counties have had to begin scaling back services provided to residents, which has had a negative impact on more vulnerable parts of the population. This has included cuts to child welfare, foster care, mental health counseling and drug/alcohol programs. The County Commissioners Association of Pennsylvania has stated that the ongoing impasse has created an uncertain outlook for ongoing provision of county services, with some counties exploring layoffs.
• The budget impasse has forced school districts across Pennsylvania to halt planning for after-school programs, athletics and early intervention (e.g., Pre-K Counts, Head Start). Payments from the Commonwealth to school districts for adult basic education were missed in July. Moreover, federal funds tied to state matching are now inaccessible.

3. Broader Economic and Community Ripple Effects

• As the impasse persists, some LGUs will be compelled to borrow, at least in the short term, to keep essential operations and payroll funded.
• The inability of the Commonwealth to make payments to LGUs will also have a significant negative impact on vendors. Thousands of contracts are paused, risking vendor bankruptcies and nonprofit closures, which indirectly burdens LGUs.

Negotiations among the Governor, the House of Representatives and the Senate continue behind closed doors. However, if the impasse persists, there are actions LGUs can take to ease the pressure on their books, including accessing the capital markets through TRANs to ensure money is available to finance essential services and other working capital needs.  

Stevens & Lee’s public finance team and its affiliate FSL Public Finance advise local governments experiencing cash flow difficulties. If you have questions about how to maintain a balance between the funding shortfalls caused by the absence of an approved state budget and your long-term goals, please contact Andrew Maher or the Stevens & Lee attorney with whom you regularly work.