HARRISBURG — Pennsylvania’s top legislative leaders and Gov. Josh Shapiro have agreed to a $50.1 billion state budget deal behind closed doors, according to two sources close to negotiations, signaling a breakthrough in a prolonged budget impasse that has stretched more than four months and stalled state funding to schools and counties.

State legislators were briefed Tuesday on the budget proposal, which, if approved by both chambers and signed by Shapiro, would mark a 4.7% increase in spending over last fiscal year, according to budget documents obtained by The Inquirer. While final elements of the deal will continue to be settled in the coming days as lawmakers view the proposed package, the deal shared Tuesday indicates legislative leaders have agreed on a framework for the budget, signifying that school districts, counties, and social service providers will soon see relief.

State budget deals in Pennsylvania often include additional agreements that go beyond how the state should spend its money. The chambers of the General Assembly, controlled by House Democrats and Senate Republicans, usually swap policy changes that are important to their members in addition to an overall spending agreement.

The state House scheduled a voting session for Wednesday morning, and the Senate announced Tuesday that the chamber would return to session later that day, suggesting that budget legislation could be made public as soon as Tuesday night.

Negotiations had been stalled for months until the end of October, when Shapiro convened top legislative leaders to return to talks. The renewed budget negotiations included House Speaker Joanna McClinton (D., Philadelphia) and Senate President Pro Tempore Kim Ward (R., Westmoreland), who are the highest-ranking officials in their respective chambers but usually keep a distance from budget talks led by House Majority Leader Matt Bradford (D., Montgomery) and Senate Majority Leader Joe Pittman (R., Indiana).

Those expanded talks behind closed doors in the governor’s office appear to be what was needed to strike a deal, as the legislative leaders and Shapiro remained mum on the status of negotiations while staff worked behind the scenes to draft a budget deal.

Shapiro proposed a $51.5 billion state budget in February that would have increased state spending by 8% over the prior year. Much of that increased spending was slotted for ballooning Medicaid costs and public education, in addition to creating new revenue streams by taxing recreational marijuana or so-called skill games and tapping into the state’s hefty reserves.

That spending plan was rejected resoundingly at the time by Senate Republicans, who panned it as reckless overspending and said it would set up the state for failure, as Pennsylvania is projected to spend more than it brings in this fiscal year and in the future.

Budget talks continued into the summer, with leaders saying for weeks that they were close to a deal. Democrats pressured the GOP-controlled Senate to approve a budget deal with a long-term recurring revenue stream for mass transit — one of their top priorities as SEPTA faced an impending “death spiral."

But Republicans rejected that, proposing their own solution to access unused capital funds for the short term, in impassioned speeches that revived Pennsylvania’s urban-rural divide. In the end, Democrats accepted that they could not get a deal on mass transit this year with Senate Republicans and said they would try again in two years. Shapiro directed SEPTA to request the capital funds, which he approved on his own.

Even with mass transit off the table, top leaders could not agree on some of the most basic details for a 2025-26 fiscal year budget, and talks slowed for weeks. The process devolved into partisan accusations, with each party claiming the other was politicizing the budget process for political gain, until talks restarted in earnest late last month.

Pennsylvania is the only state in the country that has not approved a spending plan for the fiscal year that began July 1. What’s more: The state has been in a “double whammy” of government dysfunction since Oct. 1, when the federal government shutdown began. Now, with an end to the federal shutdown in sight, Pennsylvania may soon see a functional government at both the state and federal levels for the first time since June.

What might be in a final budget deal

While details of the budget deal are still uncertain, progressive Democrats and special interest groups have heard enough rumors from the closed-door talks to spur them to action.

Progressive Democrats and environmental groups are concerned that Shapiro and top Democratic leaders will allow the state to leave an interstate cap-and-trade program that charges power plants for how much carbon emissions they release into the air. Exiting the program, the Regional Greenhouse Gas Initiative, has been a top priority for Senate Republicans since 2019, when former Democratic Gov. Tom Wolf entered Pennsylvania into the 12-state initiative. Republicans view it as prohibitive to the state’s energy industries and as a cost driver for consumers.

Meanwhile, online sports betting organizations have teamed up as the Sports Betting Alliance to try to prevent the state from increasing taxes on sports bets. The Sports Betting Alliance — led by top groups like FanDuel, DraftKings, and Fanatics Sportsbook — has spent more than $525,000 in the last week on commercial ad buys during top sports games to ask fans to call their legislators and stop any tax increase as part of a final budget deal.

Currently, Pennsylvania taxes online sportsbooks at 36%, while online and brick-and-mortar casinos pay 54%. Still, Pennsylvania’s online sports betting tax is one of the highest in the country.

Prolonged impact of a late state budget

Unlike the federal government, Pennsylvania state government does not entirely shut down when a budget has not been approved. Lawmakers and state employees have not seen paychecks stop despite the impasse being in its 134th day as of Tuesday. But the late budget has had significant impacts on school districts, counties, and social service providers — all of which have not received their billions in expected state payments.

School districts across Pennsylvania have missed more than $5 billion in state payments since July, requiring many to spend their reserves or take out loans at high interest rates to continue operating. Some districts have warned they would have to close their doors if the state does not approve a budget by the end of January. Counties, for their part, have had to lay off staff, freeze spending, stop paying nonprofit service providers, or consider raising taxes on residents to stay afloat.

The funding delay also affected nonprofit service providers that care for the state’s most vulnerable residents, as agencies were forced to close their doors or roll back the amount of care they could offer. Among them were two Delaware County homeless shelters.

“It’s just totally unacceptable that the state cannot get a budget,” said Jeanine Lisitski, the president and CEO of service provider Mental Health Partnerships, in an interview last month. “As a CEO, as a leader, if I didn’t have a budget, the board would fire me. I don’t know how people can keep their jobs when they can’t get basic stuff done.”

Mental Health Partnerships, which serves people with mental health conditions or substance use disorders in Philadelphia and the surrounding region, had already begun seeing more people on the streets around Delaware County as local shelters had to shutter.

“I’m very angry now, because we have to see what happens on the front line,” Lisitski added. “It puts people in a life-and-death situation.”

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