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Revenue Report Predicts Big Budget Hole

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The $230-million dollar year-end surplus that was projected when Governor Tom Corbett delivered his February budget address isn’t likely to materialize in the final two months of the fiscal year.  “At the end of the day we think we’ll be back at the original estimate from last June,” explains Independent Fiscal Office director Matthew Knittel.

Pennsylvania’s General Fund collections may be running $67-million above last June’s estimates, as of today, but they’re actually falling short of February’s revised expectations.   

Compounding the problem, the IFO is now projecting 1.2% growth in state revenues in the new fiscal year.  It may only be a slight downgrade from the 1.3% projection used to crunch the numbers in the governor’s budget plan, but it adds up to another $278-million dollar shortfall. 

Combined, it’s a more than $500-million dollar hole in next year’s state budget.  What’s changed since February?  Knittel says sales and use tax collections are lagging. 

“What we think is happening is that consumers are taking a hit,” Knittel explains.  “We had some federal tax increases to start the year – the payroll tax cut expiration, some tax increases on high income individuals, and we think that’s restraining spending currently.  But when we move into fall and winter, the consumers will have absorbed that hit and we think the spending will return.”

Meanwhile, the state budget season just got more difficult as state policymakers will have to find the cuts and/or revenues to fill a potential half-billion dollar hole.

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What Would the Fiscal Cliff Mean for PA?

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The fiscal cliff is more than just a federal issue.  The automatic spending cuts called for in federal sequestration could mean $60-million fewer federal dollars for Pennsylvania next year, and that’s just half of this so-called cliff. 

Without Congressional action, a variety of tax increases will also take effect as of January 1st, which could raise a combined $600-billion dollars in federal revenue in 2013.

Those tax increases could have serious implications for the Pennsylvania economy.  “Pennsylvania comprises about 4% of US economic activity, so if we apportion that number to Pennsylvania, a very rough order of magnitude might suggest a tax increase of $22-billion dollars,” Independent Fiscal Office (IFO) Director Matthew Knittel explained on Radio Smart Talk.  “[That’s] a very rough order of magnitude and a worst-case scenario.” 

Knittel believes Congress will take some action by the end of the year, just not full action, so he says a more realistic economic impact on PA would be in the $8 – $20-billion dollar range.” 

The payroll tax cut alone would mean $5-billion fewer dollars for PA taxpayers.  “If one assumes that roughly 70% of that would have been spent, and roughly 40% would have been spent on taxable items, that tax increase suggests a roughly $70 – $80-million dollar reduction in sales & use tax revenues,” Knittel says. 

The potential impact of the fiscal cliff was included in the IFO’s recently-released Economic & Budget Outlook, which projects lackluster growth in the Pennsylvania economy.

Corbett Signs Budget Ahead of Deadline

Governor Willing to Discuss Restoring Some Funding Next Year

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Governor Corbett is reacting with caution to word that the state’s revenue figures are starting to show improvement.  He says the numbers are encouraging.

However, the Governor adds that just as predictions were made in February anticipating a higher year end deficit based on the facts then, these new projections are based on the facts today, which could change quickly.

Earlier in the week, the Independent Fiscal Office projected a year end deficit of about 300 million. In February, the Governor’s office had projected a gap of more than 700 million.  April’s revenue collections came in 99 million dollars over projects.  At the end of last month, the state was running 288 million dollars  behind projections.

Some lawmakers are calling for funding to be restored to the proposed budget for the next fiscal year, based on the improved numbers. Governor Corbett says he’s open to discussion with the legislature about restoring some cuts, but wants to be cautious.

With less than two months to go in the fiscal year, the Governor was asked about the prospects of a second on-time budget.  He says he believes it will be done on time, and hopefully it won’t be ten minutes before midnight (see photo above of last year’s budget signing).  He says talks with legislators have been cordial and very productive.

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New Reports Indicate Brighter Revenue Future

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April’s General Fund collections topped expectations by $99-million dollars, according to the Department of Revenue’s latest report.  It’s the state’s third straight month in the black, but fiscal year-to-date revenues are still running $288-million below estimate. 

On the same day as the monthly report from the administration, the Independent Fiscal Office released its initial revenue estimate.  “We think the year-end shortfall will be $300-million dollars,” says IFO Director Matt Knittel.  That’s a marked improvement over the $719-million dollar shortfall that Governor Tom Corbett projected when he made is budget address in February. 

“We are seeing additional economic strength moving forward… and we think a lot of that strength will carry forward into FY2012/13,” Knittel says.   His office will release its official revenue estimate in mid-June. 

 Senate Democrats are hailing the dual reports as reason to overhaul the governor’s proposed budget for the new fiscal year.  “There is now no question that there will be far more available dollars to restore key budget lines that support job creation, education, safety net programs and investments for the future,” says Senate Democratic Leader Jay Costa (D-Allegheny). 

Governor Tom Corbett has previously expressed the desire to finalize budget plans once the May numbers are available.  We’ll hear his latest fiscal observations on next week’s “Ask the Governor.”

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“Guarded Optimism” in New PA Economic Report

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Pennsylvania appears to be on the road to economic recovery, but experts caution the road is long and full hazards.  Pennsylvania’s new Independent Fiscal Office is out with its first ever Budget & Economic Outlook, which pegs the state’s “real growth” at 1.6% for 2012. 

There are reasons for optimism in the Pennsylvania economy.  “If you look at the balance sheets of the corporations, the profits are pretty healthy, the balance sheets are strong,” says IFO Director Matt Knittel.  “If you look at the banks, they’re beginning to lend once again.  If you look at consumers, they have brought down their debt balances and I think they’re in a stronger position now than they were a year or two ago.”     

Demographic trends pose real economic concern in the years ahead, as Pennsylvania’s senior citizen population is projected to grow by 25% over the next decade.  The working age population, meanwhile, is expected to contract by nearly 2%.  “Extrapolating these trends out five years we find that if current policies are left in place and current tax laws are left in place, then expenditures greatly exceed revenues five years from now,” Knittel tells Radio PA. 

The General Assembly created the Independent Fiscal Office in 2010 as a means to provide nonpartisan financial data.  It was funded for the first time in 2011, and required by statute to release its first report this month.  The IFO will release its state revenue estimates in May. 

Governor Tom Corbett’s Budget Office will need to base a proposed spending plan on revenue estimates much earlier than that.  Corbett’s 2nd budget address is scheduled for February 7th.

First Director Named for new Independent Fiscal Office

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Pennsylvania’s Independent Fiscal Office has its first director.   Matthew Knittel is   a senior financial economist with the U S Department of Treasury.  He says the office will be a great tool to help lawmakers craft policy, providing revenue and expenditure projections and undertaking special studies and developing performance measures.

Knittel’s first day on the job is expected to be September 19th. Then, he’ll need to hire a staff to get the office up and running. The first report is due November 15th; an annual assessment of the state’s fiscal condition, but since the hiring process took longer than anticipated, that first deadline may slip a little this year.

Knittel says it’s his intention to use the office’s web site to post data analysis that will be interesting to the legislature and general public.  He says the intention of the legislature is that the office should be very transparent, and he’s a big advocate of that.

Knittel says there are several ways that he will keep the office independent.  He says he does not have any pre-existing connections to the Pennsylvania legislature, and as he hires the new staff, he’ll be sensitive to the needs for the office’s independence. He adds that given his six year appointment, he does not anticipate feeling any pressure to arrive at any particular conclusion or answer.

Knittel says even though they won’t be fully staffed right away, they should be able to meet their deadlines in May and June for issuing budget figures.

Knittel  applied for the job after seeing it advertised on the website of the National Association of State Budget Officers. He was  chosen by the Independent Fiscal Office Selection and Organization Committee established in Act 120, which authorized the new office.  The selection committee signed a unanimous letter appointing Knittel.