Fiscal Outlook for Pennsylvania: Not Too Rosy

This week the new Pennsylvania Independent Fiscal Office held its first annual seminar on the state economy and revenue. After a series of presentations on the state of the economy and state budgeting/revenue from a national perspective—all with the perspective that robust growth is unlikely and risks to the economy persist—the IFO presented on future budget trends and released its five-year fiscal outlook.

Here are some highlights (or lowlights, to be accurate):

  • Pennsylvania’s population will continue to age, with an estimated 25 percent increase in senior citizens, and a 1.8 percent decline in working-age population.
  • This translates into slow revenue growth: Estimated annual growth in General Fund Revenue is projected to average 1.6 percent annually for 2011-14, and 4 percent annually from 2015-17.
  • This is in contrast to General Fund expenditures, which are expected to grow absent significant policy changes. The big categories of growth are Public Welfare (driven by Medicaid), Corrections, Pensions, and Debt.
    • General Fund Public Welfare spending is expected to go up by 8 percent per year from 2011-14. As noted, federal policy (stimulus and Affordable Care Act) is driving this growth—increasing Medicaid eligibility and preventing state reform through the “Maintenance of Effort” requirement.
    • Commonwealth debt payments will grow by 7.3 percent per year from 2011-14.
    • Pennsylvania’s corrections spending is expected to grow 6.9 percent per year from 2011-14.
    • Commonwealth pension contributions will skyrocket by 40 percent per year over the next three years. As a share of General Fund spending, pension payments will rise from 4.2 percent for FY 2011-12 to 11.6 percent for FY 2016-17.
    • The IFO projects education spending will decline by 1 percent per year from 2011-14—this forecast is based on expected enrollment declines, rather than anticipation of legislative priorities.

All these forecasts are based on current policy, i.e., no changes to current programs. But it should be blatantly obvious that reform must occur. Lawmakers must tackle the big cost drivers. Pension reform, Medicaid and welfare reform, criminal justice reform, and reducing our debt burden must be budgetary priorities. Moreover, to improve the revenue picture lawmakers must focus on policies that promote prosperity.