Has the Wolf Administration Cured Pennsylvania’s Budget Ills?

Secretary of the Budget Randy Albright gave a surprisingly upbeat mid-year budget briefing yesterday. According to the state’s budget office, Pennsylvania’s structural deficit is virtually gone. Yet, reason for skepticism exists.

The budget office’s analysis relies on several questionable assumptions. For instance, the administration predicts collecting more than $200 million from an insurance liability fund even though a lawsuit is pending over the legality of this transfer. The administration also assumes a high return on the lease-leaseback of the Farm Show Complex and predicts gaming revenue significantly above an Independent Fiscal Office (IFO) estimate.

Talk of no structural deficit stands in stark contrast to the long-term projections from an IFO report published just four weeks ago. The IFO projects a nearly $1 billion deficit for the 2018-19 fiscal year. IFO executive Director Matthew Knittel told Chris Comisac of Capitolwire that much hasn’t changed since November (subscription):

Since we released our report in November, we have not received any new information that would cause us to adjust our projections,” Knittel said. “For FY2018-19, we projected a deficit of $1.0 billion, but on a cost-to-carry basis, it was closer to $600 million. We are still comfortable with those projections and our revenue estimate continues to hold up well.

Projections are not an exact science. Both the IFO and budget office underestimated the year-end deficit for 2016-17. In fact, the latter predicted a $604 million deficit during last December’s mid-year budget briefing. The state eventually ended the year $1.5 billion in the red.

Pennsylvania's budget deficits are primarily driven by escalating “cost to carry” growth such as debt payments, Medicaid and corrections spending. These drivers can only be addressed through structural changes such as debt reduction, restoring work requirements and continued efforts to reduce recidivism.

What's more, Sec. Albright’s presentation is inconsistent with Gov. Wolf’s insistence on the need to implement large tax increases to close recurring budget deficits. The governor has supported 10 different tax hike proposals in three years. This week's declaration is a 180-degree turn from his previous position that tax hikes must be a part of the “responsible” budget.

Finally, the administration claims $2 billion has been cut from the budget without providing much evidence, yet denies the existence of nearly $10 billion in shadow budget surpluses that remain untapped. And, according to Capitolwire, the administration has suggested they won’t be tapping the shadow budget for the $300 million authorized by the legislature. Consequently, this revenue source will need to be replaced.

If Pennsylvania’s fiscal health has improved, Gov. Wolf will need to prove it as we move closer to another budget cycle. For now, Pennsylvanians should be hopeful about the governor’s change in tone and his promise to “work to restrain or reduce state spending to balance the 2018-19 budget without increasing broad-based taxes.”

Let’s hope the rosy budget predictions are more than wishful thinking.