It Won’t Get Easier: Our Take on the State’s Five Year Outlook

Last week the Independent Fiscal Office (IFO) presented its annual set of fiscal and economic projections for the next five years. The full report and summary presentation are available here. They indicate $1 billion in overspending this year and a government habitually unable to balance its books, even in today's strong economy. Below are the main takeaways.

The Pennsylvania economy is, in the main, booming. Wages are set to grow about 4.5% this year, the fastest rate of increase in two decades. Unemployment is the lowest on record. Consumer debt is unfortunately also rising.

Consequently, revenue collections have been strong. General Fund revenue through October is $230 million more than the IFO had initially projected for this point in the fiscal year (the Pennsylvania fiscal year ends June 30).

IFO largely expects the party to continue. Their projected average annual growth rate for General Fund revenue over the next five years is 3.2% compared to 4% over the past five. The state’s three biggest revenue sources: personal income tax, sales tax and corporate income tax are projected to grow 4.2%, 2.3% and 4.8% respectively. No word on what happens if abundant growth falters.

Even so, the state can’t balance its books. They're $1 billion short this year alone. IFO projects about $1 billion of overspending in the current fiscal year, or “supplemental appropriations”. This is in one of the strongest economic environments in modern American history. It isn’t likely to get any easier for politicians to run a balanced budget than it is today.

Deficits are projected to continue, with revenue shuffling to fill the gaps. The next five years’ expense growth projection of 3.6% exceeds 3.2% revenue growth, even in the projected rosy economy. This continues the trend of the past five years, where general fund spending grew 4% per year while revenue expanded at 3.3%. With expenses set to systematically outpace revenue, the government will have to keep moving money from one pocket to another. This year the IFO expects the General Fund to draw out of other government funds including $216 million from managed care monies, and $200 million from the Joint Underwriting Association, a state affiliated insurance company. The state’s raid of the JUA is legally questionable: it has been attempted in past years but held up in court.

Structural reform is overdue. In a booming economy, and even extrapolating that boom into the future, the state government can’t balance its books. We reiterate the need for at least three reforms.

Firstly, the Taxpayer Protection Act, if passed by the legislature and the voters, would amend the state constitution to create a general fund spending limit tied to the inflation rate. This would supplement the state constitution’s balanced budget amendment, which is sadly too easily circumvented through the creation of special funds and their use to supplement or siphon off the monies in the general fund.

Secondly, the consolidation of special funds into the general fund will give citizens and policymakers a cleaner read on the state’s finances. (Click here for part 1 and part 2 of CF's primer on state finances). IFO deserves credit for the inclusion of new tables in its report this year that attempt a consolidation, but the consolidation should be both the reporting standard and a legal fact.

Finally, while state legislators can’t claim credit or blame for the national economic climate, they can keep pressing on strategic tax cuts and regulatory reform to ensure that Pennsylvania can continue to grow by attracting workers and entrepreneurs.