PBPC Budget Watch

State of the Budget July 2, 2008

Governor Rendell and state legislative leaders agreed on the framework for a state budget agreement on the evening of June 28. According to news accounts, the 2009-10 fiscal plan will reduce the Governor's February request by somewhere around $130 million through a 1.3% across the board cut in the proposed budget for most programs. Programs that had expected increases will see the increases diminish, while flat funded programs will see a real cut from 2007-08 levels.

The sharp about face came in response to June revenue numbers, which came in $159 million below estimate. On July 1, the Revenue Department reported $27.9 billion in total revenue for Fiscal Year 2007-2008, leaving the state with a year end surplus of $159.4 million, far less than the $433 million surplus projected in February.

Pennsylvania Revenue Growth from Prior Year
	2006-07	2007-08
General Fund Revenue	6.2%	1.9%
Personal Income Tax	7.7%	6.9%
Sales Tax	3.1%	-1.2%	*
Corporate Taxes	5.5%	-0.3%
Other General Fund Revenue	11.2%	-1.8%
Motor License Fund	1.1%	-3.1%	**
* Beginning in 2007-08, 4.4% of sales tax revenue was earmarked for mass transit and is not included in the General Fund total. Had it been included, Sales tax would have grown approximately 3% in 2007-08. ** The figure in 2007-08 does not include the $450 million paid to the fund by the Pennsylvania Turnpike Commission under Act 44 of 2007.

Click here to for a quick look at Pennsylvania revenue for 2007-09.

Compared to estimates, sales tax revenue was down 0.4% for the year and the realty transfer tax fell short of the target by 2.1%. The Motor License Fund, which includes revenues from gasoline taxes and motor license fees, was off by $88.5 million or 3.2% below estimate.

Corporate taxes, personal income tax, and inheritance tax collections all came in slightly ahead of projections. As expected, corporate tax collections were lower in 2007-08 than in 2006-07 due largely to the continued pahse-out of the capital stock and franchise tax.

In February, Governor Rendell proposed a $28.34 billion budget that would increase spending by 4.2%. The handshake agreement pegged total spending at $28.22 billion or a 3.8% increase.

The Governor's proposed 5.9% basic education increase appears to have remained intact. A proposed 1% cost of living increase for human service providers will likely be offset by the 1.3% cut, leaving programs, and local governments worse off than when they started.

Pennsylvania will end the fiscal year in much better shape than many states. A June report by the National Association of State Budget Officers (NASBO) identifies 20 states with revenue losses in 2007-08. Proposed budgets for 2008-09 averaged 1% nationally, but this number hides a wide degree of variation; Montana and Florida proposed state budget cuts of almost 10% while Delaware and Missouri recommended increases of over 6%.

Pennsylvania is not alone in a late year reversal of course. Connecticut Governor Jodi Rell proposed a budget with a 4.2% increase and signed a budget with a 3% cut to non-entitlement programs.

Better forecasting ?

Why has Pennsylvania avoided the fiscal black hole now sucking in other states? A few reasons: the revenue estimate for fiscal year 2007-08 was fairly conservative, pegging growth at 1.1%, in inflation adjusted dollars. Despite the usual claims about overspending, the approved budget for 07-08 grew by 3.2%--less than the national average. And Pennsylvania, with just about the lowest personal income tax rate in the country, has not implemented big tax cuts: a call for a personal income tax rate cut--costing $260 million in Fiscal 08-09--would have proven disastrous, and was quietly abandoned by its proponents by May.

Pennsylvania's mix of taxes makes for a more stable budget. States that have no personal income tax rely more heavily on sales taxes, which are a less predictable source of revenue since they are more tightly connected to the business cycle.

Another reason Pennsylvania's budget is in better shape currently than in other states is that the state has so far weathered the collapse of the housing bubble better than most states. The collapse of revenue derived from sales, property and other real estate taxes combined with a surge in state and local spending to cope with the rise in home foreclosures is a major contributor to state budget shortfalls in the rest of the country.

The budget agreement would increase borrowing for economic development and infrastructure projects. Economists argue that public works projects are a good investment during bad economic times, helping to shore up local economies. Still the demand for human services doesn't diminish and in many cases rises as people lose their jobs and their health care, and flat funding these programs puts a strain on local governments that administer many programs and on the people who provide the services.

Dark Clouds Ahead

Lawmakers considered, but abandoned a plan to tap some of the state Rainy Day fund to forestall program cuts. The reserve, now around $744 million, is the first line of defensive should revenues fall further in 2008-09. The Pennsylvania economy is clearly in the grip of a national recession which is likely going to slow the growth in tax revenue while increasing the demand for services. The budget for Fiscal Year 2009-10 could prove to be a challenge, and lawmakers may have to make tough choices. Stay tuned.