Ticking Time Bomb: PA headed for fiscal ‘perfect storm’

Member Group : Lincoln Institute

Finally, the Commonwealth of Pennsylvania has a new state budget. The 101-day budget crisis ended with a new spending plan of $27.8 billion, a mere $500 million less than the previous year’s budget which ran up a $3.2 billion deficit. Given that the new budget projects a zero percent growth in revenues, it would be logical to assume another multi-billion dollar budget deficit will ensue.

Some in the legislature understand what has happened. House Republican Leader Sam Smith summed it up well: "With more than a billion dollars in new or increased taxes, billions in federal stimulus dollars, and now by draining the Rainy Day Fund and the Health Care Provider Retention Account and raiding the Tobacco Endowment Fund, we are positioned on a giant funding cliff if the economy doesn’t swing back strongly in a year."

The situation, in fact, is even more dire than Representative Smith portrays. According to state Representative Sam Rohrer, House Republican Finance Chairman, it is unwise to use fiscal year 2008-2009 as a revenue benchmark because September of 2009 marked the 17th consecutive month where revenue collections were below estimates. In fact, revenue for the 1st quarter of the new fiscal year (July, August and September) fell $140 million below estimates.

Using historic fiscal data, Representative Rohrer says a more realistic revenue projection during the current fiscal year would be $24.3 billion in tax collections. That is $3.5 billion less than the spending contained in the recently approved state budget. Much, but not all, of the deficit will be plugged by stimulus money and one time revenue sources. But, even with that, a massive budget deficit again looms for next year. Given these figures, it would have been more responsible for the General Assembly to have pared spending in the current fiscal year to the $24.3 billion level.

It would be bad enough if that were the only fiscal problem facing the commonwealth. But, it is only the tip of the iceberg. A looming melt-down in the state’s pension system threatens to make the general fund deficit look like chump change.

The Commonwealth Foundation has been conducting a series of public meetings across the state to raise the profile of the pension problem, an arcane issue that fails to attract much media coverage but will soon have a profound effect upon taxpayers.

A policy brief issued by the Commonwealth Foundation puts the problem in perspective: "The looming crisis in the long-term commitments made by policymakers on behalf of taxpayers is reflected in the rapid 615% increase in expected taxpayer pension contributions from $584 million in FY 2004-05 to more than $4.2 billion in FY 2012-13." The foundation concludes that "without significant action affecting plan design, the Commonwealth of Pennsylvania will likely be facing unaffordable costs." In other words, when the two funds become insolvent billions of taxpayer dollars will be needed to finance the bail-outs.

Making matters worse, the state Unemployment Compensation Trust Fund, facing a $1 billion deficit, is now borrowing money from the federal government to provide benefits to the unemployed. Given that unemployment continues to tick upward, there is every reason to believe the situation is going to get worse before it gets better.

Warren Hudak, a member of the Unemployment Advisory Council, said during a Lincoln Radio Journal interview that the system has a "structural problem" and that only three other states in the nation are now paying out more in benefits than Pennsylvania. Hudak says that under the most optimistic scenario the fund will remain insolvent for a "minimum of seven to eight years."

At the moment, federal stimulus dollars are being used to plug the holes in Pennsylvania’s leaky fiscal ship. But, stimulus spending does nothing to change the underlying dynamics that point to major deficits when that temporary funding stream ends. When it does, Pennsylvania will be hit with a perfect storm unless spending is quickly reduced to more realistic levels.

Unfortunately, as the recent budget crisis has proven, the political will does not exist in Harrisburg to take that responsible course of action. And so, the fiscal storm continues to brew.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal. His e-mail address is [email protected])

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