He said there is more than $1 billion in unavoidable spending growth which needs to be accommodated in the 2012-13 state budget. He pointed to a $520 million in increase school ($320 million) and state employee ($200 million) pension costs, $400 million increase in Medical Assistance and an $80 million increase in debt service, inspite of efforts to cut costs.
Secretary Zogby said the bottom line is the Governor is likely to need about $750 million to bring the FY 2012-13 budget into balance. He said the Governor is not going to make up this shortfall with tax increases.
State agencies have already been asked to submit a budget assuming a further 5 percent reduction in spending, with no exemptions, but Secretary Zogby said no decisions have been made on any line items.
He also noted next year there will be an increase in Unemployment Compensation insurance for businesses, additional steps taken in controlling Corrections costs and more cuts or automatic sequestration of federal funding which will all have an impact on planning for FY 2012-2013.
When asked if the Governor will be addressing transportation funding needs, Secretary Zogby said the state continues to see a weak economy and reductions in state revenue which Gov. Corbett said would affect his decision on when to propose a transportation funding package.
Secretary Zogby's Release
“Gov. Corbett inherited a $4.2 billion deficit when he took office in January,” Secretary Zogby said in delivering his mid-year budget briefing to legislators. “Working with the General Assembly, he was able to sign an on-time 2011-12 budget that did not raise taxes and that cut spending from the previous fiscal year by 4.1 percent, or $1.17 billion.
“The work of returning the Commonwealth to fiscal stability, however, is far from complete,” Secretary Zogby said. “Because of the continuing weakness in the national economy, we now project that revenues for the 2011-12 fiscal year will be $500 million below estimate. This anticipated shortfall, combined with projected growth of $800 million in Medical Assistance, debt service and school employee pension costs in 2012-13, will lead to serious budgetary challenges for the Commonwealth this year and next.”
When Gov. Corbett took office in January, the 2011-12 deficit was projected to be almost 14 percent of estimated expenditures, Zogby said. The enacted 2011-12 budget eliminated 66 appropriation line items, cutting $822 million in annual spending. It reduced funding for another 226 appropriations and consolidated an additional 52 appropriations to streamline government. The budget reduced administrative spending by 4 percent and cut more than 1,000 positions in Commonwealth government.
“These measures helped restore Pennsylvania’s budget to fiscal stability, but they mark the beginning, not the end, of the process,” Secretary Zogby said. “Given the state of the economy, the governor and lawmakers will need to make many more difficult decisions about Commonwealth spending in the months ahead.”
In his first year in office, Gov. Corbett has done much to stimulate the state’s economy by supporting employers and adding private-sector jobs, Secretary Zogby said. These accomplishments include reinstating the phase-out of the Capital Stock and Franchise Tax, increasing the Research and Development Tax Credits from $40 million to $55 million and creating the Marcellus Shale Advisory Commission to develop recommendations on all aspects of natural gas drilling.
“The surest remedy for a weak economy is job creation,” Secretary Zogby said. “The governor’s focus on supporting free enterprise and limited, transparent and effective government is helping to restore Pennsylvania’s economy to health.”
Threats To Budget Stability
The greatest threats to state budget stability – in the current fiscal year and in 2012-13 – come from factors that are largely beyond the control of the administration, Secretary Zogby said. These include:
-- The persistent weakness in the national economy. Since the 2011-12 budget was enacted in June, most economists have significantly lowered their forecasts for economic growth for 2011 and 2012. -- The economic forecasting firm Global Insight, for example, has cut nearly in half its outlook for growth in real U.S. Gross Domestic Product in the Commonwealth’s 2011-12 fiscal year. In May the firm’s forecast for this indicator was 3.0 percent. By December, Global Insight had revised its forecast to 1.7 percent. Forecasts for growth in consumer expenditures and wages and salaries also have been revised downward.
-- The ongoing economic crisis in Europe. Uncertainty about the fate of the euro and the European Union, along with Europe’s growing debt crisis, has created global economic instability that has prolonged the stagnation of the U.S. economy and delayed its recovery.
-- Uncertainty over federal funding. The failure last month of the congressional deficit supercommittee triggered automatic sequestration cuts of 8.8 percent in federal funding to states. Without any action by Congress and the president, these will take effect in January 2013.
-- Health care cost inflation that is contributing to the rise in Medical Assistance health care and long-term care costs. In the 2012-13 budget, additional costs in these two areas alone are expected to be $400 million.
-- Commonwealth pension costs. Pension cost growth in the 2012-13 budget will be $520 million: $320 million for public school employees’ retirement and another $200 million for state employees’ retirement.
-- Debt service. This cost is expected to grow by $80 million in 2012-13, providing additional impetus for the administration and lawmakers to develop a capital spending plan that will put debt service costs on a sustainable path.
“Gov. Corbett’s commitment to fiscally responsible state government has not wavered since his election last year,” Secretary Zogby said. “If anything, the budgetary challenges facing the Commonwealth have only strengthened his resolve. By adhering to fiscal discipline and reality-based budgeting, Gov. Corbett will guide the Commonwealth through the tough times that lie ahead.”