Independent Fiscal Office: State Faces Over $1.7 Billion Budget Deficit In FY 2019-20

On November 15, the Independent Fiscal Office reported in its Economic & Budget Outlook Report state government faces over $8 billion in deficits over the next 5 fiscal years due to rising costs, and in spite of better than expected increases in state revenue.

IFO projects a $1.71 billion deficit in FY 2019-20, a $1.56 billion deficit in 2020-21, a $1.44 billion deficit in 2021-22, a $1.75 billion deficit in 2022-23 and a $1.58 billion deficit  in 2023-24.

The report blames the same old culprits-- $1 billion in one-time funding sources used to balance the FY 2018-19 budget and increasing health and human service program costs.

Interestingly, the same IFO report in November of 2017 projected a “structural deficit” in FY 2019-20 budget of $1.86 billion, a 2020-21 deficit of $1.77 billion, a $1.78 billion deficit in 2021-22 and a $2.18 billion deficit in 2022-23.

So a year brought some improvement, but clearly the structural deficit problem has not gone away.

“Expenditures are expected to increase by $2.70 billion in FY 2019-20, which is roughly $1.70 billion more than the projected increase in net revenues,” said Matthew Knittel, Director of the IFO.  “The factors driving the unusually large growth in expenditures in the budget year are associated with more than $1.0 billion in one-time funding sources used to balance the FY 2018-19 budget, as well as FY 2019-20 increases in state costs associated with health and human service programs.”

In addition, a new sales and use tax transfer to the Public Transportation Trust Fund beginning in FY 2022- 23 reduces revenue by approximately $500 million annually and contributes to the shortfall in the final two years of the forecast.

The IFO described the imbalance as “potential” because policymakers have various tools to control expenditures on a temporary or permanent basis.

The IFO said several other factors affect projections of the Commonwealth’s fiscal condition in the forecast period, including--

-- The projections include mandatory (also referred to as the cost-to-carry) and non-mandatory expenditures. The potential FY 2019-20 imbalance is estimated at $1.48 billion if the financial statement incorporated only mandatory expenditures.

-- Over the last four years of the forecast (FY 2020-21 through 2023-24), three factors drive lower growth in expenditures: (1) SERS and PSERS employer contribution rates stabilize, (2) a contraction of the school age population restrains the growth of Pre-K-12 expenditures and (3) the aging of the Commonwealth’s workforce (high wage employees retire and are replaced with less experienced, lower wage staff).

Recession Caution

The IFO said the report does not assume that a recession occurs over the five-year budget window, therefore, the economic forecast represents a “best case” scenario. However, the report includes a cautionary note on the economic and revenue implications of a recession.

A recent survey of economists by the Wall Street Journal indicates that most economists believe that a recession is more likely than not to occur over the next three years.

Click Here for a copy of the report.

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Esack: Another Year, Another Possible $1 Billion+ Budget Deficit For PA