HARRISBURG — The state Independent Fiscal Office provided a bit of welcomed budgetary news on Thursday, though Pennsylvania’s current financial condition is still going to present problems for lawmakers who have to complete a budget by the end of November.
The agency revised upward by $650 million, or roughly 1.8%, its official revenue estimate made in June, projecting that General Fund revenue will now total $36.524 billion by the end of June 2021.
March through June — during which much of Pennsylvania and its economy were locked down due to state-level COVID-19 mitigation policies — blew a sizable hole in the commonwealth’s General Fund budget for fiscal year 2019-20. However, the first few months of fiscal year 2020-21, which started July 1, have met or exceeded the expectations set by the IFO when it issued its fiscal 2021 official revenue estimate in June.
According to the IFO, consumer spending has been a primary driver of the better-than-expected state revenue performance, and that’s due in large part to the billions in federal stimulus and unemployment compensation benefits pumped into the state during the late spring and summer.
IFO estimates suggest that by the end of calendar year 2020, wage and salary income will have declined by roughly $20.8 billion. However, the agency says unemployment compensation and economic impact payments — assuming no additional dollars come before the end of 2020 — will have injected $42.3 billion into the state economy, more than offsetting the lost labor income.
That, along with pent-up consumer demand (due to the virus lockdown) and altered consumer purchasing (also prompted by the virus), has produced strong sales tax revenues that the IFO estimates will account for $490 million of the additional $650 million in improved General Fund revenue.
Though sales tax revenues through October are running well ahead of where they were a year earlier, the IFO does not expect that to last.
“Consumer expenditures are expected to fall in the coming months, with less federal support flowing to households in 2020 Q4,” the IFO wrote in its update revenue estimate report.
“E-commerce sales remain strong due to the continued shift of consumer purchases to online platforms in response to the COVID-19 pandemic. After months of limited activity in the spring, pent-up demand for motor vehicles increased motor vehicle collections for the first few months of the fiscal year, but is expected to wane by the end of CY 2020.”
Consumer spending also appears to have helped the state’s businesses to a certain extent, with the IFO projecting an improved corporate profit outlook. However, that only means the IFO is expecting domestic non-financial corporate profits to contract by 10% in calendar year 2020, not the 20% decline it projected as part of its June official revenue estimate.
Still the better situation for corporate profits should produce $120 million of that additional $650 million in General Fund revenue, according to IFO estimates.
And even though the state has recovered more than 50% of the more than 1 million jobs lost in the spring, the past two months have seen a dramatic slowdown in job recovery. The revised IFO forecast “assumes further modest job recovery for the remainder of the calendar year” and “that only 100,000 additional payroll jobs (average for entire year) will be recouped” in 2021.
“If that occurs, then the level of payroll employment will remain below the CY 2019 level by 350,000 jobs, and policymakers should anticipate significant challenges in regards to long-term unemployment,” the IFO wrote.
It also means continued weakness in personal income tax revenue for the General Fund, with the IFO projecting a $30 million reduction from the IFO’s June official estimate.
The IFO forecasts that the General Fund will receive some unexpected help from the state’s cigarette tax, which normally, year over year, provides less revenue unless the tax rate is increased, but that has not been the case so far this year, though the IFO doesn’t think the improved revenue will last.
“The unusually strong collections through October are largely the result of delayed processing during the early months of the pandemic,” the IFO report stated. “This strength is not expected to continue through the remainder of the fiscal year.”
Still, the IFO thinks the tax will provide $40 million more than what the agency forecast in its June official revenue estimate.
An extra $25 million is being projected by the IFO due to “higher than anticipated collections for sports wagering and iGaming.”
“Demand for online games that can be played from home have benefited from the impact of the pandemic,” according to the IFO.
And gaming appears as though it could kick in another $20 million more than what was originally estimated in June by the IFO, thanks to additional gaming licenses that have been approved or will be approved in the current fiscal year.
Alcohol and fireworks have also produced some better-than-expected revenues, to the tune of $10 million, and the Pennsylvania Liquor Control Board is still expected to transfer $185 million into the General Fund. The PLCB on Wednesday authorized a $100 million transfer, but it remains unclear if an additional $85 million will be transferred at some other point during the current fiscal year.
Yet, even with the positive news regarding a higher General Fund revenue estimate than forecast in June, lawmakers must still account for revenues that were shifted into the current fiscal year from the prior fiscal year, which ended with a $3.2 billion shortfall.
The IFO reports $1.938 billion of fiscal 2021 General Fund revenue was shifted out of fiscal 2020. (State officials early last month indicated that total is roughly $2.1 billion). That still leave a more than $1.26 billion hole to fill for fiscal 2021. (State officials early last month provided data to suggest the hole is closer to $1.1 billion.)
It also means the $650 million in additional General Fund revenue the IFO is now forecasting for fiscal 2021 is more than erased and leaves the commonwealth with less revenue — short by more than $900 million — than it was supposed to have had at the end of fiscal 2020 before COVID-19 changed everything.
So, doing some rough calculations using the IFO figures, it would appear that just to flat-fund the remainder of the current fiscal year, as well as resolve the shortfall from fiscal 2020, lawmakers are going to have to find around $2 billion — maybe a bit more — in additional revenue and/or spending reductions.
The state currently has $1.3 billion in federal CARES Act funding held in reserve, but the federal government has prohibited states from using that money to fill budget holes. Still, there could be creative ways to spend that money to reduce some of the General Fund’s burdens.
Legislators will return to the state Capitol on Nov. 10, a week after the general election, and leaders have said they will return with their focus being the completion of the budget.
First Published: November 2, 2020, 11:15 a.m.
