At Mid-Year, State's Budget Challenges Persist, Budget Secretary Says

Weak Economy, Sluggish Revenues Threaten Commonwealth Budget

HARRISBURG, Pa., Dec. 20, 2011 /PRNewswire-USNewswire/ -- At the halfway mark of the fiscal year, Pennsylvania's budget is sound under Governor Tom Corbett's leadership, but it faces ongoing threats to its stability from the lackluster economy, the dramatic growth in mandated costs and the uncertainty over federal funding, Budget Secretary Charles Zogby said today.

"Governor Corbett inherited a $4.2 billion deficit when he took office in January," 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," 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."

This projected growth would be $1 billion if the administration had not directed agencies to absorb $200 million in increased state employee pension costs in 2012-13, Zogby said.

When Governor 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," 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, Governor Corbett has done much to stimulate the state's economy by supporting employers and adding private-sector jobs, 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," 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."

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, 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.

"Governor Corbett's commitment to fiscally responsible state government has not wavered since his election last year," Zogby said. "If anything, the budgetary challenges facing the commonwealth have only strengthened his resolve. By adhering to fiscal discipline and reality-based budgeting, Governor Corbett will guide the commonwealth through the tough times that lie ahead."

Media contact: Susan Hooper, 717-265-8067

Editor's Note: To view the 2011-12 Mid-Year Budget Briefing presentation, visit the "Current and Proposed Commonwealth Budgets" section of the Office of the Budget website at www.budget.state.pa.us.

SOURCE Pennsylvania Office of the Governor