Is Pennsylvania’s economy picking up steam?

Summary: When fiscal year 2018 came to a close June 30th and the general fund revenues were finally tallied, the commonwealth’s total tax revenues collected exceeded the previous fiscal year by 4 percent. Given the struggles in recent fiscal years with stagnating revenues (see Policy Brief Vol. 17, No. 37) does this point to a strengthening in the state’s economy?
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According to the Pennsylvania Department of Revenue, total general fund tax revenue for fiscal 2018 topped $32 billion, 4 percent higher than fiscal 2017’s $30.75 billion. This is the second largest percentage increase to the total tax revenues in the last five years (fiscal 2015 was 4.96 percent greater than fiscal 2014). The other growth rates were quite anemic: 0.11 percent, 1.63 percent and 2.60 percent. While the increase in general fund tax revenue was a plus for the state, the commonwealth had estimated that collections would reach $32.13 billion, leaving actual collections about one-half of a percent below the projected level.

The corporate net income tax collections, the largest of the “corporation taxes” category, reached $2.88 billion, 4.6 percent better than the previous fiscal year’s $2.75 billion. This was the second largest yearly gain over the last five years (fiscal ‘15’s collections were 12.4 percent higher than fiscal ‘14). In fact, fiscal ‘17’s level of $2.75 billion was down 3.2 percent from fiscal ‘16 ($2.84 billion). In what had to be a surprise, this category fell 7.7 percent short of the $3.12 billion forecast. This may be a sign that businesses in Pennsylvania are not fully benefitting from a faster paced national economy. Or, it could be they are struggling under Pennsylvania’s tax and regulatory environment.

The sales and use tax, the largest of the “consumption taxes”, hit $10.38 billion in fiscal 2018, up 3.8 percent over fiscal 2017’s $10 billion. Over the last five fiscal years, the growth in sales and use tax revenue has been fairly stable, ranging from a gain of 2.14 percent (fiscal ‘17 vs. fiscal ‘16) to a high of 3.98 (fiscal ‘15 vs. fiscal ‘14). Projected sales and use tax revenue for fiscal 2018 was close to the actuals ($10.34 billion vs. $10.38 billion).

Personal income tax, the largest revenue generator, produced $13.4 billion in fiscal 2018 and accounted for 42 percent of all general fund tax revenue. This is a rise of 5.8 percent over the $12.66 billion collected in fiscal 2017 and was close to the fiscal 2015 collections gain of 5.86 percent over fiscal 2014. Forecast personal income tax collections for fiscal 2018 ($13.30 billion) were very close to the actual revenue for fiscal 2018.

By comparison, U.S. Treasury Department data indicate that thus far through the federal fiscal year (October 2017 through July 2018) personal income tax collections are up by 7.8 percent over the previous fiscal year, in spite of the tax cuts that took effect in January 2018.

Given that Pennsylvania’s fiscal ‘18 tax revenues were greater than those collected in the previous fiscal year, is the state’s economy picking up steam?

Household survey data (seasonally adjusted) for August 2018 suggest that a significant strengthening is not occurring. Compared to August 2017, the civilian labor force has fallen by 38,000 persons. That decline, combined with a gain of only 7,000 employed persons, pushed down the number of unemployed by 45,000. These data suggest that a large number of the population have stopped looking for work. Could be retirements are up or it could be discouraged workers and that would not be a healthy sign for the state’s economy.

Contrast that with the national household survey data (seasonally adjusted) which shows the civilian labor force increasing by 1.18 million over the 12 months ended in August. The number claiming to be unemployed fell by 893,000 while those reporting themselves to be employed rose by 2.07 million. Thus, strong employment opportunities have been more than ample to absorb large numbers of the previously out of work as well as newcomers.

From the August 2018 employer payroll survey (seasonally adjusted), the number of total nonfarm jobs in Pennsylvania had moved up by 65,500 (1.1 percent) from a year earlier. This continues a trend in which total nonfarm employer payrolls have struggled to break out. Particularly concerning was the drop of 4,900 from July posted in the August report.

By contrast the national nonfarm jobs rose 1.6 percent from August 2017 to August 2018. Pennsylvania has not been able to keep up with the nation in nonfarm job gains. In fact Pennsylvania has not bested the national growth rate in nonfarm jobs since coming out of the last recession in 2011.

Industry employment data are broken down into two major categories: goods-producing and service-providing. The former consists of mining and logging, construction and manufacturing while the latter consists of services such as health and education, leisure and hospitality and professional and business services. Goods-producing industries are prized for the multiplier effects on an economy with higher wages and supporting other industries, particularly the service sector industries.

Pennsylvania’s goods-producing industries have struggled to grow with the August 2018 job count up only 0.72 percent over the last 12 months. Nationally, the August year-over-year growth in the goods-producing sector rate was 3 percent. The goods-producing sector nationally has been gaining steam, while in Pennsylvania it has been weakening since March of this year.

The state’s manufacturing job count was up 0.73 percent over the past 12 months. Only June of this year posted a yearly rise of more than one percent. Nationally, the annual gain in August was a robust 2.04 percent.

Pennsylvania has kept pace with the nation as a whole in service-providing industries. The seasonally adjusted growth rate of the service-providing industries in August was 1.16 percent for the commonwealth and only 1.36 percent nationally.

One service-providing sector where Pennsylvania’s job growth tops that of the nation is in education and health services. Pennsylvania recorded a 2.62 percent 12-month rise in August while nationally that sector’s employment was up 1.93 percent during the period.
Again, while growth in service-providing sectors is welcome, these sectors do not have the wages, productivity or multiplier effects as the goods-producing sectors.

The 4 percent increase in general fund tax revenues for fiscal 2018 over 2017 should not be construed to mean the state is performing well compared to fast growing states or to the national economy. Rather, the below-national gains in nonfarm jobs in Pennsylvania point to persistent and longstanding problems with its business climate. The high corporate taxes, a smothering regulatory climate and fealty to unions all play a part in holding the state’s economy at subpar levels.

Government Costs Saving That Didn’t Lower PA Expenditures

Summary: Major cost cutting should translate into lower taxes or at least remove the need for an increase. That has not happened with the Governor’s “savings initiatives” that are supposed to produce saving of $2.1 billion. Those costs savings, representing 7 percent of current spending, should have resulted in FY 2017-18 expenditures being lower than the current year fiscal year. Unfortunately, that did not happen as the Governor calls for a spending increase of 1.8 percent over this year’s spending.

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In the Governor’s Budget Address and in the various documents prepared for Pennsylvania’s Fiscal Year (FY) 2017-18 budget there was great fanfare over a purported $2.096 billion dollars in proposed cost savings.  The savings are to be created through a series of steps that merge departments and streamline administrative functions.

Topping the savings actions list are a combination of prioritizing agency expenditures and cost efficiencies that are projected to produce $767 million in lower spending.  Perhaps the Governor can convince the Legislature the savings are achievable. The second largest savings action consists of prudent fiscal management that is expected to generate a $493 million expenditure cut. One would have thought that fiscal management was already prudent.  Revenue enhancements of $314 million are included:  not sure how this is a “savings initiative”.

Four actions account for a combined $522 million. Three of these can be real savers if carried out.  Eliminating and reducing programs outside the Commonwealth’s Core Mission ($171 million) for example would be a very good and welcome step.  Consolidation and Coordination ($104 million) can be useful targets for cost cutting.  Facility closures and downsizing and lease management ($104 million) could be achievable. Finally, Complement Controls ($143 million); again this one could take some work to convince the Legislature.

In short, whether these savings are achievable must be considered highly problematic.

As it stands with the hoped for, but as just described highly questionable, $2.1 billion in cost cutting, the projected general fund spending is slated to rise from $31.77 billion in FY 2016-17 to $32.33 billion in FY 2017-18. This would be an increase in year to year spending of a modest 1.8 percent. On its face, it would appear the savings are doing a good job in holding down the hike in spending from FY 2016-17 to FY 2017-18.

But that is not the way to look at this.  Assume that in a fit of fiscal discipline the Governor had decided to raise overall spending above the FY 2016-17 by the inflation rate, say 2.5 percent. In this scenario spending for FY 2017-18 would be $32.56 billion.  But here is the problem.  If we subtract the hoped for $2.1 billion in savings, that would take the budget expenditures for the next FY to $30.46 billion, well over a billion dollars below the 2016-17 fiscal year forecast and $1.87 billion below the FY 2017-18 budgeted level.

Or looked at the other way, assume the $2.1 billion in cost savings could be realized before the end of the current fiscal year. That would bring spending for this fiscal year down to $29.67 billion. Then allowing for a 2.5 percent rise from FY 2016-17 to FY 2017-18 the budgeted spending for next year would be $30.41 billion.  Even allowing a three percent rise would put spending at $30.56 billion, $1.77 billion below the Governor’s budgeted amount.

What is actually happening is that most of the hoped for savings are being spent. If the savings were in place during the current fiscal year, the budget expenditure proposed for next year would be $2.66 billion or 8.9 percent higher than in FY 2016-17 ($32.33B minus $29.67B).  The $2.66 billion figure is equal to the budgeted increase for next year plus the $2.1 billion in savings.

There is little question that the goal is to save as many taxpayer dollars as possible.  But in this case the savings proposed and hoped for are not being allowed to do what they should do which is to lower actual spending.  Savings that amount to nearly 7 percent of the current fiscal year outlays along with a rise in spending that covered inflation of 2.5 percent would have allowed tax cuts or more money for the rainy day fund and would have at least eliminated the talk of tax increases.  None of which has happened in the Governor’s budget address or in the budget documents.

Perhaps the Legislature will see through the failure of the projected savings to achieve a desired objective which is to push planned spending lower if possible and remove the threat of tax hikes that perennially arise during budget development. The Governor is to be applauded for looking for savings.  But looking for savings should be an ongoing role of administrations. And savings should not be simply at the margins.

Beyond the concerns about the failure of the proposed budget to achieve a reduction in total spending for next year, the Legislature should consider the projected savings to be questionable as discussed above. If the savings do not materialize, there will be a deficit that will increase dollar for every dollar of unrealized savings in FY 2017-18—assuming the Legislature approved the Governor’s budget as presented.

Moreover, the government needs to look at major government expenditure drivers as well as laws that add costs to business and inhibit growth.  Prevailing wage laws, teacher strikes, overly aggressive regulators, a history of kicking the pension crisis down the road, high taxes and a business climate that leads to very slow new business formation and expansion must all be addressed. Those rectifiable problems will, unless addressed forcefully and successfully, continue to produce perennial budget angst.

Sluggish Economy Creates State Revenue and Budget Problems

Summary:  Three months ago (see Policy Brief Vol. 16, No. 47) we called attention to the slowdown in statewide employment since March of 2016. Data since indicates the slowdown has not been reversed. Recently released private sector employment figures for December 2016 continued to disappoint, dipping below November’s reading and standing only 37,000 above the December 2015 level. This weakness is having a ripple effect in the state’s economy and tax revenues that trail projected estimates and widening the budget deficit.  Fixing the economy should be top priority and talk of tax increases is exactly the wrong approach.

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Pennsylvania’s private sector job count in December 2016 rose only 37,000 from December 2015, well below the average gain of 52,000 from December 2010 to December 2015. Indeed, the pace of job growth coming out of the recession has been replaced by a cooling, especially noteworthy during the last few months of 2016 following a respectable first half. There can be little doubt that for much of the period of 2010 through 2015 the relatively strong job gains reflected the advent of Marcellus gas drilling and production.  Still, notwithstanding the stronger gains since the 2009-10 recession the average yearly job gains of 13,600 private jobs in the new century pale in comparison to the 84,600 average yearly rise in the late 1990s.

Sluggish growth of late can be traced to the weakness in goods producing categories, mining and logging, construction, and manufacturing. Reflecting the slide in natural gas prices mining jobs fell on a year over year basis every month in 2016—a trend that actually began in April 2015.  By 2016 the monthly average of the sector had dropped by 12,800 jobs (-34 percent).  And that decline has had a significant negative effect on other sectors.

Manufacturing tells a similar story, losing 2,300 jobs in 2016 compared to the 2015 yearly average.   After a small rebound from the recession low point, factory employment has been basically flat for four years. Moreover, the longer term picture is very poor with 2016’s average of 566,000 jobs a drop of 15 percent from 2006’s level of 670,400.

Employment in service producing industries has fared much better than in the goods producing sectors with education and health services leading the way.  For instance, private services employment grew 41,300 from December 2015 to December 2016. Moreover, the sector has added 30,600 jobs per year since 2006 thanks to a relatively strong performance after the recession that accounts for all the net private sector job gains during the period.

In fact, overall the private sector managed average annual increases of only 18,000 jobs from 2006 to 2016 reflecting the big losses in manufacturing.

With the new national emphasis on policies focused on stimulating manufacturing and energy production perhaps this picture might change for the better in the future.

For the present and near term, service sectors are keeping the Pennsylvania economy moving forward, albeit slowly. But the reality is that many of the service jobs being created are very low paying with few benefits and their output has little or no multiplier impact on the economy. Thus, a concentration of employment gains in low labor productivity, low wage jobs industries provide only a very small impetus to state revenue. This is evident in the state’s tax revenue collections data.

Moreover, the recent slackening pace of overall job gains and the dramatic shift in the industry mix of employment away from goods production are definitely having an effect on state revenue collections. Since the recession ended in 2010, annual (calendar year not fiscal year) general fund revenue has risen at a slow 2.5 percent average yearly rate, with the highest increase posted at only 3.7 percent in 2011 and two other years reaching just over three percent. 2012’s increase was barely two percent and 2013 registered a paltry 1.6 percent gain.  But the low point over the last six years was the 1.2 percent increase from 2015 to 2016. Thus far in the first six months of the current fiscal year, general fund revenue is maintaining its weak growth pattern and is up only 0.4 percent compared to the first six months of the prior fiscal year ($13.45 billion vs. $13.40 billion).

While this is a slim positive gain, it is $367 million or 2.7 percent below what the Commonwealth budget projected would be collected thus far ($13.82 billion).  And December’s monthly revenue collection was four percent below the budget estimate figure.

Based on the slow pace of revenue gains of late it is not surprising that year to date collections in all major categories of tax revenue (corporate net income, personal income and sales and use) are running behind the forecast for the first six months of FY 2016-17.

Of the three, the $116 million shortfall in the corporate net income tax is largest in percentage terms at 8.9 percent under forecast. The personal income tax has also performed below not just last year’s level, but estimated levels as well.  Through the first six months of FY 2016-17, the collections on personal income tax are $126 million or 2.3 percent under the budgeted figure. Meanwhile, sales and use tax revenue was $133.3 million (2.6 percent under budget.) These three account for most of the overall revenue shortfall although other categories were also lower and a few small sources registered increases.

Of course revenues are only half of the ledger—spending being the other half.  Thus far in FY 2016-17, general fund spending is running about $4.4 billion higher than revenues collected.  Typically, the first six months of the fiscal years have spending running ahead of revenues. With the heaviest revenue inflows in the spring, the spending–revenue gap is dramatically reduced. But for the last few years, the fiscal years have ended with increasingly larger deficits.

Just recently the Independent Fiscal Office (IFO) reported that it is now estimating the current year deficit at $700 million as a result of a forecast for a further $250 million revenue shortfall. The Director of the IFO in comments to the Associated Press on January 27th said, “We’re really not getting any kind of economic growth through January…So it’s very puzzling.”

On the contrary, slow growth in Pennsylvania is not much of a mystery. The state rates very poorly in state rankings of business taxes, business climate, and its two largest metro areas are among the lowest ranking for new business formations.  High taxes, the threat of more taxes, (especially on the gas industry) enormous unfunded liabilities in the state employee and teacher pensions that portend tax increases all hamper the state’s ability to grow and attract business.  Labor union problems, especially with public sector employees, combined with the rapid expansion of the number of Midwestern states adopting right to work laws will put the Commonwealth at an ongoing serious competitive disadvantage.

One thing should be perfectly clear. Raising tax rates or levying new taxes on business in an attempt to close the deficit will be counterproductive.  There is no substitute for adopting policies that favor free enterprise and making the state more business friendly.

State Jobs and Revenue Gains Very Weak in Recent Months

Summary:  The State’s fiscal situation is closely tied to its economic growth.  As the economy grows jobs, tax receipts from firms and individuals grow.  This Policy Brief looks at the recent dramatic slowing in job gains in the Commonwealth and the accompanying weakness in state tax revenue.

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The Pennsylvania economy has been plodding slowly along as evidenced by the weakening jobs numbers since March of this year.  Job growth is not only a measure of the economic wellbeing of the Commonwealth; it also affects the amount of tax revenue the State can expect to collect.  When job gains weaken, so will tax collections. For the first quarter of the current fiscal year (2016-17), Pennsylvania’s revenues have borne out this relationship as total general fund revenues, and many of the subcategories such as corporate net income, and personal income, are running behind the year earlier pace. And, more importantly they are coming in below the State’s official estimates for the current fiscal year.

 

Recently released labor data for September put the seasonally adjusted unemployment rate at 5.7 percent, up almost a percentage point from the March rate of 4.9 percent and a full point since January’s 4.6 percent rate. Over the same six month period, the household survey data show the number of people reporting they were working had fallen by 34,000.

 

The establishment survey payroll data show a similar pattern.  Over the last six months, nonfarm employment was essentially flat rising very slightly from March (5,894.6 thousand) to September (5,895.2 thousand).  Meanwhile, private sector jobs fell by 3,000 during that time. In contrast, in the preceding six months from September 2015 to March 2016, private employment rose by 51,000.  It is important to note that Pennsylvania’s private employment in September was only a tiny 2.8 percent higher than the pre-recession level of September 2007. It took seven years for employment to recover to pre-recession levels.

 

It is virtually axiomatic that a slowing in job gains will translate to weaker revenue growth for taxing bodies.  Indeed, in the first quarter of the State’s current fiscal year (July through September) total general fund revenues fell slightly compared to the same quarter of the previous fiscal year (-0.21 percent).  Of the three most important revenue streams (corporate net income, personal income, and sales and use taxes) only the sales and use tax amount is ahead of last year’s pace (0.19 percent).  The personal income tax, the largest of the three, is trailing last year’s collections by 2.4 percent while the corporate net income tax is down 7.6 percent.  The corporate tax is problematic because it is a tax on corporate profits and if profits are down, hiring new employees is less likely, and the firm may be in danger of having to do layoffs. Note that a sizable jump in the cigarette tax (owing to the dollar per pack tax hike) has kept the general fund revenue decline from being even greater.

 

Even more problematic for the Commonwealth is that actual revenue collections are significantly below estimated figures prepared for the budget. Through the first quarter of the current fiscal year total general fund revenues were $6.614 billion.  The State’s estimate was for collections of $6.833 billion resulting in a $219 million shortfall relative to forecast.  Corporate net income taxes are off by more than $67 million ($529.2 million actual vs. $596.9 million estimated).  The estimates were a little closer for the personal income tax with $2.731 billion actual vs. $2.786 billion estimated, and for the sales and use tax, revenue was overestimated by $72.4 million ($2.495 billion actual vs. $2.567 billion estimated).  Obviously, unless the first quarter performance is dramatically improved in the months ahead there will be a major budget problem early in 2017.

 

The cigarette tax had the largest revenue increase compared to the first quarter of the previous fiscal year owing to the $1 per pack boost from $1.60 to $2.60.  For the first quarter of the current fiscal year, the State has collected $279.7 million, up by $32 million from a year earlier. However, the collections are below the State’s estimate of $289.4 million, a shortfall of about $10 million.

 

The July to September quarter slowing compared to a year ago is not a recent problem either.  Looking at these revenues over the last six months shows a similar pattern.  Total general fund revenues for April 2016 through September 2016 are $15.28 billion. Last year during that six month span they were $15.51 billion. In our Policy Brief from early July (Volume 16, Number 29) we noted that “The slowdown has been underway for some time but has become pronounced in the last several months. Fiscal Year to date total revenue gains for each month of 2016 have fallen well short of the increases posted for January through May in 2015. For January to May 2016, the average Fiscal Year to date rise was 1.4 percent with the May cumulative fiscal year to date a meager 0.6 percent. For the same period in 2015, the average increase was 7 percent and for May of 2015 it was 7.3 percent.”

 

The caution lights are flashing.  Pennsylvania’s job growth is flagging and that is translating into weaker collections of tax revenues. This has the potential to become a sizable problem as the fiscal year progresses if the economy and jobs do not return to significantly faster growth—and soon. In light of the decade of anemic employment gains, it would seem apparent that Pennsylvania must adopt policies that promote strong economic growth and move away from its tradition of fealty to public sector unions and its regulatory environment that hamstring businesses.

Gambling on Revenues

Given last year’s contentious budget debate, the Pennsylvania Legislature and Governor were very quick to settle a budget for the current fiscal year (2016-2017).  So quick in fact, that they didn’t cement the revenue side of the ledger.  While they did enact new taxes to help cover the increase to spending such as on internet downloads, or expand existing taxes on cigarettes, they also proposed revenue sources on services that may or may not materialize—the largest sums coming on the coattails of the gaming industry.

According to a recent news report, the Legislature counted on selling licenses to the twelve Pennsylvania casinos, for $1 million each, to sell liquor on a 24/7 basis (currently liquor sales end at 2AM and begin at 6AM).  The problem, as the article notes, is that casinos are not interested in purchasing these licenses.  They cite liability concerns as well as staffing costs as reasons for turning the licenses down which means that the proposed revenue stream just took a $12 million hit this fiscal year alone.  As one CEO was quoted, “Who advises these legislators?”  And that’s a great question, if casinos aren’t clamoring for expanded liquor sales, why was the proposal put forth?

The Legislature is also counting on money from the expansion of gaming in Pennsylvania.  HB 2150 outlines the case for expanding gaming to include online gaming (see Policy Brief Volume 16, Number 27) and the expanding of slot parlors to international airports and other off-track betting parlors.  But as of late July this bill, which passed the House of Representatives on June 28th, is sitting in the Senate Committee on Community, Economic and Recreational Development.  Not only has it not yet been passed, it may not pass in its original form.  In another article, the bill’s primary sponsor claims that when the Legislature reconvenes in September, that the provisions in HB 2150 that legalizes online gaming is a better lock to pass than the expansion of gaming into off-track betting parlors.  Even if the online portion becomes law, will all twelve casinos jump aboard?  It is not clear that this is an avenue that many, if any casinos, are willing to go down at all.  And if they do, our Policy Brief notes that the state may not realize the amount of tax revenue they are counting on.  And if the off- track parlors do not pass, the hole to the projected revenue stream becomes even larger.

So for all the congratulations Legislators have been giving themselves for passing a budget that was not too long after the deadline, they still do not have the revenue side shored up.  They are relying on gaming to carry the weight of the revenue increases.  But given the casinos’ cool response to increased liquor sales and the incomplete gaming expansion bill, there may be more holes than they care to patch come September.  This is one gamble they may lose, and that will not be good for Pennsylvanians.

Pennsylvania General Fund Revenue Growth Has Slowed Dramatically

As Pennsylvania’s government works to put together a budget for Fiscal Year 2016-17 (FY 16-17) an unwelcome and very worrisome slowdown in the growth of General Fund revenues has occurred. Plans to boost spending by $1.5 billion could face an even bigger than projected hurdle if the slowdown persists into the second half of 2016. The slowdown has been underway for some time but has become pronounced in the last several months.  Fiscal Year to date total revenue gains for each month of 2016 have fallen well short of the increases posted for January through May in 2015. For January to May 2016, the average Fiscal Year to date rise was 1.4 percent with the May cumulative fiscal year to date a meager 0.6 percent. For the same period in 2015, the average increase was 7 percent and for May of 2015 it was 7.3 percent.

 

Growth in every major category of General Fund revenue, except the gross receipts tax revenue, has fallen below the increase in the cumulative revenue through May 2015 including corporate taxes, personal income taxes, inheritance taxes, and sales and uses taxes—although the drop off in the rate of increases of sales and uses taxes is not as dramatic as the other taxes.

 

The recent slowdown, particularly in April and May, has pushed the collections from several major revenue sources below the budget projection levels. Personal income tax revenue has taken the biggest plunge falling 4.3 percent below the budgeted number in April and 5.4 percent less than the May projection.

 

Granted, the recent period of substantially slower revenue gains does not necessarily mean that the trend will continue.  But the latest two months of employment data clearly reflects a much less vibrant economy.

 

Both April and May saw month to month declines in seasonally adjusted private sector jobs. The high paying goods producing industries experienced jobs reductions in every month but one since May 2015.  The mining component has been hard hit by the sharp decline in gas drilling activity. Meanwhile, manufacturing jobs in the first half of 2016 are running several thousand below the same period of 2015.  And after significant gains between March 2014 and November 2015, construction employment has started to sag and in May 2016 fell by 3,000 compared to May 2015.

 

Private jobs have been bolstered somewhat by continuing gains in professional and technical services and education and health although not enough to prevent the declines in overall job counts in April and May.  The leisure and hospitality sector has been a major driver of new jobs but posted losses in April and May.  Meanwhile, financial services jobs have been flat for a year as has employment in the administrative and support subsector.

 

All told, the recent employment picture is not encouraging for growth in General Fund revenues.

 

In the Governor’s latest budget proposal released in February of 2016, the forecasters put General Fund revenue for FY 2015-16 at $31,538,489,000, a 3.1 percent rise above the revenue for FY 2014-15.  That projection was based on the latest actual numbers as well as a proposed retroactive tax rate increase, which was not enacted.

 

Note that as of December 2015, the General Fund revenue forecast for FY15-16 stood at $30,871,700,000. But owing to plans to get a retroactive personal income tax increase to January of 2016, the tax revenue projection was boosted by $613 million and the non-tax revenue by nearly $54 million for a total estimate boost of $667 million.  Of course that tax increase was never approved. Thus, it now appears that not only will the revised budget estimate not be reached but absent an enormous jump in June collections the lower official December projection will not be reached either.

 

The Governor’s February budget plan forecast a surplus of $31 million for FY15-16, following a surplus of $206 million in FY14-15.  The Governor’s projected surplus could be in serious danger given the shortfall of revenues. Moreover, there will be no money to transfer to the Budget Stabilization Fund that was projected to have a balance of $69 million.

 

This means that the spending plan just approved by both Legislative branches is not only underfunded by well over a billion dollars, but that shortfall will get even worse if the revenue weakness continues or deepens. Thus, there will not be enough money in the Stabilization Fund to make a dent in the projected gap between spending and revenue.

 

Nor do the proposed revenue measures appear likely to achieve the projected collections levels. For one thing they are not yet enacted, and most cannot be made retroactive, so yearly estimates will not be achieved in FY16-17.  Then too, they appear to be overly optimistic (See Policy Brief Volume 16, Number 27).

 

Now with the jobs slowdown compounding the problem of weak revenue gains, this would be a good time to step back and look at where spending can be cut.  In a $30 billion dollar spending plan, one percent reduction saves $300 million.  Find some outsourcing opportunities and cut frivolous special interest spending, especially in highly questionable grants to businesses.  Reining in the Commonwealth Financing Authority would be a great place to start.  Then too, selling liquor stores remains a good revenue raising idea.

Governor’s Budget Proposal Seems to Be a Non-Starter

The budget proposed for fiscal year 2015-16 is facing a lot of skepticism as being too aggressive, too far reaching and ill-considered.  In short, it ought to be viewed as a non-starter.

 

In the first place, it seeks to make far more major structural changes than can possibly be thoroughly analyzed and evaluated by the General Assembly before June 30. These changes include hefty increases to sales and income taxes, levying a severance and per cubic foot tax on the Marcellus Shale industry, cutting corporate net income tax with major changes in factors determining tax liability, altering the operations of the liquor stores, an increase in tobacco product taxes, issuing bonds to fund green energy projects, raising the minimum wage to $10 and tying it to inflation, major amendments and expansion of health care provided by the state, and setting up funds to distribute income tax revenue to property tax relief.  All told, the proposed tax increases when fully implemented in 2016 would generate an expected $6.5 billion in additional annual revenue.

 

These changes, not to mention dozens of other smaller ones, will take months to wade through from an economic analysis standpoint and much longer to deal with politically.   There is much opposition to many of these proposals. Moreover, there is only a minimal nod toward solving the gigantic pension crisis that will require more than just throwing money at it or kicking the can down the road again. The state’s credit rating has been lowered because of the failure to grapple with the monstrous problem.  And absent meaningful reforms soon, the credit rating agencies might well lower the rating again.

 

Writing off the sale of the liquor stores will not sit well with many members of the Legislature.  Raising the minimum wage by a third will not sit well with employers and is unlikely to get much traction in the Legislature.

 

On the spending side, the budget plan calls for huge increases ($100 million) in pre-K programs and special education as well as a $400 million rise in basic education funding. Presumably, the severance tax is supposed to cover much of the education spending increase. Enacting a severance tax appears to be very unlikely at this time. Interestingly, the state’s normal funding for school pensions is not in the proposed budget.  There is however, a $1.75 billion transfer of funds into a restricted account for school employee pensions.

 

In a cautionary note, it is important to bear in mind that the economic and employment forecast for the next several years is a matter of concern. The revenue forecasts in the budget are based on a doubling of growth in incomes and employment in 2015 from the 2014 pace. The faster pace would persist through 2016, lifting the state’s economic fortunes to a much higher plateau. But as many have learned to their dismay, economic forecasts can be very unreliable and lead to major shortfalls of predicted revenue.

 

A key element in the budget is the plan for dramatic changes to education funding. Education is slated to receive sizable increases in appropriations over the next five years in the Governor’s proposal. This is in line with, and follows the philosophy of, the educational establishment who suffer from the belief that every academic shortcoming can be fixed by dumping more money on it.

 

Before the General Assembly considers the proposed major increases in spending, the Governor needs to explain some things to taxpayers.  In the first instance, he needs to explain how it is that Peters Township schools spent only $11,602 per student in 2012-13 ($3,000 per student less than the state average and merely $2,608 per student from the state) and had 93 percent of 11th grade test takers in 2013-14 scoring proficient or higher on the PSSA math test and 98.6 percent proficient or higher in reading. These proficiency levels are far above the 70 percent range of scores in the statewide averages. Then too, Greater Latrobe spent only $11,800 per student (about $3,000 below the state average) and has almost 30 percent of the students classified as economically disadvantaged. Yet 85 percent of the district’s 11th graders scored proficient or higher in math and 93 percent scored proficient or higher on reading.

 

Consider the Hampton district where per student spending is $1,000 below the state average but the high school is ranked as the 8th best in the state, even including all the magnet academies. Then there is Mt. Lebanon where per pupil spending is only slightly higher than the state average yet manages to rank consistently among the top tier of academically performing districts in Pennsylvania.   Many other examples could be cited but these make the point that hefty spending is not necessary to achieve excellent or very respectable academic outcomes.

 

Now consider two districts that spend over $20,000 per student—Pittsburgh and Wilkinsburg.  Bear in mind that despite having a fairly high local funding capability, Pittsburgh received $9,000 per student from the state in 2012-13. Note, in an interesting aside, the North Hills District with PA Education Department aid ratios that are virtually identical to Pittsburgh’s received only $3,411 per pupil.

 

Notwithstanding its enormous expenditures per pupil, Pittsburgh’s academic performance is very weak. Indeed, in the City’s high schools, other than a couple of magnets and Allderdice, the PSSA scores are lower than in 2008. At the five non-magnet high schools only 30 percent of 11th graders were able to score at the proficient level on the latest year’s math test; in a couple of schools fewer than 20 percent were proficient. The schools’ reading proficiency was equally disappointing.  Among K-8 PSSA test takers barely 60 percent scored proficient or better in math and only 53 percent in reading. It is a sad but undeniable truth that while not good, the elementary and middle school academic achievement levels are still much higher than the 11th grade performance.

 

Note that Pittsburgh spends a fifth of its school budget, or about $100 million, on special education including programs such as pre-K and early intervention—areas where the Governor wants to greatly increase spending.

 

In Wilkinsburg, despite the $21,000 per student expenditures, only 8 percent of 11th graders were proficient in math and 13 percent in reading. At the middle school only 24 percent scored proficient in math and 33 percent in reading.  The elementary scores were modestly better than the middle school but still far below a level to create any encouragement that the schools were effectively educating the students in their charge.

 

It is important to point out that the high schools in Pittsburgh and Wilkinsburg share a common devastating  problem—high absenteeism.  With official attendance rates hovering at 80 percent (for both districts) that means the average student is absent 36 days per year and some probably out 50 or more. The low attendance rate suggests strongly that a large fraction of students have no interest in education and a woeful lack of commitment to getting one.

 

How can the General Assembly be asked to spend a lot more money to educate students who have no interest in learning?

 

The Governor needs to explain why more dollars will not simply feed the maw of ineffective spending when the problem in many schools is a lack of interest on the part of so many students.  More spending cannot solve the underlying causes of the poor academic performance, as much as advocates want to believe it will. They need to offer some evidence before the Legislature considers massive increases in spending. Improving third grade or even seventh grade scores is not enough if that fails to translate into 12th graders who are ready to go out into the world as employees or postsecondary students. When large numbers of students are graduating as functional illiterates, the schools have failed regardless of how excited school boards are about third grade scores.

 

In short, there are very good school districts in Pennsylvania that spend a moderate amount per student and some very poorly performing ones that spend enormous amounts of money. It should be obvious that huge additional dollops of money are not the answer to what is wrong with the poorly performing schools.

 

Equally disturbing is the continuing claim that the previous Governor cut a billion dollars out of the state’s education budget. In fact, it was the previous Governor’s predecessor who cut state funds to education. Of course, he had the luxury of using a big chunk of Pennsylvania’s “stimulus” money.  So, even with the recession and falling state revenue he was able to increase school funding using Federal money.

 

But as we know, his successor would have no such good fortune. Federal funds fell by well over a billion dollars, and the state was facing a $3 billion dollar deficit. Nonetheless, the newly inaugurated Governor added back $250 million in state money to education expenditures.  But the loss of a billion Federal dollars simply could not be made up in the economic environment that existed. Unfortunately, the exploitation of that situation by politicians who conveniently forget how the previous Governor had set the whole thing in motion by using up large chunks of the stimulus money has become part of the enduring political narrative.

 

In sum, the new Governor’s first budget is predicated on easily refuted arguments and tired old rhetoric and is unlikely to get very far without substantial modifications.