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IFO Releases its Five-Year Economic & Budget Outlook

The Independent Fiscal Office (IFO) released its annual, five-year Economic & Budget Outlook for fiscal years 2018-19 to 2023-24 on November 15, 2018. 

For the current 2018-19 fiscal year, the IFO projects that a modest revenue surplus of approximately $224 million above the Official Estimate will be offset by the need for supplemental appropriations and other adjustments, which will result in a preliminary ending balance of zero (i.e. neither a budget surplus nor deficit).

For the coming 2019-20 budget year, the IFO projects General Fund revenue growth at a reasonable rate in line with historical norms of 3%.  However, the IFO projects that FY 2019-20 expenditures will increase by more than 8%.  The mismatch between 3% forecasted revenue growth and a projected 8% growth in expenditures results in an anticipated structural deficit of $1.7 billion for the 2019-20 budget year.

The significant fiscal year 2019-20 expenditure growth is due to the non-recurrence of one-time savings measures used to support Department of Human Services (DHS) programs in fiscal year 2018-19, a projected expansion of DHS programs in the coming budget year, and reduced support from non-General Fund revenue sources such as the Tobacco Settlement Fund and Motor License Fund.

The IFO’s expenditure growth projection for the coming budget year assumes a cost-to-carry budget under current law, but it also assumes substantial costs for items such as a Workers’ Compensation loan repayment, a restart of the General Assistance Cash Grants program, a regional expansion of the Community HealthChoices program, and a lower federal share of Medicaid payments.  The following tables lay out the factors that are driving the IFO’s projected fiscal year 2019-20 structural deficit:

Millions $

Estimated FY 2018-19
Net Revenues
Projected FY 2019-20
Net Revenues
Growth
$32,808 $33,782 3%


Millions $

Estimated FY 2018-19
State Expenditures
Projected FY 2019-20
State Expenditures
Growth
$32,918 $35,616 8.2%

The IFO’s latest report shows that the projected structural deficit will range from $1.7 billion in fiscal year 2019-20 to $1.6 billion in fiscal year 2023-24.  What is important to note is that these projected structural deficits have been steadily shrinking in recent years because of positive steps taken by the General Assembly.  To illustrate, the IFO’s projected five-year structural deficits ranged from $1 billion to $2.2 billion in its corresponding November 2017 report.  The IFO’s November 2016 report had five-year projected structural deficits ranging from $1.7 billion to $3 billion.  Since the 2016 report was published, the projected structural deficit for fiscal year 2021-22 has been reduced from $3 billion to $1.4 billion.  Such marked improvement is directly related to the advancement of budgets that have focused on living within the Commonwealth’s means.

As the IFO points out in the Demographic Outlook section of its report, fiscal policymakers will be faced with significant challenges resulting from Pennsylvania’s population distribution characteristics.  There will be fewer working age residents to support the financial needs of disproportionately expanding retiree and elderly populations, so the burden of public support will fall on a smaller group of taxpayers.

The General Assembly will have the ability to shape the fiscal year 2019-20 budget in order to mitigate projected expenditure growth in a way that the IFO is not able to do in its recent report.  Consequently, the projected structural deficit shown in the report does not reflect the actions that will undoubtedly be considered as the Senate Republican Caucus once again leads the way in crafting a responsible budget that allows the Commonwealth to live within its means while making investments in key areas that continue to be important to our success.  While challenges remain, the Commonwealth has the opportunity to continue improving its budget outlook such that solving the structural deficit issue can be achieved in the not-so-distant future.

The full report is available on the IFO’s website at the following URL: http://www.ifo.state.pa.us/releases.cfm?id=234

November Adds to Surplus

General Fund revenue collections for the month of November exceeded the estimate by $95.1 million, or 4.3%.   General Fund tax revenues were $46.8 million, or 2.2% higher than the monthly estimate, and non-tax revenue exceeded the estimate by $48.7 million, or 44.7%.  General Fund revenue collections for the first five months of the fiscal year are $333.6 million, or 2.8%, ahead of estimate.

The FY 2018-19 revenue estimate includes $125 million related to gaming license fees.  These license fees for activities such as iGaming and sports wagering are payable depending upon when individual operators apply for and are granted licenses by the Pennsylvania Gaming Control Board.  Through November, the revenue estimate assumed that $36.3 million would be collected for licenses and fees; however, the General Fund has received $122.6 million, or $86.3 million more than anticipated.  It is important to note that this overage is largely a timing difference between when gaming license revenue was estimated to be received and when it actually was received, which likely will reverse itself in the remaining months of the fiscal year.

November 2018 General Fund Revenue vs. Monthly Estimate:

  • Corporation taxes were $27.3 million, or 24.7%, above the estimate.
  • Sales and use tax collections beat the estimate by $45.4 million, or 5.3%, for the month.
  • Personal income tax collections were below estimate by $30.2 million, or 3.5%.

Fiscal Year 2018-19 vs. the Official Revenue Estimate To-Date:

  • General Fund tax revenue is $264.9 million, or 2.2%, above estimate.
  • Corporation taxes are $207.1 million, or 23.7%, above the estimate.
  • Sales and use taxes are $140 million, or 3.1%, above the estimate.
  • Personal income tax collections are below estimate by $71 million, or 1.4%.
  • Non-tax revenues are $68.7 million, or 35.6%, above estimate.

Fiscal Year 2018-19 vs. Fiscal Year 2017-18:

  • Total General Fund revenues through November are $950.8 million, or 8.3%, higher than last year.
  • General Fund tax revenue is $913.3 million, or 8.2%, higher than last year.
  • Non-tax revenues are $37.6 million, or 16.7%, higher than last fiscal year through November.

Motor License Fund:

  • Motor License Fund revenues are $21.4 million, or 1.8%, below estimate through November.
  • Motor License Fund revenues are $83.2 million, or 6.6%, less than last year at this time.

PASSHE Enrollment Continues to Decline

The Pennsylvania State System of Higher Education (PASSHE) reported in October that its 2018 fall undergraduate enrollment among the 14 member universities totaled 98,342 students, a decline of 3,959 students, or 3.9% from the  previous year.

The 14 PASSHE member universities include Bloomsburg University, California University, Cheyney University, Clarion    University, East Stroudsburg University, Edinboro University, Indiana University, Kutztown University, Lock Haven University, Mansfield University, Millersville University, Shippensburg University, Slippery Rock University and West Chester University. 

Based on the current enrollments, all PASSHE member universities except Kutztown University, Millersville University and West Chester University saw enrollment declines.  The most notable declines in enrollment occurred at Indiana University, which lost 916 students, or 7.4% of its enrollment, Edinboro University, which lost 617 students, or 11.1% of its enrollment and California University, which lost 505 students, or 6.5% of its enrollment.

This year’s decline in PASSHE’s fall enrollment represents the eighth consecutive year in which PASSHE’s enrollment has dropped.  From 2010 to present, PASSHE enrollment has declined from 119,513 students to 98,342 students, which amounts to a reduction of 21,171, or 17.7%

Over the last eight years, only West Chester University’s enrollment increased from 14,490 to 17,488 (20.7%), while the other universities saw significant enrollment reductions.  For example, Cheyney University’s enrollment declined from 1,586 students to 476 students (70.6%) and Mansfield University’s enrollment dropped from 3,411 students to 1,665 students (51.2%).  In addition, Indiana University’s enrollment declined by 3,726 students (24.6%) and Edinboro University’s enrollment dropped by 3,684 students (42.6%).

Based on projections made by the National Center for Education Statistics through 2026-2027, the number of public high school graduates in Pennsylvania is estimated to decline.  Given this information, it is unlikely that PASSHE enrollments will rebound to previous levels in the near future.

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