In preparation for Governor Rendell's budget speech today, I spent some time looking up recent articles on the state of the Commonwealth's finances. It looks like we are ahead of where we were last year (in reference to the budget deficit) but revenues still continue to decline monthly on a year over year analysis.
According to The Pennsylvania Budget and Policy Center (a non-partisan think tank) January revenues to the State came in $120 million below expectations with 85% of that drop due to lower than expected revenues from income taxes and sales taxes. This is an issue because it was just in December that the Governor suggested the 2009-2010 budget gap might be $450 million. With the unexpected slump in revenues, Rendell's projection will most likely prove to be off the mark. From the article linked above:
Sales tax collections, which are normally the highest of the fiscal year in January (due to holiday shopping), missed their monthly target by $50 million, or 5.9%. For the fiscal year, sales tax collections are $231 million, or 4.6%, lower than expected. Sales tax collections have fallen short of estimate every month of 2009-10 – indicative of a slower-than-expected economy and weaker-than-anticipated consumer confidence.
The problem here is not just on the revenue side. Expenses are proving to be a problem as well. The Commonwealth has had to borrow $2.25 billion from the Federal Government in order to pay unemployment compensation. From the article above:
Pennsylvania's efforts to keep its nearly 560,000 unemployed workers' heads above water is causing the ship of state itself to sink deeper in a sea of debt. The state's Unemployment Compensation and Rainy Day funds, intended for down times, ran out of money in March.
But wait, it's not all gloom and doom. The fact that the State budget is so far in the hole means that the likelihood of an immediate solution to the PSERS pension crisis increases. Think about it for a second. For every school district in the state that has to raise taxes to pay for PSERS, the Commonwealth needs to come up with half that. With 501 school districts across the state, the Commonwealth share of this contribution spike will be enormous. Plus:
The Senate has contracted with Price Waterhouse to review the pension issue, not only to value the assets that are there, but to make specific recommendations
Nothing a little accounting magic can't cure...again (Pennsylvania did the accounting trick previously in 2002/2003 I believe).
When doing a little searching I also came across an article from the PSEA with the headline, "PSERS is Sound". From the article:
Warnings of a “spike” in the employer contribution rate in 2012-2013 are proving to be overrated. Originally projected to rise to 27.73%, projections in September 2007 now put the increase at less than 12%.
This had to be written in late 2007/early 2008. The PSERS Rate Spike is now projected to be up to 10.59 in 2012. Then it jumps to 29.22 in 2013 and 32.09 for 2014 before it starts to level off.
Again, the sheer magnitude of this spike means that the State is more likely to act. The question is, given the increases outlined in the chart above, will it act for 2010-2011 or will it wait for a future year? With no money to spend, the State will be forced to address the pension issue through accounting measures thereby masking the true cost of the pension plan. Let's hope that the Commonwealth doesn't simply stop at masking the problem but instead go all the way with a much needed reform to the unsustainable pension system.
I am not a fan of accounting "magic" to make liabilities disappear, however, in this case I may have to make an exception. Let's all just wait and see what the Governor says today.
Thanks for reading.
James
