Small Revenue Shortfall Predicted for 2013-14 But No Need to Panic — Yet

Pennsylvania is staring at a likely revenue shortfall of more than $100 million come June when the current fiscal year draws to a close, according to the latest revenue estimates from the Pennsylvania Independent Fiscal Office (IFO). A slow-growing economy has dampened tax and other collections during the first half of the 2013-14 fiscal year, and IFO analysts think the trend will continue in the months ahead.

It is too early to sound the alarm just yet, although it could spell bad news for the 2014-15 budget that Governor Corbett will unveil next week. It is certainly something that everyone should keep an eye on in the months ahead. We can officially worry after we see the numbers in March, the next significant revenue month.

The IFO's revenue update comes at the fiscal year's midpoint. The office first estimates revenue collections around the time the budget is adopted in June based on economic trends at the time, then updates its numbers in January. The revised 2013-14 report predicts the state will collect $150 million less than initially expected into the General Fund (where most of your state tax dollars go). If the IFO's revised estimates hold up, the state will end the 2013-14 fiscal year $112 million short of the Corbett administration's official revenue estimate.

The Corbett administration is prepared to offset the drop in revenue — at least for now. Budget Secretary Charles Zogby noted during his midyear budget update (see page 14) that the administration plans to freeze $195 million in prior year and $75 million in current year spending that had been appropriated but not yet spent. These modest spending cuts, in combination with other changes, were expected to produce a year-end General Fund balance of $232 million. This cushion would shrink to about $100 million, based on the IFO's latest estimate.

All of which could signal less available funding for the 2014-15 budget, at a time when revenue collections are already expected to be about $1 billion less than expected spending. That would mean even more revenue will need to be raised or more programs cut to balance next year's budget.

The IFO's updated estimates for personal income and sales tax collections offer a picture of the potential trouble ahead.

When the budget was passed last summer, national economic forecasts predicted modest growth in 2013 and more robust growth in 2014. The Corbett administration built this assumption into its monthly collection targets. For example, monthly sales tax collection estimates were projected to grow by a modest 2.6% in the first half of 2013-14 (over the first half of the prior fiscal year) and increase to 4.9% in the second half. (See blue bar in chart below.)
Sales Tax Would Have to Grow by 5.3% in Second Half of 2013-14 to Reach Target, IFO Projects Lower Growth
The problem is that these revenue streams did not meet even the more modest expectations for the latter part of 2013. Sales tax grew by only 2.3%.

To meet year-end revenue estimates, these taxes would have to grow by even more than was already expected in 2014 — and that doesn't seem likely. So, the IFO revised downward its revenue projections for the second half of 2013-14. For sales tax, this meant cutting growth to 3.9% in the second half of the fiscal year, a point lower than what was expected in the official estimate.

Don't be too surprised if revenue collections miss estimates in the coming months. Official estimate growth set last summer, based on national economic forecasts at the time, showed robust growth in the first half of 2014, and it now appears likely we will fall a bit short. If revenues can grow along the lines of the IFO's seemingly reasonable revised estimate, we could end 2013-14 with a small but manageable revenue deficit. At this point, it is something to monitor, not a "budget buster" going into 2014-15. Yet.

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