More upbeat about possibly smaller deficit

First Posted:

MARC LEVY Associated Press
HARRISBURG — By now, the staggering deficit facing Pennsylvania state government — currently estimated to be at least $4 billion and perhaps $5 billion — is part of practically every conversation in the Capitol.

But as the days grow longer and the mercury creeps up, some statehouse budget analysts are quietly beginning to pencil rosier revenue figures onto the backs of envelopes.
Most are guarding against too much optimism, given the expectation that, barring a miracle, Pennsylvania will experience its fourth straight fiscal year with a structural deficit of $1 billion or more.
But some acknowledge the possibility that the crucial four months ahead may signal a big enough recovery in the commonwealth’s recession-battered tax collections to cut the most dire deficit projection nearly in half.
“We’re like everybody else, kind of soft-pedaling this because we don’t want to get folks overly optimistic,” said Philadelphia Sen. Vincent Hughes, the Appropriations Committee’s ranking Democrat. “Things can change, especially in a very difficult economy.”
Hughes’ Republican counterpart, Sen. Jake Corman, R-Centre, agreed that budget-makers are a little more hopeful about an end-of-year surplus, given the state’s $264 million surplus — 2 percent ahead of projections — at the end of January. However, he said he remains cautious, given the huge importance of the heavy tax collections next month.
“I’d be very hesitant to project any kind of surplus until we see those types of numbers for March,” Corman said.
The $4 billion-plus deficit projection for the 2011-2012 fiscal year, which starts July 1, assumes no surplus this year, and no growth next year.
But if tax collections continue to run 2 percent ahead of expectations, the end-of-year surplus will exceed $500 million. And many analysts anticipate growth next year as the economy continues to recover, meaning the state can expect another $500 million extra next year, plus some growth.
If that growth is, say, 4 percent, then that’s another $1 billion — potentially shrinking the deficit to below $3 billion and, perhaps, closer to $2 billion.
For now, Gov. Tom Corbett’s budget office isn’t making forecasts until the newly elected Republican delivers his 2011-12 budget plan to the Legislature on March 8.
Corbett has insisted that he will keep his campaign pledge to balance the budget without raising taxes or fees.
Until lately, Pennsylvania’s deficit in the 2011-12 fiscal year had been projected by most budget analysts to be at least $4 billion, primarily a result of sluggish tax collections that were temporarily buttressed by federal aid and state reserves that are no longer there. Those estimates don’t even include the rising cost of health care or salary increases.
Sticking to his pledge will mean that Corbett must cut at least one in seven dollars out of the state’s current $28 billion budget. That likely puts him on a collision course with county commissioners, school boards, hospital CEOs, university presidents, advocates for the poor and Democratic lawmakers.
“While there’ll be revenue growth (next year), the claims on that money are growing,” said Scott Pattison, executive director of the Washington, D.C.-based National Association of State Budget Officers. “The pie is going to be bigger, but the people who want a piece of that pie and the size they want is more than there is pie.”
Still, there are reasons to expect that a $4 billion-plus deficit won’t materialize.
Toward the end of 2010, hiring was up and layoffs were down — and Pennsylvanians are spending more freely.
“Looking from a calendar-year perspective, I think 2011 is going to be much better than 2010,” said Ryan Sweet, an economist who analyzes Pennsylvania for Moody’s Economy.com.
“And by 2012, Pennsylvania’s economy is going to be off and running.”
That said, Sweet and others caution that recovery will be slow: One in about 28 jobs have not returned since the 2008 peak. And state fiscal-year revenues through January were still 2 percent behind the 2007-08 fiscal year at the same point.
Corbett could try to smooth over the deficit by tapping other pots of money hanging around state government — slot-machine gambling money, for instance.
But Corman said he believes that Corbett is intent on avoiding “gimmicks” and will instead try to match spending to actual revenue.
Hughes stressed that slashing spending to get out of even a $2 billion deficit — let alone a $4 billion deficit — could still be devastating to the state’s economic recovery if cuts to schools and hospitals result in layoffs.
“That’s still a lot of money,” Hughes said. “It’s still $2 billion. You can’t minimize that.”