INDEPENDENT FISCAL OFFICE ECONOMIC & BUDGET OUTLOOK FISCAL YEARS 2012-13 TO 2017-18

Chris Latta John Burch November 19, 2012

On November 15, 2012 the Independent Fiscal Office issued its annual report on the five year economic and budget outlook for the Commonwealth of Pennsylvania. The following is a summary of the report. The Independent Fiscal Office provides revenue projections for use in the state budget process along with impartial analysis of fiscal, economic and budgetary issues to assist the General Assembly in its evaluation of policy decisions. Demographic Outlook: Age based population trends for the Commonwealth of Pennsylvania (COPA) show an accelerating upward shift in the age of Pennsylvanians. While the decade growth rate for the 65-84 age cohort declined by 1.7% from 2000-10, it is projected to increase by nearly 30% from 2010-20. Their share of the population will increase from 13.7% to 16.3%. This change reflects the aging of the Baby-Boom generation and will likely place significant strain on the COPA budget. As the Baby-Boomers age, the number of people aged 20-64, those continuing to work, will decline by 1.0%. The decrease in the number of people in their prime working years will place downward pressure on tax revenues. The 0-19 age cohort declined by 2.8% from 2000-10 and will likely continue to decline by 0.5% in the current decade. By implication, these demographic changes are not likely to correct themselves over the next 20 years. Those leaving the state (the young and working) are headed south to states with lower taxes and fewer social services (North Carolina, Florida, Texas). Those coming to Pennsylvania (the retired) are coming from states with higher taxes and more generous social services (New York, New Jersey, California).

Economic Outlook: The Independent Fiscal Office (IFO) is projecting modest growth from a very slow recovery. The IFO there will be continued softness in the labor market resulting from consumers continuing to pay down debt, rebuild home equity.

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Uncertainty regarding federal fiscal policy (businesses), employment opportunities (individuals) and European and Far East markets place additional downward pressure on economic growth. The LFO projects Gross State Product to increase over the 2012-18 period by a meager 1.9%, which is up slightly from and unimpressive 1.0% rate over the 2002-11 period. The unemployment rate is expected to stay stubbornly high, averaging 6.4% and never falling below 5.5%.
Annual Ave. Growth Rates - Selected Economic Variables 1992-01 2002-11 2012-18 Real GSP 2.2% 1.0% 1.9% Personal Income 4.6% 3.7% 4.0% Wages & Slaries 4.8% 3.0% 3.6% CPI-U 2.5% 2.8% 1.7% Payroll Employment 1.1% 0.0% 0.8% UE Rate (average level) 5.7% 5.9% 6.4%

Expenditure Outlook: The declining population in the under 20 age group from 2010-20 should ease budget pressures for education and social programs such as the Childrens Health Insurance Program (CHIP). However, the nearly 30% increase in the 65-84 age group will more than offset any gains with significant increased demand for Medical Assistance (MA) and long-term care services.

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Expenditures v. Revenues
(thousands)

34,000 32,000 30,000 28,000 26,000 24,000 2012-13 2013-14 2014-15 2015-16 Expenditures 2016-17 2017-18 Revenues

The long-term pension obligations of the Public School Employees Retirement System (PSERS) will do more to drive increases in education spending than spending on facilities or instruction.

Total Pension Contributions from General Fund

(Millions)

3,500 3,000 2,500 2,000 1,500 1,000 500 2012-13 2013-14 2014-15 SERS 2015-16 PSERS 2016-17 2017-18

Healthcare cost increases and a growth rate for the MA population that is predicted to be more than three times the growth rate for the general population will cause Department of Public Welfare expenditures to consistently outpace inflation and revenue growth. Pennsylvania recently began implementing its Justice Reinvestment Initiative, which is designed to, among other things, realize significant savings in the Department of Corrections.

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Pensions loom as a huge problem for Pennsylvanias public fisc. Total contributions from the General Fund will grow from $1.1 billion in the current fiscal year to $3.1 billion in Fiscal Year 2017-18.

Revenue Outlook: The IFO sets long-term revenue growth at an annual average rate at 3.0%. More retirees and fewer workers will limit the upside potential for revenue growth. Assuming an increasing labor force participation rate, the IFO expects Personal Income Tax Revenues to increase at an average annual rate of 4.1% through 2017-18.

Increase in Revenue Shortfall

(Thousands)

2500 2000 1500 1000 500 0 2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

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