Independent Fiscal Office projects depletion of General Fund surplus

Pennsylvania’s General Fund surplus of $6.6 billion will likely be depleted before the end of the next fiscal year, according to research released July 18 by the state’s Independent Fiscal Office (IFO).

The IFO, which publishes an annual five-year projection of General Fund revenues and expenditures each November, projected General Fund operating deficits of -$624 million for fiscal year 2023-2024, -$2.0 billion (FY 2024-2025), and -$3.0 billion (FY 2025-2026) for November 2023.

“Those estimates were based on tax law effective at that time and the spending policies embedded in the FY 23-24 budget,” according to IFO’s new report. “Those amounts can now be updated based on the FY 24-25 enacted budget, recent tax law changes, and the latest revenue estimates.”

For the same three fiscal years, the updated deficits are -$892 million (FY 2023-24), -$3.3 billion (FY 2024-25) and -$4.5 billion (FY 2025-26), the report says.

Some groups already saw this coming.

The Commonwealth Foundation, a think tank based in Harrisburg, Pa., that develops and advances fiscally conservative and libertarian public policies, warned earlier this month that the Pennsylvania legislature passed a seriously flawed 2024–25 state budget deal that fails to address the educational needs of students trapped in failing schools, doesn’t control spending to avoid tax hikes, and misses opportunities to improve the economy through meaningful tax and regulatory reform.

The budget includes a spending increase of 4.9 percent, which the group said would drain state reserves and position families for tax hikes in 2026, and it creates a structural deficit of more than $3.6 billion.

The FY 2024-25 budget means “thousands of children will spend another year trapped in underperforming, unsafe schools, taxpayers will face tax hikes in 2026, and businesses will continue to face substantial regulatory hurdles trying to set up shop in Pennsylvania and create jobs,” said Commonwealth Foundation Senior Vice President Nathan Benefield in a July 11 statement.

“It raises taxes and leaves kids behind,” he added. “The people of Pennsylvania deserve better.”

In fact, citing the Commonwealth Foundation’s recent analysis, Pennsylvania Manufacturers’ Association President and CEO David Taylor said on Tuesday that without significant economic growth — which he said the state hasn’t seen in far too long — taxpayers will feel the burden from these spending decisions in just a year or two.

“Fixing the structural deficit should be the fundamental consideration in drafting the General Fund budget,” Taylor said. “Mandatory spending is increasing faster than revenue from economic growth, driven by Pennsylvania’s demographic crisis.

“The only new spending that can be justified would be for policy changes to close that gap with more and faster economic growth,” he said.

The IFO report says that the revenue estimate for FY 2024-25 is $320 million lower than the official estimate certified by the governor.

“If the certified estimate is correct, then the projected deficit would be reduced by that amount,” according to the IFO. “Gross revenues are reduced by $203 million to reflect newly enacted policies that impact revenues such as transfers, tax credits and exemptions.”

For FY 2025-26, revenue growth is modest (1.4 percent), the IFO says, due to the ongoing corporate rate cut, the reduction in interest that accrues on General Fund balances (-$240 million) and the deduction of newly enacted tax law changes (-$304 million).

For FY 2025-26, the expenditure growth rate is from the IFO five-year outlook report and it assumes that basic education funding grows by 2.4 percent, Department of Human Services by 5.2 percent, and personnel-related costs by 4.2 percent.

“Due to the recent ratification of wage contracts and stability of near-term employer contribution rates, the personnel-related growth rate should be relatively accurate and those expenditures comprise 19 percent of state General Fund spending,” says the IFO report.

Meanwhile, the IFO says that the General Fund and Rainy Day Fund balances both accrue interest during the fiscal year and for FY 2024-25, 10 percent of the General Fund ending balance is transferred to the Rainy Day Fund.

“The projected -$1.6 billion General Fund ending balance for FY 25-26 cannot occur and must be addressed if it transpires,” the report says.

“This budget is a slap in the face to the voters of Pennsylvania who trusted Gov. Shapiro,” said Benefield.

By law, the IFO must update and extend its projections to FY 2029-30 by Nov. 15.

The post Independent Fiscal Office projects depletion of General Fund surplus appeared first on Pennsylvania Business Report .