Governor Rendell Takes Steps to Assure Balanced Budget

Press Release

Governor Edward G. Rendell today said that additional spending cuts are needed to keep the current budget in balance as a result of a continuing decline in state revenues caused by a slow national economic recovery.

Without additional cuts, the administration projects a revenue shortfall of $450 million when the current budget year ends June 30. That amount would represent 1.5 percent of estimated General Fund revenues. The revenue shortfall for the first five months of the fiscal year was $217 million.

To address the projected shortfall, Governor Rendell has directed a freeze of $170 million, which is a less than one percent reduction in state expenditures. The state will also recoup $50 million from prior-year unspent funds and will plan to draw $230 million from a year-end surplus originally projected at $354 million. That will leave $124 million to serve as a cushion against further erosion of finances.

"In developing the current budget, we were very conservative in setting our revenue estimates and our spending levels. The wisdom of that course is now apparent, with the national economic recovery too weak to produce improvement in state revenues," Governor Rendell said. "Pennsylvania will continue to restrain spending in response to economic uncertainty."

State spending in the current budget is $1.9 billion lower than it was in 2008-09. When federal stimulus funds of $2.6 billion are counted, the $27.8 billion budget is still $524 million less than last fiscal year.

During the recent protracted budget debate, proposals surfaced to increase the estimated rate of revenue growth by 0.8 percent, but the administration prudently insisted on assuming no growth. Had the administration not insisted on being conservative in its revenue estimate, the $450 million projected shortfall would have been another $200 million higher.

"When we finalized the budget in October, we were careful not to assume that the economy would climb out of the recession too quickly," Governor Rendell said. "We kept our revenue estimate at last year's levels and we built a modest surplus into our balance sheet to help cover additional shortfalls."

Although the economy has been stagnant thus far in 2009, some preliminary encouraging signs appeared nationally at the end of November. Retail sales rose more than expected as shoppers headed into the holiday season, a possible sign that consumer spending could be improving. That would be cause for optimism, as the state sales tax is the largest single component of the shortfall. The sales tax (non-motor vehicle) was off by $150.6 million and Personal Income Tax collections were $105.5 million less than anticipated in the first five months of the fiscal year. Corporate taxes and some other tax categories were higher than expected.

These problems appear at a time when the 50 states generally face what the National Governors Association has called "one of the worst, if not the worst, fiscal periods since the Great Depression." States feel increasing budgetary pressure from rising human services demands, growing prison populations and high unemployment at the very time revenues are in decline. Pennsylvania's unemployment rate for October was 8.8 percent -- unchanged from September.

While caution is still necessary, a Pew study of the fiscal status of the states found Pennsylvania among the 10 best in financial condition. Pennsylvania ranked seventh in the nation for fiscal stability, and is the only state in the northeast and the only large industrial state to appear in the top 10. Pennsylvania's revenue decline was only half the national average.

Governor Rendell stressed that the state still needs to enact gaming legislation designed to produce $250 million for the General Fund. Having that money available is a prerequisite to releasing funds for state-related universities and other non-preferred appropriations recipients, in order to have a balanced budget as required by the constitution.

The state also must enact capital debt authorization legislation to pay for previous state commitments toward capital improvement projects. That funding is critical to numerous construction projects that keep workers on the job and produce economic growth. The debt bill is currently before the state Senate, as is a bill that makes changes in the Welfare Code which are necessary to ensure further savings.

In addition to the actions announced today, the Rendell administration continues its ongoing efforts to contain the costs of state government. Since January 2003, the state workforce has declined overall by 4.8 percent -- largely through attrition. During fiscal year 2009-10, the state has furloughed 721 employees and eliminated more than 2,000 vacant positions. A freeze on salaries of managers and non-union employees beginning in January 2009 has saved $87.3 million.

The Rendell administration's commitment to reducing the cost of government produced $1.75 billion in recurring annual management and productivity savings in 2008-09. These include savings through better procurement practices, administrative operations and program efficiencies.

"Even as we take action to balance the budget and meet our financial obligations in the current year, we must look ahead and plan ways to address the enormous strains that Pennsylvania will face in the years to come," Governor Rendell said. "The long-term fiscal challenges that confront us will require difficult choices and political courage. The longer we wait to take them on, the more difficult those problems will be to solve."

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