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Just last month, Pennsylvania’s finances were finally on an upswing again. Tax revenues were coming in higher than forecasted, and Democratic Gov. Tom Wolf proposed a $36 billion budget with some ambitious new spending plans.
By one estimate, the chance of a recession was only around 20%.
Then the coronavirus began to spread.
The outbreak now poses an unprecedented fiscal challenge for the state for which there is no roadmap. Never before has such a large percentage of Pennsylvania’s economy been shut down for a prolonged period, and no one knows how quickly it will rebound.
The challenge will be particularly acute because, as revenues decline, demand for public assistance programs like unemployment compensation will increase. At the same time, experts say Pennsylvania’s rainy day fund is woefully short of the level it should be at.
“We’re in new territory and it’s unlikely that any state is fully prepared for what they are about to face, but Pennsylvania finds itself particularly ill-prepared,” said Jared Walczak, director of state tax policy at the Tax Foundation, a Washington, D.C.-based think tank.
Already, with casinos closed since March 17, revenues from slot machines and table games — which brought in $1.36 billion for the state in 2019 — are plummeting toward zero. The state liquor stores, which generated more than $700 million in the last fiscal year, are closed and are not selling online.
Sales tax revenues will slump because businesses are closed and families are cutting back on spending. Since Pennsylvania doesn’t tax essential items, panic-buying groceries and hoarding toilet paper doesn’t generate much revenue, either.
In addition, income tax revenues will fall as workers lose their jobs, lottery proceeds will likely dip as fewer people play and shops that sell tickets close, and revenues from realty transfer taxes will wane if home buying and selling slows.
“It is clear that state revenues are softening pretty dramatically at the moment,” Revenue Secretary C. Daniel Hassell said in an interview Monday.
The scale of the shortfall will become clearer in about a week, Hassell said, when final revenue numbers for March are released, coming in “many millions under estimate.”
“It’s a huge challenge for all of us as we try to figure out where we go from here,” he said.
On Monday, Wolf issued a stay-at-home order for the seven counties most affected by the coronavirus. Last week, he ordered all businesses except those deemed “life-sustaining” to close their physical operations, and this week, police began enforcement.
The state Department of Revenue doesn’t have specific estimates yet on just how badly the emergency measures put in place to slow the outbreak will hit Pennsylvania’s bottom line. That’s in part because of how fluid the situation remains, both here and in Washington, D.C.
“We’ve been watching the economic forecasts that have been coming out and honestly they vary so widely that it’s difficult to know what to make of it,” Hassell said.
In the nation’s capital, lawmakers continue to hash out the details of a massive federal stimulus package. It’s not yet clear how much of a boost that could provide to states.
As revenues plummet, demand for some state programs is set to soar. In the coming weeks, more people will have to rely on public assistance programs. The state has already seen record numbers of people filing unemployment claims.
Wolf addressed the fiscal challenge ahead Monday, saying at a news conference that the state is “like any other business.” Until the fate of a federal stimulus package becomes clear, he said, “we’re doing the best we can to live within our means.”
Last week, Wolf put a hiring freeze and general purchasing ban in place across state government, urging agencies to curb spending on goods and services “not absolutely critical to operations.”
Like many states, Pennsylvania was midway through the budget process when the outbreak hit.
In the past, the state has been criticized for using one-time revenues to balance the budget. Experts say core government functions should be paid for with recurring revenues.
But this year, the administration was upbeat about the financial outlook. The governor’s proposed budget was based on a projection of 4.5% growth in revenues, an estimate that is no longer viable, Hassell said. That means many of Wolf’s new spending proposals, already met with a cool response in the Republican-controlled legislature, may have to be put aside to get the state back up and running.
Those proposals included a $1 billion expansion of a debt-funded grant program for lead and asbestos remediation in schools.
Pennsylvania also faces the challenge of going into an economic downturn with meager reserves, after lawmakers drained the rainy day fund during the Great Recession.
Even after the largest transfer in decades into the rainy day fund last July, the state still has only $340 million in reserves – enough to fund government operations for around three and a half days, the state treasurer’s office estimated at the time.
A 2019 study by Moody’s Analytics found that, in order to get through a moderate recession without tax increases or spending cuts, a typical state would need to have just over 11% of its general fund revenues in a reserve fund.
Pennsylvania has around 2%.
“This is a wake-up call for states and local governments to do things differently in post-COVID-19 life,” said Lucy Dadayan, a senior research associate at the Urban-Brookings Tax Policy Center. “You have to have reserves.”
Asked whether lawmakers were considering spending cuts to balance the budget, Sen. Pat Browne (R., Lehigh), chair of the Appropriations Committee, said nothing had been decided yet. He acknowledged, “the decisions going forward are going to be challenging.”
Unlike the 2008 recession, which Browne said took the state almost 10 years to recover from, the COVID-19 outbreak is a “short window of challenge.”
“All things being equal, this should not result in extended consequences like the last one did,” he said.
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