IFO: State’s finances improve

Ending balance for 2020-21 fiscal year projected at $1.5 billion

HARRISBURG -- It was a good news-bad news report delivered by the state Independent Fiscal Office on Thursday as the agency presented its Economic and Budget Outlook for Fiscal Years 2020-21 to 2025-26.

The relatively good news is that Pennsylvania managed to get through the COVID-19 recession without a major hit to the immediate state budget, thanks in large part to a significant amount of federal stimulus dollars and a far quicker economic turnaround than most had expected.

"Based on our projections of revenues and expenditures for the current fiscal year, we are projecting an ending balance of $1.5 billion," said IFO Director Matt Knittel during Thursday virtual briefing.

Noting the $1.5 billion figure is substantially higher than the "zero" that had been on the General Fund financial statement for the final FY2020-21 balanced budget that was adopted in November, Knittel explained, "We have an increase up to $1.5 billion largely due to the improved economic outlook (and) the strong-than-expected revenue collections since that time."

The bad news is that all those one-time federal dollars (and other budget-balancing strategies), while helpful in the short term to buoy Pennsylvania residents and the state's fiscal health, are still only one-time, and will leave a sizable structural deficit to be addressed in the coming fiscal years.

The IFO forecasts it to be $2.5 billion for the coming 2021-22 fiscal year -- barring any additional federal or state efforts that boost commonwealth revenues.

Even more concerning is the forecast by the IFO that most of the state's job losses that have not already been recovered since the losses in the spring of 2020 are likely to take far longer to recover, with some to never be recovered.

Pointing out the housing and financial crisis of 2008 was a significant contraction of more than 4 percent, with employment needing six years to revert to pre-recession level, the IFO explains the COVID-19 recession produced an immediate contraction of 1.1 million jobs -- or around 18 percent -- so they are assuming payroll employment will also require six years to revert to the pre-recession level.

Not including self-employed individuals, Pennsylvania's latest employment data -- for November -- show 455,000 fewer people employed than a year ago, and Knittel said he expects that number to be a bit higher -- due to some business closures during the holidays -- when new December data is released in about a week.

Additionally, there's been a contraction of the state's labor force -- those working or looking for work -- of approximately 260,000 compared to a year earlier.

Pointing to the substantial increase in labor productivity nationally - up by 10.6 percent for the second quarter of 2020 and 4.6 percent for the third quarter, when for all of 2019 productivity increased by 1.7 percent -- Knittel suggested that could mean many lost jobs aren't returning, with those unrecovered jobs being in the retail trade, food service, accommodation and personal services sectors.

"This [productivity] is much higher than we've seen in the past decade, which was usually running about 1 or 2 percent, and it's a dramatic takeaway from the impact of the COVID-19 recession," said Knittel. "We are seeing a dramatic increase in labor productivity and this could occur for many reasons -- employers might ask their employees to do more or they might invest in labor-saving machinery and technology that requires less labor.

"But this improvement in labor productivity, which has not reversed, it does suggest and we do think that a lot of the job loss now will not be made up, and part of that is due to the fact that employers and businesses are now more productive from the changes that they have implemented in response to the COVID-19 recession."