Anticipates $3.2 billion deficit, legislative leaders and auditor general expect more

Governor-elect Tom Corbett will face a budget gap of more than $3.2 billion in June if he wants to keep the state’s spending level in line with the current fiscal year.

State Budget Secretary Mary Soderberg said Thursday the anticipated deficit for 2012 will be “between $3.2 and $3.8 billion” depending on the revenue assumptions made by the Corbett Administration which takes over on Jan. 17.

Gov. Ed Rendell made his mid-year budget update Thursday in Harrisburg.

The current state budget spends $28 billion, but Pennsylvania will have only about $25 billion in recurring revenues next year, according to the most recent estimates. Making up the difference will require cuts to the budget or substantial revenue increases.

The largest factor in next year’s deficit will be the loss of $2.6 billion of federal stimulus funds, which expire in June. The state also used more than $750 million of one-time fund transfers – which will not be available next year – to balance this year’s budget.

“In retrospect, I wish the legislature had followed the advice I had given them over the last two years and created a stimulus transition reserve fund. They didn’t so next year is going to be a very difficult year,” said Mr. Rendell.

He urged Republicans and Democrats to work with Mr. Corbett on a budget to “continue the investments” made by the Rendell Administration.

Mr. Corbett has not provided a target figure for next year’s budget, though he and Republicans in the General Assembly have called for widespread cuts to balance the budget. Mr. Corbett’s staff did not return requests for comment Thursday on the mid-year budget update.

The governor’s projections paint a slightly better picture than the estimate made by Auditor General Jack Wager earlier this year. In September, Mr. Wagner said the budget deficit for fiscal year 2012 would exceed $5 billion because of structural costs like a $3 billion in unemployment compensation debt which must be repaid to the federal government and $800 million in increased public pension costs.

Thursday, a spokesperson for the auditor general said Mr. Wagner stood by his earlier estimate.

Mr. Corbett will lay out his plan for next year’s budget in early March.

Before he can even tackle the looming deficit in fiscal year 2012, Mr. Corbett will have to fill an estimated $63 million operating deficit from the current fiscal year. The expected shortfall was created because the state expected a larger portion of funds from a federal stimulus extension package last summer.

When the federal package was $280 million smaller than expected, the governor ordered cuts to the basic education subsidy and across the board cuts of 1.9 percent from state government agencies to save $220 million. The remaining portion was expected to be made up with a new tax on natural gas extraction which failed to pass in the General Assembly.

Mr. Rendell was happy to report the state’s tax estimates appear to be on target as the fiscal year approaches its halfway point.

While sales and corporate tax returns are in line with expectations, personal income tax returns are expected to come in lower than anticipated, a lingering effect of the recession which pushed unemployment to its highest levels in a quarter century in Pennsylvania.

Next year, the governor’s economic advisors project 3.3 percent revenue growth in Pennsylvania. Ms. Soderberg said a 1percent increase or decrease from economic growth projections would equal about $280 million in state revenues.

State Sen. Jake Corman (R-Centre), chair of the Senate Appropriations Committee, said he was generally unsurprised by the budget projections made Thursday, though he expects revenues to follow a historical pattern of declining in the new year.

“The projections are probably a little optimistic and the deficit is probably going to grow more than he expects at this point in time,” said Mr. Corman. “Until the unemployment rate comes down, we’re going to have a tough time with revenues.”

Mr. Corman said next year’s budget will have to be based on available revenues and will have to be less than the current budget of $28 billion.

Steve Miskin, spokesperson for House Republicans, said the General Assembly will be working with Mr. Corbett to “right-size” the state government. Mr. Miskin pointed to a proposal to privatize the state Liquor Control Board as one way to close a significant portion of the budget deficit next year.

House Majority Leader Mike Turzai (R-Allegheny), a major proponent of the plan to sell the state liquor stores, believes the plan would raise $2 billion.

Lisa Scullin, spokesperson for Senate Minority Leader Jay Costa (D-Allegheny) said the General Assembly should exercise caution in using one-time revenue sources to close budget gaps because they create larger shortfalls in the long-term.

Because Mr. Corbett’s “no-tax” pledge means spending reductions will be used to balance the budget, Senate Democrat leaders also urged consideration of who will be hurt by budget cuts, including local governments which have increasingly benefitted from state assistance.

“We really have our work cut out for us,” said Ms. Scullin. “Obviously cuts need to be made, but we need to be careful about where those cuts take place and who will be impacted by them.”