Pennsylvania IFO encourages rainy day fund deposits to hedge against impending recession


Pennsylvania’s Independent Fiscal Office says building up the state's rainy day fund will help the government weather another economic recession – whenever it should come to pass.

Senate Appropriations Majority Chairman Pat Browne, R-Lehigh, asked IFO Director Matthew Knittel why the economy continues expanding despite indicators – such as misaligned capitalization growth and corporate profitability – that suggest another downturn could be around the corner.

“It makes me somewhat concerned that our spending proposals continue to estimate growth,” he said. “I don’t want to be the Eeyore here … but I think we have to keep that in mind.”

Browne framed his concerns in the context of Gov. Tom Wolf’s $36.1 billion budget proposal that relies on “optimistic” 4.5 percent revenue growth to fund an additional $1.5 billion in government spending.

“Given what we know from the past, and maybe it’s just that the 2008 downturn was so huge … it’s just hard to have any real confidence that something in the near term is not going to change that scenario,” he said.

Knittel said consumers’ more effective debt management practices, such as refinancing mortgages at lower rates for shorter terms, help sustain growth year after year – defying most preconceived notions about economic ebbs and flows.

“What’s different this time is consumers are in very good shape, and they are really driving what we are seeing right now,” he said.

Members of the House Appropriations Committee expressed similar sentiments during the same hearing this week, pressing Knittel for guidance on how to hedge against another recession.

“The [surplus] deposit, that’s always good to build up the rainy day fund,” Knittel said. “Another good policy is not to rely overly on one revenue source, and I think Pennsylvania stacks up well there. Also paying expenses due in the current fiscal year and not rolling them forward.”

Last year, Wolf deposited $316.9 million in revenue surplus into the state’s “rainy day fund,” bringing its total balance to just over $341 million. Browne referred to this as a “responsible” move, but far short of what credit rating agencies recommend to ensure financial sustainability.

Despite lawmakers’ wariness, Knittel said Pennsylvania continues to benefit from a strong labor force that drives increases in personal income tax revenues. While he expects smaller gains in the coming year, he said even the governor’s minimum wage proposal, once “fully phased in,” would net $50 million in tax revenues for the state.

“So in other words, if they [businesses] raise their wage rates, they will lose profits, but will realize savings through higher productivity and reduced turnover,” he said.

Wolf, during his budget address earlier this month, proposed raising the state’s minimum wage from $7.50 to $12 an hour, with a gradual increase to $15 by 2026. It's the sixth time the governor has pushed for the policy, though its remained largely unpopular among the Legislature’s Republican majorities.

Critics say minimum wage hikes lead to job and benefit losses, reduced hours for some workers, and higher prices for consumers.

In November, the Senate voted 42-7 in favor of a plan to increase the minimum wage to $9.50 an hour over the next two years. The bill awaits consideration in House.