Pennsylvania

E C O N OM I C &R E V E N U E U P D A T EI N D E P E N D E N T F I S C A L O F F I C E

HOUSE AND SENATE

APPROPR IAT IONS COMMITTEES

F E B R U A R Y 2 1 2 0 1 7

INDEPENDENT FISCAL OFFICE

Second Floor, Rachel Carson State Office Building 400 Market Street

Harrisburg, Pennsylvania 17105

February 13, 2017 Dear Chairmen and Members of the House and Senate Appropriations Committees: Thank you for the opportunity to submit materials in advance of the budget hearing for the Independent Fiscal Office (IFO). The 2017-2018 Governor’s Executive Budget proposed an appropriation of $2.076 million for the office, the same amount appropriated for the current year. In addition to questions about the IFO’s budget, past hearings have included wide-ranging discussions regarding Pennsylvania’s economic and consumer outlook, labor market, revenue collections, demographics, long-term fiscal outlook and energy industry trends. The office has compiled some of the most frequently requested data, including select interstate comparisons, and enclosed it for the information of committee members. We trust this background data will be helpful as you consider the fiscal year 2017-18 budget proposal. Since the 2016 budget hearings, the IFO has made progress on a duty specified in its original authorizing legislation and undertaken two new statutory duties. First, the IFO published a report that outlined options for outcome-based performance measurement of executive agencies and created a prototype report to solicit feedback on its usefulness. A built-out version of the prototype report for the Department of Corrections will be submitted to the Appropriations Committees for these budget hearings. Second, the office published cost analyses of nine proposed collective bargaining agreements pursuant to Act 14 of 2016. Finally, the office is responsible for coordinating analyses and issuing actuarial notes for legislation proposing changes to public employee pension or retirement plans pursuant to Act 100 of 2016. The office has filled vacant positions and bolstered staffing to meet these obligations. Other functions of the IFO include the preparation of monthly reports on the state economy and revenue collections, periodic revenue estimates and special reports and research briefs on various budgetary and economic topics. The enclosure lists recent reports published by the IFO, and all of these reports are available on the office website (www.ifo.state.pa.us). Sincerely, MATTHEW J. KNITTEL Director

Independent Fiscal Office Background The office was created by Act 120 of 2010 and is entering its sixth year of operation. The office currently employs 11 staff: 3 managers, 1 administrative assistant and 7 analysts. The FY 2017-18 Executive Budget proposes an appropriation of $2.076 million for the office. That amount includes $200,000 for work related to contracted actuarial analysis, and those funds are dedicated to that purpose. A statement that details the actual and projected utilization of appropriated funds is included with this submission. Mission Statement The Independent Fiscal Office (IFO) provides revenue projections for use in the state budget process along with impartial and timely analysis of fiscal, economic and budgetary issues to assist Commonwealth residents and the General Assembly in their evaluation of policy decisions. In that capacity, the IFO does not support or oppose any policy it analyzes, and will disclose the methodologies, data sources and assumptions used in published reports and estimates. Role in the Budget Process The statute creating the IFO outlines several points at which the office is required to provide budget-related information to policymakers. They are as follows:

November 15 Prepare an assessment of the state’s fiscal condition for the current fiscal year and subsequent five fiscal years by taking account of the state economy, demographics, revenues and expenditures.

January 31 Convene a revenue conference with the chairs of the Appropriations Committees, the Secretary of the Budget and the Secretary of Revenue to discuss economic trends and revenue performance.

May 1 Provide an initial revenue estimate for the upcoming fiscal year.

June 15 Provide a final revenue estimate for the upcoming fiscal year. Other Responsibilities Office resources are also used for the following purposes: (1) coordinate and facilitate actuarial analysis of proposed changes to the pension systems, (2) provide a cost analysis of approved collective bargaining agreements, (3) provide an economic analysis of any revenue proposals included in the Executive Budget and (4) at the request of members of the General Assembly, provide economic, revenue or fiscal analysis.

IFO Reports and Analyses

Regular Monthly or Quarterly Reports

• Monthly Trends Report. Provides a summary of recent economic trends for the U.S. and Pennsylvania. Displays monthly and fiscal year-to-date revenues and compares them to the same period for the prior year.

• Impact Fee Update. Provides detail regarding impact fee revenues including the number of wells subject to the fee and their vintage.

• Quarterly Natural Gas Production Report. Provides unconventional production volumes and well counts on a quarterly basis. Top producing counties also listed.

• Quarterly Revenue Review. Published after each quarter to compare the IFO’s revenue estimates to actual revenues.

Published Reports and Analyses (since January 1, 2016)

• Impact Fee Update (January 2016) • Natural Gas Production Report Quarter 4 (February 2016) • Economic Development Incentives (March 2016) • Analysis of Revenue Proposals in FY 2016-17 Executive Budget (April 2016) • Analysis of Executive Order 2016-02 (May 2016) • Natural Gas Production Report Quarter 1 (May 2016) • FY 2016-17 Official Revenue Estimate (June 2016) • Impact Fee Update and 2016 Outlook (July 2016) • Revenue Estimate Performance (August 2016) • Quarterly Revenue Estimate (August 2016) • Natural Gas Production Report Quarter 2 (August 2016) • Using Performance Measures in the State Budget (September 2016) • AFSCME Wage Contract Analysis (September 2016) • SEIU Wage Contract Analysis (September 2016) • Actuarial Note Transmittal for A10803 to Senate Bill 1071 (October 2016) • Quarterly Revenue Review (October 2016) • Five-Year Economic and Budget Outlook (November 2016) • Natural Gas Production Report Quarter 3 (November 2016) • Impact Fee Estimate (January 2017) • School District Property Tax Forecast (January 2017) • Analysis of Recent Collective Bargaining Agreements (January 2017) • Quarterly Revenue Review (January 2017) • Mid-Year Update FY 2016-17 (January 2017) • PFBC Wage Contract Analysis (February 2017) • Pennsylvania Gaming Trends (February 2017)

All reports published by the office are available on its website at www.ifo.state.pa.us.

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Actual Available Estimate2015-16 2016-17 2017-18

$721,188 $900,700 $937,000244,160 327,600 344,000143,258 203,600 240,000

62,820 83,700 87,0001,171,426 1,515,600 1,608,000

$19,177 $20,400 $20,40020,831 44,100 15,00044,985 28,500 29,50020,141 21,000 21,00020,465 25,800 27,600

3,980 4,900 5,400129,579 144,700 118,900

- 200,000 200,000

Total Expenditures $1,301,005 $1,860,300 $1,926,900

1,692,000 2,076,000 2,076,000390,995 215,700 149,100Available

Contracted Actuarial AnalysisActuarial

Appropriated / Proposed

Summary of IFO Expenditures

Subtotal

Operating

Personnel

Office Operations & Supplies

SalariesBenefitsRetirementEmployer Taxes

Computers, Networks, Servers and SoftwareData Acquisition and AnalysisProfessional Publications & Research MaterialsParkingOtherSubtotal

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Outlook SummaryEconomic and Consumer Outlook Page

The U.S. economy expands moderately in 2017 and consumer inflation exceeds 2.0%. 3The Pennsylvania economy showed weak expansion in 2016 and acceleration in 2017. 4For 2016, total consumer debt increases modestly due to a reduction in primary mortgage debt. 5Consumer inflation in both the Philadelphia and Pittsburgh metro regions begins to accelerate. 6Gasoline prices have recovered from a decade low. Stock markets achieve steady gains. 7Pennsylvania economic and employment growth slower than U.S. and adjacent states. 8

Demographic OutlookFrom 2015 to 2025, the Pennsylvania working age population will contract by 181,000. 9Pennsylvania population growth is slower than U.S. and adjacent states. 10

Revenue OutlookThrough January 2017, the base growth rate of General Fund revenues is 0.3%. 11Executive Budget and IFO revenue estimates are very similar for this and next fiscal year. 12Since FY 2010-11, General Fund revenues have expanded at an average rate of 2.4% per annum. 13For FY 2016-17, gaming revenues and lottery sales are projected to decline. 14Census data show that the Pennsylvania sales tax burden is much lower than U.S. average. 15

Pension OutlookThe SERS employer contribution rate flat lines after 2018, while PSERS increases modestly. 16If actuarial assumptions are met (e.g., rates of return), unfunded liability will be $67.6 billion by 2020. 17Amortization of the unfunded liability is the largest component of the employer contribution rate. 18

Natural Gas OutlookProduction continues to expand despite the collapse of gas prices and less new drilling. 19A recent price spike closes the gap between local hub spot prices and the Henry Hub. 20

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Shaded figures represent preliminary data or forecasts.For 2016, U.S. economic growth is subdued due to weak exports and business investment.Domestic corporate profits projected to rebound in 2017 after two consecutive years of decline.

Growth Rate2011 2012 2013 2014 2015 2016 2017

Real GDP 1.6% 2.2% 1.7% 2.4% 2.6% 1.6% 2.3%Personal Income 6.2% 5.0% 1.1% 5.2% 4.4% 3.5% 4.6%Consumer Price Index 3.2% 2.1% 1.5% 1.6% 0.1% 1.3% 2.5%Domestic Corporate Profits 3.1% 15.0% 1.7% 6.2% -2.2% -1.5% 10.4%S&P 500 Index 12.3% 8.7% 19.2% 17.2% 4.8% 3.2% n.a.

Annualized or Year-Over-Year Growth Rate2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2

Real GDP 0.9% 0.8% 1.4% 3.5% 1.9% 2.4% 2.3%Personal Income 3.5% 1.3% 4.9% 4.4% 3.8% 4.5% 4.9%Consumer Price Index 0.4% 1.1% 1.1% 1.1% 1.8% 2.6% 2.5%Domestic Corporate Profits -13.7% -8.3% -7.7% 0.3% 11.3% 10.1% 15.8%S&P 500 Index -0.3% -3.1% 0.9% 7.0% 7.0% 14.7% n.a.

Note: Corporate profits exclude foreign profits and the Federal Reserve, but includes S corporations. The S&P 500 Index growth rate is based on quarterly or annual average levels. The value for 2017 Q1 is through February 10, 2017. Growth rates for quarterly real GDP and personal

The U.S. Economy: Historical and Recent Trends

income are quarterly annualized growth rates, all others are year-over-year annual rates.Source: Historical data from the U.S. Bureau of Economic Analysis, and U.S. Bureau of Labor Statistics. Forecasts by IHS Economics.

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Preliminary data show a significant contraction of the PA economy in the first quarter of 2016.Despite weak economic growth, the net number of new jobs in 2016 was similar to non-recession years.The forecast for 2017 projects an acceleration of economic growth.

Growth Rate or Change2011 2012 2013 2014 2015 2016 2017

Real GDP 1.3% 1.6% 1.9% 1.8% 2.8% 0.7% 1.7%Wages and Salaries 3.9% 3.7% 1.8% 3.9% 4.0% 2.5% 3.3%Payroll Employment (000s) 64.7 39.9 14.7 47.6 48.6 43.5 50.0 Philadelphia CPI-U 2.7% 1.8% 1.2% 1.3% -0.1% 0.6% 1.8%Pittsburgh CPI-U 4.5% 3.5% 1.3% 1.3% 0.7% 1.6% 1.8%

Growth Rate or Change2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4

Real GDP 0.8% 2.7% 1.7% -4.5% 0.5% 3.3% n.a Wages and Salaries 3.9% 3.8% 4.4% 1.9% 2.6% 3.1% n.a. Payroll Employment (000s) 44.9 44.3 46.3 50.3 42.9 53.0 27.7 Philadelphia CPI-U 0.1% -0.2% -0.4% 0.2% 0.4% 0.6% 1.5%

Note: Growth rates for 2016 GDP and wages-salaries based on data through 2016 Q3 and are forecasts by the IFO.Real GDP uses quarterly annualized growth rates, wages and CPI-U use year-over-year growth rates. Quarterly data for Pittsburgh CPI-U unavailable.Payroll employment is the year-over-year change in average level for the quarter.Source: Historical data from the U.S. Bureau of Economic Analysis and U.S. Bureau of Labor Statistics. Forecasts by IFO.

The Pennsylvania Economy

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Pennsylvania Consumer Debt and Spending

For 2016: auto, home equity (HELOC) and student loan debt show strong growth; home mortgage debt contracts.Decline in mortgage debt may be due to (1) an aging population and (2) lack of first-time homebuyers.Share of personal consumption expenditures to (non-taxable) services continues to increase every year.

Year-Over-Year Growth Rates2008 2009 2010 2011 2012 2013 2014 2015 2016

Consumer DebtAuto Loans (10%) -2.2% -5.7% 0.8% 5.5% 6.1% 6.3% 9.2% 8.9% 7.6%Credit Card (7%) 0.2% -8.2% -7.1% -1.8% -2.2% 2.3% 0.8% 5.5% 3.6%Home - Mortgage (60%) 4.1% -1.5% -1.2% -0.5% -2.1% 0.6% 1.8% 0.3% -0.8%Home - HELOC (6%) 14.4% 12.2% 4.6% 2.7% -1.3% -3.1% 6.0% 2.1% 6.7%Student Loan (14%) 14.2% 12.3% 10.5% 7.9% 7.0% 11.9% 5.9% 2.8% 8.1%Personal and Other (3%) 2.4% -27.5% -15.1% -29.1% -2.6% -11.9% 8.9% 8.6% -1.6%Total 4.3% -2.6% -1.0% -0.5% -0.5% 1.8% 3.3% 2.1% 1.9%

Consumer Expenditures 3.5% -0.7% 3.4% 4.3% 2.5% 2.0% 3.1% 2.6% n.a.All Goods 2.5% -3.4% 5.2% 6.3% 2.3% 1.2% 1.7% -0.1% n.a.All Services 3.9% 0.6% 2.7% 3.4% 2.6% 2.4% 3.8% 3.8% n.a.

Service Share of Expenditures 67.7% 68.6% 68.1% 67.5% 67.5% 67.8% 68.2% 69.1% n.a.

Note: Other debt includes personal loans and credit cards for specific stores. Data pertain to debt at the end of the calendar year. Growth rates for 2016 based ondata through third quarter. Figures in parentheses represent share of total debt in 2016 Q3.Source: Consumer debt from Federal Reserve Bank of New York. Personal consumption expenditures from U.S. Bureau of Economic Analysis.

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Inflation in both the Pittsburgh and Philadelphia metro regions accelerates.This outcome is largely due to energy prices, which continue to recover.Core inflation, which excludes energy purchases, is approaching the Federal Reserve's target rate.

Year-Over-Year Growth Rates CPI-UPhiladelphia Metro Region Dec 2015 Jun 2016 Dec 2016 ShareCPI-U: All Items -0.2% 0.1% 1.7% 100.0%Core: All Items Less Energy 0.9% 0.9% 1.5% 93.0%Housing 0.2% 0.4% 1.9% 43.5%Housing - Fuels/Utilities -6.0% -2.2% 0.7% 5.4%Transportation -5.1% -3.5% 3.6% 14.8%Transportation - Gasoline -20.4% -14.7% 11.9% 2.7%Medical Care 2.9% 3.5% 2.3% 8.7%Food and Beverage 0.6% -0.8% -1.3% 13.2%

Year-Over-Year Growth Rates CPI-UPittsburgh Metro Region Dec 2015 Jun 2016 Dec 2016 ShareCPI-U: All Items 1.1% 1.6% 1.7% 100.0%Core: All Items Less Energy 2.6% 2.5% 2.1% 93.5%Housing 1.9% 1.6% 1.7% 42.1%Housing - Fuels/Utilities -2.8% -2.4% 0.6% 5.0%Transportation -5.5% -2.3% -0.6% 14.8%Transportation - Gasoline -24.7% -15.0% -4.6% 2.5%Medical Care 3.7% 1.7% 2.6% 7.4%Food and Beverage 1.5% 0.6% -0.1% 14.4%

Source: U.S. Bureau of Labor Statistics.

PA Consumer Inflation Accelerates

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The price of gasoline is up significantly compared to the multi-year low last February.The stock market shows modest expansion, despite weak corporate profits growth.

Dollar AmDollar Amounts

Other Factors That Affect Consumers

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Jan-2017

Source: U.S. Energy Information Administration, Mid-Atlantic price.

$3.72

$2.28

$2.78

$1.84

$2.34

Gasoline

1,200

1,400

1,600

1,800

2,000

2,200

2,400

Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Jan-2017

Source: Yahoo Finance. Growth rates based on average level for calendar year.

+3.2%+4.8%

+17.2%

+19.2%

S&P 500

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Most listed states' real gross domestic product grew slower than the U.S. in 2016.Slower demographic growth in Northeast and Mid-Atlantic regions is a primary factor.Pennsylvania and West Virginia employment growth notably slower than U.S. and other states.

Wages and Salaries2014 2015 2016 2014 2015 2016

Delaware 4.8% 2.7% 1.2% 4.5% 3.7% 1.6%Maryland 1.0% 2.0% 0.5% 3.3% 4.6% 4.3%New Jersey 0.2% 2.0% 1.6% 2.8% 4.3% 3.9%New York 0.8% 0.9% 1.2% 6.4% 4.3% 4.0%Ohio 2.6% 1.8% 1.1% 4.3% 4.0% 3.9%Pennsylvania 1.8% 2.8% 0.1% 3.9% 4.0% 2.6%West Virginia 1.0% 1.4% -2.7% 2.0% 0.5% -1.2%United States 2.4% 2.6% 1.6% 5.1% 5.1% 4.2%

Payroll Employment Manufacturing Employment2014 2015 2016 2014 2015 2016

Delaware 2.3% 2.3% 2.4% 2.8% 4.1% 0.2%Maryland 0.9% 1.5% 1.7% -2.3% 0.8% 2.4%New Jersey 0.8% 1.4% 1.3% 0.0% -0.3% 1.0%New York 1.8% 1.7% 1.2% -0.6% 0.3% -0.8%Ohio 1.5% 1.5% 1.3% 1.8% 1.9% 0.0%Pennsylvania 0.8% 0.8% 0.9% 0.5% 0.1% -0.4%West Virginia -0.3% -0.6% -0.2% -1.2% -0.5% -1.1%United States 1.9% 2.1% 1.8% 1.4% 1.2% 0.1%

Note: For 2016, real GDP and wages-salaries growth rates based on data through 2016 Q3. U.S. figures based on data through 2016 Q4.Source: U.S. Bureau of Economic Analysis and U.S. Bureau of Labor Statistics.

State Economic Growth Rate Comparison

Real Gross Domestic Product

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From 2015-25, the working age population (20-64) will contract by 181,000 residents (-2.4%).From 2015-25, the number of retirees will increase by 677,000 residents (31%).U.S. Census data reveal that 18.7% of residents age 65 or older are part of the labor force.

Number of Residents (000s) Change (000s) Avg. Annual Growth2005 2015 2025 2005-15 2015-25 2005-15 2015-25

Age 0-9 1,468 1,451 1,391 -17 -60 -0.1% -0.4%Age 10-19 1,758 1,590 1,626 -168 36 -1.0% 0.2%Age 20-29 1,552 1,716 1,738 165 21 1.0% 0.1%Age 30-39 1,570 1,541 1,694 -30 154 -0.2% 1.0%Age 40-49 1,941 1,600 1,548 -340 -52 -1.9% -0.3%Age 50-59 1,681 1,884 1,547 203 -336 1.1% -1.9%Age 60-69 1,068 1,537 1,736 470 199 3.7% 1.2%Age 70-79 832 866 1,282 34 416 0.4% 4.0%Age 80-89 493 504 596 11 93 0.2% 1.7%Age 90+ 87 113 116 25 3 2.6% 0.3%Total Population 12,450 12,803 13,276 353 473 0.3% 0.4%

Students: Age 0-19 3,226 3,041 3,018 -185 -23 -0.6% -0.1%Workers: Age 20-64 7,337 7,581 7,401 245 -181 0.3% -0.2%Retired: Age 65+ 1,887 2,180 2,857 293 677 1.5% 2.7%Total Population 12,450 12,803 13,276 353 473 0.3% 0.4%

Source: U.S. Census Bureau and Pennsylvania State Data Center.

Pennsylvania Demographic Trends

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Except for West Virginia, Pennsylvania has a higher share of residents age 65+ than contiguous states.Since 2010, Pennsylvania population has grown much slower than national average.Since 2010, Pennsylvania domestic outflows are largely offset by international inflows.

0-19 20-64 65+ Total 0-19 20-64 65+Delaware 229 556 161 946 24.3% 58.8% 17.0%Maryland 1,503 3,653 850 6,006 25.0% 60.8% 14.1%New Jersey 2,218 5,397 1,344 8,958 24.8% 60.2% 15.0%New York 4,732 12,099 2,964 19,796 23.9% 61.1% 15.0%Ohio 2,934 6,837 1,843 11,613 25.3% 58.9% 15.9%Pennsylvania 3,041 7,581 2,180 12,803 23.8% 59.2% 17.0%West Virginia 424 1,084 336 1,844 23.0% 58.8% 18.2%United States 82,126 191,532 47,761 321,419 25.6% 59.6% 14.9%

2010 2016 Change AAGR Natural Dom. Mig. Int. Mig.Delaware 900 952 52 0.9% 17 20 15Maryland 5,789 6,016 228 0.6% 162 -84 155New Jersey 8,804 8,944 141 0.3% 192 -328 286New York 19,403 19,745 343 0.3% 520 -822 676Ohio 11,541 11,614 73 0.1% 151 -175 109Pennsylvania 12,712 12,784 72 0.1% 77 -182 189West Virginia 1,854 1,831 -23 -0.2% -10 -18 6United States 309,348 323,128 13,779 0.7% 8,138 0 5,641

Note: Natural growth is births less deaths. Domestic migration is migration from other states. International migration is net inflow from othercountries. Sum of natural growth and migration slightly different than total change for states. AAGR is average annual growth rate.Sources: U.S. Census Bureau and Pennsylvania State Data Center.

State Demographic Comparison

2015 Number of Residents (000s) Share of Residents

Demographic Growth: 2010 to 2016 Components of Growth

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Revenue Performance Through January

The base growth rate column deducts tax law changes and controls for certain timing issues.The base growth rate is flat. Nearly all revenue sources are below forecast.Wage growth starting to accelerate slightly. Sales and use tax collections remain weak.

Amounts through January Policy & Base2015-16 2016-17 Change Growth Timing Growth

Total General Fund $15,900 $16,097 $197 1.2% $156 0.3%Corporate Net Income 1,367 1,243 -124 -9.1% -39 -6.2%Capital Stock & Franchise 98 33 -65 -66.4% -65 n.a.SUT - Non-Motor 5,048 5,102 54 1.1% 23 0.6%SUT - Motor Vehicle 782 792 11 1.4% 0 1.4%PIT - Withholding 5,388 5,496 108 2.0% -64 3.2%PIT - Other 1,278 1,228 -51 -4.0% 6 -4.4%Cigarette and Other Tobacco 529 763 234 44.2% 260 -4.8%Inheritance 515 530 15 2.9% 0 2.9%Realty Transfer Tax 292 282 -10 -3.4% -13 1.1%All Other 602 628 26 4.3% 49 -3.9%

Note: Millions of dollars. Policy and timing column represents additional monies due to tax law changes (e.g., higher cigarette tax rate) or timing issues related to due dates or transfers (e.g., extra withholding days).

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Both estimates include the $200 million loan from the Joint Underwriters Association for this fiscal year.For FY 2017-18, the IFO's base growth rate (excludes loans and policy) is 3.1%. For the Executive Budget, it is 2.2%.

Independent Fiscal Office Executive Budget Dollar Difference2016-17 2017-18 Growth 2016-17 2017-18 Growth 2016-17 2017-18

Total General Fund $32,060 $32,637 1.8% $32,302 $32,619 1.0% -$242 $19Corporate Net Income 2,845 2,901 2.0% 2,766 2,729 -1.3% 79 172Gross Receipts 1,300 1,303 0.2% 1,294 1,280 -1.1% 6 24Financial Institutions 359 367 2.3% 371 374 0.7% -12 -6Insurance Premiums 431 443 2.9% 460 423 -8.0% -29 20Other Corporate 66 43 -35.2% 70 40 -43.6% -4 3Sales and Use 9,985 10,252 2.7% 9,986 10,250 2.6% -1 2Cigarette and OTP 1,347 1,346 0.0% 1,307 1,359 4.0% 40 -13Inheritance 1,002 1,003 0.1% 994 1,017 2.3% 8 -14Personal Income 12,921 13,381 3.6% 12,897 13,578 5.3% 24 -197Realty Transfer 474 498 5.0% 496 506 2.1% -22 -8All Other Tax 478 496 3.7% 480 481 0.2% -2 15Liquor Store Profits 131 142 8.1% 216 185 -14.3% -85 -43Licenses and Fees 119 159 34.2% 191 118 -38.5% -72 42Escheats, Treasury, Fines 601 302 -49.7% 774 281 -63.7% -173 22

Note: Millions of dollars. Executive Budget projections exclude all policy initiatives, including $100 million for gaming expansion in FY 2016-17.Source: IFO forecast from January 2017 Mid-Year Update.

General Fund Revenue Comparison

For FY 2016-17, difference between the IFO and Executive Budget is the WCSF loan ($165m) and liquor code changes.

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From FY 2010-11 to FY 2016-17, General Fund revenues expand at an average rate of 2.6% per annum.If tax policy changes, loans and transfers are excluded, then the average rate falls to 2.4% per annum.

By comparison, nominal state GDP expands by 3.2% per annum and the Philly CPI-U by 1.2% per annum.

Dollar Amounts2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Corporate Net Income $2,022 $2,423 $2,502 $2,812 $2,842 $2,845Capital Stock and Franchise 837 602 320 242 151 25Other Corporate 2,104 2,164 2,077 2,064 2,145 2,131Sales and Use 8,772 8,894 9,130 9,493 9,795 9,985Personal Income 10,801 11,371 11,437 12,107 12,506 12,921All Other Tax 2,612 2,613 2,633 2,775 2,819 3,302Non-Tax Revenue 529 580 509 1,100 644 851

Transfers 61 47 17 238 44 275Escheats 125 196 151 544 251 168All Other 344 337 341 318 349 408

Total General Fund $27,678 $28,647 $28,607 $30,593 $30,902 $32,060

Growth Rates2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Corporate Net Income -5.1% 19.8% 3.2% 12.4% 1.1% 0.1%Capital Stock and Franchise 2.2% -28.1% -46.8% -24.5% -37.7% -83.4%Other Corporate 8.4% 2.9% -4.0% -0.6% 3.9% -0.7%Sales and Use 2.1% 1.4% 2.7% 4.0% 3.2% 1.9%Personal Income 3.5% 5.3% 0.6% 5.9% 3.3% 3.3%All Other Tax 2.7% 0.0% 0.8% 5.4% 1.6% 17.1%Non-Tax Revenue -48.9% 9.5% -12.2% 116.1% -41.5% 32.2%Total General Fund 0.7% 3.5% -0.1% 6.9% 1.0% 3.8%

Note: Millions of dollars.Source: IFO forecast from January 2017 Mid-Year Update.

General Fund Revenue Performance

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Projected slots revenues down in FY 2016-17 partly due to increased competition from other states.Table games revenues increase in current fiscal year due to temporary rate increase through FY 2018-19.Instant ticket sales are flat after many years of strong growth.

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17Slot Machine Tax Revenues $1,329 $1,390 $1,354 $1,289 $1,296 $1,325 $1,293Table Games Tax Revenues 81 107 103 105 112 120 139Pari-Mutuel Tax Revenues 10 13 11 10 9 9 9Total Gaming Tax Revenues 1,421 1,511 1,468 1,404 1,417 1,453 1,440

Instant Ticket $1,922 $2,135 $2,305 $2,445 $2,592 $2,793 $2,809Multi-State Lotto 340 429 485 447 381 496 410All Other Lottery 945 917 910 907 847 846 831Total Lottery Sales 3,208 3,481 3,700 3,800 3,820 4,135 4,050

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17Slot Machine Tax Revenues 7.9% 4.6% -2.6% -4.8% 0.6% 2.2% -2.4%Table Games Tax Revenues n.a. 32.0% -4.2% 2.3% 6.5% 6.7% 15.8%Pari-Mutuel Tax Revenues -21.8% 25.3% -11.8% -11.2% -12.4% 1.8% 2.5%Total Tax Revenues 14.2% 6.3% -2.8% -4.4% 0.9% 2.6% -0.9%

Instant Ticket 9.9% 11.1% 8.0% 6.1% 6.0% 7.8% 0.6%Multi-State Lotto -3.9% 26.0% 13.0% -7.7% -14.8% 30.3% -17.4%All Other Lottery -1.8% -3.0% -0.8% -0.3% -6.7% -0.1% -1.8%Total Lottery Sales 4.6% 8.5% 6.3% 2.7% 0.5% 8.3% -2.1%

Note: Millions of dollars. Slots and table games revenues have not been reduced for $45.3 million in CY 2016 refunds.Source: IFO forecast from Gaming Trends Research Brief, February 2017.

Dollar Amounts

Growth Rates

Gaming Revenue and Lottery Sales

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Tax burden equal to ratio of total state-local taxes divided by personal income.Pennsylvania slightly lower than U.S. weighted average.Sales tax burden lower due to narrower tax base; rate is comparable to other states.

Pennsylvania U.S. AverageTotal State and Local Taxes 10.40% 10.50% General Sales Tax 1.96% 2.64% Personal Income Tax 2.69% 2.49% Property Tax 2.96% 3.18% Corporate Net Income Tax 0.51% 0.43% Gaming-Liquor-Tobacco Taxes 0.66% 0.38% All Other Taxes 1.62% 1.38%

Average State and Local Tax Burden

Note: Personal income adjusted to (1) include capital gains, IRA withdrawals and pensions received and (2) exclude imputed interest and employer contributions to health-pension plans. Sales tax includes utility taxes (e.g., gross receipts tax). U.S. totals exclude severance taxes. Gaming includes lottery and liquor store profits.

0.24%

Source: U.S. Census Bureau (tax revenues), U.S. Bureau of Economic Analysis (personal income) and Internal Revenue Service (capital gains and pensions). Data for FY 2013-14 and FY 2014-15.

Difference-0.10%-0.68%0.20%-0.22%0.08%0.28%

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For FY 2017-18, the projected employer contribution rates are 32.6% (PSERS) and 31.7% (SERS) of payroll.The projections assume the following rates of return: 7.25% (PSERS) and 7.5% (SERS).For FY 2017-18, the Act 120 rate collars, which limit the increase in employer contributions, do not applyand the contribution rates are the actuarially determined rates.

Note: PSERS values after FYE 2018 and SERS values after FYE 2017 based on system projections.

Employer Contribution Rates for PSERS and SERS

20%

11%

5% 4% 5%

21%

36%

13%

9%

5%2%

4%

21%

31%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1990 1995 2000 2005 2010 2015 2020

PSERS

SERS

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Unfunded Pension Liabilities

The most recent actuarial valuations for PSERS (6/30/2016) and SERS (12/31/2015) reveal acombined unfunded actuarial liability of $62.2 billion.Unfunded liability projections after the most recent actuarial valuations are based on attainment ofeach systems' actuarial assumptions. Projected values are based on current law.

Note: Billions of dollars. PSERS values after FYE 2016 and SERS values after FYE 2015 based on system projections.

-$4.9 -$3.1

$9.5

-$10.0

-$19.7

-$37.3

-$48.0

-$1.7$0.8

$2.3

$1.3 -$3.8

-$17.9 -$19.7

-$60

-$50

-$40

-$30

-$20

-$10

$0

$10

$20

1990 1995 2000 2005 2010 2015 2020

PSERS

SERS

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The annual employer contribution rate primarily consists of the normal cost rate and the unfunded liability rate.The unfunded liability rate constitutes the majority of the employer contribution.The Act 120 collars reduce the employer contribution rates in 2016 (PSERS and SERS) and 2017 (SERS) below theactuarially determined rates.

Fiscal Year Ending2016 2017 2018 2019 2020

PSERSNormal Cost & Healthcare Rates1 9.2% 9.1% 8.5% 8.4% 8.2%Unfunded Liability Rate2 19.4% 20.9% 24.0% 25.8% 27.3%Application of Act 120 Collar3 -2.8% 0.0% 0.0% 0.0% 0.0%Total Employer Contribution Rate 25.8% 30.0% 32.6% 34.2% 35.5%

SERSNormal Cost Rate4 5.0% 4.5% 4.5% 4.5% 4.5%Unfunded Liability Rate2 26.6% 27.6% 27.2% 26.7% 26.6%Application of Act 120 Collar3 -6.5% -2.6% 0.0% 0.0% 0.0%Total Employer Contribution Rate 25.0% 29.5% 31.7% 31.2% 31.1%

Note: Values are percent of payroll. 1 For PSERS, the normal cost represents the weighted average employer rate to pay pension benefits earned in that year for both pre- and post-Act 120

employees. The normal cost for post-Act 120 employees is approximately 3%, and the weighted average will decline as pre-Act 120 employees leavethe system (retire) and the share of post-Act 120 employees increases. The healthcare rate is less than 0.85% per annum.

2 Represents the rate to finance the unfunded liability, which results from paying less than the actuarially determined amount (e.g., underfunding andfunding deferrals) in prior years.

3 The Act 120 collars limit the increase in the total employer contribution rate to 4.5 percentage points in any year. 4 For SERS, the normal cost represents the employer rate to pay pension benefits earned in that year for post-Act 120 employees only. Therefore, this

measure of normal cost will be lower than the average normal cost for all employees reported by PSERS.

Employer Contribution Rates Decomposed

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Data through November 2016 show that natural gas production increased by 10.9% for 2016.For 2016, the number of new wells drilled declines by 35.8% from 2015 and 62.7% from 2014.Impact fee revenues projected to decline to $175 million due to reduction in new wells.

Calendar Year Totals2011 2012 2013 2014 2015 2016 2017 2018

PA Consumption (bcf)1 867 918 959 1,040 1,069 1,111 1,156 1,202PA Production (bcf)1 1,049 2,028 3,088 4,053 4,597 5,096 5,389 5,747

Approximate Share Exported 17% 55% 69% 74% 77% 78% 79% 79%

New Horizontal Wells Drilled 1,834 1,312 1,187 1,350 783 503 n.a. n.a.Impact Fee Revenues ($ million)2 $204.2 $202.5 $225.8 $223.5 $187.7 $174.6 n.a. n.a.

Commonwealth Leases3

Royalties ($ million) $56.8 $76.1 $121.8 $131.3 $66.6 $67.2 $80.6 $84.7Reported Operator Price $4.15 $2.86 $3.57 $3.53 $1.61 $1.60 n.a. n.a.

Average Calendar Year Hub Prices ($ per mmbtu)2011 2012 2013 2014 2015 2016 2017 2018

Henry Hub4 $3.99 $2.75 $3.72 $4.33 $2.60 $2.48 $3.66 $3.43Dominion South Hub4 $4.11 $2.77 $3.51 $3.26 $1.46 $1.49 $2.50 $2.65Leidy Hub4 n.a. n.a. n.a. $2.61 $1.20 $1.45 $2.33 $2.22New York City Hub4 $4.98 $3.25 $5.11 $6.26 $3.78 $2.18 $3.52 $4.01

Notes1 Production data from PA DEP through November 2016. December 2016 and future years estimated by IFO. Production data represent

unconventional gas only. Consumption data from U.S. Energy Information Administration and includes conventional sources. Forecast by IFO.2 Impact fee revenues as reported by the PUC (millions). Revenues shown based on drilling year, not the year revenues received.3 Royalties from the leasing of Commonwealth lands (millions) shown according to month gas was produced, not month payment received.

Operator prices provided by DCNR ($/mmbtu). For both, final three months of 2016 estimated by IFO.4 Hub prices and forecasts from Bentek Energy.

Pennsylvania Natural Gas Outlook

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Natural Gas Spot Prices

drove down prices.

a drawdown in supply. Analysts expect that the hub prices will fall in the coming months.

Dollar AmoDollar Amounts

Polar vortex (winter 2014) caused natural gas prices to spike, which stimulated production and

Leidy and Dominion South generally move in tandem, and have recently increased due to

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Henry Hub

DominionSouth

Leidy

Source: Bentek Energy. Spot prices shown in $/mmbtu. Leidy data not available before 2014.