Tax revenue analysis and economic impacts

Tax Revenue Analysis for the State of Pennsylvania and New York

Pennsylvania also known as the keystone state is one of the four commonwealth states in the United States. It earned the title of commonwealth due to its organization by the commonwealth consent of its citizens during the colonial period. The commonwealth of Pennsylvania offers a wide range of services to enhance the quality of life to its 12.6 million people. The commonwealth divides these services into seven broad program categories consisting of supportive and directive services, health and human services, protection of persons and property, economic development, public education, recreation, cultural enrichment and transportation. This approach enables the state of Pennsylvania to serve its citizens well.

The commonwealth of Pennsylvania apart from the defined primary state government is also account table for a number of legally separate component unit organizations. The main component units in Pennsylvania include, the Pennsylvania housing finance agency, Pennsylvania turnpike commission, the Pennsylvania higher education assistance agency, the state system of higher education and the Pennsylvania infrastructure investment authority. Even though commonwealth does not operate or control these component unit organizations it is still accountable for them and so includes them in the financial reporting and reports them separately within its government wide financial statements.

Pennsylvania government has three unique branches: the judicial branch, the legislative branch and the executive branch. The legislative branch is made up of senate and House of Representatives it develops and passes the laws. The judicial branch which is made of the supreme court and other courts which interprets the law and the executive which comprises of the elected governor, attorney general, state treasurer, auditor general and other appointed bodies.

How the annual financial report for the state of Pennsylvania is derived

The general fund, which is commonwealth's largest operating fund, is used to assess Pennsylvania's financial report and the activities of the financial year ended june30, 2010.it accounts for all the revenues and other receipts that are not needed by law to be accounted for or deposited in other special funds and reflects a significant expenditure of commonwealth. Personal and corporate income, tax revenues and sales and use taxes.

The economic condition of Pennsylvania

The worst economic recession since the great depression continues to adversely affect the national economy and Pennsylvania economic growth correlates directly to the national economy. Even though the effects of the economy may have affected the June 2009, the economy may not have rebounded as fast as expected. The national unemployment rate is still high at 10%. Pennsylvania economic performance depends on job growth whilst job losses were lower than the national average, all the sectors with the exception of education, health services and government experienced job loss. Increased unemployment will negatively affect projected revenue from the personal income tax. Consumer spending also remains weak given tight credit, high debt levels and depleted consumer wealth.

The general wide statement at a glance

Net assets-Government activities net assets totaled to $23.5 billion dollars at June 30, 2010 compared to $23 at June 30, 2009.this represents an increase of $0.3 billion. For business type, activities the overall net assets were negative $1.2 billion at June 30, 2010 a decrease of $1.8 billion compared to $0.6 billion at June 30, 2009.when combined the total net assets for government activities and business type activities decreased by $1.5 billion for the primary government during the financial fiscal year ended June 2010.

General obligation bonds-during the fiscal year, total general obligation bond indebtedness increased by $1.4 from $9.1 billion to $10.5 billion.

Fund statements at a glance

Government funds-total fund balances were $6.351 billion at June 30, 2010 compared to $6.089 at June 2009.

General fund-fund balance was $284.8 million at June 30, 2010 compared to $515.2 million at June 30, 2009.

Overview and discussion of financial statements

The financial section of Pennsylvania consists of a number of parts, the independent auditors report, managements discussions analysis, required supplementary information, basic financial statements, combining financial statements and statistical section. The basic financial statements have two sets of statements that present different views of the commonwealth the fund financial statements and the government wide financial statements.

Government wide financial statements

Government wide financial statements show commonwealths overall financial position that is statement of assets as at June 30,2010 and its aggregate revenues and expenses for the fiscal year ended June 30, 2010.the statement for net assets presents the assets, liabilities and net assets for the commonwealth as a whole. The statement for activities presents by program or function, offsetting revenues, the expenses and changes in net assets. Both statements highlight amounts by business type activities, government activities and component units.

The government wide financial statements are prepared using the flow of economic resources measurement focus and accrual basis of accounting.

Fund financial statements-governmental funds

Funds are groups of related accounts that are used to maintain control over resources that have been set aside for some specific objectives and activities. The commonwealth uses funds accounting to show compliance with finance related legal requirements. The commonwealth funds are categorized as proprietary funds, government funds and fiduciary funds.

The main differences between government wide statements and fund financial statements

While government wide statements focus on the government as whole fund financial statements disclose more detailed fund specific information for major government and proprietary funds.

Unlike the aggregated columns for government and business type activities in government wide statements, the fund statements report individual funds, which are established by state law and used to account for specific mandated activities.

The government wide statements use full accrual basis of accounting. In the fund statements, governmental funds use the modified accrual basis of accounting and current financial resources measurement focus.

Changes in assets and liabilities

During the fiscal year ended June 30,2010 total government activities and investment increased by $339.8 million even after deducting a year over year decrease in securities lending collateral holdings of over $230 million. The present fiscal years cash and investment increase is because of $4.1 billion decrease during the first year. The net capital assets increase of nearly $1.9 billion follows a $1.6 billion in the prior fiscal year. The current year increase in capital assets net of close to $1.9 billion consists of; an expansion of and improvements to commonwealth's reported high way and bridge infrastructure assets during the fiscal year ended June 30, 2010,an increase in buildings and increases in other depreciable general capital assets. Governmental activities accounts payable and accrued liabilities balances decreased by $0.1 billion due to lower reported accounts payable balances with the general fund.

Overall changes in net assets

During the year ended June 30, 2010 the overall financial position of the commonwealth including both governmental and business type activities decrease by $1.5 billion. The current fiscal year increase in governmental activities net assets represents a $2.4 billion increase from the prior fiscal years decrease of $2.1 billion. The current fiscal year of increase in governmental activities net, assets represents an improvement in the commonwealth overall financial position when compared to the prior fiscal year ended June 30, 2009.

Changes in revenues and expenses for governmental activities

The following chart provides a year-over-year comparison of governmental activities revenues and transfers:

For governmental activities, general revenues and taxes increased by over $588 million net during the fiscal year largely as a result of increases in reported general fund tax revenues, and increase in motor license fund tax revenues and an increase in gaming tax revenues.

Tax revenue decreases were reported for general fund personal income ($139) sales and use ($102) and corporation ($63 million) all of these decrease resulted from declines in overall economic activity during the fiscal year ended June 30, 2010 in comparison to the prior fiscal year.

The following chart provides a year-over-year comparison of governmental activities expenses:

For government activities, total expenses increased $3.4 billion largely due to significant increases in expenses for human services and health, transportation, direction and supportive and public education.

The following chart presents governmental activities revenues compared to expenses for the fiscal year ended June 30, 2010:

Changes in revenues and expenses for business type activities

During the current fiscal year, total business type activities expenses exceeded total revenues by $1.6 billion in the prior fiscal year total expenses were $2.2 billion higher than revenues.

Overall, expenses for business type activities increased by $5.3 billion based on increased expenses of $5.3 billion for the extended benefits in the unemployment compensation program, offsets by miscellaneous increases or decreases among the other business type activities expenses during the current fiscal year.

General fund economic factors during the fiscal year ended June 30, 2010

The continuing effects of the national economic recession again negatively affected the commonwealth economy during fiscal year 2010.while avoiding the contractions in the national economy from the prior fiscal year, the commonwealth experienced only minimal economic growth in fiscal year 2010.high unemployment levels and turbulent financial markets negatively affected the commonwealth revenues and receipts.

General fund

The general fund, the commonwealth largest fund accounts for over 77% of the total governmental fund type revenues and other financial sources and 78% of the total government fund type expenditures and other financing uses. The general fund collects over 86% of the total tax revenues and is the primary funding source for most commonwealth agencies.

General fund tax revenues

The largest significant source of tax revenues net of refunds is personal income tax. Reported personal income tax accounts for 38% of all tax revenues reported. Sales tax, which represents a tax on various items purchased by consumers, is the second largest category. Reported sales tax accounts for 33% of all tax revenues reported. Corporate taxes, which represent different taxes on various corporations, are the third largest category. Reported corporate tax accounts for 17% of all tax revenues reported. These three categories represent Pennsylvania largest sources revenues.

Expenditures

The general fund reported total expenditure of $47,866 and total other financing uses of $1,049 during the fiscal year ended June 30,2010.exenditure for health and human services accounting for over 56% of all general fund expenditures. The second largest category, public education accounts for nearly 28% of the reported expenditure.

Profile of New York State

New York was one of the original 13 states ratifying the U.S. constitution and entering the union on July 26, 1788.the state has a land area of 49,576 square miles and the largest park system. New York's government comprises of three branches legislative, executive and judicial. The executive branch includes the department of audit and control and the department of law headed by the governor, controller and attorney general. The chief justice who heads the court of appeal heads the judicial branch.

Economic condition and outlook

Throughout the year 2009, the national economy remained in the hands of the most serious recession since the great depression. The recession, which had its roots in a severe downturn in the housing market that led into a worldwide financial crisis, resulted in large job losses, which was a significant reduction in economic output and largely reduced consumer spending and confidence. In some respects, the recession was not severe in New York State as it was elsewhere in the nation. Economic output as measured by GDP growth was less affected in New York than in the nation. Job losses started later in the state where the decline was less than it was in other nations. Wages and incomes in New York were however affected more by the recession than the rest of the nation, reflecting the importance of financial sector to New York's economy and tax revenues.

The reporting entity and its services

The funds and entities included in this comprehensive annual financial report are those which the state is accountable, based on the criteria for defining financial reporting entity prescribed by the GASB, the criteria include: fiscal dependency, legal standing and financial accountability. The state provides a range of government services in areas such as social services, criminal justice, education, health and environment, housing, mental hygiene and transportation just to name a few and also administers the new York state and local retirement systems.

Management discussion and analysis

Management discussion and analysis provides an analysis and overview of the financial activities of the state of New York for the fiscal year ended march 31, 2010.it is meant to serve as an introduction to the states basic financial statements, which have the following components, government wide financial statements, fund financial statements and note to the financial statements.

Reporting the state as a whole

The statement of net assets and the statement of activities

The annual report contains a series of financial statements and supplementary information. The statement of net assets and the statement of activities provide information about the activities of the state as a whole and present a longer-term view of the state's finances. For government activities, these statements show how services were financed in the short-term as well as how much may remain for future activities. Fund financial statements also report the states operations in more detail than the government wide statements by providing information about state's most significant funds.

The statements of net assets and the statement of activities report information about the state as a whole and about its activities. These statements include all assets and liabilities using the accruals basis of accounting that are similar to the accounting method used by most private sector companies. All the current year's revenues and expenses are taken into consideration regardless of which cash was used or received.

These two statements report the states net assets and changes to them. You can think of the states net assets as the difference between assets and liabilities as one way to measure a state's financial health. Over time, increases or decrease in the states net assets are indicators of whether its financial health is improving or deteriorating. One may need to consider other financial factors such as changes in the states tax structure, employment, population and the condition of the states bridges, roads and buildings in order to assess the overall health of the state.

When it comes to the statements of net assets and the statement of activities operations of the state are divided into three kinds of activities:

Governmental activities-most of the state's basic services are reported here, including public health, education, public safety, public welfare, support and regulation of business, environmental and recreation, transportation, general government, consumption and use taxes, personal income taxes, transfer of lottery revenues and bond proceeds.

Business type activities -- the state charges a fee to customers to help cover all or part of the cost of certain services it provides.

Reporting the state's most significant funds

Fund financial statements

Financial statements prepared at the fund level provide additional detail about the state's financial position and activities. Information presented in the fund financial statements differ from the information presented in the government wide statements because the perspective and basis of accounting used to prepare the government wide statements. The funds presented in the fund financial statements are categorized as either major or non-major funds as required by generally accepted accounting principles (GAAP).

Overall financial position and results of operations

Government entities are required by GAAP to report on their net assets conditions. The statement of net assets presents the value of all of New York states assets and liabilities with the difference between the two reported as net assets.

The state reported net assets of $28.1 billion comprised of $64.3billion in capital assets net of related debt and $3.8 billion in restricted net assets offset by an unrestricted net asset deficit of $39.9 billion.net assets reported for government activities decreased by $2.9 billion from 2009 decreasing from $30.9 billion to $28 billion. Unrestricted net assets for government activities the part of net assets that can be used to finance had a deficit of $38.5 billion at march 31, 2010.

Government activities

The state's total revenues for government activities of $125.9 were less than its total expenses of $126.7 billion by $760million. However, the amount he stat taxpayers ultimately financed for activities through state taxes and other state revenues was $63.1 billion including education aid and transfers from the state lottery of $2.7 billion grants and contributions of $51.3 billion and revenues derived by those who directly benefited from the programs of $11.6 billion.

Business type activities

The cost of all business activities in the year was $27.8 billion and increase of $7 billion as compared to $20.8 billion in 2009. The increase in expenses for business type activities was caused primarily by increases in unemployment benefit payments from the unemployment insurance fund.

PROGRAM COSTS

VS.

PROGRAM REVENUES

The states funds

The state uses fund accounting to ensure and demonstrate compliance with legal and finance related requirements. As the state completed the year, its governmental funds reported a combined fund balance of $3.9 billion. In the year 2010 total change in fund balance is a deficit of $594 million in the state's general fund, which resulted from expenditures exceeding revenues by $9.3 billion, which was offset by transfers to the general fund. Even though the general fund reported an increase in personal income taxes and miscellaneous revenues, the general fund also reported a $115 million decrease in consumption and uses taxes, a $180 million decrease in business tax revenue and a $215 million decrease in other taxes. The increase in personal income tax was due to the removal of the middle class School Tax Relief Rebate program and an increase in withholding and estimated tax payments from the same period in the year 2009.Miscellaneous revenues increased primarily due to the temporary increase in public utility assessments and increased collections of abandoned property. The decrease in consumption and use taxes is primarily due to a decrease in sales tax collections from household spending. The decline in business taxes is due to slowdown in corporate profitability and a decrease in audit and compliant receipts. The increase in general fund revenues was combined with a $2.5 billion decrease in expenditure. States operation decreased $409 million, due to primarily to across the board reductions in agency operating budgets. The state ended the 200-2010 fiscal year with a general fund accumulated deficit fund balance of $3.5 million.