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Mar 13, 2020

Coronavirus: The Economic Effect on Pennsylvania and the Nation

COVID-19, or coronavirus, is having a major impact on both a national and global scale. We have seen the postponing and cancellation of major sporting and cultural events and even the locking down of entire countries. In this discussion with Pennsylvania state Rep. Frank Ryan, we explore the effect the outbreak is having on Pennsylvania, both on its economy or the health of its citizens. Make sure to check out PICPA’s webpage dedicated to the effects of coronavirus for information on upcoming PICPA events and additional resources.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

COVID-19, more widely known as coronavirus, has already had a sweeping effect on life and business throughout the nation and the globe. From the suspension of the NBA season to the locking down of entire nations, careful steps are being taken to cease the virus's spread, but how about the effects that the virus is taking on the state of Pennsylvania in particular? To get into that today and provide some incredibly valuable information, we will be talking to state Rep. Frank Ryan, who will cover not only the overall hit on our national economy, but the impact on Pennsylvania's finances as well as its elderly population.

What do you think the overall hit on economic growth will be from coronavirus? What’s it looking like right now?

[Ryan] That impact is actually dependent upon us and it's one of the reasons that it's so important to me that we get out as CPAs and talk to the public about the circumstances. The coronavirus in and of itself is being contained from a medical perspective, but there was a great quote that Franklin Roosevelt used in 1933 in his inaugural speech. He said, "The only thing that we have to fear is fear itself." So, the actual impact that we could have is really going to be dependent upon how much we alter our lives, and do we let that fear impact our spending decisions in our day-to-day life.

We're really fortunate that the economy is robust. We have an extraordinarily low unemployment rate. We have a situation where people are starting to recover almost completely from the financial debacle that happened in 2008-2009. So I actually see this situation where one of the reasons I wanted to speak out on it at this point is so that we as CPAs can provide guidance to our clients and to the public in general, that as a responsible person, just look at the situation, take reasonable medical precautions, and try not to have it affect your life any more than it already has just from a medical perspective.

We had a very similar situation in 2001 and right after that I got called back to active duty and was deployed in the Middle East. And after September 11th, people became very concerned. Obviously, it was a significant tragedy, but we got through it. But those decisions that happened at that time created significant economic effect that led into further recession. So it doesn't have to have a huge effect.

I'm very concerned from what I'm seeing right now with what I believe to be an overreaction in the stock market, that people will start to feel the effects of the wealth effect, where they'll look at their 401(k) and they'll say, "Oh my God, I don't have as much," when in fact nothing really happened unless you had to sell your portfolio. And if you give it time, as you saw in 2008-2009, when we had the mortgage meltdown, if you bought in in 2009 in March, you would be doing incredibly well today, even after the setback of the 20 to 25% reduction in value of stocks.

Since we've handled the overall view, let's drill down to Pennsylvania. How do you think the coronavirus outbreak will impact Pennsylvania's economy specifically?

[Ryan] This is probably the one where I'm most concerned. We in Pennsylvania, from an executive branch and legislative branch perspective, have been working on reforms for a while. We're not where I think we need to be. We've had a significant number of years of great economic growth. We should have had a lot more money in the rainy-day fund. But it doesn't really benefit everybody just to keep looking back. Instead, we have to look forward.

What I'm seeing is with the cancellation of so many different events and people's perspective that they should avoid large gatherings in crowds, which is sound medical advice, is when you start to do that, you start to have an automatic contraction in things such as the hospitality industry. We get a tremendous amount of what we need in Pennsylvania from the sales and use tax. So, as we continue to have the outbreak of the coronavirus go on as long as it has been so far, and depending upon how much longer it will go, I think we'll see the first immediate effects on the hospitality side, which will then translate to a reduction in state sales tax revenue.

Then, the next issue I think we'll start to see is in sports, airlines, and things of that nature, so I would expect the Philadelphia Airport, the Pittsburgh Airport, to be negatively affected. In fact, they already have been. You'll find restaurants will also be affected as well, as people are starting to scale back on their travel.

We're seeing some other areas as well in the academic world where the sporting events and academic events have been postponed. Even things such as class trips have been canceled, so that has a ripple effect. I think the first thing we're going to see is the sales tax side of it. Then, what we'll see is potential layoffs. You'll start to see increasing expenditure for appointment compensation that we have as kind of a safety net to get trips in once there's a recession.

Then I think the next issue that we'll start to see is with that kind of layoff, you'll see a reduction in personal income taxes and income tax revenue that will come in for the Commonwealth. If this is short-lived, and I suspect if we are able to get the medical side of this under control quickly, the effects won't be particularly significant. I'm optimistic that we're coming off of a very strong economy, so as long as people don't panic, I think we'll be okay.

Pennsylvania has a large elderly population. Do you see this as a driving factor in presenting potential economic impacts on our state, especially in light of President Trump's announcement Wednesday night (March 11)?

[Ryan] I think that's where we're probably going to see some of the larger effects. The coronavirus, from all indications we've had in the briefings that we've gotten from the health secretary in Pennsylvania, sees more of the older population, people with preexisting conditions, that are a greater risk. The vast majority of fatalities have come about from that arena as well. So we're already seeing organizations that care for people who are elderly already start to cancel events.

I was working on a project as an example yesterday where a constituent called up and said, "My dad is in hospice at the VA (Veterans Affairs) and they were told that we can't come in to visit." I spoke with the director of the Lebanon VA, worked with him very closely, and said they're trying to minimize people coming in to see that population as much as possible, but they would do it on a case-by-case basis. He said it was a little bit of a misnomer that they were doing a complete cutoff. He said we would really encourage you to keep the amount of people that are going to see the elderly people to be an absolute minimum, taking all the necessary precautions. So, I see some vulnerability there.

I also see ... it's interesting, I got a call from a healthcare provider today and she said, "Frank, I just want you all to keep this in the back of your mind as schools are making decisions." The school announced that they're not going to be open today, and I'm a healthcare worker and my employer said, "You absolutely must be there because we need you." We're in almost a triage-type circumstance in treating people who are coming in who have concerns about their own health, either testing for coronavirus or something of that nature. So, she said, "As you're doing your planning, that's something you ought to look at from a perspective of ‘do we need emergency measures on daycare and childcare facilities for the actual healthcare providers themselves,’" which was actually a good catch on her part.

I think we've got a very delicate balance. We do have an older population. We're very much like Florida in that regard. From a budgetary perspective, that's also been a significant concern as well because we've been seeing a net inflow of seniors coming into Pennsylvania now for quite some time because of our advantageous tax code. With the combination of all of these things, it's the one thing that I'm probably monitoring more closely than others.

As a policymaker, what are your recommendations to ensure hopefully the least possible impact on Pennsylvanians?

[Ryan] This is the one where I would say, and I've been saying when I ran for office three and a half years ago, I made the comment that we have two to four years in Pennsylvania before the financial situation will be of such a nature and will have deteriorated to such a level that the alternatives politically to solve our financial crisis will be very difficult to put into effect. We saw a little bit of that in fact with my House Bill 13, which was kind of an indicator that certain decisions that might need to be made to get rid of property taxes, which is what House Bill 13 was designed to do. It was somewhat of a precursor to this kind of a crisis.

As a policymaker, what I'm concerned about is we have many structural issues in Pennsylvania that we've been unwilling to deal with in the past. Yet, we have potential solutions on the table to deal with those right now, so I'll give you a perfect example. Myself and many of the members of the Pennsylvania legislature are working very closely on doing these types of things. And to be candid with you, I'm very thankful as well. Treasurer Joe Torsella and I have become fairly good friends and I'm very impressed with his astuteness as well in terms of understanding what we need to do to be able to make sure that the financial markets are stable.

From a legislative perspective, just a couple of things for you to be aware of: We have House Bill 985 and then House Bill 1053. One is on the Auditor General Fraud Enforcement Act, which is to provide the auditor general with a fraud and forensic capability. And then House Bill 1053 is designed to put the government on a lean operations level. My House Bill 985 is already into Senate. We're waiting for that for consideration. House Bill 1053 is on second or third consideration in the House of Representatives. We expect that'll move soon. I've got a bankruptcy bill. It's called the Keystone Solvency Operating Study. So, we're aware of what happens when some of the other states trip. Now, Pennsylvania is 12 years away from any insolvency-related issues, but we really need to know what is at risk, so that's House Bill 1995.

We have a whole series of pension-reform bills, two of which I'm the author of. I'm a prime sponsor of one of them. I'm also on the PSERS board of directors and currently the vice chairman of the Pennsylvania School Employee Retirement System, commonly called PSERS. One of the things that we're trying to do there is enhance the yield returns. What I'm concerned about from a policy perspective is many of these decisions that were not made years before, such as putting more money away for the rainy-day fund. We only have about $330 billion in the rainy-day fund. That would last us about six hours in terms of governmental operations. We really need to sit down right now as this budget is being discussed. We're bringing it up for vote by the month of June. We really need to take a real clear and hard look at fixed cost of government where we might be able to curtail things so that we don't find ourselves in a position like we did before where essential funding for certain things, such as the school system, children with disabilities, elderly population, and then the pension requirement, which is fairly significant. Obviously, the pension plans nationwide took a significant hit as a result of this, so the required contribution that will come about as a result of this economic stock market crisis will increase the amount of money that has to be paid by people who own property as well as from the state government for their 50% of it.

We have some real significant cost drivers that we have to deal with. My policy approach that we're looking at at this point in time is to get serious on reducing the overall scope in spending, get the government to be significantly more efficient, provide some safety net for fraud and forensic capability, and then make sure that we really, at all sides, both Democrats and Republicans, join together, stop this bickering for a while, and see what we can do to really put our house in a better financial order. If we don't do this, we will find that we will regret the time that we may have squandered while this was going on, because if fear takes hold and this gets worse ... and I'm more concerned about the rest of the world. The U.S. economy is really strong, but the ripple effect … we're no longer in a situation where we can live in a world where the rest of the world craters and goes into a severe recession, or perhaps depression, and we don't.

The only caveat that I want everyone to be aware of from my years of experience of doing economic warfare, and my years of doing turnarounds with financially troubled companies before I went into the legislature, the only thing I truly fear, and the one that I'm monitoring the most from a policy perspective, is what happens and what we need to do to avoid going into a deflationary spiral. When oil and gas drops down as much as they are and have been, to where they're the $30 per barrel range, the danger of that is it could create a deflationary spiral, which would exacerbate the cash flow for a whole series of industries, which will make things significantly worse. We've got a lot on our plate. It's time for everybody to really pull together, work together to resolve , and make sure that we keep calm in the process because you've got a lot of decent, dedicated people working very diligently to make sure that this thing stays on an even keel.

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Podcast transcripts are provided as a summary of the conversation and have been lightly edited for the written medium. The transcript is not a verbatim representation of the interview.
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