UPDATE 1-Pa. to cut jobs, services to balance budget

(Adds details, reaction, quotes from governor)

By Jon Hurdle

HARRISBURG, Pennsylvania Feb 4 (Reuters) - Pennsylvania Governor Ed Rendell on Wednesday proposed a $26.6 billion general fund budget for fiscal 2010, a 0.2 percent reduction that cuts almost 3,000 state jobs and reduces funding in most agencies to balance the budget in the deepening recession.

Almost $1 billion in spending cuts will be achieved by eliminating funding from 101 state programs and reducing support for another 346 programs. The new budget proposes to reduce the state work force by 2,995 positions.

The only areas to receive more funding are education, public welfare, corrections and probation and parole.

"The budget I propose requires considerable sacrifice and pain so that we can close the deficit and put our fiscal house in order," Rendell said in a speech to the state legislature. "The crisis demands that we make these cuts."

The Democratic governor warned that some cuts would be permanent "because they are outside of the essential business of the state." Among facilities targeted for closure is a school that was founded for Civil War orphans and now costs $45,000 per student.

The budget assumes the state will receive $1.1 billion in federal funds in the current year, and another $2.4 billion in the fiscal year starting July 1, as part of the Obama administration's national economic stimulus plan.

This year's anticipated federal funds would pay for a temporary increase in medical assistance, rising to $1.9 billion in the coming fiscal year. A further $493 million is expected in fiscal 2010 to allow Pennsylvania to maintain critical services such as education and public safety, along with about $26 million for special education and child care.

By fiscal 2011, total federal funding under the stimulus program is expected to decline to $1.5 billion, according to budget documents.

The budget projects no growth in general fund revenues in fiscal 2010 from the current year because of the national recession.

The plan for the coming year avoids broad-based tax increases but proposes to raise cigarette taxes by 10 cents a pack, impose a tax on smokeless tobacco products, and implement a severance tax on natural gas.

To eliminate what Rendell called a "staggering" $2.3 billion shortfall in the current year, the state is proposing to use the federal funding, along with transfers from the Rainy Day fund, unspent funds from the previous year, and revenues from companies drilling for natural gas on state lands. The Rainy Day fund will also be used to help balance the fiscal 2010 budget.

To help close the current shortfall, Rendell also proposed legalizing and taxing video poker gaming in bars and restaurants.

For the fiscal year to the end of January, Pennsylvania's general fund revenue totaled $13.3 billion, representing a shortfall of $1.1 billion, or 7.5 percent, below estimate, the state revenue department said this week. For January alone, revenue of $2.2 billion was 10.7 percent short of official projections.

Sales tax, personal income tax, and corporation tax receipts were all below estimates for the year so far, and Rendell said he expects those revenues to continue to decline for "many, many months ahead."

State Rep. Sam Smith, leader of the House Republicans, rejected the governor's claims that the budget cut spending, and argued that it really contains a spending increase of about $700 million. "At a time when we are being told to tighten our belts, an increase by $700 million is letting a few links out on the belt," he said.

Rendell spokesman Chuck Ardo responded to Smith, saying: "We don't believe his math adds up."

State Sen. Robert Mellow, leader of the Senate Democrats, attacked Rendell's plan to legalize and tax video poker, saying that a current plan to expand casinos in Pennsylvania should be fully implemented before considering trying to get revenue from video poker.

"The governor is going to have a problem getting what he presented through the legislature," Mellow said. (Reporting by Jon Hurdle, Editing by Andrea Ricci)