Yesterday’s Massachusetts Association of School Business Manager’s (MASBO) February Bi-Monthly meeting featured a number of thoughtful presentations. In one session, Eileen McAnneny, President of the Massachusetts Taxpayers Foundation (MTF), which she described as the “fiscal watchdog of the Commonwealth…making sure tax dollars are well spent…,” offered comments and opinions on recent fiscal history in Massachusetts as well as the Governor’s budget (House 2) for the coming year. Here are some highlights, along with links to today’s Globe article on S&P's comments regarding House 2 and the January MassBudget opinion on the fiscal outlook:
The FY15 budget gap was $1B midway through the year. Causes? Revenues weren’t coming in while spending continued. After Gov. Patrick’s budget reductions there was still exposure (capital gains coming in but had to go into stabilization acct. for more $, MassHealth and GIC insurance expenditures, etc.). How was the budget gap addressed? Through the tax amnesty program, and cutting MBTA contract assistance, MassHealth, etc. ($643M in reductions). Capital gains taxes “saved the day” because the statutory rule about putting excess into the rainy day fund was suspended. (But using one-time revenues for the operating budget – like diverting capital gains taxes – is a problem.)
In Fy16, the budget gap was $565M mid year. Why less than it could have been? Early retirement did not get the participation anticipated, tax revenues came in above projection, 9C cuts were taken, etc. But transfers (like to MBTA) are spending exposures that haven’t been taken into account.
The FY17 budget gap is projected at $700-900M. Use of one-time revenues is trending in the right direction ($1.2B in FY15, $629M in FY16).
EA’s point of information: Massachusetts disproportionately relies on income tax for revenue (about 60%). We are in year seven of economic recovery in what is usually a ten-year cycle, and we don’t have enough in the stabilization fund to prepare for the next downturn.
In the House 2 proposal, spending doesn’t exceed revenue. The Governor is trying to limit use of one-time money using different strategies (e.g. a capital gains diversion of $250M, down from the $629M noted above). There are notable changes to the budget in education and elsewhere. Concern: state spending doubled from FY00 to FY15. Much of that was due to increases in MassHealth (the cost has tripled, and enrollment jumped over 70%). When MA adopted healthcare reform (in 2006), Medicaid was expanded too. Has the socioeconomic status of residents changed? About 1/3 of residents are now on MassHealth. As long as MassHealth grows faster than overall revenue, it’s a burden on the financial health of the state.
Looking ahead: state tax revenue growth is expected to be relatively flat. We currently aren’t planning for potential economic downturn. Municipalities will have to absorb their shortfalls since the state doesn’t have a discretionary cushion. Other issues: unfunded pension liability and OPEB liabilities (currently funded as pay-as-you-go), which will be very sizeable (and state law determines much of this, so there are not a lot of tools to address it in the budget).
The state’s ability to fund recommendations from the Foundation Budget Review Commission is not good since there is very limited discretionary income – things would have to be done very differently. Supts have said they’ve worked to save money by regionalizing, etc., but the issue is for the state to find savings through better use of technology/efficiencies, which takes time.
A pending state ballot initiative calls for a Constitutional amendment that establishes an additional 4% tax on that portion of income over $1M to be used for education and transportation. (MTF also questions MBTA financing, saying monies haven’t been well spent, and “that’s critically important” because the state provides $187M above what they get from the sales tax. If MBTA budget challenges are solved, we solve money problems for other line items.) By law, a ballot initiative can’t be used to make specific appropriations, so the money wouldn’t technically go to education and transportation, it would go to the General Fund and MTF is concerned. In polling, 70% of voters want this initiative, but when you tell people it might not be used for the intended purposes, favorability falls significantly. (My notes: This initiative is also called the “Fair Share Amendment.” MTF opposes. More info here: https://ballotpedia.org/Massachusetts_Income_Tax_for_Education_and_Transportation_Amendment_(2016).)