State Stabilization Fund

The state’s stabilization (or “rainy day”) fund is designed to buoy the state through tough economic times, and it has certainly been used in the recent recession.  This post will examine the set-up of the fund, the recent history of its use, and its future in getting the state through the Great Recession.

The stabilization fund is established by M.G.L. Chapter 29 Section 2H out of any available surplus, to be spent under the following circumstances: to cover revenue shortfalls, to replace the loss of federal funds, or for any event “which threatens the health, safety or welfare of the people or the fiscal stability of the commonwealth” as determined by the legislature.  A “substantial decline” in economic indicators is included as such an event.  While the legislature itself determines if a fiscal situation meets the criteria for spending the fund, the statute requires “a comprehensive analysis of alternative legislative action and revenue sources”  as well as a finding that spending from the fund will not “adversely affect the overall fiscal health of the commonwealth.”

The stabilization fund has several sources of money.  One half of one percent of tax revenues from the previous fiscal year are allocated to the stabilization fund, pursuant to M.G.L. Chapter 29 Section 5C. If there is money left over in other state funds it is transferred to the stabilization fund.  The legislature can also direct additional money into the fund.  Finally, the fund is augmented by returns on its investment.

Governor Patrick has proposed using revenue from the capital gains tax to add to the stabilization fund.  According to the Massachusetts Budget and Policy Center, he would cap the amount of revenues from the tax that can be used for the rest of the budget at $1 billion, preventing the volatility in financing for ongoing programs that results from the large changes in capital gains tax revenue from year to year. Then, 95% of the remaining revenue from the tax would go to the stabilization fund.  Thus, in years when the economy is booming and there are higher capital gains, more money would be available to be allocated to the fund.

There is currently about $607 million in the stabilization fund, but it has been drained significantly in recent years from its high of $2.34 billion in FY 2007.  The following link has a table showing the amount in the stabilization fund since FY ’01.

Massachusetts Budget and Policy Center

FY ’08 is when the state began spending from the fund after a five-year period of putting money into it.  The state spent $315 million from the fund in FY ’08, $1.39 billion in FY ’09, and $235 million so far in FY 2010.  The Governor’s budget proposal for FY ’11 uses $175 million from the stabilization fund, while both the House and Senate Budgets do not use any money from the fund.

The Massachusetts Taxpayers Foundation projects (see slide 11) the balance of the stabilization fund to be at $545 million next year down from its current level of $607 million.  This is taking into account the $175 million the Governor proposes to spend, but also an influx of $109 million in federal funds over this year and next, along with $4 million in interest.

Mass. Taxpayers’ main source of concern is not the 2011 budget itself, which appropriates almost the same amount as the pre-recession FY ’09 budget did, but the structural deficit it will leave for FY ‘12.  The Governor proposes using a total of $2.134 billion in one-time funds for the FY ’11 budget.  The House budget would use $1.93 billion in one-time funds, which is slightly less because it doesn’t use $175 million from the stabilization fund.  These one-time funds bridge the gap between the $2.35 billion less in tax revenue compared to 2009 and maintaining the spending in the budget at about the same level.  The problem is that this leaves the same gap for FY ’12 without the one-time funds to fill it.  Mass. Taxpayers, factoring in the inability to rely on $2.1 billion in 2011’s one-time funds, minus another $1.4 billion in a combination of Medicaid increases, Chapter 70 school aid, and a 3% rise in union wages, and then even adding an assumed 5% growth in revenue as the economy recovers (worth $1 billion), estimates the 2012 structural deficit at $2.5 billion.  The stabilization fund would have about $545 million, as shown previously, so even if it were all used in 2012, the deficit would still be $2 billion.

To address this, Mass. Taxpayers proposes putting off some of 2011’s one-time spending to 2012.  They would use only the $1.4 billion in stimulus money, which must be spent that year, in 2011.  It then proposes to put the remaining $700 million in one-time funds currently proposed for 2011 into the stabilization fund for use in 2012.  This money consists of $300 million “saved” from putting off debt payments, $160 million in federal Medicaid funds, and not using $175 million from the stabilization fund in 2011, as the Governor proposes.  Of course, not spending $700 million in 2011 and putting it into the stabilization fund means cutting $700 million from the 2011 budget, a task easier for said than done.  The stabilization fund has so far been used along with other one-time spending to avert drastic cuts in the budget, but the roughly $545 million remaining after 2011 will not be enough to avert a reckoning for FY 2012.

Peter Sullivan