There is one chart that gets to the heart of the state’s current budget problem. It’s in the back of the standard briefing book that the Department of Revenue provides each year to the legislature as we try to agree on revenue estimates for the coming fiscal year.
The chart compares revenue estimates to actual receipts over the past dozen years. In the last economic expansion, revenues consistently exceeded projections. In every year from 2004 through 2008, revenues came in above our early projections by roughly 5% (one billion dollars). We — collectively the legislature and successive Governors — got into a routine of implicitly assuming that our best guess as to revenues would turn out to be low. So, we would pass budgets that were “balanced”, but actually were built on a lot of underestimates on the spending side.
We routinely underbudgeted variables like snow removal contracts, payments to private lawyers to represent the indigent, health care costs for employees, and the 800 pound gorilla, the MassHealth budget. Our implicit assumption was: “Despite our official projections to the contrary, there will be money to pay these bills when they come due.” And that assumption seemed like a safe one. In fact, we were typically able to pay the bills and also build our reserves. Our healthy reserves were very important in cushioning the impact of the recession.
During the trough of the recession in 2009, when revenues came in below expectations and for a couple of hard years after that, there seemed to be no practical alternative to wishful thinking in the budget process. So, the habit of budgetary optimism persisted through the recession.
And we have continued that optimism over the past few years as the economy has started to expand again. But, this expansion is different — it’s slower ( especially when compared to the expansion of the late 90s, see the briefing book). There does seem to be a “new normal”, in which we really cannot count on good news surprises. In fact, in the last three years, actual revenues have been much closer to projections and this year, revenues are coming in spot on (within 0.4% or $94 million of) the $24 billion full-year projection.
Even as the economy has expanded, we have been unable to build our reserves as we did in the last expansion. And, the underbudgeting of expenses is really coming home to roost this year. MassHealth and other hard to control programs have come in high and many state programs are going to suffer cuts over the next few months to keep the budget in balance.
Next year does not look cheerful. The economists agree that we should expect growth — that is the good news. The officially sanctioned estimate is now for a 4.8% increase in tax revenues. But if you consider that, through underbudgeting for our commitments, we were planning to spend roughly 3% more than we actually have this year, that means essentially that, given predictable health care cost inflation, the program cuts we make to balance this year will have to be permanent and we will have very little room to accommodate inflation in the coming year. Additionally, there are storm clouds in the international economy that may send some weather our way.
I’m someone who believes that we should be spending more in lot of areas of state government. I am deeply concerned that we have stretched many agencies beyond their ability to achieve their missions — from justice to public health to children and families, state agencies do have critical missions. And we do want to meet expectations for continued growth in local aid support schools and local services. However, there is little sentiment for an increase in taxes at the moment. That means that the legislature and the Governor are going to have to work very hard to stretch dollars over the next couple of years.
Expenditure on MassHealth Budget was inflated greatly by the Health Connector disaster in relation to the roll-out of the ACA. Many people who would ordinarily be paying their own premium were placed on MassHealth.
We have to get really serious about reducing health care costs in MA – this system is wasteful and unsustainable.
Agreed!
The fidelity with which MassHealth can judge eligibility is important. People’s circumstances can change from month to month so if they lose a job they have an immediate need for assistance. For people without savings being able to pay for next month’s premium is of vital (and that’s literal) importance. Conversely, if someone get’s a job there should be a mechanism for seeing if they still qualify for MassHealth, rather than leaving it up to the person to call.
Yes — that’s where we should get to. Technology limitations stand in the way.
I agree that the state fulfills many critical needs; in addition to those you mention, transportation and other infrastructure are vital to a functioning economy. However, in a time when the public is wary of any increased spending, it becomes especially important that any expenditures are done, and seen to be done, in the most efficient way possible. Failing that, I don’t see how support for increased spending for anything will gain support.
I agree – some areas to look at
Can we reduce prison populations by letting non-violent offenders move to parole status. It must cheaper to hire a parole officer than pay for a prisoner for a year.
Reduce number of committees and commissions. I know it is small dollars but we need a more efficient government.
Health care costs – a great opportunity to put together some great minds to figure out how to reduce costs or at least make sense of this cost system.
We should reduce prison populations, but that will mainly make prisons safer places more conducive to rehabilitation. We will reduce overcrowding, but that won’t change operating costs too much.
The main thing is health care. Clearly we are going to stay focused on that.
Will,
As this has been a one party state for years you do have your work cut out for you. All you can say is think of it as a family. You cannot buy more than you make. You cannot promise your kids more than you can provide. Time for government to live within it’s means. Make cuts and tell the people we cannot afford this anymore. Not what the state pols are use to but it is time to put on your big boy pants. Tax increases won’t fly.
I could never understand the way we pay for the system. We borrow tons of money for stuff tat will be obsolete before the payments are completed. Are we headed to be another Detroit chapter 9 ? Maybe the Legislature should restructure the transportation dept. separate from the state. DOT file for bankruptcy, discharge the big dig debt. Break up Masspork sell it’s operations and get out of the port business then refinance the MBTA.
” …there seemed to be no practical alternative to wishful thinking in the budget process. So, the habit of budgetary optimism persisted through the recession.”
What an interesting and polite way to put it, Will. If this were business, we’d simply say “mismanagement” and fire the board and the CEO.*
Clearly, the “new reality” (Circa 2010) is that every dollar needs to be worked to it’s fullest. We are in an age of Governmental “rightsizing”. The answer is simply to cut programs, features, that are not beneficial and fund those that are. Any family or small business knows this. In other words, we need to start acting like there still is a recession and behave accordingly.
I wish I thought we had the wherewithal to do it, but based on our track record, I’d say we’re just going to continue with “business as usual”.
I’m sorry to sound sour, but you know my favorite pet peeve and we’ve now spent more than $6,000,000 on it since you and I first spoke. Imagine what the $6,000,000 could have done if used for good instead of pork?
I’m with you Will, you are a voice of reason in an otherwise desert of insanity that is our commonwealth’s government.
But you’re just one guy….
* Oh yeah, we did just fire the CEO….maybe there is hope
I support an increase in gas tax. This should not hurt too much since the cost of gasoline has decreased.
Hi Will- I am equally appreciative of your honesty and utterly stunned at the absurdity of your words.
Rich is correct, in no other place, be it a high tech business or human service provider could anyone keep there job after such irresponsible behavior.
it would be comical if it werent so sad and impactful to so many.
I would like to see both an increase in the gas tax and a modest increase on income and capital gains at the upper income levels.
Why have we again decreased the income tax rate, now to 5.15%, when we have a revenue shortfall?
The voters voted in 2000 to bring it down to 5.00%. In 2003, the legislature slowed that rate decrease down with a law creating a staged set of triggers. One of those triggers kicked in. It’s based on growth rates.
Just a suggestion. A graph of the major budget items helps to clarify the magnitude of the budget increases. Details are best to use once the large budget items are identified.
I believe that very modest tax increases could go a long way to fixing this problem. Too bad nobody is willing to deal.
The state income tax should be raised on those earning more than $100,000. Cuts should not be made to education, health, aid to indigent and disabled people, legal services.
This is as good, and concise, a summary of the Commonwealth’s current budget situation as I’ve read – and I’ve read them all.
“… in no other place, be it a high tech business or human service provider could anyone keep there job after such irresponsible behavior…”
After 2008, which is at the root of many of these problems, can we please dispense with this tired old piece of conventional “wisdom”? I have seen people keep their jobs, perhaps even get a promotion, after all kinds of “irresponsible behavior”, whether it be public sector, private sector, or academia. I am sure that others have witnessed the same. The polarization created by the private-sector-good public-sector-bad mentality is counter-productive. If you think that you could do better than our current crop of representatives, then give it a go. That’s the way things work. But these cheap shots from the sidelines….
I have just read your piece and most of the comments. I agree that:
– the state is a ‘different animal’ from private industry in a number of ways. It’s supposed to reach an agreement among 6.7 million people of how to manage its affairs! 6.7 million people who are required by law to pay their taxes.
– the ‘economic recovery’ is shaky at best, and perhaps even a total fiction (numbers are being crunched, debt is being manipulated by huge banks out of sight of the public and regulators, etc.)
So, what do we do? We shift the state from trying to do as much as it has in the past and more to helping other non-government organizations do more things instead. All over the place new ways are disrupting old ways. Uber is disrupting the old fashioned taxi industry to pick one small example. The new organizations are smaller, more networked, more agile, and more adaptable to the changing circumstances of the economy as it is today. The state is stuck with a structure that forces it to act slowly, try to accomplish things over a very long term, etc. It just can’t keep up with an increasingly rapidly changing society around it!
I’m not saying that the state is totally obsolete, but its power is dwindling and its ability to respond to current needs is weakening. I say we must recognize this and act accordingly. No, this is not a quick fix. No, there are no easy answers. I’m just asking for an overall theme, here. Think about how new, more agile organizations can accomplish what the state cannot.
I agree that loose more nimble structures are part of the answer. Transportation is a great case in point.
There is a tremendous amount of wealth at the top, especially in this state. It is very disturbing to read that they pay less in taxes as a percentage of income or net worth then does the middle class. Please don’t believe the fish tales and do what you can to preserve the middle class, lift the working poor, and protect the most vulnerable in our society.
Thank you for this analysis, Will. I’m afraid that the obvious conclusion is that we should raise taxes in a carefully planned and responsible way. As the recent MBTA woes show all too clearly, it is penny-wise and pound-foolish to refuse to invest in the future of our “common wealth” in order to keep taxes artificially low.
Paying taxes is as painful for me personally as it is for anyone, but seeing our state infrastructure decline and our quality of life erode is also painful!
How much support is there for simple progressivity? What would people think about cutting the sales tax and making up for the loss (plus maybe a little bit more) with a more progressive income tax? Not by enough to give Mass the most progressive tax structure in the union — we wouldn’t want that — but maybe somewhere around tenth or eleventh?
Tax progressivity makes a lot of sense at the federal level, but at the state level it is a mixed bag. Bear in mind that the state budget is intrinsically progressive because much of it goes to support people in need. The risks with very progressive taxation are (a) it tends to be less stable because the income of the wealthy goes up and down more than that of the middle class; (b) at a certain level, it does drive mobile affluence out of the state.