How is the state doing financially? What can cities and towns expect from the state? In short, the answers are: Pretty well and cities and towns can expect continued moderate aid growth, but the outlook is uncertain and the state is likely to continue to neglect real needs.
The state seems to be wrapping up the current fiscal year in good condition. Year to date tax collections through May are essentially right on target — just $12 million under a target of $21 billion. Supplemental spending — spending above the annual budget level — has run well below last year’s level. The state’s “rainy day” fund should finish the year at $1.4 billion, essentially the same level as at the end of 2011 — despite the loss of federal stimulus support and an economy that is still performing below its long term trend line.
As to the coming fiscal year, which begins on July 1, the budget is near finalization — the House and the Senate are negotiating differences between their alternative drafts of the budget. Both branches have approved budgets that include modest local aid increases. Both branches provide incremental increases in general education aid and general government aid for all cities and towns. The Senate budget includes full funding for the special education circuit breaker, which provides state reimbursement for the high costs of school arrangements for children with very special needs. The House budget does a little better on Kindergarten funding. The House offers $25 million for Community Preservation Act matching, but only from end-of-year surplus, while the Senate offers $5 million not subject to any contingency.
The overall fiscal outlook for next year remains uncertain — the state gets a lot of its funding from the federal government and the federal budget is, in turn, subject to great uncertainty as a result of partisan deadlock. Additionally, the global economy seems to be slowing. However, the state’s rainy day fund balance is healthy and it is an election year, so it is fairly safe to predict that the final budget will resolve most differences between the House and Senate local aid programs in the upwards direction. How negotiators will resolve the Community Preservation Act matching is harder to predict.
The Chapter 70 education aid distribution formula remains a problem area. I have given this a lot of attention over the past few months. Among my communities, Watertown has received a particularly low level of Chapter 70 aid in relation to its need. In 2006, the state recognized that the Chapter 70 distribution was inequitable and created a new formula. However, the transition to that new formula was phased and the phase-in was delayed through the recession, with the result that communities like Watertown that received an especially poor allocation under the old, discredited formula continue to receive an especially poor allocation.
In direct response to the formula problem that Watertown faces, the Senate includes funding for a “pothole” account to allow the state education department to make grants to fix formula problems. The funding item includes language targeting aid to communities like Watertown. While I deeply appreciate the attention that the Senate budgeteers have given to the concerns I have raised, this is a very partial fix. I look forward to working in the fall with Watertown Representatives Hecht and Lawn (and other legislators in similarly situated communities) to see if we can get the education department to embrace a broader fix. It will be important to start early in the cycle, because once the department publishes a preliminary aid allocation, the preliminary allocation creates expectations that make it politically impossible to shift aid among communities.
In the longer term, the economic outlook is mixed but most economists and policy makers are forecasting continuing moderate growth for the Massachusetts economy. The state’s long term projection contemplates a growth of per-capita state product at an inflation-adjusted rate of 1.6%. If this assumption turns out to be valid, and if the state is successful in its major legislative effort to hold health care cost to the same rate as state product, then we will be able to maintain continued modest growth in local aid for cities and towns for the next few years without running down state reserves. So, the health care cost control legislation is a central concern.
Even with these favorable assumptions, there is no room in the projection to solve the problems of the MBTA, catch up on road maintenance, put our pensions on a more responsible funding basis or restore services for the vulnerable in all of our communities. So, the conversation about taxes and spending will inevitably remain central for the next few years.