Does the state have a structural deficit in its budgeted funds?

The answer appears to be Yes in the sense that we face needs that considerably exceed revenue as we prepare the 2009 budget and look out over the next few years

However, the answer is unclear, if by a structural deficit, one means an historical long term mismatch between the locked-in rate of growth in spending and the locked-in rate of growth in revenues.  The longer term history of the state’s taxes and spending does not reveal a structural deficit created by slow growing revenue sources.  Rather, it reveals a series of changes in financial structure reflecting shifting political and economical trends. 

Economic fluctuations directly affect state revenue.  Because of economic uncertainty, it is impossible to forecast the long term rate of revenue growth.  State leaders have repeatedly adjusted tax rates over the past 20 years. 

In 1989, revenues fell and the legislature enacted income tax increases to cover the FY1989 deficit and forecasted deficits in coming years. 

However, through all of the 1990s, years of healthy economic growth, it appeared that the state had a structural surplus — revenues growing faster than expenses.  State policy makers had a robust enough belief in the structural surplus that they made a number of expansive long-term policy decisions:

  • Tax cuts totalling $4.6 billion in impact on 2003 revenues — an amount equal to over 1/6 of budgeted expenses in 2003.  Some these tax cuts were for business and some for individuals.  See analysis from the Massachusetts Budget and Policy Center.    (The voter enacted income tax rate reduction of 2000 accounts for only $0.9 billion of this total.)
  • Expansion of state employment by 9% from 77,028 employees in 1996 to 83,886 employees in 2001 — theComprehensive Annual Financial Reports do not track total full time equivalent state employment before 1996.
  • Expansion of   from 1990 to 2001 at an average annual rate of 4.9% (well above inflation).

Fortunately, given the downturn that was to follow, by the end of 2001, the state had built up a reserve of $2.3 billion ($1.7 billion in the stabilization fund and $0.6 billion in a transitional escrow to cover the then emerging downturn).  See the state’sComprehensive Annual Financial Report for 2001.  But this wise reservation of surplus also contributed to the sense of long term health that led voters to cut taxes in 2000.

When the “perfect storm” hit state revenue in 2001, leaders were forced to partially reverse their decisions of the 1990s — to cut employment and local aid and to raise taxes substantially.   By 2003, accumulated reserves had been drawn down substantially and at its outset, Fiscal 2004 looked like another year of economic squeeze.  See generally the budget reports of the Massachusetts Taxpayers Foundation.

Most recently, as revenues rebounded strongly in Fiscal Years 2004 through 2007, the state increased employment and local aid (although neither to their previous peaks), made an ambitious commitment to Universal Health Care, and rebuilt the stabilization fund to $2.3 billion — a level well above most other states as a percentage of expenditures (see the state’s Statutory Basis Financial Report for 2007).

In summary, the fundamental challenge in state budgeting is to meet the Commonwealth’s needs and support economic growth in a way that is fair to all.  But the analytical challenge in state budgeting is to navigate the shifting political and economic trends while minimizing wrenching course changes. 

Cities and towns in Massachusetts face the same fundamental and analytic challenges, but they do face a clear structural budget deficit.  The rate of growth in their principal revenue source — property tax revenues — is limited to 2.5% by Proposition 2.5.   Their expenditures are driven by bargained personnel costs, which tend to rise with inflation at roughly 3%, and health care costs, which have been rising at much rates, often double digit rates, in the long term.  The locked-in blended costs of maintaining existing local programs rises faster than revenues.  At the same time, especially in more affluent residential communities, local officials are insulated from economic fluctuations to some extent, because their principal revenue source, the property tax does not fluctuate as dramatically as the state’s principal revenue source, the income tax.

Published by Will Brownsberger

Will Brownsberger is State Senator from the Second Suffolk and Middlesex District.