How “tight” is the FY2009 state budget?

According to most commentators, across the spectrum, the FY2009 budget is tighter than in most years.  See for example, the Mass. Budget and Policy Center (structural gap), the Mass. Taxpayers Foundation (revenue slow down), or  the Governor’s Budget message.

The dominant immediate reality is a slow down in revenue growth and the distinct possibility of further slow down.  Consensus projections from early January for tax revenue growth (without any law changes or new revenue sources) show a substantial deceleration in FY2008 and FY2009 as compared to the prior four years.

FY08 (the current fiscal year):                       3.2%

FY09 (starts in July 2008):                            3.8%

Compare average annual from FY03 to FY07:  7.2%

Approximate current value of 1 percentage point change in revenue growth: $200 million.

These tax revenue estimates form the basis of the Governor’s budget.  The economic estimates on which they are based assume a national slow down, but no recession.  However, the most recent economic news appears to be discouraging (at the time of this writing in late January) and more and more economists are beginning to forecast a recession.  Notably Alan Greenspan now believes that a recession is slightly more likely than not.  The Governor’s budget document details the basis of the consensus revenue forecast and explains the consensus revenue process that the administration conducts with the legislature.

Built-in spending pressures — notably FY2008 total spending at a level above revenues and promised increases in health and education spending — create a FY2009 “structural” budget gap of $1 to $1.5 billion (roughly 5% of spending). 

According to a tabulation of the moving parts from the Massachusetts Budget and Policy Centerrecurring expenditures and other recurring uses of cash from the budgeted funds in Fiscal 2008 appear likely to exceed recurring revenues by $0.7 billion in FY2008.  This is a result of the use of reserves to balance the FY2008 budget, additional post-budget spending, and also the overestimate of lottery revenues.  This means that the FY2009 balance of revenues and expenditures starts in the hole by that amount: $0.7 billion.  (Note that it additionally means that the state will at some point around the end of the year need to cover that FY08 operating deficit in the general fund, perhaps by a transfer from reserve.)

To that base gap of $0.7 billion, MBPC adds a new gap of $0.4 billion — excess of increased FY2009 maintenance spending ($1.2 billion) over projected increased revenues ($0.8 billion) — for a total structural gap of $1.1 billion.  MBPC assumes a very modest average 2% growth in most state spending programs.  The 2% estimate of maintenance spending appears low, given that many collective bargaining agreements run at 3 to 4% and employee health care costs at over 6%.  Additionally MBPC quotes administration estimates of costs of health care reform at $370 million.  Overall MBPC’s estimate of  $1.1 billion gap seems muted to avoid any accusation of alarmism.

The Governor’s budget makes a higher estimate of the gap at $1.3 billion.  See the Governor’s budget document under the heading “Fiscal Year 2009 Budget Challenge”.   This gap estimate builds in many more specific judgments about line item spending than the MBPC estimate — some new initiatives and some planned savings.  But the basic large moving parts are the same — Chapter 70, health care reform, the prior year built in gap.

Estimates of the gap will change through the next few months of the legislative budget process, as revenue and costs estimates evolve based on emerging data and as savings and spending priorities are evaluated in the budget process.

While it is typical for perceptions about revenue estimates to evolve positively through the budget season, this year seems to be unusually likely to be a year in which initial consensus revenue estimates are ultimately perceived to be high.

Published by Will Brownsberger

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