Today the financial leadership of the House, the Senate and the Governor’s office held their annual “consensus revenue hearing“. In short, the outlook is fair — a continuing moderate budget squeeze with some warning flags about long-term issues.
The consensus revenue hearing kicks off the annual budget process. The idea is that all three players (House, Senate and Governor) should be using the same assumptions in their budget development. The Department of Revenue presents their tax projections, the Treasurer projects lottery revenue and pension costs (which come off the top of revenue before budgeting begins) and then outside experts present alternative views. The analysts all make use of third party economic modeling sources for the economic projections that form the foundation for their revenue projections.
This year, as in most years, the projections lie close to each other with a couple of outliers. All agreed that in the current year, Fiscal 2016, revenues will come in very close to previous projections. No decision was made in the hearing — it was solely an occasion for input — but, based on the testimony, tax revenue growth at roughly 4% seems like a reasonable projection for Fiscal 2017, the state financial year beginning next July 1.
Four percent revenue growth means a tight state budget because so much of the state’s budget is driven by rapidly growing health care costs. We have yet to have hearings on projected MassHealth costs — those will occur in the spring and will importantly shape our options. Pension costs are also scheduled to grow steeply.
Perhaps the most troubling issue is our relatively low level of financial reserves — $1.255 billion or 4.9% of current year tax revenues. Massachusetts ranks well towards the bottom among state governments when its reserves are compared to its revenues. The ratio of reserves to revenues (or, alternatively, expenditures) defines how much of a downturn the state could absorb without making deep cuts in services.
Everyone agrees our reserves are too low. During the recent recession, revenues remained more than 10% below their prerecession level for two years and we drew heavily from the stabilization fund. We had a reserve of $2.3 billion, almost twice our current level, before the shock hit, but we nonetheless had to make deep service cuts at the state level. Given the volatility of the state’s income tax revenues, 10% of tax revenues or roughly $2.5 billion, seems like a responsible goal, although Treasurer Goldberg recommended a higher level — $4 billion which would be a little more than 10% of total state spending (spending is based not only on tax revenues but on revenues from other sources including federal aid).
Getting to $2.5 billion will be a multi-year challenge. The Massachusetts Taxpayers Foundation has suggested prioritizing reserve fund growth by taking roughly $250 million off the top of revenues each year for the next five years and using non-recurring revenues as they become available.
$250 million is a heavy lift and would compromise the state’s ability to increase local aid or transportation funding and to support essential human services. I do believe that unstable funding is very destructive for any institution — it can take years to recover when funding cuts force personnel reductions. So, there is a strong argument for taking moderate pain now to avoid severe pain when the next recession hits.
Choosing rationally between certain near-term pain and greater, but uncertain, future pain is hard for humans and other animals. State budget planners, like most people in their personal financial management, tend to operate with too much hope — hope that the economy will turn up more sharply or hope that health care cost pressures will abate or hope that politics will turn and people will support a tax increase that will ease the squeeze. Based on all available data, none of those is likely to happen in the next couple of years, but then again a recession isn’t expected either.
But those long-term issues mean that the budgetary choices over the next few months won’t be easy.
Your thoughts welcome.
Responding to a recurring theme in the comments — revenue increases:
Many below point to acute needs and advocate raising revenues. There are many approaches to raising revenues that I would support and I know that a majority in my district would support many of those approaches.
Revenue measures need to originate in the House (which has taken them off the table in the last few budget cycles) and would need to be approved by the Governor (who has expressed opposition to tax increases). So, they are not really among our options right now. In media comments following Wednesday’s hearing, house leaders re-affirmed their commitment to a no new taxes approach.
The question raised here is: Do we let our reserves remain low in the hope of different future politics, or do we build our reserves with the revenues we have, making sacrifices in the near term, to avoid the possibility that we will be left with inadequate reserves in the next recession when we might or might not be able to raise revenues.
The whole spending program is roughly $35 billion across hundreds of different line items. We will spend months considering the question of how much to spend and how much to put in reserve. I recognize that, as some below have suggested, it would not be fair to expect anyone to be truly able to answer that question based on the limited information I present here.
Responding to questions about the income tax — automatic rate cuts:
In 2000, the voters approved a schedule of income tax rate cuts that would bring the rate down to 5%. The margin was 59.4% to 40.6%. In 2002, the legislature slowed the schedule for rate decline with a new formula. That formula has resulted in continuing cuts. The rate will drop to 5.1% on January 1, 2016 and, based on the testimony in the revenue hearing is likely to drop again on January 1, 2017 to 5.05%.
I gave my best working years to the State at the Mass Rehabilitation Commission and retired on a modest (15 year) pension which is essential for my being able to eat and have health care and heat my home. My household income is in the 40-50k range and I pay several thousand dollars in income tax. After all this I hear that my only sources of income, Social Security and my MA pension, are in jeopardy. I worked for the money I receive and question why I have to live in fear so that a small number of extremely rich people- who can buy anything they want at the grocery store regardless of price- can maintain their lifestyle. I have never had the experience of being able to shop for groceries and buy anything i wanted rather than what I could budget. I gave to the state in many ways. Why should I be the one to live in fear? I’m 68 years old and the way this country is going I’m glad I won’t be around to see much more of it. It disgusts me.
I think now is the time when we reconsider rising the gas tax to pay for are transportation needs. I can not take the “hard choices” argument seriously unless that option is on the table, and do not think its fair that transit users should have to suffer while a gas tax rise is not on the table. Please propose rising the gas tax so we do not have to lose our transit (losing weekend commuter rail service for example is an example of “severe pain” that will send this regain back 40 years). If the governor dose not want to rise the gas tax, well then our democratic legislator can rise the gas tax over his veto, and if they cant then at least we tried and we are not worse off then we are now, but if all options are truly on the table, rising the gas tax must be on the table as well. Furthermore with gas prices the lowest they have been in years, now is the best possible time to do this, if we don’t do it now it might be much harder a few years down the road.
I suppose this doesn’t bode well for the Green Line extension…?
But the to axe it is almost a guaranteed lawsuit from the City of Somerville, no?
I have yet to see any public agency take the budget process seriously. Lots a hand wringing and whining but little action. Practice zero based budgeting. Establish priorities, fund them fully and eliminate funding for the lowest priority items. Face realities. Our needs will always exceed our funding capacity. That’s life.
Look for opportunities to fix chronic drags on the budget – healthcare costs and pensions. If we continue to duck the hard decisions we need different leadership.
No easy answer but that’s the job.
I appreciate your analysis and look forward to hearing more as the budgeting process moves along. My main concern is that Massachusetts does not cut funding needed to keep public transportation safe and reliable.
Amend the state constitution to allow a graduated income tax, and tax high-income people more.
The Commonwealth will never be on sound financial footing until this happens.
Under such a scheme I will probably be one of the people who ends up paying higher taxes. I’m by no means rich, but I make a decent living. I will gladly pay higher state taxes to ensure that the services I depend on are adequately funded and the state is able to provide essential services to all residents, especially those in need.
Under a proper graduated income tax, the vast majority of residents will pay the same or less taxes than they do now, and yet they will benefit from the higher taxes paid by those who can afford it. That the legislature has attempted to pass such an amendment several times and failed several times because voters turned it down is testimony to the fact that people vote against their own self-interest and the legislature is bad at educating voters. Try again. Keep trying until you get it right.
I couldn’t agree more with this sentiment. It’s unbelievable that such a progressive state does not have a progressive income tax.
Has Massachusetts corporate tax revenue been reduced by offshoring—merger with a smaller foreign company located in a low tax state, such as Ireland? For example, see Apple. By how much?
Massachusetts recovered from the Great Recession earlier than the US and earlier than most other states. We are benefitted by large and growing technology industries.
But at the height of recovery, we somehow have insufficient funds for the Rainy Day Fund, a health care program in place since Governor Romney, and the GRX which suffers from some profit making by its contractors, but suffers much more by the unwarranted low ball of early estimates based more on wish than either integrity or smarts.
We are basically a one party state. Why aren’t we better managed? Why aren’t we more forthrightly informed?
Maybe it is time to eliminate the tax free weekend in August? It would be a drop in the bucket but at least it might help reserves in a minuscule way.
Gas tax increase is also an option; and find a way to impose a tax on hybrids who use the same roads that fossil-fueled vehicles share.
And why only tolls on East-West turnpike?
Agree and have spoken out on all of these — I’m still in a minority.
Thanks for your report Will. First, I heard on the radio yesterday that state tax is being reduced by .25% next year because the state has enough revenue. So this doesn’t make sense. Many workers in my field , services for seniors, through the ASAP program, are low paid, incl. the case managers who are the backbone of the program. The homemakers and personal care workers also make very low wages. At my ASAP we get a 3% COLA each year but it’s not guaranteed and some years it’s less. The people at the top e.g. EOEA and in admin. at my agency do pretty well, but not the rest of us. I am a supervisor of CMs at an ASAP and see this first hand.
Police education and behavior in Mass. seems to be good and effective. We don’t have as many of the police brutality (and brutality against the police) seen elsewhere. They should keep up the good work with that.
Health care seems adequate, and I don’t know much about the public ed. system and the test controversy.
Those are my thoughts. Thank you for your attention.
Thanks, John. Yes the income tax rate will decline slightly on January 1. That is the result of a compromise passed after the people voted at the ballot to cut the income tax rate to 5% — the legislature phased in the reductions based on a formula related to economic growth.
Since someone brought up pensions, let me make a few points.
1. How do state pensions and benefits compare to pensions and benefits of people who work outside of government?
2. My guess is the assumptions on the future expected returns on the pension fund are overly optimistic.
3. I would like to see a cap on annual payments to pensions. Limit it to per capita income or some other reasonable amount.
4. I would actually like to see state and federal pensions changed so that they don’t treat government workers separate from other workers. So you won’t be punished by spending half your working career in private business and the other half working for the government. It is much rarer to spend your whole career working at one place of business than it was previously.
5. I don’t think even the staunchest opponent of government pensions is advocating taking away the pension benefits of current pensioners.
On a related topic, CalPERS (California Public Employees’ Retirement System) tells retirees that there is a maximum they will pay for certain medical procedures and they provide a long list of hospitals that will be under that limit. You want to pay more, fine, it comes out of your pocket. Cost of surgery does not positively correlate to good outcomes of surgeries. And CalPERS does limit pension amount per year, the number is too high, but it is a start.
“We have yet to have hearings on projected MassHealth costs — those will occur in the spring and will importantly shape our options. Pension costs are also scheduled to grow steeply.”
If health and pension costs are growing faster than Mass income, we should examine ways to reduce them. The Pioneer Institute has provided constructive proposals in both areas.
Also, encouraging economic growth through lower (not higher and progressive taxes) will also help solve budgetary problems. The reason we have low reserves is that the tendency of government is to continue on the current path without considering cost saving measures (for example, reining in the use of financial derivatives by the pension plans).
On the pension issue, please see this thread, which speaks to many of the good points you raise.
Raise the gasoline tax!!
1) Tax alcohol & tobacco.
2) Consider skipping tax free weekend one year & see how it goes.
Having read somewhere (?the Economist?) that low interest rates by the Fed and low inflation may be a return to normal long-term conditions, I seems prudent to aim for “certain near-term pain” in the hope of avoiding worse further along.
Keep up your good work!
That’s a duesy of a question.
It would be easy to be snide, but seriously, I don’t know how the costs are broken out but I have an 88 year old mother in law on Medicare/Medicaid, on Oxygen and with a drain in her gallbladder that sometimes requires sub-emergency but urgent attention. I don’t pay much attention to her bills that often but it seems ambulance transport costs are insanely expensive if the rates they charge are what actually is paid. From what I’ve observed it is really obvious to me that “single payer”, or more accurately “regionally allocated resource allocation and budgeting”, could save huge amounts. But ambulances seem like one area where some degree of State involvement could save a lot. Also, and related, is what appears to be a cost burden on the system and a (sometimes dangerous) situation caused by satellite hospitals feeding hospitals within their own corporate structure but at a far distance.
Then there’s the salaries of all the University heads, Community College Administrators, court clerks, department managers, etc. but not lumping everyone in the same basket.
Maybe I’m just a working stiff but are these guys and gals really worth that much ? If the argument that “They could make so much more in the private sector”, was so true then lawyers wouldn’t trip over each other to score a measly 165K judgeship, or whatever it is these days. IE: A reality check among the “elites” about what they think they are worth could probably help a little.
Agreed about the reality check.
Re ambulance rates, it’s not the ride we are paying for. It’s the guys being kept ready so that they can get the in under four minutes and keep oxygen flowing to our brains. The standby service is what is expensive. See this thread.
I’m referring to the fees that are charged to transport patients from satellite hospitals to the medical center. Seems some effort could be made to reduce the need and the cost.
Although (unlike the federal government) MA must balance its budget, a time of low interest rates is ideal for INVESTING in capital improvements that must be done sooner or later.
Borrowing for projects that increase spending on bridges and public transit are job creating and improve economic well being. Cities and towns need state help in these areas.
Increase taxes on the well off (including educational institutions) as much as possible. Insist on much lower pay for pubic university presidents, public school superintendents and the like in exchange for state support. Teachers are cut when admin salaries go up. Provide for the most vulnerable. This is our basic obligation.
Massachusetts is close to it’s borrowing limit. I don’t think additional borrowing is prudent.
I really wish there had been a little less hand waving and more definitive suggestions. However, here is a little hand waving in return. We are a rich nation and a rich state. Massachusetts is a wonderful place to live and Boston is about as good as it gets. I am an employed, lower middle class, close-to-retirement woman, and I still believe that we are fairly well off. Therefore, my priorities would be to provide health care to the poor and elderly and educate the young, and then tax the citizens of the Commonwealth accordingly. We cannot have it all, if we are unwilling to share our good fortune with the less fortunate. Thank you!
I agree. I would add those needing mental health care to this list.We should not harm the most vulnerable in our society as a way of cutting costs.
There are a lot of people in need of mental health treatment in our prisons. There is a better and more economical way.
Agree. I am hopeful that we will build a consensus that prisons are an area in which we can save money. More community support; less incarceration.
I support funding the reserves adequately. Moderate pain as you described makes sense to me with continued funding at minimum levels of primary services.
I would also like the state to invest in infrastructure in the same way as rebuilding reserves. It seems to me that a strategy to rein in health care costs is needed to permit any reasonable spending on anything else. That is the toughest challenge.
Thank you for your good work.
Private sector employees have seen their pension plans turned into 401-Ks. Funding in these plans took a big hit during the big recession. Private sector employees have to make up their own shortfall The same should be true in the case of public sector workers — they should have to make up shortfalls in public sector pension funding. Private sector employees should not have to make up for funding shortfalls in both their own accounts and the state pension fund.
I think public private partnerships should be considered for fixing MA infrastructure. I have read that MA is nearly at the debt limit. We can’t borrow any more. If we want to grow our economy we can’t tax more or ignore our infrastructure problems.
Reserve funding should be done.
Thanks, Charlotte. On the pension issue, please see this thread — it is one that I have given a lot of effort to. Interestingly, there is not much appetite for further reform right now. The Governor has not chosen to focus on that issue and it would take leadership from him.
Does it then follow that when pension fund investments outperform their targets the surplus should go to public sector workers?
No discussion of Massachusetts public pension plans is complete without a reference to Alica Munnell’s summation of our “stingiest in the country” public pension plans:
“The bottom line is that, while taxpayers in other states are paying an average of 14.2 percent of payroll (6.2 percent for Social Security and 8 percent for public pension costs), taxpayers in Massachusetts are paying less than 3 percent of payroll for public employee retirement benefits. Thus, in terms of benefits, the Massachusetts plans serve the taxpayer very well.”
I support graduated income taxation to the point of expropriation, higher taxes on alcohol and tobacco, and elimination of the tax-free weekend. Raising the gasoline tax is more complicated, because it disproportionately affects working class and poor people who have no viable public transportation alternative. I wonder whether one could compensate by giving people with defined characteristics a deduction for commuting expenses, and even for a certain number of miles per week for shopping, based on geography. If such a scheme could be devised, and it could be less complicated than many other tax provisions, I would support a very high gasoline tax.
I am a physician practicing high-tech medicine; I spend a lot of public money on health care, and worry about it a lot. We either need to figure out how to reduce health care spending, or we have to make up our minds to give up other amenities of our extraordinarily wealthy modern society to pay for the health care. Single-payor care, in fact fully socialized medicine, is a no-brainer, but not nearly enough. We must face the requirement to ration. Solutions short of explicit rationing are either naive or fraudulent. Unfortunately, some items, like the cost of drugs, are beyond the control of individual states.
We are fortunate to have lived in a state economy that weathered the recession better than most. One reason for the better performance, than the devastating economic meltdown that occurred in most states is ..over the years we have continued to invest in education , healthcare , transportation and social services. Allowing MA to have a strong base from which to handle the vagaries of the economy and be an attractive place for business and professionals alike . While never popular,increasing revenues would allow us to continue to fund priorities at an appropriate level…thereby insuring the future economic health of the entire state.
I would suggest the commonwealth look at reforms to law enforcement and prison sentencing with an eye towards keeping non violent offenders out of jail but under effective supervision as a way to trim budgets in these areas. I believe you as a ranking member on Justice issues could be effective in shaping such a policy. A few million here and there not spent on prison and keeping offenders paying taxes would be a step in a better direction. The issue will be creating “effective supervision” so the offenders remain out of further trouble. Needing to close a prison would save real money.
Absolutely right! Working hard on exactly this. Hopeful for progress over a one to two year time frame.
Would a 1/2 percentage point increase in state income tax help? I wonder what the mood is right now about this. I would favor a slight increase if it would help increase the reserves and repair the infrastructure. Health care costs need to be reined in. Obtain bargaining power on drugs? Educate doctors on hospice care for the terminally ill, cheaper than dying in a hospital and far more humane. my two cents….
Thank you, Nayla. This would definitely help the budget. Please the comments in the blue box above — it is not an option politically in this session.
So given all of this, how do we have the benchmarks to DECREASE the state income tax rate as of 1/1/16?
Thanks, Elaine. Please see the discussion I’ve added above in the blue box.
One of the key objectives should be to provide money in reserve, because we all know that we will see recessionary times again, and without an adequate reserve, we would need to drastically cut programs and/or raise tax rates.
I wonder how much other states are putting into reserve funds?
Massachusetts, like many other states, exempts energy and electricity consumption from state sales tax. The exemptions are worth hundreds of millions of dollars per year, exacerbate climate change, and erode the incentives to shift to cleaner fuels and conserve. With market prices of energy down so much over the past couple of years, this would be the perfect time to fix this problem. Any concerns over energy affordability can be addressed through targeted subsidies for the poor (lifeline rates are already used for water and electricity).
Local communities also need larger fiscal reserves. Many states provide a local option on gasoline taxes, where towns can add a small surcharge to state and federal taxes that supports local communities. Indeed, MA allows this for hotels and restaurants, but not for fuels. A local option tax for fuel sales should be added. Again, with market prices down so much, now is the time to make the adjustment.
I have long been a believer in higher gas tax rates.
Hi Will – Just consider this a “rant” – I hold no illusions that there’s wherewithal in the government to change
— BUT —
In business (and I know you’ve been there too!) when we have a fiscal crisis we try to work both sides of the issue (revenue and spending) with tools like Zero Based Budgeting and requiring owners of processes to justify the value of spend verses the cost of the initiative then eliminating low or no-yield initiatives. This process is not unlike our personal process for our home budget.
The mechanisms by which the government runs itself seems to based on an entirely different system. I can understand some element of “government’s gotta spend” because that’s it’s job… but some of the things we spend on here in Massachusetts in an era of declining or stagnant wages is pretty amazing…
Is chapter 9 bankruptcy on the agenda? Big dig debt discharge.
Honestly, bankruptcy is not at all on the agenda — that would have a lot of bad consequences.
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