The Governor and the legislature are circling uncomfortably around the issue of how much to cut the present fiscal year’s budget and whether or not the cuts must affect local aid. Next year’s budget is also looking grim.
The state’s tax revenues are very closely tied to the economy. Income tax revenues are running low because people aren’t working — employment numbers remain surprisingly poor. Sales tax revenues are low because people aren’t spending — even if they are working, they are “deleveraging”. Corporate tax revenues are low because corporate profits haven’t recovered. Capital gains taxes are down because of the hangover of losses in the stock market. Even as economic output seems to be ticking up and the recession bottoming, these key indicators are running well below expectations. For a well-respected current analysis see this release from the Mass. Taxpayers Foundation.
The needed cuts in this year’s budget are looking to be between $500 and million and $1 billion. For perspective, the state’s annual budget is roughly $30 billion. The fiscal 2009 mid-year budget cuts last fall were painful; the 2010 budget passed this spring was painful — most believed it was painful enough that it wouldn’t need to be cut again. Since one always makes the least painful cuts first, the present round of 2010 mid-year cuts — similar in magnitude to last year’s mid-year cuts — will be even more painful.
In fiscal 2009 and 2010 the state was able to cushion the revenue surprises with the use of reserve funds, federal stimulus funds and a sales tax rate increase. None of those options appear open now — the appetite for further tax increases is nil; reserves are dangerously low; and the bulk of the federal stimulus funding was used to bail us out in Fiscal 2009 and/or is already built into the present year’s budget (Fiscal 2010).
The coming fiscal year, Fiscal 2011, may be out of balance by $2 to $3 billion according to the preliminary estimates circulating around the building. This will mean another round of cuts for agencies already under great strain, cuts comparable in magnitude to the cuts endured in the Fiscal 2010 spring budget.
In summary, from a state budgeting standpoint, the next 12 months are going to be a replay of the last 12 months — cuts, cuts and more cuts — only worse. The only possible relief that people see is another wave of stimulus funding coming from Washington. That seems possible if there are too many states in terrible shape (and many are worse off than Massachusetts). Yet, one Washington elected official recently expressed to me the political judgment that there would not be another wave of stimulus — too many members of Congress have been hearing summer dissatisfaction in their districts about high federal spending.
The House has created informal working groups to identify cost-savings opportunities in every area of the budget before the formal process starts for next year. In addition, we are considering longer-term cost-control proposals, related to both health care and employee benefits, and the possibility of increased revenue from gaming (the last being an approach I do not support).
For more information, see recent multi-year analyses from:
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