There is one chart that gets to the heart of the state’s current budget problem. It’s in the back of the standard briefing book that the Department of Revenue provides each year to the legislature as we try to agree on revenue estimates for the coming fiscal year.
The chart compares revenue estimates to actual receipts over the past dozen years. In the last economic expansion, revenues consistently exceeded projections. In every year from 2004 through 2008, revenues came in above our early projections by roughly 5% (one billion dollars). We — collectively the legislature and successive Governors — got into a routine of implicitly assuming that our best guess as to revenues would turn out to be low. So, we would pass budgets that were “balanced”, but actually were built on a lot of underestimates on the spending side.
We routinely underbudgeted variables like snow removal contracts, payments to private lawyers to represent the indigent, health care costs for employees, and the 800 pound gorilla, the MassHealth budget. Our implicit assumption was: “Despite our official projections to the contrary, there will be money to pay these bills when they come due.” And that assumption seemed like a safe one. In fact, we were typically able to pay the bills and also build our reserves. Our healthy reserves were very important in cushioning the impact of the recession.
During the trough of the recession in 2009, when revenues came in below expectations and for a couple of hard years after that, there seemed to be no practical alternative to wishful thinking in the budget process. So, the habit of budgetary optimism persisted through the recession.
And we have continued that optimism over the past few years as the economy has started to expand again. But, this expansion is different — it’s slower ( especially when compared to the expansion of the late 90s, see the briefing book). There does seem to be a “new normal”, in which we really cannot count on good news surprises. In fact, in the last three years, actual revenues have been much closer to projections and this year, revenues are coming in spot on (within 0.4% or $94 million of) the $24 billion full-year projection.
Even as the economy has expanded, we have been unable to build our reserves as we did in the last expansion. And, the underbudgeting of expenses is really coming home to roost this year. MassHealth and other hard to control programs have come in high and many state programs are going to suffer cuts over the next few months to keep the budget in balance.
Next year does not look cheerful. The economists agree that we should expect growth — that is the good news. The officially sanctioned estimate is now for a 4.8% increase in tax revenues. But if you consider that, through underbudgeting for our commitments, we were planning to spend roughly 3% more than we actually have this year, that means essentially that, given predictable health care cost inflation, the program cuts we make to balance this year will have to be permanent and we will have very little room to accommodate inflation in the coming year. Additionally, there are storm clouds in the international economy that may send some weather our way.
I’m someone who believes that we should be spending more in lot of areas of state government. I am deeply concerned that we have stretched many agencies beyond their ability to achieve their missions — from justice to public health to children and families, state agencies do have critical missions. And we do want to meet expectations for continued growth in local aid support schools and local services. However, there is little sentiment for an increase in taxes at the moment. That means that the legislature and the Governor are going to have to work very hard to stretch dollars over the next couple of years.