State House News Service
Thursday, January 31, 2002
Budget Gap now $357M and growing:
tax hikes will be considered
By Rick Collins and Michael Levenson
STATE HOUSE, BOSTON, JAN. 31, 2002 ... The state's immediate problems doubled in just one month, the Swift administration announced today, and leaders of the House said they'll consider tax hikes this spring to deal with it.
The state collected $185 million less than expected in January, adding to a $189 million budget gap in Fiscal Year 2002, Acting Gov. Jane Swift's budget chief said.
For the year to date, revenue collections are running 9.5 percent ($899 million) behind last year. Anne Reale Collins said she will go over the new numbers with the acting governor tonight and the administration will have a package of offsetting cuts and other budget balancing strategies ready within a matter of days.
Collins once again called on lawmakers to pass a bill delaying a paydown of the state's pension liability. She said she has no reason to believe the revenue picture will get much brighter in the next few months, and the budget-balancing strategy the administration puts together will include that pessimistic assumption.
She said the administration agrees with Wall Street fiscal analysts who've advised that spending cuts, not further dips in state reserve funds, are the way to address the growing crisis. Collections totaled $1.581 billion in January, compared to $1.937 billion in January of last year. Sales taxes performed decently - a 2.5 percent increase over 2001 - but personal and corporate income collections plunged; corporate income collections were down 488 percent.
The House in late April will consider raising taxes, its budget leader said Thursday after a two hour closed-door caucus with Democratic members of the rank-and-file in Room A-1.
"We're heading in a downward spiral very quickly, economically and fiscally, and we need to be honest with ourselves and with the people of the Commonwealth in order to begin to address solutions," House budget chief John Rogers (D-Norwood) said.
The House has set April 29 to have "an intelligent, mature discussion about tax hikes or tax cut postponements," he said.
The budget shortfall could be $700 million by July, Rogers said. That would mean Acting Gov. Jane Swift would be forced to cut education, health programs, transportation or the environment, Rogers said.
"The more we delay in making necessary cuts, the deeper you have to cut to make the savings," Rogers said.
Swift later told reporters she would "do whatever is necessary to constrain spending." Collins said the administration is adamant against using revenue increases of any sort to balance the budget.
Swift has proposed a plan to delay $134 million in payments to the state's pension fund and cut $55 million, a proposal Rogers called "gimmicky."
Tax proposals that lawmakers are considering include
a freeze in the state income rollback passed by the voters in 2000,
a freeze or reversal of the capital gains tax cut approved in 1994, and
a freeze of a tax cut for charitable donations that passed in a referendum in 2000.
Meanwhile, Swift warned she would veto any attempt by the Legislature to repeal the Clean Elections law. The Supreme Judicial Court ruled last week that lawmakers must fund or repeal the public campaign finance law passed by the voters.
Faced with her veto threat, Swift said lawmakers should "just shortcut the [veto] process and fund it now."
House Speaker Thomas Finneran, a critic of the law, will poll the 160 House legislators over the weekend to determine a course of action by Monday, a Finneran spokesman said.
According to a schedule given to members at the caucus, the House will debate its own version of the budget on May 6.
House Speaker Thomas Finneran set up five special committees on Thursday that will develop plans for budget areas including the state's credit rating, Medicaid, taxes, local aid, and budget cuts. The plans will then be submitted for consideration to the House Ways and Means Committee, led by Rogers.
State aid to cities and towns, which pays for police and firefighters among other local services, will likely be cut 10 percent in the House budget, Rogers said.
House leaders used the two-hour caucus Thursday to paint a "dire" and "grim" portrait of state finances, lawmakers said.
Rep. David Flynn (D-Bridgewater) said Finneran told members it is "very critical to let our communities know they could expect as much as a 10 percent drop in local aid."
"We have to tell them to be ready for it," added Rep. Kathleen Teahan (D-Whitman).
Lawmakers generally praised Finneran's idea of setting up special budget committees.
Rep. Ruth Balser (D-Newton), a frequent critic of House leadership, said, "the more the members who are involved in the process the better."
Teahan said, "I think everybody wants to know more about what's going on and to be included. A more diversified group of people can find better solutions than just the eyes of the conference committee."
One new possible remedy would be for the state to borrow money against its $1.5 billion savings account at a much lower interest rate than if it borrowed money through traditional methods. Rep. Philip Travis (D-Rehoboth), who proposed it at today's caucus, said it would be a type of "passbook loan" where the state could borrow money against its savings account and only pay a 1 percent differential.
Travis, who spent 20 years in banking and financing before joining the House, said it would be the cheapest way for the state to borrow money if it finds itself unable to balance the books at the end of the fiscal year on June 30.
Jon Tapper, a spokesman for Treasurer Shannon O'Brien, said the office was not familiar with Travis' proposal but "certainly we welcome any ideas and look forward to working with him on any proposal."
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State House News Service
Thursday, January 31, 2002
House chief: Mid-year budget deficit nearing $400M,
on the road to $700M
By Michael P. Norton
STATE HOUSE, BOSTON, JAN. 30, 2002 ... State government's fiscal problems took another negative turn Wednesday, as House leaders announced January tax collections are much worse than expected and this year's budget may be on its way to being $700 million out of balance.
The creeping mid-year budget deficit is in addition to a projected budget gap of roughly $2 billion that the Legislature and Acting Gov. Jane Swift must close next year through a combination of spending cuts, the use of reserves and possibly, higher taxes, which are getting more consideration as problems deepen.
While official Department of Revenue figures won't be released until Friday, House Ways and Means chairman John Rogers (D-Norwood) circulated a letter to his colleagues Wednesday to inform them that January tax collections appear to be $180 million or 20 percent short of estimates used to build the state budget. House Democrats will huddle for two hours Thursday to discuss possible responses to the news.
The Swift administration has already confirmed a fiscal-year-to-date shortfall of $189 million, which forced Swift to outline mid-year spending cuts in public health, smoking prevention, human services, education and public safety programs. The new numbers mean this year's problem has ballooned to $370 million, and is growing, Rogers said.
"Unfortunately, the remaining months of this fiscal year, but particularly the month of April, will likely continue this trend," said Rogers. "By the end of fiscal year 2002 the shortfall could easily grow to as much as $600 million to $700 million." Rogers said the development is part of a "fiscal nightmare."
Rogers announced the news two days before officials numbers are due to be released, and just hours after Swift's new acting administration and finance secretary, Ann Reale Collins, informed state department and agency leaders at a special meeting that the $189 million worth of budget cuts outlined by the administration last week "should be the last round of cuts for fiscal 2002."
After the meeting, Reale Collins said that with more than half of the fiscal year gone, the ability for state government to address budget gaps with spending cuts is diminishing, making it more likely that reserves will be tapped again to plug the budget gap. "Our ability to implement further cuts this year is going to get much more difficult," she said.
After using $800 million worth or reserves to balance this year's budget, the state has about $1.5 billion left, an amount that could vanish quickly given the scope of next year's budget problems and the large new hole in the budget lawmakers just passed in December.
Rogers has also questioned Swift's claim that tax revenues, which were down 7 percent for the first half of the fiscal year, will turn around suddenly and grow by 5 percent in the fiscal year that begins July 1.
Reale Collins today said the 5 percent estimate is optimistic, but realistic according to the economists who advise Swift. In general, the administration's economists - DRI-WEFA and economy.com - advise Swift that the recession here won't be as bad or last as long as the national one. And Reale Collins said tax revenue growth has exceeded 5 percent in all but three or four of the last 20 years.
Of the $189 million in cuts already outlined by Swift as necessary to balance this year's budget, $55 million worth are inevitable. Swift is holding out hope that lawmakers will reverse course and adopt her plan to tap the pension fund for $134 million to avoid the remaining cuts, which will hit hardest on education and health and human services programs. Swift wants to extend pension liability payments for 10 years, which would cause the state to pay off a $6.4 billion liability by 2028, instead of 2018.
Swift has said her pension proposal will prevent immediate budget cuts without jeopardizing state employee and retiree pensions. The Legislature, in overwhelmingly rejecting the proposal last year, said it is foolhardy and passes $8 billion worth of costs on to future taxpayers. Swift has not presented evidence to refute that claim, but administration sources say the long-term cost is about $1 billion and is tough to measure because calculations depend on long-term annual appropriations and investment returns.
Reale Collins acknowledged today that there is a "very real possibility" that lawmakers will continue to resist Swift's pension proposal, forcing the acting governor to unilaterally launch a major round of cuts.
Outlining the budget problems to an auditorium full of state managers, Reale Collins said criteria Swift is using to determine spending cuts exempts about two thirds of accounts in the state's $22.6 billion budget. The exempt accounts pay for direct services to families and children, provide public safety and security, fund legally mandated programs, generate federal revenue, are entitlements or use dedicated revenue.
That leaves just over $7 billion worth of the state budget subject to cuts. Reale Collins advised department heads to continue examining their budgets, looking for activities that can be consolidated or eliminated or programs with few customers or that are non-essential. "Our ability to manage through this is absolutely resting on your shoulders as well as mine," Reale Collins told state agency leaders. "The challenge here is obviously daunting."
While so many of state government's fiscal problems are predicated on a bad economy, the Swift administration does not have an economic stimulus package per se. Administration officials say the state can't do much to stir the economy and the best thing it can do is balance the state budget and keep the voter-approved $1.4 billion income tax cut on the books so families and individuals have more money. The administration is also looking to boost capital spending on public works projects to create jobs.
Municipal officials who depend on large amounts of state aid to deliver education and public safety services are closely watching state government's budget drama. Reale Collins said Swift's proposal to reduce Lottery prizes is intended to generate $274 million and prevent "massive cuts" in local aid next year. Response to that plan has been lukewarm, with skeptics fearful that smaller prizes will mean fewer players, lower sales and as a result, less money to send back to cities and towns. Reale Collins said the $274 million figure assumes a modest drop in sales and noted prizes here are the largest nationwide.
In confronting its budget problems, the state has largely avoided layoffs to date. But the number of pink slips could surge if more state employees don't show interest in early retirement sweeteners offered under a pair of special laws passed at the end of 2001. To date, about 2,700 state workers have applied. The law anticipated payroll savings based on 4,000 employees leaving public service early, with full pensions.
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COMMONWEALTH OF MASSACHUSETTS
HOUSE OF REPRESENTATIVES
REPRESENTATIVE JOHN H. ROGERS
January 30, 2002
Dear Colleague:
Tax collections for the month of January have confirmed my fear that the fiscal nightmare is far worse than the acting Governor claims. In fact, January collections are so low that the magnitude of the fiscal crisis could be even worse than my predictions last week.
Just days ago, we discussed two highly suspect estimates that support the acting Governor's revenue assumptions for FY03:
1.) the administration's unrealistic estimated FY03 growth rate of 5.2%; and
2.) the assumption that in FY02 the shortfall in tax revenues would only be $189 million.
Only time will expose the perilously aggressive FY03 growth estimate. On the subject of FY02 collections, however, we are already beginning to see how fantastically inaccurate the administration's assumptions are. Consider the following:
-
Unfortunately, the remaining months of this fiscal year, but particularly the month of April, will likely continue this trend.
I will continue to provide updated information on this grave matter. Please do not hesitate to contact me if you require additional information.
Sincerely,
John H. Rogers, Chairman
House Ways and Means Committee
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