A burgeoning economic rebound could erase the federal budget
deficit but has yet to ease a fiscal crisis gripping Beacon Hill and city halls statewide, analysts said yesterday.
A market-boosting stream of encouraging economic news began
yesterday with word that factory orders rose in January for the second straight month, yet another signal that the
recession that began last March has ended.
That news from the Commerce Department spurred stocks to
fresh gains, as the Dow industrials tacked on nearly 141 points to top 10,500 and the broader Nasdaq composite
and Standard & Poor's 500 also rose, by about 24 points and 16.6 points,
respectively.
Later yesterday the Federal Reserve confirmed earlier
analyses that the recession has ended with its periodic look at regional economic conditions, a report known as the Beige Book.
The Fed survey found signs that the recovery is flowering in New England apace with the
rest of the nation.
In Washington, the non-partisan Congressional Budget Office
said the economic upturn could produce a budget surplus of $5 billion to $6 billion for the 2002 fiscal year, erasing a
predicted deficit.
But in Boston, budget analysts and economists said it was
too soon to see similar relief for the state's dimming fiscal picture. State budget analysts said they expect to revise
downward their projections for state revenue today or tomorrow, and the independent Massachusetts
Taxpayers Foundation said it still expects the state to face a $1.8 billion revenue
shortfall for the current fiscal year.
But the horizon looked a bit brighter yesterday to Michael
Widmer, MTF's president.
"We are assuming the situation will begin to improve in
(fiscal 2003) and we'll finally see an end in the next few months to the fiscal freefall," he said.
Once tax revenue starts growing, it won't be as robust as in
the late 1990s because there won't be the large bonuses and stock option payouts, Widmer predicted.
"The other problem, from a fiscal point of view, is that the
damage has already been done," Widmer said. "With the dramatic drop in tax revenue this year, the state faces a large
mutli-year structural deficit even if the economy does improve."
In addition, tax cuts that take effect in the coming months
will further offset any gains, he said.
The uncertainty on the state level is making it difficult
for local leaders trying to budget for next year, said Pat Mikes, spokeswoman for the Massachusetts Muncipal Association.
"The indication coming from the state is that things are
still bleak in terms of money for the 2003 budget," she said. "It's difficult because (city and town leaders) don't know what
the local aid will be."
But the region's economy is on the mend, along with most of
the nation, Federal Reserve economists said yesterday. From software producers to retailers and service providers, all
reported seeing some pick-up in business by late February from early January, the Fed
reported yesterday. Only manufacturers said business remained flat.
"It looks great; it's just what the doctor ordered," said
Ned Riley, an economist with State Street Global Advisors. "Virtually all districts are showing some improvement, and
employment at the very worst has stabilized and in some areas has improved."
That points to payroll growth in the next month or so as
companies start to add jobs rather than cut them, he said.
In New England, the outlook is better than it was a month
ago, said Katharine Bradbury, vice president and economist at the Federal Reserve Bank of Boston.
"The retailers and the manufacturers that we spoke with
indicate that their results were more positive in general in February than the last time we spoke with them in January," she
said.
"We also spoke with some people in the commercial real
estate market who said the market is not in particularly good shape, but they don't feel it is deteriorating," Bradbury said.
Mark Maloney, head of the Boston Redevelopment Authority,
said yesterday that office vacancies appear to be declining after a period of sharp growth. Maloney said the downtown
vacancy rate is about 10 percent.
But commercial construction will remain weak in part because
of still-high office vacancy rates, some analysts said yesterday. While vacancy rates appear to have recovered from a
recently estimated 13 percent peak, it will be several months before construction picks up
again, economists say.
"We're in the beginning stage of an economic recovery that
will prove to be robust by year's end," said Sara Johnson, managing director of DRI-WEFA's Macroeconomics Group in
Lexington.
"Locally we expect to see the economy will be improving in
step with the national economy," Johnson said. "In the months ahead we'll see some job growth after a period of decline."
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State House News Service
Wednesday, March 6, 2002
Economists recommend freezing
voter-approved income tax rate cut
By Michael C. Levenson
STATE HOUSE, BOSTON, MARCH 6, 2002 ... A panel of top
economists testified Wednesday that freezing the income tax cut passed by the voters in 2000 would help ease
the state's budget crisis without harming the economy.
The economists, from the Federal Reserve Bank of Boston,
State Street Bank, University of Massachusetts-Boston and the Massachusetts Taxpayers Foundation, told legislators
freezing the income tax rate at 5.3 percent, political ramifications aside, would help close a
yawning budget gap that may exceed $2 billion next year without slowing the pace of an
economic recovery that appears to be starting.
Voters passed the income tax cut, known as Question 4, in
2000. Under the law, the tax rate has dropped from 5.95 percent to the current rate of 5.3 percent. It is set to drop again in
January 2003 to 5 percent. Hiking the income tax rate to 5.6 percent would add $460
million to the tax base, House leaders say. Freezing the rate at 5.3 percent would allow the
government to keep an extra $225 million a year. Even with the changes, state leaders will be
forced to make steep budget cuts and draw from rainy day reserves.
"Somehow, someway, you need to get the tax rate back to a
level that is more sustainable," Fred Breimeyer, economist at State Street Bank told leaders from the House, Senate and
Swift administration gathered to try to determine a reliable estimate of revenues for the fiscal
year that begins in July.
Alan Clayton Matthews, economist at UMass-Boston, agreed,
telling legislators, "It's important to maintain state services ... and the way to do that is to roll back the tax cut."
The economists said Massachusetts, like the nation, is
likely emerging from the recession and that raising the income tax rate would not hinder that recovery. "I do not see the
potential for a state income tax increase to derail an economic recovery," said Yolanda
Kodrzycki, economist at the Federal Reserve Bank of Boston. "To some extent, these economic
problems just take time to work out."
Michael Widmer, president of the Massachusetts Taxpayers
Foundation called a freeze on the income tax cut "the common sense approach," combined with budget cuts to resolving
the state's budget crisis.
The comments come as lawmakers, especially Democratic
legislative leaders, weigh a host of unpopular tax increases to offset what is expected to be the deepest budget gap since the
late 1980s. House leaders have accused Swift of resting on "overly rosy" economic forecasts
as she seeks to defend the tax cut.
Swift has pledged to veto any tax hike or new tax that hits
her desk, saying higher taxes will hurt the economy and take money away from workers and families who may also be
struggling. She has made her stance on taxes the cornerstone of her governorship and
pledged to use it often in this year's campaign.
Swift administration officials told lawmakers Wednesday they
had lowered their revenue outlook for the next fiscal year, from a 5.1 percent growth in baseline tax revenues to 4.6
percent. MTF's Widmer said he "essentially agreed" with that forecast.
But the House budget leader, Rep. John Rogers (D-Norwood,)
said that was still too rosy a forecast and he called Swift's budget plan "wildly optimistic." The Senate budget chief, Sen.
Mark Montigny (D-New Bedford) agreed in less stark terms, telling administration officials,
"I am left feeling you are a bit more optimistic than we are."
House leaders predicting a gap of $2 billion to $3 billion
by the end of fiscal year 2003 recently proposed a menu of 16 tax hikes, drawing criticism from Acting Gov. Jane Swift.
Swift accused the Democrats of being too quick to dip into taxpayers' pockets before
considering other ways to balance the budget, such as slowing state payments to the pension
fund. Swift has also proposed reducing Lottery prizes and redirecting more
money to cities and towns.
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State House News Service
Wednesday, March 6, 2002
Bond rating testimony on Swift pension plan
interests Birmingham
Senate President Thomas Birmingham said he was "interested"
in hearing more about the testimony given by three bond rating agencies Tuesday indicating that Acting Gov. Jane
Swift's proposal to slow down payments to the state's pension system by
$134 million won't hurt the state's bond rating.
Representative's from Moody's, Fitch Ratings and Standard
and Poor's made the comments to a House panel looking at ways to improve the state's credit rating.
Birmingham wasn't at the hearing, but said on Wednesday he
"would be interested" in hearing the reasoning behind their contention.
The Legislature late last year shot down the governor's
proposal, which would fully fund the state's pension system in 2028 rather than 2018. A new version of the bill filed by Swift
has languished in the House Ways and Means Committee.
Rep. John Rogers (D-Norwood), who chairs that committee,
says the proposal is dead. House Transportation Committee Chairman Rep. Joseph Sullivan (D-Braintree) said
Tuesday that lawmakers are still considering it. And a spokesman for House
Speaker Thomas Finneran, who had blasted the plan last year, said Finneran still considers it an
option in the face of growing budget gaps.
Swift says she will be forced to make additional spending
cuts if the bill does not pass. Treasurer Shannon O'Brien last year estimated the long-term cost of the proposal at $8
billion. Administration officials this week said it's somewhere between $1.2 billion and $1.8
billion, and added that the state is no longer on track to erase its $6.4 billion pension
liability by 2018.
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State House News Service
Tuesday, March 5, 2002
Credit analysts say flexibility key
to state's bid to get out of $$$ crisis
By Michael P. Norton
Testifying before a House subcommittee charged with
exploring bond-rating issues, representatives from the three major Wall Street rating agencies said Acting Gov. Jane
Swift's rigid opposition to any tax hikes restricts budget-balancing options. But they said her
proposal to pay for current services by postponing the full payoff of state pension liabilities
won't hurt the state's credit rating....
The agencies -- Fitch Ratings, Standard and Poor's and
Moody's -- evaluate the credit risks of private and public debt issuers, including the states. Investors use ratings to
evaluate investments, but for politicians and voters, the ratings are tantamount to seals of approval, or
disapproval, of government performance. And in the legislative arena, ratings
are frequently used like a hammer, to defend or oppose policy plans....
Brossard, Cohen and Shapiro all indicated the rating
agencies do not look disapprovingly at Swift's proposal to spend $134 million now to preserve programs and services by
extending the target date for paying off the state's unfunded pension liability. The date would be pushed
from 2018 to 2028. The House and Senate resoundingly rejected the plan in
December, saying it's fiscally irresponsible, but Swift has refiled it. She says raising long-term pension
appropriations by about $1.5 billion is preferable to cuts in education,
health care and public safety programs that she may have to make in the coming weeks and months.
Asked about the plan, analysts said it seems reasonable to
reduce appropriations during a fiscal crisis and revisit the funding schedule when the economy rebounds. Other states are
also turning to their pension funds to provide relief in tough times, analysts said.
"It makes sense that you're looking at that as a source of
relief," Brossard said.
Said Shapiro: "We see that as, in a sense, a reserve. It
would not have a direct impact on the rating."
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The Lowell Sun
Wednesday, March 6, 2002
Editorial
Action vs. inaction
Acting Gov. Jane Swift's favorability rating may be
plummeting, but it's not for lack of trying to restore order -- or sanity -- in a chaotic fiscal crisis.
In fact, the Republican governor's declining poll numbers
can be traced to the difficult decisions she -- and only she -- is making to fill a $450 million hole in this year's budget and
a potential $2.6 billion crater in fiscal year 2003.
Swift is getting little cooperation from the Democratic-controlled Legislature. They're
standing by and criticizing the governor's every move while remaining silent on
any concrete proposals of their own. It is an election year, after all.
But lest the citizens of the commonwealth forget, Swift
isn't trying to punish taxpayers for the recession -- and the Sept. 11 tragedy -- that put state revenues in a free fall.
Unlike the Legislature, she's looking to cut spending and reduce costs rather than raise taxes and freeze
the state income tax rollback.
To date, Swift has ordered $66 million in painful program
cuts that have affected social services and the court system. She's also called for $217 million in spending freezes. On
Monday, the governor announced the closing of three prisons, including minimum security
MCI-Shirley, and the transfer of inmates to other state facilities as a cost-savings measure.
She's also put forth proposals to generate more money by
tinkering with the state Lottery's prize pool and by deferring a $134 million payment into the state pension system.
To Swift's credit, she hasn't endorsed a single tax
increase, although she is seeking an increase for bridge, turnpike and tunnel tolls. Eventually, the governor might have
to consider finding other revenue sources. For now, however, Swift is acting responsibly by reining in
spending as her first priority.
We wish the same were true of the Legislature. Crisis mode
on Beacon Hill appears to be the daily release of ever-expanding budget deficit figures -- one day $1.6 billion,
today $2 billion, tomorrow $3 billion -- and allowing legislators to spread the fear to their home
communities. This is called "setting up" constituents for a soft landing when
legislators make their inevitable appeal for tax increases.
All the while, legislative leaders haven't proposed a single
plan to cut expenses.
It's becoming increasingly clear that a majority of
Democrats support a freeze on the state income tax rollback approved by voters. There is also talk of raising taxes on
cigarettes and gasoline.
Once again, Beacon Hill's response to a crisis is to tax
Massachusetts out of a recession with nary a thought of reducing government spending.
So while Swift's popularity continues to plunge, ask
yourself this question: Who's trying to protect your pocketbook?
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