The various actions taken by the Governor and the Legislature
over the last several weeks -- to close out fiscal 2000 and act on major bills before ending the formal legislative
session on July 31 -- give indications that the Commonwealth has entered a period of diminished financial discipline. While
recent events are a far cry from the excesses of the 1980s, there are clear signs that fiscal restraint is taking a back
seat to demands for new spending.
On the plus side, fiscal 2000 ended with another large
surplus, and the 2001 budget is comfortably balanced. The Governor and Legislature deserve considerable credit for
devoting the majority of the 2000 surplus to Central Artery financing and other important one-time capital needs. By using
surplus revenues and other new resources, the Commonwealth will be able to cover the large Artery cost overruns and help
pay for statewide transportation projects without overburdening the operating budget. State leaders also
adopted a Fenway Park financing plan which appropriately limits state support to the costs of public
infrastructure.
At the same time, however, a number of other actions are cause
for concern. The almost 7 percent rate of spending growth in the 2001 budget -- an unsustainable pace over the longer term
-- will rise even higher because of significant underfunding of Medicaid and other programs. To complicate matters further,
state leaders have approved two expensive entitlements -- a sweeping pharmacy benefit program for seniors and
early retirement benefits for teachers (the latter over the Governor's veto) - that will have their greatest fiscal
impact in future years. The growing appetite for additional spending was also reflected in a proposal to divert
unemployment insurance taxes to finance new parental leave benefits, which
the Governor wisely rejected. And while the adoption of a state charitable deduction as part of the 2001 budget is a
positive development, the failure to embrace a broad-based cut in the income tax rate is particularly disappointing given the
large surplus and continued strong growth of state tax revenues.
Fiscal 2000 -- Closing Chapter
ith the Governor's recent signing of a final supplemental
budget for the year, the state Comptroller can now proceed to close the books on fiscal 2000, which officially ended June
30. Although the final accounting of spending and revenues will not be reported until October 31, MTF projects a 2000
budget surplus of $775 million,{1} a figure that is slightly higher than the administration's estimate of $760 million.
Fiscal 2000 marks the fifth consecutive year of budgetary surpluses in the range of one-half billion dollars or more,
topped only by the huge $1.2 billion surplus in fiscal 1998.
In a major fiscal accomplishment, the lion's share of the 2000
surplus, $500 million, will be used to pay Central Artery cost overruns and help fund the statewide transportation program
without burdening the state operating budget (see Table 1). This action was part of a positive transportation financing
plan adopted by the Governor and Legislature in mid-May. While the Commonwealth will continue to face a long-term
challenge in meeting its infrastructure investment needs with limited capital resources, the decision to use
surplus revenues to help address Central Artery financing is an important
contribution to the state's future fiscal stability.
Much of the remaining surplus, about $195 million, will be
dedicated to a variety of one-time capital investments, including Chapter 90 local road and bridge repairs ($50
million), acquisition and redevelopment of MDC properties ($16 million), public libraries ($12 million), improvements at the
Registry of Motor Vehicles ($12 million), dredging ($10 million), and historic preservation grants ($5 million). The
Governor vetoed another $20.1 million of capital project spending from surplus revenues that was included in the final
deficiency budget. Another $10 million of the surplus is earmarked for a new endowment fund for programs
to improve superintendent, principal and teacher quality. While the Foundation generally supports the use of
surplus funds for pressing one-time capital needs, it is unfortunate that the
Governor has approved provisions of the final deficiency bill that dedicate $67 million of the 2000 surplus to new MBTA
capital investments. This prolonging of state assistance undercuts the sweeping fiscal reforms enacted last year to put
the authority on an independent financial footing.
Under state finance law, 40 percent of the remaining estimated
surplus of approximately $70 million will be dedicated to current capital costs which otherwise would require borrowing,
with the residual balance of just over $40 million to be transferred into the stabilization fund. This deposit plus
interest earnings on previous balances will bring the total amount in the rainy day fund to almost $1.5 billion, or close
to 7 percent of projected 2001 revenues.
Since 1996 the state has distinguished itself in its prudent
use of surpluses, devoting balances in roughly equal shares to critical one-time capital needs, deposits to the rainy day
fund, and tax cuts. This surplus strategy has strengthened the state's fiscal position while avoiding building up the ongoing
spending base.
Fiscal 2001 -- Vetoes and Overrides
On the final day of formal legislative sessions, the House and
Senate overrode 26 of the Governor's 130 line item vetoes of proposed fiscal 2001 spending, adding $88.2 million of the
$174.8 million veto total back to the budget (see Table 2). With these actions, initial appropriations for the new fiscal
year equal $21.547 billion, $1.37 billion or 6.6 percent over the initial 2000
budget{2}, a figure that rises to 7.5 percent
after taking into account known underfunding. As noted in our July 21 Bulletin, up to $200 million in supplemental
2001 appropriations will be needed, primarily for Medicaid, because of inadequate funding in the initial
budget. While it is traditional to authorize additional appropriations for
unexpected deficiencies that develop during the course of the fiscal year, beginning the year with significant underfunding
of a major program such as Medicaid is a troubling divergence from the responsible budgeting that has been the norm in
recent years.
As expected, lawmakers overrode the Governor's $25 million
veto of state employee health benefits, which was tied to an administration proposal to increase from 15 percent to 20
percent the employee share of benefit premium costs. This proposal has been repeatedly rejected by the Legislature,
which last year overrode a similar, gubernatorial veto.
Several of the Governor's vetoes -- and legislative overrides
-- were earmarks of operating funds for capital projects, including parks and roads. Although funding capital projects
through the operating budget relieves some of the strain on the Commonwealth's capital finances and averts interest costs
for capital bonds, the practice of earmarking dollars gives priority to favored projects which in many cases would have
been given a lower priority in the bond-funded capital budget, either by delaying the start of the project or by not
funding it at all. In some instances, such as the highway department, the earmarking appears to have usurped
dollars needed for agency operations, creating underfunding that will require
supplemental appropriations later in the year.
While it was wise for the Governor to exercise his veto power
to reduce 2001 spending by approximately $175 million, several of his specific veto actions were nevertheless problematic.
One veto the Legislature surprisingly failed to override was the Governor's reduction -- from $25 million to $15 million --
of funding for salary increases for human services workers at private agencies operating under state contracts. With the
veto, human service providers, whose low pay scales have made it difficult to attract and retain a quality
workforce, will receive the smallest increase of the last three years, about
three percent.
Lawmakers also failed to override the Governor's veto of
almost $3 million for community corrections programs. The Foundation has been supportive of efforts to increase
financial support for these cost-effective alternatives to formal incarceration. As a result of the veto, only $13.6
million will be invested in community corrections in 2001, an amount actually slightly less than was budgeted in 2000.
It should be noted the Legislature's failure to override
vetoes is not necessarily the last word on 2001 spending in highly popular programs. In a number of areas -- youth summer
jobs, magnet and equal educational opportunity grants, school performance audits, and tobacco cessation efforts -- there
will be continuing pressure for supplemental appropriations to reverse the impact of the Governor's vetoes when the
Legislature reconvenes in formal session in January.
Capital
Financing some of the Commonwealth's long list of capital
needs -- including roads and bridges, environmental cleanups, parks and a host of other facilities -- was the focus of
several of the flurry of bills passed at the end of the session. A trio of bond bills authorize $3.7 billion in
borrowing for infrastructure investments, and the year-end deficiency bill directs almost $200 million of fiscal 2000
surplus revenues to pay-as-you-go funding for other capital projects, as discussed above.
The $3.4 billion transportation finance bill -- filed by the
Governor 18 months ago -- provides $1.7 billion for the Central Artery, $1.4 billion for the statewide road and bridge
program, $50 million for Chapter 90 local transportation aid, and over $200 million for other projects through 2003. Half of
the spending is financed with Commonwealth bonds and half with federal highway funds. Two other capital bond bills --
$145 million for environmental projects and $117 million for repairs to state-owned buildings -- also
survived the confusion of the final legislative hours.
While bond authorizations are necessary to keep these projects
moving forward, actual spending will still be limited by the administration's $1 billion annual borrowing limit. The bond
cap has been successful in slowing the runaway growth in state debt and increasing the Commonwealth's credit rating but has
created intense competition among authorized projects for funds. The Legislature and the Governor have historically
fueled this conflict by approving far more bond authorizations than the state could afford to issue. Despite attempts
by the House to scale back the latest bills and to require offsetting deauthorization of earlier bond approvals,
the total of new authorizations and earlier bonds that have been authorized but
remain unissued will rise to about $12.2 billion, more than ten times the $1 billion cap on annual borrowing. Included in
this total is $100 million authorized for the state's share of the new Fenway Park, which, if the funds are spent, will
squeeze an equivalent amount of other projects out of the capital plan. With numerous projects not even authorized, the
gap between the Commonwealth's capital needs and its ability to finance them continues to grow.
By applying surplus dollars to projects that had been
authorized for bond funding, the fiscal 2000 deficiency bill addresses selected capital needs that otherwise would be
delayed for years. The Governor, however, vetoed $20.1 million of the pay-as-you-go funding, including $5 million for a new
science facility at UMass Amherst, which is grappling with a $44 million funding shortfall in the campus' $300 million
five-year capital plan. The veto makes little sense given the acute shortage of science-trained workers in the state.
The capital funding shortfall will be exacerbated by the need
to divert $1.5 billion in future federal highway aid to repay Grant Anticipation Notes issued to help finance the Central
Artery. The Commonwealth's excessive reliance on GANs will reduce the state's ability to complete other important highway
projects for another decade after the Artery is complete. The transportation bond bill authorizes the final $150 million of
GANs; an administration plan to issue another $150 million in GANs to cover Artery cost overruns was
wisely rejected by the Legislature earlier this year.
By vetoing a section of the transportation bond bill that
would have created a blue ribbon transportation finance commission, the Governor missed an important opportunity to
address the Commonwealth's challenges in making critical capital investments, one of the greatest threats to the
state's future economic vitality. The commission, proposed by MTF and other organizations, would have assessed the state's
transportation needs -- with realistic cost estimates -- and developed a comprehensive strategy to finance
the most critical projects. Rather than continuing to offer piecemeal responses to the crisis of the day, the
Commonwealth needs to take a long-term perspective in its capital planning.
MBTA Capital
Unfortunately, the Legislature also proposed -- and the
Governor has approved -- using $66.6 million of the 2000 surplus for the planned MBTA Greenbush commuter rail extension
and improvements to Red Line stations. Just nine months ago the Legislature passed a sweeping set of fiscal reforms that
finally put some limits on the amount of state aid for the T, perhaps the most important achievement of the 1999-2000
session. Under the reforms, which have been in effect for less than two months, the MBTA was expected to
manage spending and increase revenues in order to finance its capital program with
its own resources. The Governor and the Legislature should have given the T a chance to meet this challenge before
providing additional funds that the authority never requested.
Fenway Park
The session's most intensely anticipated legislation provides
$100 million of capital funding for street and public transit improvements to support the construction of a new Fenway Park.
The bill generally follows the approach of last year's Patriots stadium financing plan by limiting state spending to
public infrastructure and not the ballpark itself. The finance plan also avoids the imposition of any broad-based taxes,
relying on user fees -- surcharges on tickets, luxury boxes, and game day parking -- and additional tax receipts generated
by the development itself to finance the city of Boston's contribution to the project. The onus is now on the
Red Sox to line up the financing for constructing the ballpark.
Privatization
The Legislature's actions in the final days of the session
provide contradictory messages on attempts to streamline government services. The environmental bond bill includes a
long-sought provision to allow the Department of Environmental Management to enter into long-term management agreements for
its skating rinks, which should result in more cost-effective operation and better maintenance of the facilities. The
legislatively approved transportation bond bill, on the other hand, took a step in the wrong direction by
extending the Pacheco law to freight service from New Bedford operated by
the Woods Hole, Martha's Vineyard and Nantucket Steamship Authority. The application of this misguided law, which makes
it nearly impossible to contract out government services regardless of improvement in quality or cost savings, needs
to be scaled back, not expanded, and the Governor deserves credit for vetoing its extension to the
Steamship Authority.
Paid Parental Leave
Despite pressure from organized labor groups and parental
leave advocates, Governor Cellucci has wisely avoided the temptation to finance a politically popular paid parental
leave benefit out of the state's unemployment insurance trust fund. Under the proposal included in the final deficiency
budget, parents would be eligible to collect up to 12 weeks of unemployment insurance benefits at any time during the first
year following the birth or adoption of a child. While paid parental leave is an idea with considerable merit,
the proposed funding mechanism posed a serious threat to the integrity of the unemployment insurance trust
fund. The fund's historic purpose has been to provide financial assistance to
unemployed workers.
Until very recently, the use of UI taxes for purposes other
than unemployment assistance has been federally prohibited, and so far no other state has approved using trust fund
revenues for parental leave benefits.
In rejecting the Legislature's proposal, the Governor
substituted an amendment which would provide a tax credit of up to $2,550 per employee to employers offering a paid
parental leave benefit. The program would be voluntary for employers and include a maximum benefit to employees of $5,100
-- $425 per week for not more than 12 weeks. Implementation of the tax credit would be subject to a joint feasibility study
by the Department of Labor and Workforce Development and the Department of Revenue. Because the
Legislature has ended its formal sessions for the year, there will be no action on the
Governor's amendment in 2000.
{1} The amount of 2000 appropriations left unspent at the end
of year (so-called reversions) will be reported by the Comptroller at the end of October. The MTF surplus estimate
assumes that 2000 reversions equal the fiscal 1999 amount of $558 million.
{2} After adjusting for $645 million of MBTA funding moving
off-budget in 2001.