JAY GONZALEZ
WAYS AND MEANS COMMITTEE TESTIMONY
MARCH 3, 2009

I want to begin by thanking Chairman Panagiotakos, Chairman Murphy and the members of the Ways and Means Committees for giving us this opportunity to discuss the Governor's Fiscal Year 2010 budget recommendation with you. Secretary Kirwan is very sorry to be missing this hearing - if it were up to her instead of her doctors, she would be here. I am happy to report that she is recovering well and should be back in the office in a few days.

Secretary Kirwan values the partnership she has developed with all of you and with Chairman Panagiotakos and former Chairman - now Speaker - DeLeo in particular. She also appreciates and recognizes the importance of the strong working relationship that has developed between our staffs. She, I and the rest of the team in Administration and Finance extend our congratulations to Chairman Murphy on his recent appointment, and we all look forward to working with him, Chairman Panagiotakos, the other members of the committees and the staffs of the committees to responsibly address the fiscal challenges facing the Commonwealth.

This partnership and strong working relationship is more important now than it ever has been. The Commonwealth is in the midst of the worst economic downturn since the Great Depression. More and more residents are losing their jobs, their health insurance, their homes, their businesses, their investments and their capacity as consumers to make the expenditures that serve as the lifeblood of the economy. As a result, more and more people need state services and assistance, but the tax revenues the state depends on to meet these needs are diminishing. Maintaining a balanced budget in the face of these pressures requires that we make many difficult decisions - decisions that in one way or another will impact virtually every resident of the Commonwealth.

We may not agree on every one of these decisions or on every proposal for meeting the extraordinary fiscal challenges we face. I know, however, that we share a genuine commitment to meet these challenges in a manner that serves the best interests of the Commonwealth. On the basis of this shared commitment, we look forward to working in close partnership with you to resolve whatever differences we may have and to enact a fiscally and socially responsible budget.

Challenges

The challenges we face in developing the Fiscal Year 2010 budget are extraordinary, and they are compounded by the ongoing fiscal challenges we must manage in the current fiscal year. Even before we started to see the tax revenue impacts of the current economic crisis last fall, we had inherited a persistent structural budget deficit that required a $401 million transfer from the Stabilization Fund to balance the Fiscal Year 2009 budget. Early in FY09, we began to experience weaker than expected tax revenue collections as a result of the economic downturn. To date, we have reduced our tax revenue estimate for FY09 by close to $2 billion, and we are projecting virtually no growth over this reduced FY09 tax revenue estimate for FY10. This sharp decline in tax revenues and natural spending pressures have required us to close budget gaps over the last few months totaling approximately $6 billion for FY09 and FY10.

The length and depth of the economic crisis is still unknown, and its impact on the state budget is still uncertain. We are already seeing cause for additional concern and potential budgetary exposures. Yesterday's announcement that February tax revenues fell $86 million short of the revised revenue estimate is a troubling result for a relatively small tax collection month. This news leaves us $62 million short of budgeted revenues for the year to date. If this trend continues in the bigger tax collection months that remain in FY09, we could be faced with another significant revenue shortfall to solve for FY09 and with the need to reduce our revenue estimate for FY10.

We are currently in the process of reviewing the status of the FY09 budget and identifying any deficiencies that will need to be addressed. While we have not yet completed this analysis, there are at least some exposures we are anticipating. Additional costs related to snow and ice removal and settlements and judgments are just a couple of examples of budgetary shortfalls that will need to be addressed. We expect to complete our analysis and to quantify these and any other budget deficiencies within the next few weeks. It is likely, however, that we will need to find additional budget solutions in the remaining months of this fiscal year to address budget deficiencies.

Governor's Emergency Recovery Plan

In response to these unprecedented fiscal challenges, the Governor proposed an Emergency Recovery Plan. This plan will allow us to responsibly manage our FY09 and FY10 budget challenges. The Governor's plan strikes a balance between protecting critical government functions and making the tough choices required to maintain balanced budgets and to position us for growth and fiscal sustainability in the years to come.

The Governor's Emergency Recovery Plan has four major elements: (1) budget cuts and savings; (2) use of reserves and other one-time revenues; (3) new sustainable revenue sources; and (4) reforms to make government more effective and efficient.

The magnitude of the fiscal challenge we face makes significant and painful budget cuts unavoidable. Even after taking into account much-needed federal stimulus funds and the rainy day funds and new revenues we have proposed, we have identified $2.9 billion in cuts and savings - virtually half of the solution to the $6 billion budget gap for FY09 and FY10.

These cuts are deep and spread throughout the budget, and they will be felt by every constituency and by every citizen. They will require a shared sacrifice - sacrifice from the state employees who contribute more to their health insurance premiums; sacrifice from our cities and towns who must cut services in response to reductions in state aid; sacrifice from state agencies who will experience deep cuts in each of their budgets; and sacrifice from citizens throughout the Commonwealth who will feel the impact of these cuts in their day-to-day lives when their streets aren't plowed; when fewer police officers are on their streets; when their local community centers and libraries reduce their hours; when their parks aren't maintained as frequently; when they wait in line longer at the RMV; when the fees they are charged to attend our universities and colleges go up; and when the state assistance thousands of them depend on for affordable housing, health care or other basic needs is not available to all of them. Many of the Governor's priority initiatives have also been scaled back, including his "Readiness Project" education reform initiative, the life sciences initiative and the Commonwealth Corps volunteer program.

We understand the hardships these budget cuts will cause. The Administration is doing - and will continue to do - everything possible to mitigate the impact of the cuts on critical programs and services. To this end, the Governor's Fiscal Year 2010 budget recommendation proposes to give state agencies additional flexibility to manage these severe budget cuts by consolidating over 800 budgetary line item accounts into just over half that amount. This builds on the authority the legislature granted the Administration to transfer appropriated amounts between line items to help manage the budgetary challenges agencies are facing in the current fiscal year.

The second element of the Governor's Economic Recovery Plan is the use of reserves and one-time revenue sources to maintain services and programs and to serve as a bridge to economic recovery. The Governor's plan - which was developed before the federal economic recovery bill was passed - conservatively assumed and relied on over $1.2 billion of additional Medicaid assistance from the federal government for fiscal years 2009 and 2010. While helpful for avoiding even deeper cuts in health care programs, this amount solves only one-fifth of our total budget shortfall for fiscal years 2009 and 2010. In addition, the Governor's plan proposes using over $1.4 billion in reserves from the Stabilization Fund to avoid deeper cuts in programs and services and to maintain balanced budgets in fiscal years 2009 and 2010. This will reduce our Stabilization Fund balance from over $2.2 billion at the beginning of FY09 to over $800 million at the end of FY10.

Based on the final version of the federal economic recovery act, it appears that we will receive more in additional federal Medicaid funding than anticipated by the Governor's Economic Recovery Plan. While this is welcome news, we must be prudent in budgeting this additional amount as it may be needed to help prevent further painful cuts caused by the tax revenue shortfalls and other potential budgetary exposures I described before. Thanks in part to Governor Patrick's leadership and advocacy, the federal economic recovery act will also provide the Commonwealth with unprecedented, one-time funding to help prevent cuts in education and other spending. The Administration is still analyzing these provisions of the federal bill and awaiting federal guidance on when the funding will be available and how it can be used. It is expected, however, that this funding will enable us to restore some of the cuts that we proposed to higher education and to bring fiscal year 2010 chapter 70 education funding to the level necessary to bring every community to foundation.

The use of these one-time revenue sources is necessary and appropriate in the current fiscal environment. The purpose of the additional federal funding is to preserve vital health care, education and other programs and services at a time when they are most needed. The reason we maintain a rainy day reserve fund is to help the state survive rainy days. It's not just raining now - we are in the midst of a fiscal storm. The use of these one-time revenue sources will help us build a bridge to an economic recovery that brings with it increased tax revenues that allow us to reduce our reliance on the use of reserves and one-time revenues.

We must, however, be responsible in using one-time revenues to build a bridge to better times. We need to ensure we have the resources to build the bridge all the way to the other side of the fiscal canyon, the distance and depth of which continues to remain uncertain. In addition, we need to ensure that we build a bridge that takes us to solid ground, a place where we can continue down the road to growth and prosperity on our own two feet.

The Governor's economic recovery plan attempts to strike the right balance between using our rainy day funds to supplement the federal economic recovery assistance to preserve vital programs and services and avoid the need for more painful cuts, while at the same time ensuring that we preserve enough of our rainy day fund balance to help address additional exposures that may develop in fiscal years 2009 and 2010 and to provide us with at least a modest level of security for the years to follow. The Fiscal Year 2010 budget relies on approximately $1.2 billion of combined one-time federal assistance and rainy day funds, a structural deficit that serves as our starting point for Fiscal Year 2011. The more than $800 million balance the Governor's plan preserves in the Stabilization Fund - and the unanticipated additional federal Medicaid funding - should help us address budgetary exposures that materialize over the next year and a half and any portion of the structural deficit in Fiscal Year 2011 not addressed by an economic recovery and a resulting increase in tax revenues.

The third element of the Governor's Emergency Recovery Plan is new revenues. These new revenue proposals will protect funding for related, high-priority programs in the short-term, and they will provide stable, sustainable sources of funding for these purposes in the years to come. They will also further other important public policy objectives. These proposals include: a statewide, one-percent increase in the meals tax and hotel/motel tax to preserve funding for municipalities, as well as authorization for municipalities to increase each of these taxes by an additional one percent at their option and for their own benefit; the elimination of the sales tax exemptions for alcoholic beverages, sweetened drinks and candy to preserve funding for public health programs; the inclusion of bottles used for non-carbonated drinks in the bottle bill deposit program to preserve funding for state recycling programs and for assistance to water and sewer ratepayers; and increases in certain departmental revenues, including an increase in some RMV fees to preserve existing transportation funding.

In total, these new revenue proposals will generate $42 million to solve our Fiscal Year 2009 budget shortfall and close to $600 million to solve our Fiscal Year 2010 budget shortfall. Although these new revenue proposals constitute less than one-fifth of the total solution needed for Fiscal Year 2010, they represent a responsible and critical component of a balanced approach to meeting our fiscal challenges.

The last element of the Governor's Emergency Recovery Plan is a number of reform proposals. The fiscal crisis presents both the need and the opportunity to change the way we do things to make government more efficient, effective and responsive to the needs and concerns of its citizens. The Governor's plan includes the following reforms for state government: consolidating the state's homeless services in furtherance of our "housing first" strategy; consolidating information technology governance and infrastructure; consolidating energy management; converting the seven county sheriffs to state sheriffs; surplus land reform; and more. These reforms will achieve budgetary savings and more coordinated, thoughtful management of state resources and programs. In addition to these reform efforts through the Governor's Emergency Recovery Plan, the Administration is separately pursuing reforms for our transportation system, criminal justice system, state employee pensions and government ethics.

The Governor's plan also proposes various municipal reforms. These reforms will give municipalities tools they need to better manage the fiscal crisis and will encourage long-term cost savings initiatives at the local level. In addition to giving municipalities the ability to raise their own additional revenues through the local option meals tax and hotel/motel tax and through the elimination of the outdated property tax exemption for telecommunication companies, the Governor's plan makes it easier for municipalities to join the state's Group Insurance Commission to achieve savings in employee health insurance costs, promotes regionalization initiatives and collaborative purchasing opportunities, and modernizes various outdated, overly burdensome and costly administrative requirements imposed on cities and towns.

Priorities Protected

Although budget cuts are unavoidable and widespread, the balanced, multi-pronged approach to solving our budget challenges proposed by the Governor through his Economic Recovery Plan has allowed us to mitigate the impact on certain high-priority programs and services. Notably, we have protected funding for Chapter 70 education aid by funding it at the all-time high FY09 level. We are also maintaining investments in extended learning time and college scholarships; funding continued growth in MassHealth and Commonwealth Care necessary to pay for health care reform while maintaining our state's generous eligibility standards without capping enrollment or cutting benefits; maintaining housing assistance for our most vulnerable residents; and maintaining services for domestic violence, summer jobs for youths, veterans' benefits and gang violence prevention programs.

Before taking questions, I want to take this opportunity to thank and recognize a few people for their contributions to the Administration's effort to manage the FY09 fiscal challenges and to develop the Governor's FY10 budget recommendations.

One of the most difficult aspects of budgeting over the last few months has been analyzing the rapidly shifting trends in the economy and in tax revenue collections to estimate tax revenues that will be available to support budgetary spending. The current economic crisis is unprecedented and continues to surprise some of the world's greatest economists. Commissioner Bal, Howard Merkowitz and the rest of the team at the Department of Revenue have done a great job helping us track and analyze the rapidly changing economic developments and tax revenue implications. We are also fortunate to have benefited from the advice and insight of the Governor's Economic Advisory Council, chaired by Cathy Minehan. Additional thanks goes to Council members Alan Clayton-Matthews of the University of Massachusetts and James Stock of Harvard University.

I also want to thank the entire A&F team for their hard work, dedication. Special recognition and thanks go to Assistant Secretary for the Budget, Matt Gorzkowicz. It is impossible to overstate the importance of Matt's leadership, competence, creativity, professionalism and patience. I know that Secretary Kirwan is grateful for the incredible work Matt and his team do everyday and that she could not be more proud of them.

In her absence, I am also going to take this opportunity to say a word about Secretary Kirwan. As someone who has the pleasure and the privilege of working with the Secretary everyday, I know how fortunate the citizens of the Commonwealth are to have her serve as the Governor's steward of the state's finances in these difficult fiscal times. I think all would agree that her calm, competent and proactive leadership has been critical to the state's management of the extraordinary circumstances we face.

Lastly, I want to thank the Governor and the Lieutenant Governor for their active participation and leadership in managing the state's fiscal challenges.