The fiscal condition of the Commonwealth of Massachusetts is excellent. According to the Comprehensive Annual Financial Report (CAFR) recently released by the Comptroller, Fiscal Year 1998 closed with a $1,841.4 billion balance on a Generally Accepted Accounting Principles (GAAP) basis. The balance calculated on the less rigorous statutory basis of accounting is a resounding $2,192.1 billion. This is the eighth consecutive fiscal year that closed with a budgetary surplus. The Cellucci/Swift Administration’s task now is to manage the Commonwealth’s prevailing prosperity into the future despite an array of global uncertainties that could slow the national economy and impact virtually all states.

The fiscal well-being of the Commonwealth stems not simply from the long national economic expansion. The cooperation of the Legislature and the Administration in responsibly managing Massachusetts’s finances has allowed the Commonwealth to recover from the budget deficits of the late 1980s as well as to prepare for the future. Legislation was approved in Fiscal Year 1998 to again raise the statutory ceiling on the Stabilization Fund, the Commonwealth’s "rainy day" hedge against the fiscal pressures of an economic downturn. The fund’s cap is now 7.5% of total budgetary revenue and the balance in the fund, including the Fiscal Year 1998 deposit of $317.4 million, stands at $1.16 billion, the third largest in the nation. That is a marked contrast to the fund’s zero balance at the end of Fiscal Year 1990.

The Commonwealth has built up other protections against the possibility of a deteriorating economy. The State retains $128 million in the Caseload Increase Mitigation Fund, funded with one-time revenue that resulted from federal welfare reform in Fiscal Year 1997. Massachusetts is among only ten states to maintain a buffer against the rise in welfare caseloads that typically accompany an economic decline. The Unemployment Insurance Fund, depleted in the early 1990s, now carries a balance of $1.7 billion. Also, this year’s budget recommendation includes a proposal to effectively manage the multi-billion dollar tobacco settlement, which will both support health-care programs for our neediest citizens well into the next millenium and create a reserve for future needs.

As part of the ongoing effort to address the demand for capital projects that built up as the Commonwealth recovered from the excesses of the late 1980s, almost $200 million was appropriated at the close of Fiscal Year 1998 for capital expenditures. It was the second year in a row that about $200 million of revenue surpluses were able to be spent on one-time capital projects.

The effects of the Commonwealth’s judicious fiscal management have not gone unrecognized on Wall Street. In Calendar Year 1998, confidence in the Commonwealth was again demonstrated by two hikes in Massachusetts’s bond rating. Because ratings are indicators of the investment quality of a security, including the relative risk of default, bonds become increasingly difficult and hence more expensive to market as ratings fall. The rating up-grades since December 1989, when the Commonwealth’s bonds were rated only one level above "junk," have saved the taxpayers of Massachusetts tens of millions of dollars in interest expenses.

	Moody’s	Standard & Poor’s	Fitch
July 1989	A	A	AA
October 1989	A	A	A
November 1989	Baa1	A	A
December 1989	Baa1	BBB*	A
March 1990	Baa*	BBB*	A
September 1991	Baa*	BBB*	A
December 1991	Baa*	BBB*	A
September 1992	A	A	A
October 1993	A	A+	A+
November 1994	A1	A+	A+
October 1997	A1	AA-	A+
January 1998	A1	AA-	AA-
April 1998	Aa3	AA-	AA-

The Cellucci/Swift Administration is committed to the strategy that has proved so successful for the past eight years in shaping and safeguarding the Commonwealth’s sound fiscal condition: save for future contingencies; commit to one-time projects instead of new initiatives for which funding could prove untenable over time; and return budgetary surpluses to the rightful heirs, the Commonwealth’s taxpayers. Of the Fiscal Year 1998 surplus, $200 million was transferred to the Tax Reduction Fund and $162.5 million is being held in escrow to finance the increased personal income tax deductions approved for Tax Years 1998 and 1999. This is the third such reduction funded with year-end surplus revenue in as many years. In all, the 28 tax cuts passed during the Weld and Cellucci Administrations will save taxpayers an aggregate of more than $2.3 billion in Fiscal Year 2000.

In part because Massachusetts has changed the business climate by substantially reducing taxes, the Commonwealth is much better positioned to withstand economic shocks than it was eight years ago. The economic base has also diversified as reliance on traditional manufacturing and defense contracting has waned in favor of emerging technologies, high tech manufacturing, financial services, and health care industries. As indicated on the following chart, Massachusetts has an equal or above-average employee concentration in five of the six fastest growing industries in the country. On the whole, Massachusetts’s economy is expected to continue to out-perform those of the region and the nation into the foreseeable future.

Despite the sweeping accomplishments of the last eight years, more work needs to be done. The Cellucci/Swift Administration’s Fiscal Year 2000 budget includes several recommendations of the Governor’s Transition Team for Fiscal and Economic Policy that will help to ensure the Commonwealth’s long-term fiscal stability. The recommendations are:

• To focus the annual budget dialogue away from how much is available to spend to one that addresses how much the Commonwealth needs to spend to meet its obligations, the Administration proposes several changes to the appropriations process. The first requires agencies to provide five-year "budget buster" spending projections. Since those eight program areas¹ account for most of the Commonwealth’s non-discretionary spending, and almost 70% of budgeted expenditures, the information will be a valuable planning tool for determining future spending requirements. This budget also proposes that all new program initiatives and expansions provide detailed information about out-year cost implications. Finally, the Administration recommends an annual consensus spending estimate to mirror the consensus revenue estimate that exists under current law.
  
 

• To ensure that the Commonwealth lives within its means, the Fiscal Year 2000 budget recommends that the Legislature be required to certify that sufficient revenues exist to fund supplemental appropriations. Only the Governor is currently required to make this certification.
  
 

• The Administration recommends requiring a two-thirds vote of the Legislature to appropriate funds from the Stabilization Fund, sheltering the hard-earned balance in the fund from being frivolously expended.
  
 

• State agencies should act in a business-friendly manner, and be subject to penalties like those in the private sector when they do not. To provide an incentive for the prompt payment of vendors, the Administration recommends authorizing the Secretary of Administration and Finance to increase interest charges against state agencies with a pattern of habitually late payment.
  
 

• The Fiscal Year 2000 budget recommends making permanent the prevailing investment tax credit and also bringing the Commonwealth’s tax treatment of offshore investment companies into conformity with the practices of the federal government. The approval of these two initiatives would have no impact on Fiscal Year 2000 revenues.
  

The Cellucci/Swift Administration’s Fiscal Year 2000 budget recommendation continues the fiscally prudent policies that have been the hallmark of the Commonwealth since Calendar Year 1991. It incorporates revenue projections that have been forecast conservatively but realistically. Proposed spending reflects a modest increase of 2.5%, mostly for increased Local Aid, education, and expanded health care coverage. These priorities provide a sound foundation for the next generation as we enter into a new millenium.

The vitality of the national and local economies, as well as the vagaries of federal financial participation, affect both the revenue available to and the spending incumbent upon state governments. Tax and non-tax revenue collections are dependent on employment levels, personal income, and inflation. During economic downturns, spending in support of many publicly funded programs, including budget-busting entitlement programs such as Medicaid and public assistance, rises in inverse relation to revenues. Responsible fiscal management dictates that the economy be assessed realistically on an ongoing basis. Revenues, including windfall taxes on capital gains generated by the booming stock market of the past three years, and spending must be managed with an eye to the potential for escalating demands on government resources.

Overall, Calendar Year 1998 was another economically healthy year for both Massachusetts and the nation. Despite weakness in the Asian and Russian economies, and the resulting turbulence in U.S. financial markets, the national economy for the year as a whole continued to grow strongly with few signs of inflation. Through the third quarter of 1998 (the latest data available), growth as measured by real Gross Domestic Product (GDP) was up 3.5% from a year earlier. Inflation through November 1998 as measured by the consumer price index rose at an annualized rate of only 1.5%, the lowest rate of increase since 1967.

The Commonwealth’s economy again outpaced that of the nation as a whole in Calendar Year 1998. As shown in the following graph, the unemployment rate in Massachusetts has fallen almost consistently since the peak of 9.6% in mid-Calendar Year 1991, and has remained at or below that of the nation for nearly four years. Monthly unemployment in Massachusetts in Fiscal Year 1998 averaged a low 3.7% as compared to the national rate of 4.7%. In November 1998, the rate in Massachusetts stood at 2.9%, a full percentage point lower than a year earlier and the lowest rate in over 11 years. The national rate during the same period was 4.4%.

Growth in the rate of employment has a positive impact on personal incomes for Massachusetts residents. Personal incomes in Massachusetts have outpaced the rate of growth in the national economy in most quarters since the depths of the recession in Calendar Year 1991. As indicated on the following chart, Massachusetts personal income in Fiscal Year 1998 grew 5.1%, a full percentage point higher than the national rate.

The levels of employment, income, and general business activity directly affect the income, sales, corporate, and other tax revenues available to the Commonwealth. In Fiscal Year 1998, sales tax collections were up by more than 7% (after adjusting for a change in the schedule for collecting sales taxes that resulted in a one-time revenue reduction in Fiscal Year 1998) and income tax revenues rose by 11.8%, or $850 million, from Fiscal Year 1997. In the aggregate, tax revenues available for the budget totaled $14.025 billion in Fiscal Year 1998, up $1.160 billion, or 9%, from Fiscal Year 1997. Adjusting for the sales tax change described above as well as other tax law changes, base tax revenue collections rose by 12% in Fiscal Year 1998.

Halfway through Fiscal Year 1999, the U.S. economy continues to expand with an inflation rate that, given the tight job market, remains low. However, most economic forecasters believe that the outlook for the second half of Fiscal Year 1999 and for Fiscal Year 2000 is one of moderating growth. The tax revenue forecast for Fiscal Year 2000 is based on an annualized rate of growth in real GDP of about 2%. This declining growth reflects the predicted impact of developments in Asian and other foreign economies and the maturing of the current economic expansion, which as of January 1999 is the longest peacetime expansion in U.S. history. Only the 117-month stretch of growth in the 1960s was longer. Inflation as measured by consumer prices should range near 2%. The U.S. unemployment rate is not expected to change significantly in the next year or two; Calendar Year 1999 is projected to end with a jobless rate of approximately 4.6% that will edge up to 4.8% by the end of Calendar Year 2000.

The Massachusetts economy over the next 18 months is expected to roughly mirror that of the nation. Unemployment is projected to average slightly above 3% for Fiscal Year 1999 and to rise by 0.3% - 0.5% in Fiscal Year 2000. Growth in personal income is expected to decline from the Fiscal Year 1998 rate of about 5.1% to approximately 4.5% in Fiscal 1999. It should hold about steady in Fiscal Year 2000, although forecasts among economists range more widely than has been the case in recent years with personal income growth projections varying from 3.7% to 5.9%. The rate of inflation (as measured by consumer prices), at least in metropolitan Boston, should continue to outpace that of the nation by at least 0.5%. The downside risks for Massachusetts should remain unchanged from those of the past few years: a shortage of skilled labor coupled with low net population growth that will constrain job creation, and the prominence of the financial services industry in the economy such that Massachusetts could be impacted more than any other state if the equities markets turn strongly bearish.

Tax and non-tax revenue assumptions for the Fiscal Year 2000 budget are organized by fund and revenue type in the following table. Total Fiscal Year 2000 revenues are projected to be $20.241 billion. Tax revenues are projected to total $14.459 billion, which reflects a reduction of $226 million for tax cuts recently filed by the Administration and incorporated in this budget recommendation. This represents an increase of 3.3% over Fiscal Year 1999 projected tax revenues. Non-tax revenues are projected to total $5.782 billion, a 1% increase from Fiscal Year 1999. After accounting for the proposed transfer of certain programs off-budget, non-tax revenues are projected to increase 2.6% in Fiscal Year 2000.

	All				Other
	Budgeted	General	Local Aid	Highway	Budgeted
Source	Funds	Fund	Fund	Fund	Funds
Tax Revenue
Alcoholic Beverages	57.0	57.0	0.0	0.0	0.0
Banks	150.0	150.0	0.0	0.0	0.0
Cigarettes	302.0	102.6	0.0	0.0	199.3
Corporations	1,083.0	649.8	433.2	0.0	0.0
Deeds	84.0	84.0	0.0	0.0	0.0
Income Tax	7,952.1	4,771.3	3,180.8	0.0	0.0
Estate/Inheritance	197.0	197.0	0.0	0.0	0.0
Insurance	311.0	311.0	0.0	0.0	0.0
Motor Fuels	675.0	90.5	0.0	576.1	8.4
Public Utilities	158.0	158.0	0.0	0.0	0.0
Racing	7.0	7.0	0.0	0.0	0.0
Room Occupancy	122.0	68.0	0.0	0.0	54.0
Sales: Regular	2,422.8	1,440.2	960.1	0.0	22.5
Sales: Meals	442.0	265.2	176.8	0.0	0.0
Sales: Motor Vehicles	484.0	290.4	193.6	0.0	0.0
Miscellaneous	12.1	12.1	0.0	0.0	0.0
Total Tax Revenue	14,459.0	8,654.0	4,944.6	576.1	284.3
Non-Tax Revenue
Federal Reimbursements	3,488.8	2,720.1	0.0	4.8	763.9
Departmental Revenue	1,270.0	810.3	0.7	260.9	198.1
Consolidated Transfers	1,023.6	288.9	690.5	0.0	44.3
Total Non-Tax Revenue	5,782.4	3,819.3	691.2	265.7	1,006.3
Total Budgetary Revenue	20,241.4	12,473.2	5,635.7	841.8	1,290.6

The Fiscal Year 2000 revenue estimates reflect several proposed transfers between budgeted and non-budgeted funds. These movements have no net effect on the Commonwealth’s statutory balance or financial condition. However, they do affect gross spending and revenue totals, changing the overall size of the state budget and should be noted. This budget incorporates shifts of $164.6 million of revenue and spending from budgeted to non-budgeted accounts.

• In anticipation of the receipt of proceeds from the tobacco industry settlement, the Cellucci/Swift Administration proposes the establishment of the Health Care and Community Service Trust Fund. The annual payments to the fund are expected to begin in Fiscal Year 1999 and are estimated to annualize at between $250 and $300 million. In Fiscal Year 2000, the Administration proposes shifting $145.8 million of previously budgeted expenditures to the trust. Many of these expenditures are federally reimbursable and are anticipated to produce $71 million in revenue for the fund in Fiscal Year 2000. In addition, the Administration proposes to use $70 million from the trust to fund out-year obligations for health care expansion in the Children’s and Seniors’ Health Care Assistance Fund. Finally, the trust will supplant a $37 million transfer from the General Fund to the Children’s and Seniors’ Health Care Assistance Fund for the costs of Emergency Assistance to the Elderly, Disabled, and Children (EAEDC) clients.
  
 

• In Fiscal Year 1999, the Legislature created a new Workforce Development Fund that will use $18 million of Unemployment Insurance contributions to fund worker training programs. The Administration proposes to shift this funding off-budget to allow maximum flexibility in addressing the needs of employers and workers.
  
 

• The Administration proposes creation of a new off-budget trust for administration of the Low-Income Housing Tax Credit (LIHTC). Fees for the LIHTC currently are held in a retained revenue account and are projected to total almost $800,000 in Fiscal Year 2000. The proposed change would ensure compliance with federal guidelines mandating that LIHTC revenue be dedicated to the program.
  
 

• The transition of Hampden, Hampshire, and Worcester Counties into state government will be completed in Fiscal Year 1999. The Administration's commitment to eliminate the duplication of services and to avoid needless state spending on county insolvency will continue with the assumption by the Commonwealth of the operations of the Suffolk County Registry of Deeds and of Essex County in Fiscal Year 2000, resulting in additional state spending of $11.5 million in Fiscal Year 2000. However, the spending being assumed by the Commonwealth will be offset by county revenues that are to be credited to the State.
  

  This budget recommendation also provides for the abolition of the governments of Bristol and Plymouth Counties effective July 1, 2000 (or earlier if these counties default on debt obligations). Legislation approved in Fiscal Year 1999 calls for the abolition of government for Berkshire County effective July 1, 2000.
  

 

• In addition to the shifts between budgeted and non-budgeted funds noted above, Fiscal Year 2000 spending and revenue estimates incorporate the proposal to eliminate the Social Services budgeted minor fund. This proposal will result in federal Social Services Block Grant (SSBG) funds collected by the Department of Social Services being deposited as unrestricted revenue to the General Fund. The recommendation will have no net effect on gross spending or revenue since the shift is between budgeted funds.

Moderate economic growth with low inflation is the basic assumption underlying the Fiscal Year 2000 tax revenue forecast. Overall, the Department of Revenue projects a slowing in the growth rate of the tax revenue base (the tax estimate before the Fiscal Year 2000 impact of any tax law changes are incorporated). In Fiscal Year 2000, the tax revenue base is expected to increase by 3.9% from that in Fiscal Year 1999, as compared to (fiscal) year-over-year increases of 5.6% for Fiscal Year 1999 and 12% for Fiscal Year 1998.

Total Fiscal Year 2000 tax collections (the projected tax revenue base adjusted by the Fiscal Year 2000 impact of both previously enacted and proposed tax law changes) are estimated to increase by 3.3% over Fiscal Year 1999 levels. These projections are fiscally conservative and fall below the forecasts of most private economic forecasters. However, given the potential for further tumult in overseas economies, the Fiscal Year 2000 tax revenue forecast is responsible.

Over the past eight years, the Commonwealth has made significant advances in easing the tax burden of its citizens. The Fiscal Year 2000 budget recommendation reflects the Cellucci/Swift Administration’s commitment to tax relief. Described below are two tax proposals recently filed by the Administration that would encourage savings and investment in Massachusetts. The revenue impact for each is outlined in the table at the end of this section.

Recently Filed Tax Cuts Reflected in House 1	Fiscal Year 2000 Revenue Impact ($ millions)
1.   Reduce tax on "earned" income from 5.95% to 5.00%	$219.0
2.   Reduce tax on interest and dividend income from 5.95% to
5.00%	$7.0
Total FY2000 Reduction in Tax Collections	$226.0

Three classes of non-tax revenue are shown in the Commonwealth’s financial statements: federal reimbursements (revenue associated with spending for which the federal government reimburses the State or provides matching funds), including block grants; departmental revenue (licensing and user fees, fines, and miscellaneous revenue collected by state agencies); and consolidated transfers (primarily Lottery profits deposited in the Local Aid Fund for distribution to cities and towns, and fringe benefit charges to off-budget funds).

The Cellucci/Swift Administration’s Fiscal Year 2000 budget recommendation assumes budgetary non-tax revenues of $5.782 billion. This amount totals $5.873 billion after adjusting for the transfers to and from off-budget accounts outlined above and represents an increase of $147 million from Fiscal Year 1999. The major changes in non-tax revenue are described below.

Federal reimbursements are projected to total $3.489 billion in Fiscal Year 2000, or $3.560 billion when adjusted for the impact of transfers to off-budget accounts. This level of reimbursement represents an increase of approximately 3.5% from Fiscal Year 1999 federal revenues.

Medicaid.   Division of Medical Assistance (DMA) revenue in Fiscal Year 2000 is projected to total $2.185 billion, an increase of $36 million over Fiscal Year 1999 that is attributable mainly to increased federal reimbursement of Health Care Reform expenditures. Expenditures transferred to the new Health Care and Community Services Trust will produce $66 million of federal reimbursements for the Trust. These expenditures stem from direct Medicaid and related administrative and technological spending through the Executive Office of Health and Human Services.

Welfare.   In Fiscal Year 1999, the Commonwealth will meet maintenance of effort requirements and be eligible to collect its share of the federal Temporary Assistance to Needy Families (TANF) block grant, $459.4 million.

In Fiscal Year 2000, the Commonwealth will collect $460.6 million in TANF block grant funds: its full $459.4 million Fiscal Year 2000 grant and $1.2 million of unspent funds from prior-year grants. The majority of the grant, $322.6 million, will be deposited into the Transitional Aid to Needy Families Fund at the state level, and the balance will be transferred at the federal level to the Child Care Development Fund (CCDF) block grant and the SSBG. Several departments will collect this TANF revenue:

• the Department of Transitional Assistance will collect $247.2 million for Transitional Aid to Families with Dependent Children (TAFDC) benefits and employment assistance programs;
  
 

• the Office of Child Care Services will collect $75.5 million for child care provided to TAFDC families who are required to work, and $91.9 million which will be transferred from the TANF block grant to the CCDF block grant; and
  
 

• the Department of Social Services will collect $45.9 million that will be transferred from the TANF block grant to the SSBG.
  

In Fiscal Year 2000, departmental revenues are projected to total $1.270 billion, or $1.271 billion after adjusting for the impact of transfers to and from off-budget accounts. This projection is approximately $26 million lower than the Fiscal Year 1999 departmental revenue estimate, due primarily to the implementation of lifetime drivers’ licensing and vehicle registration at the Registry of Motor Vehicles and a $10 million cyclical drop in licensing fees at the Division of Insurance.

Beginning in Fiscal Year 1998, drivers’ licenses and registrations for non-commercial passenger vehicles are renewable automatically and free of charge. To ensure that the Commonwealth’s cities and towns do not lose revenue during the changeover to lifetime licenses and registrations, all parking tickets, moving violation citations, excise taxes, and insurance premiums must be paid before license and registration renewals are processed. In Fiscal Year 1999, the first full year in which all vehicle owners become eligible for lifetime vehicle registrations, revenues are projected to decline by approximately $55 million.

Free renewals of drivers’ licenses first result in a revenue loss in Fiscal Year 2000 when revenue reductions are projected to total approximately $11.25 million. In Fiscal Year 2001, when all drivers become eligible for free license renewals, the revenue reduction is expected to total approximately $45 million.

The Revenue Optimization program continues to be a successful mechanism by which departments identify and generate new sources of non-tax revenue. Largely due to new initiatives pertaining to federal reimbursements of state expenditures, the program is expected to generate revenue for the General Fund totaling $21 million in Fiscal Year 1999 and $19.7 million in Fiscal Year 2000.

Transfers from the Commonwealth’s non-budgeted funds to its budgeted funds are projected to increase by $36.3 million from Fiscal Year 1999 levels, including a transfer of $70 million to the Children’s and Seniors’ Health Care Assistance Fund from proceeds of the settlement with the tobacco industry. Lottery profits, the largest component of consolidated transfers, are expected to remain unchanged in Fiscal Year 2000. The second most significant component of consolidated transfers, fringe reimbursements, are estimated to increase by $1.1 million.

The Cellucci/Swift Administration’s Fiscal Year 2000 budget recommendation projects spending of $20.391 billion, or $20.556 billion when adjusted for the impact of the proposed transfers to and from off-budget accounts. This represents a 2.5% increase over projected Fiscal Year 1999 expenditures. The following highlights several areas in which spending levels would change:

Education Local Aid.   In Fiscal Year 2000, the Cellucci/Swift Administration fulfills the ongoing commitment to education by recommending $260 million in additional funding for Education Reform. This increase brings the aggregate spending on Education Reform since the program was implemented in Fiscal Year 1993 to $16 billion.

The Fiscal Year 2000 budget recommendation also proposes $20 million in assistance to the Commonwealth’s cities and towns for additional teachers, $41 million in expansion for the School Building Assistance program, and $24 million for the Early Education and Care program.

Welfare.   In sustaining the Cellucci/Swift Administration’s commitment to welfare reform, the Fiscal Year 2000 budget recommends total welfare spending of $849.9 million. This proposal includes an additional $10 million for job-search assistance for Transitional Aid to Families with Dependent Children (TAFDC) recipients who are now required to work as a result of changes in Massachusetts’s welfare laws.

In Fiscal Year 2000, the Administration anticipates expenditure of approximately $10 million of the $20 million three-year federal Welfare-to-Work grant received in Fiscal Year 1998. These funds will be administered by the Department of Labor and Workforce Development in support of the Department of Transitional Assistance’s efforts to provide job training and to better prepare TAFDC recipients for work. Application for the successor Welfare-to-Work grant will be filed in the spring of Calendar Year 1999.

The Administration’s Fiscal Year 2000 budget also incorporates proposals for an additional $55.6 million for child care for both current and former TAFDC recipients, and an additional $7.5 million for assistance to low-income working families on waiting lists to receive child care services.

Medicaid.   The Cellucci/Swift Administration’s Fiscal Year 2000 budget recommends total DMA spending of $4.184 billion, an increase of 3.7% or $149.4 million over Fiscal Year 1999. This budget incorporates the Administration’s proposal to designate $132 million to support the third year of Health Care Reform that will extend comprehensive health care coverage or medical insurance premium assistance to an additional 78,000 adults and children. Spending in support of these initiatives is provided through the Children’s and Seniors’ Health Care Assistance Fund, which was established in Fiscal Year 1997 to fund expansions in the population eligible for health-care assistance. The proposed Fiscal Year 2000 expansion in Medicaid coverage conforms to the terms of the Commonwealth’s federal waiver and was authorized by legislation enacted in July 1996 and July 1997. In Fiscal Year 2000, the Children’s and Seniors’ Health Care Assistance Fund also will receive contributions of $77 million from the Uncompensated Care Trust Fund and $70 million from the new Health Care and Community Services Trust Fund, the proposed depository of payments from the national tobacco settlement. In addition to these budget recommendations, $132 million in traditional Medicaid expenditures are to be funded by the Health Care and Community Services Trust Fund.

Lottery Local Aid. The final uncapping on Lottery distributions to the Commonwealth’s cities and towns occurs in Fiscal Year 2000. Accordingly, this budget recommendation reflects an increase of $34 million over estimated Fiscal Year 1999 spending for Lottery Local Aid, bringing the projected total Lottery distribution to cities and towns for Fiscal Year 2000 to $670 million.

Employee Pensions and Health Insurance. The Fiscal Year 2000 budget recommendation for state employees’ and Boston teachers’ pensions reflects savings of $55.3 million attributable to the outstanding performance of the Pension Reserve Investment Trust (PRIT). For the five years ended June 30, 1998, the PRIT fund realized returns of 15.81% compared to the 8.25% actuarial rate of return assumed in the funding schedule.

This budget proposal also reflects two changes in the actuarial method used to determine the value of the PRIT fund. First, the Commonwealth updated the mortality table used in the valuation to the industry standard 1983 Group Annuity Mortality table. Secondly, Massachusetts adopted a five-year asset performance averaging method, thereby moving away from a market value of assets method to calculate the unfunded liability. The two changes bring Massachusetts into conformity with generally accepted pension asset valuation practices as adopted by most other states and the private sector. The Public Employees Retirement Administration Commission (PERAC) will develop a revised funding schedule in the spring of 1999 based on an actuarial valuation calculated as of January 1999.

The Cellucci/Swift Administration’s budget recommendation for state employees’ health insurance incorporates net savings of more than $39 million attributable to a proposal that state workers pay 25% of the cost of their health insurance premiums in Fiscal Year 2000, instead of the current 15% contribution. This budget proposal also includes $2.2 million for the costs associated with providing health benefits to former employees and retirees of Essex County, the government of which is abolished July 1, 1999. The benefits’ expense for former employees and retirees of the previously abolished county governments (Hampden, Worcester, and Middlesex) are included in the overall state estimate.

Higher Education.   The Fiscal Year 2000 budget recommendation reflects the Cellucci/Swift Administration’s continued efforts to enhance the affordability of higher education for all Massachusetts residents. For the fourth year in a row, the Administration will support tuition reductions at all Massachusetts public institutions of higher education: by 5% both at the campuses of the University of Massachusetts and at the state colleges, and slightly less than 10% at the community colleges. The resultant revenue loss to the Commonwealth in Fiscal Year 2000 is projected at $5 million.

In addition to fully funding all existing scholarship programs in its Fiscal Year 2000 budget proposal, the Cellucci/Swift Administration recommends $3 million to provide full scholarships for Tomorrow’s Teachers, a program implemented in Fiscal Year 1999 to attract top students from Massachusetts secondary schools to teacher education programs at public institutions of higher education within the Commonwealth.

Finally, the Cellucci/Swift Administration proposes in the Fiscal Year 2000 budget that the Board of Higher Education institute a policy directing its 29 campuses to expend 5% of their combined state appropriation and student retained revenues for ongoing deferred maintenance and facility renewal. In support of this policy, the Administration recommends that $13 million in campus funding, derived from various savings initiatives, be applied towards the 5% maintenance and renewal requirement.

Water and Sewer Assistance.   The Cellucci/Swift Administration sustains the Commonwealth’s commitment to maintaining and improving the State’s infrastructure by proposing additional funding in Fiscal Year 2000 for local water and sewer improvement projects. This budget recommends $1.8 million, or a $163,000 increase over Fiscal Year 1999, for the Massachusetts Water Pollution Abatement Trust (MWPAT), through the State Revolving Fund, to support 31 new safe drinking-water projects in 27 communities. Also, a $7 million increase is proposed for clean water contract assistance that will allow 125 new projects across the Commonwealth to move forward. Finally, the Administration is recommending $861,000 to implement a new local pipeline assistance program. Modeled on existing MWPAT financing programs, the proposal would provide low- or zero-interest loans to communities for targeted local water pipeline improvements, allowing MWPAT to leverage $60 million in contributions from the Massachusetts Water Resources Authority (MWRA) and to provide over $500 million in financing over 20 years for local pipeline improvements.

Fiscal Year 2000 marks the seventh consecutive year in which the Commonwealth has been able to provide sewer rate relief, which is expected to reach more than 123 communities in Fiscal Year 2000. This budget recommends the distribution of $53.9 million in sewer rate relief, or funding equal to that in Fiscal Year 1999, bringing the total relief granted to the Commonwealth’s cities and towns since the program’s inception to $259 million.

Debt Service.   Much of the Commonwealth’s fiscal difficulties in the late 1980s stemmed from an escalation in state borrowing that arose from financing operating shortfalls with bonded debt. The Weld and Cellucci Administrations’ debt-management policies since Calendar Year 1991 have resulted in a drop in the percentage growth of outstanding general and special obligation debt from 29% in Fiscal Year 1991 to 2% in Fiscal Year 1998. This debt-management policy included the institution of an administrative cap on capital expenditures. Strict adherence to the capital cap has reduced the annual increase in debt-service expenditures from a whopping 20% between Fiscal Year 1987 and Fiscal Year 1991 to a manageable level of 4% from Fiscal Year 1991 to Fiscal Year 1998. This record of fiscal discipline on capital expenditures is even more impressive when viewed in the context of the demands of the Central Artery/Tunnel Project, which is scheduled for completion in Calendar Year 2004.

Short-term debt service and Grant Anticipation Note (GAN) obligations are projected to total $86 million in Fiscal Year 2000. The Commonwealth’s successful GANs program is used to finance interim cash shortfalls for the Central Artery/Tunnel Project. These notes will be repaid as federal reimbursements are received. No Bond Anticipation Notes (BANs) expenses are projected in Fiscal Year 2000.

Through December 31, 1998, Fiscal Year 1999 tax revenue collections totaled $6.706 billion, up 8.9%, or $548 million, from the same period in Fiscal Year 1998. Collections were $357 million, or 5.6% over the midpoint of the benchmark range established by the Department of Revenue (DOR) corresponding to the October 15, 1998 Fiscal Year 1999 tax revenue estimate of $13.61 billion.

Based on tax revenue collections through December, the Executive Office for Administration and Finance now projects that Fiscal Year 1999 tax receipts will total $14.0 billion, $390 million higher than the October 15, 1998 estimate. The $14.0 billion estimate represents a net decrease of 0.2% below Fiscal Year 1998 actual tax collections, and a base increase (which ignores revenue impacts caused by tax law changes) of 5.6% above Fiscal Year 1998. The net change is lower than the projected tax base growth because recent tax law changes, including the doubling of personal income tax exemptions and the reduction of the tax rate on interest and dividend income from 12% to 5.95%, are being phased in during Fiscal Year 1999.

The Fiscal Year 1998 audited financial report on the Commonwealth’s operations (the Comprehensive Annual Financial Report, or CAFR) was issued by the State Comptroller in December 1998. The CAFR reports the Commonwealth’s financial position as measured according to Generally Accepted Accounting Principles (GAAP), the more stringent accounting system used in the private sector. GAAP contrasts to the statutory basis of accounting, which is defined in Massachusetts law and is used to develop the Commonwealth’s budget and to control its daily fiscal activities.

With the statutory basis of accounting, expenditures and revenues are, for the most part, equivalent to cash disbursements and receipts. If, for example, Medicaid bills incurred in a fiscal year remain unpaid at year-end, the expense or liability is not accounted for in that fiscal year, but recorded in the next fiscal year. Accordingly, the Commonwealth’s statutory-basis financial condition may appear better than it actually is. As indicated on the following chart, according to the statutory basis of accounting, the budgeted funds’ year-end balances progressed from a negative balance of $1.104 billion in Fiscal Year 1990 to a positive balance of $2,194.1 billion at the close of Fiscal Year 1998. The cumulative improvement in the Commonwealth’s year-end balances during the Weld and Cellucci Administrations, then, is $3.3 billion.

In contrast, GAAP matches inflows pertaining to a fiscal year with outflows for the same period using a modified accrual basis of accounting to recognize certain assets and liabilities (or, in state finance parlance, revenues and expenditures). Under GAAP, the unpaid Medicaid bills are accounted for in the year in which they were incurred despite no cash having been disbursed for payment. GAAP, therefore, provides a more realistic picture of the Commonwealth’s financial condition. On the GAAP basis of accounting, the Commonwealth’s budgeted funds’ balance for Fiscal Years 1990 through 1998 grew from a deficit $1.896 billion to a positive $ 1,841.4 billion, a cumulative improvement of an astounding $3.7 billion.

Financial Statements Fiscal Year 2000 Projected Financial Statement Fiscal Year 1999 Projected Financial Statement Fiscal Year 1998 Financial Statement

 
 

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Executive Office for Administration and Finance
Fiscal Affairs Division
State House, Room 272
Boston, MA 02133
(617) 727-2081


Last updated on January 27, 1999

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