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Fiscal Health

PREPARING FOR THE FUTURE

As a result of years of fiscally responsible management and of policies promoting economic growth, the Commonwealth stands prepared to weather potentially uncertain economic times and to continue its economic leadership of the industrial and high-tech states. The Cellucci-Swift Administration has established a fiscally conservative framework to restrain unnecessary spending growth and has built up strong reserves to sustain the Commonwealth through any slowdown in the national economy. Within that context, the Administration continues to strategically target investments in our people and our infrastructure, and to couple them with strong accountability systems. Finally, with the passage of the long-promised tax reduction, the Commonwealth has positioned itself to continue attracting business and talent, and to prevent a replay of the exodus that occurred in the recession of 1989-92.

The cornerstone of continued prosperity is fiscal discipline. Prior to the last recession, from Fiscal Year 1983-FY89, spending growth averaged 10.5%, or 6.7% faster than inflation. This rate of growth was unsustainable. It was followed by a painful decline in the ensuing recession (see chart below), and a compensating recovery spike the year after. From Fiscal Year 1993-FY99, spending growth was held to a stable average annual rate of 5.5%, or 2.9% faster than inflation. In Fiscal Year 2000, spending growth rose to 10.7%, or 6.5% after inflation. Much of this growth reflected one-time capital investments, including the Big Dig, but it also reflected a relaxation of fiscal discipline in a flurry of veto overrides in November 1999. The first and most important goal of the Cellucci-Swift Administration's Fiscal Year 2002 budget recommendation is to maintain fiscal discipline by recommending appropriations that will hold final spending growth to 5%.

Chart: Spending Growth, Adjusted for Inflation

The fiscal restraint of the last decade has allowed the Commonwealth to accumulate substantial reserves in preparation for any economic slowdown. The Commonwealth's Stabilization (or "rainy day") Fund now stands at $1.608 billion, including the Fiscal Year 2000 surplus deposit of $115 million. The Fund, now nearing the statutory ceiling of $1.7 billion, will serve, if necessary, as a hedge against the fiscal pressures of an economic downturn. The Fund balance is the fourth largest in the nation, a stark contrast to the fund's zero balance in Fiscal Year 1990.

Chart: Stabilization Fund Balance

In addition to the Stabilization Fund, the Commonwealth has other protections against the possibility of a deteriorating economy. The State retains $153 million in the Welfare Caseload Increase Mitigation Fund, which originated with one-time revenue that resulted from federal welfare reform in Fiscal Year 1997. Massachusetts is among only 13 states to maintain a buffer against the rise in welfare caseloads that typically accompanies an economic decline. The Unemployment Insurance Fund, depleted in the early 1990s, now carries a balance of $2 billion, funding sufficient to pay benefits for 32 months at current rates of unemployment, even without further contributions.

In Fiscal Year 2000, for the fourth consecutive year, surplus revenues were appropriated for one-time capital expenditures 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. Approximately $205.6 million was appropriated at the close of Fiscal Year 2000 for this purpose. The Commonwealth also has a balance of $76.5 million in the Capital Project Reserve Fund, which the Secretary of Administration and Finance can direct to fund previously authorized capital projects without having to authorize additional debt.

The Commonwealth's sound fiscal management has not gone unrecognized on Wall Street. Financial rating agencies have consistently cited the State's strong fiscal discipline and capital planning and management practices among the reasons for the Commonwealth's credit enhancements. 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 upgrades since December 1989, when the Commonwealth's bonds were rated only one level above "junk" bond status, have saved the taxpayers of Massachusetts tens of millions of dollars in interest expenses.

Wall Street has consistently demonstrated its confidence in the Commonwealth by raising the State's bond rating nine times since 1991:

Massachusetts Bond Ratings History

 

Moody's

Standard & Poor's

Fitch

January 2000

Aa2

AA-

AA-

April 1998

Aa3

AA-

AA-

January 1998

A1

AA-

AA-

October 1997

A1

AA-

A+

November 1994

A1

A+

A+

October 1993

A

A+

A+

September 1992

A

A

A

December 1991

Baa*

BBB*

A

September 1991

Baa*

BBB*

A

March 1990

Baa*

BBB*

A

December 1989

Baa1

BBB*

A

* One level above speculative grade, or "junk" bond status

While the improvement in the Commonwealth's credit rating is an indication of the State's fiscal progress, it is also a reminder of how sharply its fiscal condition deteriorated during the last recession. In fact, the Commonwealth fared worse than the nation as a whole during three of the last four national recessions. In the last recession, large numbers of businesses and residents moved out of state.

To avoid a recurrence of such events, the Cellucci-Swift Administration has not only restored fiscal discipline, but has also pursued an economic strategy to bring the costs of doing business in Massachusetts in line with those of the rest of the nation. Since 1991, comprehensive regulation reform has helped streamline business interaction with state government. Electricity deregulation brought significant reductions in the price of electric power, reducing the cost burden on Massachusetts residents and businesses, and lowering the base to which current rate increases necessitated by higher natural gas costs are being added. Workers' compensation reform and unemployment insurance reform have also reduced the costs of doing business in the Commonwealth.

Most significantly, over the last decade 41 tax cuts have trimmed over $3 billion from business and personal tax burdens in Fiscal Year 2001, compared to what would have been paid under the 1990 tax code. This includes $135 million for the first phase of the long-overdue income tax rollback approved by voters in November 2000. In contrast, during the 1980s, only about $300 million in tax cuts were enacted, and they were subsequently overwhelmed by more than $1 billion in tax hikes during the 1989-92 recession. As national corporations decided where to close plants and reduce payrolls during the last recession, Massachusetts was unfortunately hit hard, in part due to its high-tax status. Thousands of young, well-educated workers left the state. Today, because of the strategy of reducing taxes and business costs in the last decade, the Commonwealth stands much better prepared to retain its businesses and its workers in the event of an economic downturn.

The Cellucci-Swift Administration's investment priorities are designed to sustain our economic success. The Fiscal Year 2002 budget recommends $4.1 billion for K-12 education to enhance the skills of our future workforce. However, far more important than the continued funding commitment are the accountability systems of education reform. Massachusetts Comprehensive Assessment System (MCAS) is stimulating extraordinary efforts in school districts to improve student performance through a variety of means, including curriculum reform and after-school and summer programs. To support these efforts, the Cellucci-Swift Fiscal Year 2002 budget recommends increasing the MCAS remediation funds from $40 million to $46 million. Finally, the Fiscal Year 2002 budget reflects major reforms to the state's eight-year-old Chapter 70 local education aid formula.

Tight housing markets are another impediment to growth, and the Fiscal Year 2002 budget includes several proposals to ameliorate these issues. This budget proposes an additional $3.6 million for the deferred maintenance needs of state-aided public housing. Another $20 million will be transferred to the Affordable Housing Trust. The state low-income housing tax credit, which each year allows the commitment of $20 million in state tax credits to be taken over the next five years, will be in effect for its first full fiscal year. In combination with the first increase in the federal limit on tax-exempt private activity bonds and in federal low-income housing tax credits since 1986, these additional resources will promote the development and rehabilitation of more properties for affordable housing.

In sum, the Cellucci-Swift Administration's Fiscal Year 2002 budget recommendation continues the fiscally prudent policies that have been the hallmark of the Commonwealth since 1991. It incorporates revenue projections that have been forecast conservatively but realistically. Proposed spending reflects a modest increase of 5%, primarily for increases in K-12 education, housing, and health care.

Recent Economic Performance

Overall, Calendar Year 2000 was another economically healthy year for both Massachusetts and the nation, although the economy appears to have slowed in the fourth quarter of 2000. Through the third quarter of 2000 (the latest data available), growth as measured by real Gross Domestic Product was up 3.1% from a year earlier. Inflation through November 2000, as measured by the consumer price index, rose 3.4% over November 1999.

Chart: Growth in Real Gross Domestic Product 1991 - 2000
As shown in the following graph, the Massachusetts unemployment rate has fallen almost consistently since the peak of 9.6% in 1991, and has remained at or below that of the nation for nearly five years. Monthly unemployment in Massachusetts in Fiscal Year 2000 averaged a low 3% as compared to the national rate of 4.1%. In November 2000, the rate in Massachusetts stood at 2.6%. The national rate during the same period was 4%.

Chart: Unemployment Rate, U.S. and Massachusetts
Growth in the rate of employment has a positive impact on personal incomes for Massachusetts residents. Personal income in Massachusetts has 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 the second quarter of Calendar Year 2000 (the latest information available) grew 9.4% from the corresponding period in the previous year.
 
Chart: Growth in Massachusetts Personal Income

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 2000, sales tax collections were up by more than $295 million, or 9%. Income tax revenues were also strong, with baseline growth of 12.5% over Fiscal Year 1999. In all, baseline tax growth increased by a solid 10.1% in Fiscal Year 2000.

In part, because the Cellucci-Swift Administration 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 in Massachusetts is also much more diverse than in the past, as reliance on traditional manufacturing and defense contracting has transitioned to emerging technologies, high-tech manufacturing, financial services, and health care industries.

THE ECONOMIC OUTLOOK

Halfway through Fiscal Year 2001, 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 2001 and for Fiscal Year 2002 is one of more moderate growth. The tax revenue forecast for Fiscal Year 2001 is based on an annualized rate of growth in real GDP of about 3.8%. This rate of growth reflects the maturing of the current economic expansion, which as of January 2001 is the longest in U.S. history. Inflation as measured by consumer prices should range near 2.8%. The U.S. unemployment rate is not expected to change significantly in the next year or two; the jobless rate in Fiscal Year 2001 is projected to average approximately 4.3%, increasing by 0.4% in Fiscal Year 2002.

In Massachusetts, growth in the economy over the next 18 months is expected to roughly mirror that of the nation. Unemployment is projected to average approximately 2.6% for Fiscal Year 2001 and to increase slightly from that level in Fiscal Year 2002 to 2.9%. Growth in personal income is expected to decline from the Fiscal Year 2000 average rate of about 8.6% to approximately 6.5% in Fiscal Year 2001, and it is expected to decline slightly further in Fiscal Year 2002. The rate of inflation, as measured by consumer prices, should approximate that of the nation. Should the economy avoid a major slowdown, the economic risks for Massachusetts would remain unchanged from those of the past few years-a shortage of skilled labor that, coupled with low net population growth and a tight housing market, could constrain job creation.

REVENUES

Tax and non-tax revenue assumptions for the Fiscal Year 2002 budget are organized by fund and revenue type and are laid out in Section 1A. Total Fiscal Year 2002 revenues are projected to be $22.639 billion. Tax revenues are projected to total $16.344 billion, which reflects a reduction of $457 million for the tax cuts approved in November 2000. The estimate reflects tax revenues prior to any offsets for the operations of the MBTA and the Regional Transit Authorities (RTA). The MBTA and RTA will receive $671 million and $42.2 million respectively, in Fiscal Year 2002, which reduces available tax revenues to $15,630.8 billion.

Tax Revenue

Moderate economic growth with low inflation is the basic assumption underlying the Fiscal Year 2002 tax revenue forecast. Overall, the Department of Revenue projects a slowing in the growth rate of the tax revenue base (that is, the tax estimate before the impact of any tax law changes). In Fiscal Year 2002, the tax revenue base is expected to increase by 4.9% from that in Fiscal Year 2001, as compared to (fiscal) year-over-year increases of 6.6% anticipated for Fiscal Year 2001 and 10.1% for Fiscal Year 2000.

Non-Tax Revenue

Three classes of non-tax revenue comprise the total: federal reimbursements, or revenue associated with spending for which the federal government reimburses the State or provides matching funds, including block grants; departmental revenue, or 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 2002 budget recommendation assumes budgetary non-tax revenues of $7.008 billion. The major changes in non-tax revenue are described below.

Federal Reimbursements and Block Grants

Federal reimbursements are projected to total $4.14 billion in Fiscal Year 2002. This level of reimbursement represents an increase of approximately 6.7% from estimated Fiscal Year 2001 federal revenues.

Medicaid. Division of Medical Assistance revenue in Fiscal Year 2002 is projected to total $2.755 billion, an increase of $223 million over Fiscal Year 2001, which is attributable primarily to Medicaid program expenditures. Expenditures from the Tobacco Settlement Trust will produce $13.5 million of federal reimbursements for the trust.

Welfare. In Fiscal Year 2001, the Commonwealth will meet maintenance-of-effort requirements enabling it to collect its annual share of the federal Temporary Assistance for Needy Families (TANF) block grant, or $459.3 million. The Commonwealth will also collect $77.6 million in unspent funds from prior years' block grants.

In Fiscal Year 2002, the Commonwealth will collect $498.4 million in Temporary Assistance for Needy Families (TANF) block grant funds: its full $459.3 million Fiscal Year 2002 grant and $39 million in unspent funds from prior years' block grants. The majority of the TANF funds, $360.6 million, will be deposited into the Transitional Aid to Needy Families Fund and the balance will be transferred to the Child Care Development Fund (CCDF) and the Social Services Block Grant (SSBG). Several departments will collect this revenue:

Departmental Revenues

In Fiscal Year 2002, departmental revenues are projected to total $1.492 billion, including $384 million from the Registry of Motor Vehicles. This projection is approximately $45 million, or 3.1%, higher than the Fiscal Year 2001 departmental revenue estimate.

Consolidated Transfers

Transfers from the Commonwealth's non-budgeted funds to its budgeted funds are projected to increase by $229 million from Fiscal Year 2001 levels, including an increase of $55 million in the Uncompensated Care Pool transfer to the Children's and Seniors' Health Care Assistance Fund, and an increase of $146 million from proceeds of the national settlement with the tobacco industry. Lottery proceeds, the largest component of consolidated transfers, are expected to increase by $54.4 million in Fiscal Year 2002.

FISCAL YEAR 2001 MID-YEAR UPDATE

On October 15, 2000, the Executive Office for Administration and Finance established the Fiscal Year 2001 tax revenue estimate at $16.704 billion. Through December 31, 2000, tax revenue collections totaled $7.55 billion, up 7.2% or $508 million, from the same period in Fiscal Year 2000. After adjusting for tax law changes in the first six months of the year, baseline tax growth was 9.3% through December. Collections were approximately $158 million over the midpoint of the benchmark range established by the Department of Revenue (DOR) for the October 15, 2000 estimate.

Based on tax revenue collections through December 2000, the Executive Office for Administration and Finance now projects that Fiscal Year 2001 tax receipts will total $16.232 billion, $158 million higher than the October 15, 2000 estimate. The new estimate represents an increase of 3.5% over Fiscal Year 2000 actual tax collections, and a baseline increase (which factors out revenue impacts caused by tax law changes) of 6.6% above Fiscal Year 2000. Since baseline tax growth for the first six months of the year increased by 9.3%, the $16.232 billion estimate will require baseline growth of approximately 4.6% for the remaining six months of Fiscal Year 2001 over the same period last year.

FISCAL YEAR 2000 AUDITED RESULTS - GAAP vs. Statutory Basis Accounting

The State Comptroller issued the Comprehensive Annual Financial Report (CAFR), the Fiscal Year 2000 audited financial report on the Commonwealth's operations, in December 2000. The CAFR reports the Commonwealth's financial position as measured according to Generally Accepted Accounting Principles (GAAP), the 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 $2.285 billion at the close of Fiscal Year 2000.

Chart: Trends in Budgeted Funds Balance
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#&39;s budgeted funds' balance for Fiscal Years 1990 through 2000 grew from a deficit $1.896 billion to a positive $2.325 billion, a cumulative improvement of an astounding $4.2 billion.

FISCAL SUMMARIES

For easy reference, the recommendations for the Fiscal Year 2002 budget are organized in both a pie chart and a table on the following pages. Finally, the recommendations are combined into a Statutory Basis Financial Statement. Fiscal Year 2000 and 2001 Financial Statements are also included for reference.

FISCAL YEAR 2002 HOUSE 1 SUMMARY

Chart: FY2002 House 1 Summary - Revenues
Chart:  FY2002 House 1 Summary - Expenditures
 
 
FISCAL YEAR 2002 RESOURCE SUMMARY ($000)
COMMONWEALTH OF MASSACHUSETTS
FY 2001
General
Appropriation
Act
FY 2002
Budgetary
Recommendations
FY 2002
Federal, Trust,
and Other
FY 2002
Total
Spending
FY 2002
Budgetary
Non-Tax Revenue

Judiciary 566,621  599,365  464  599,829  67,602 
District Attorneys 80,179  84,395  2,740  87,135 
Sheriffs 180,259  190,280  779  191,059  3,487 
Executive Office 5,863  6,184  6,184  10 
Secretary of the Commonwealth 41,834  40,364  1,191  41,555  85,180 
Treasurer and Receiver-General 3,820,760  3,832,383  1,130,443  4,962,825  1,250,472 
State Auditor 15,487  16,118  500  16,618 
Attorney General 34,260  37,414  12,203  49,618  6,910 
State Ethics Commission 1,474  1,623  1,623  22 
Inspector General 2,717 
Office of Campaign and Political Finance 1,089  1,353  10,000  11,353  23 
Commission on the Status of Women 195  196  196 
Disabled Persons Protection Commission 1,686  1,760  1,760 
Office of the Comptroller 14,767  15,717  24,799  40,516  240,530 
Executive Office for Administration and Finance 1,322,889  1,254,277  122,333  1,376,610  343,633 
Executive Office of Environmental Affairs 230,796  225,317  69,929  295,247  80,852 
Executive Office of Health and Human Services 8,543,219  9,210,162  363,841  9,574,003  4,211,241 
Executive Office of Transportation & Construction 136,112  106,193  49,451  155,644  8,001 
Board of Library Commissioners 34,623  34,684  3,028  37,711 
Department of Labor and Workforce Development 64,728  68,037  1,117,574  1,185,611  20,964 
Department of Housing and Community Development 142,344  146,328  315,753  462,081  4,342 
Office of Consumer Affairs and Business Regulation 48,241  50,490  10,730  61,220  76,404 
Department of Economic Development 40,147  33,619  3,719  37,338 
Department of Education 3,924,215  4,139,200  659,789  4,798,990  9,827 
Board of Higher Education 1,051,813  1,068,204  1,310,050  2,378,254  140,292 
Executive Office of Public Safety 935,728  1,023,470  118,307  1,141,778  454,032 
Executive Office of Elder Affairs 180,363  306,967  30,209  337,177  4,917 
Legislature 54,975  55,450  55,450  19 

TOTAL     21,477,387    22,549,552  5,357,833    27,907,385  7,008,776 
 
 
Financial Statements
 
Fiscal Year 2002 Projected Financial Statement
Fiscal Year 2001 Projected Financial Statement
Fiscal Year 2000 Financial Statement
 
 
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Commonwealth of Massachusetts

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


Last updated on January 17, 2001

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