A Message from Governor Argeo Paul Cellucci
and Lieutenant Governor Jane Swift
As we prepare for Fiscal Year 2002, we are in an era of transition. Clearly, our economy is in transition, from an unprecedented ten-year economic boom, to an economic slowdown the dimensions of which are as yet unknown, but for which we must prepare. We remain in a period of transition in health care, as the health care industry continues to evolve into a de-regulated, market-driven environment; as cost structures in Massachusetts remain substantially higher than national norms with continuing uncertainty as to the logic of those costs; as federal and private payer reimbursement levels are in flux; as expanded state benefit packages reach uncharted spending levels; and as the health care providers experience a legitimate crisis in balancing their bottom lines. We remain in transition in K-12 education, as the monumental, bipartisan Education Reform effort moves from vastly increasing state education subsidies to meeting demands for accountability and performance, measured in rigorous standards-based student testing, teacher testing, and school educational audits. Our entire culture and economy remain in transition to a high-tech, Internet-based infrastructure which must now bring its benefits of productivity and efficiency to the public sector as well. Even the processes of state government remain in transition, as we move to a new era of Clean Elections, with substantial public subsidy; as courageous legislative leaders propose legislative reforms; and as people all along the ideological spectrum rise up to return the budget to its proper - and limited - role in making and amending substantive state law.
But the greatest transition of all, and the transition that will surely challenge us the most, is the economic transition. Over the past ten years, the Massachusetts economy has moved from nearly worst in the nation to nearly first in the nation. With the stimulus of 41 strategically targeted and across the board tax cuts, baseline tax revenues have grown an average of 9.7% over the past five years. We have fought to hold the growth of state spending to sustainable levels, and to save surpluses as a cushion against bad times to follow. We have held spending growth during those years to an average of 6.1% (exclusive of the $500 million Big Dig refinancing and $100 million oddity of a 53rd Medicaid payment week in Fiscal Year 2000). We have managed to put away almost $4 billion in various "Rainy Day" accounts, including $2 billion in the Unemployment Insurance Fund and $1.7 billion in the Stabilization Fund. And we have reduced the unfunded state pension liability from 60% to 15%. We have set a standard of fiscal discipline - tax cuts, controlled sustainable spending, and saving for a rainy day - because we believe that this fiscal discipline assures us that we will have the resources to provide vital state services through good times and bad.
Now it appears that we are entering a period of economic slowdown, for which we have been preparing all these years. The budget we present here - the first budget in almost ten years that has been prepared in a time of economic slowdown - and the legislation that will accompany it, reflect that commitment to maintain vital services in the context of rigorous fiscal discipline:
We are proposing a budget with 5% spending growth from the General Appropriation Act (GAA) of Fiscal Year 2001, and 1.1% growth from projected overall spending for Fiscal Year 2001.
We are proposing to maintain or expand all vital state services, while controlling the growth of potential "budget busters" in the future.
We are proposing a number of aggressive and innovative initiatives, particularly in the areas of health care, housing, and e-government, to maximize the use of existing resources to address compelling social and economic problems.
We are proposing a state budget for Fiscal Year 2002 that is devoid of the infamous Outside Sections which have been used in the past to substantively amend or establish General or Special Laws, without proper review and hearing by the appropriate legislative committees and their constituencies.
The challenge of the Fiscal Year 2002 budget is to implement a strategy which maintains the Commonwealth's prosperity, restrains spending growth as revenue growth rapidly declines, and ensures the delivery of vital services, the fitting role of state government. We believe this budget has met this challenge.
HIGHLIGHTS OF THE FISCAL YEAR 2002 BUDGET
Reforming the State Budget
For the past 25 years, the legislative and executive branches have increasingly used the device of Outside Sections in the state budget to make new, substantive law. Often the law embodied in those Outside Sections may be commendable public policy. However, good public policy or not, the process of using the budget to make new substantive law deprives our citizens, our legislators, and organized advocacy groups the opportunity to fully participate in the legislative process which is central to a flourishing democracy. We propose a halt to this inappropriate practice.
In this budget we have used a new standard for Outside Sections. It is not the proper role of this appropriations bill, or any other appropriations bill, to establish or amend General or Special Law, unless such establishment or amendment is intrinsic to the routine and logical implementation of the budget. Using this standard, we have attached only 41 Outside Sections to this budget, and of those, 18 codify boilerplate sections which have occurred year after year, and will occur no longer.
We urge the House and Senate to join with us in implementing this standard for the budget, which we believe will help ensure public access and involvement throughout the legislative process.
While we will not be using Outside Sections to write new substantive law, we will be proposing a number of major initiatives in separate legislation. The line items in this budget reflect those policy initiatives, but the proposals to change the law will follow an independent and appropriate route in the Legislature.
Balancing the Budget
By Constitutional requirement, we must submit a balanced budget to the Legislature. There are three key elements which work together to comprise a balanced budget: the estimated revenue base for the prior fiscal year, which establishes the beginning point for the new budget; the rate of projected revenue growth from that base year throughout the new fiscal year; and the proposed spending growth by all branches of government during the new fiscal year. Over the past several years, as revenue growth has increased, responsible budget builders have tried to use those three variables in an honest and constructive way to constrain spending growth. In many instances, we have worked together with the Legislature to use conservative assumptions which would ensure that all revenue growth was not added to our "base" state spending. Using these conservative assumptions, we have managed over the last few years to use "surplus" revenues to strengthen rainy day funds, pay down our unfunded pension liability, and, for the most part, invest in extraordinary one-time programs which did not build the ongoing base of spending.
However, building a budget for Fiscal Year 2002 is different. For the first time in a long time, the rate of revenue growth could fall behind the rate of routine spending growth, and there most likely will not be substantial surpluses above routine spending growth. This year, rather than use intentionally, or even artificially, conservative assumptions to attempt to pull down spending growth, budget planners must attempt to accurately target revenue growth, so that we may make the difficult trade-offs and plan properly in a revenue-constrained environment:
Fiscal Year 2001 Tax Revenue Estimate. For the purpose of forecasting Fiscal Year 2002, we assume a Fiscal Year 2001 annual baseline tax revenue estimate of 6.6%. This represents a substantial reduction from the baseline revenue growth in Fiscal Year 2000 of 10.2%. In order to meet this annual baseline revenue growth of 6.6%, we project baseline revenue growth of 4.6% from January through June of this calendar year.
Projected Baseline Revenue Growth for Fiscal Year 2002. In prior fiscal years, members of the Legislature and the Governor's office have worked together to determine baseline revenue growth for the new fiscal year which served as a constraint on the level of growth of state spending. This year, we believe that, rather than agree on a very low estimate of revenue growth to help constrain spending growth, the Consensus Revenue number should be designed to target more realistic baseline revenue growth, in order that budget planners can make appropriate decisions on priorities for spending growth in Fiscal Year 2002. Since it is likely that we will be dealing with rigorous competition for the available tax dollars, we believe that honest planning for actual revenue growth is essential in our collaborative effort to protect essential state services. In this budget, we are projecting 4.9% baseline revenue growth in Fiscal Year 2002.
Proposed Spending Growth for Fiscal Year 2002. With this budget, we are proposing an increase of 5% in state spending over the GAA adopted last July. This number represents 1.1% growth over total state spending presently projected for Fiscal Year 2001. While in prior fiscal years, due to the availability of surplus tax revenue, the spending growth eventually adopted in the GAA has been significantly higher than that proposed in House 1, we hope that legislative leaders will see fit to constrain total growth in their budgets to a similar percentage. If we can enact a timely GAA for Fiscal Year 2002 at 5% growth from the prior GAA, and hold supplementary spending in Fiscal Year 2002 to approximately $300-400 million, we will have held total actual spending growth from Fiscal Year 2001 to Fiscal Year 2002 to approximately 3%. This exercise in fiscal discipline in a time of declining revenue growth is responsible, and will position us well for the possibility of another year or two of constrained revenue growth.
Local Aid / Education
In this budget, we continue our decade-long commitment to Education Reform and embark on a funding path that will add $1 billion in new education spending by the state over the next five years. Required school spending by the state and localities has now reached a level of $7.2 billion, an increase of 67% since Education Reform began. Required spending now stands at $7,465 per student, up 41%. This year, we are continuing to increase Chapter 70 by $171 million, to $3.1 billion. We are proposing an increase of $47 million in school building assistance for 46 new school projects. We are providing $3.9 million for the first full year of the Office of Educational Quality and Accountability, a vital new element of Education Reform that ensures the vast state investment in education is used appropriately to maximize high standards in academic excellence. In addition, Massachusetts Comprehensive Assessment System (MCAS) remediation funds will be increased by $6 million and will be distributed by formula, based on individual student MCAS performance, rather than through a grant process. This change will ensure that the assistance is provided to all students who require remediation. Formula distribution will allow districts to receive funding sooner, thereby enabling them to begin individual student remediation earlier in the school year.
Equally important, we are proposing major revisions of the eight year-old education aid formula. The original funding commitment in 1993 established a spending path through Fiscal Year 2000. The new formula, first and foremost, continues and expands that funding commitment to ensure educational funding adequacy for all students over the next five years. Specifically, the foundation budget will be augmented to better reflect the demands of special education and educational technology. Second, the formula will better target state aid to those communities with growing enrollments and limited ability to pay. Finally, the formula is greatly simplified, so that the goal of transparency - so critical to a well-functioning democracy - may finally be achieved in this key program. Outside Section 3 displays the share of local aid pursuant to this new formula. Legislation to enact this formula will be filed separately, as we believe that this is a major public policy issue which deserves the full review and involvement of all interested city and town officials, citizens, and other advocacy groups.
Housing and Homelessness
This budget includes $23 million in additional funding for housing and homelessness services. This expansion, along with a package of legislative bills that we will file later this month, reflects our strong commitment to increasing housing opportunities across Massachusetts. Our housing agenda focuses on the whole spectrum of the state's housing shortage including removing the barriers to housing development to encourage the construction of more housing; serving the homeless to prevent homelessness; and maintaining the state's valuable public housing supply. In addition, we are making administrative changes to address the coordination and collaboration of existing state and local programs currently serving the homeless and those at risk of homelessness. There is a critical need for effective discharge planning for persons released from state funded programs in order to prevent homelessness. The new Discharge Planning initiative is a proven method for homeless prevention which state agencies can implement quickly and effectively with dramatic results.
The health care industry remains in a period of transition. This transition is a result of several factors including a continued shift in federal and private-payer reimbursement levels and the fact that cost structures in the Massachusetts health care system remain higher than national norms. This said, health care providers are experiencing a legitimate crisis in balancing their bottom lines. At the same time, the Commonwealth's commitment to ensuring access to quality health care for our citizens has led to unprecedented levels of state health care expenditure. In addition, the state continues to grapple with the question of how to appropriately regulate the health care industry to protect quality without dampening the market's potential to lead to increased efficiency.
This past year we have achieved many important milestones to protect the quality of health care in Massachusetts. We are continuing to examine ways to support the system of care through the Health Care Task Force and to continue to build access to health insurance for all citizens through a new federally-funded planning grant. In Fiscal Year 2002 we want to build off these successes by continuing our commitment to MassHealth, the state's Medicaid program. During Fiscal Year 2002, we recommend spending an additional $577 million to maintain our investment in MassHealth. This funding ensures that these critical services will be available for all who may need them.
To further maintain this critical access to quality health care we must continue to provide targeted relief to troubled health care providers. In line with this goal, later this month we will be filing a package of health care legislation that will propose broad-based temporary relief for the health care industry.
In addition, we propose supporting increased community-based health services through $11 million in new funding. This includes $5 million for community health centers to allow them to expand capacity and serve more people in their communities. The remaining $6.1 million will fund new services for our elders to have the support necessary to remain in their own homes. A major contributor to our seniors living longer is the important advances in medical technology and pharmaceuticals. This is why we are supporting our first-in-the-nation Prescription Advantage Plan with an additional $36 million in Fiscal Year 2002 to ensure that all seniors have access to these advances.
Streamlining State Government
We firmly believe that the services of state government can be delivered less expensively and more effectively by a continuing review of the organization of state agencies and functions. In this budget we are proposing to eliminate the Office of the Inspector General, because we are confident that the functions of the Inspector General, while important, can be adequately carried out through the Office of the State Auditor and under the auspices of the House and Senate Post Audit Committees. Similarly, we have saved $2.5 million by consolidating overlapping and competitive international marketing functions from the Massachusetts International Trade Council and Office of Trade and Tourism to MassPort. We are proposing to reduce the state subsidy for the Massachusetts Water Resources Authority (MWRA) by $12 million, and at the same time, we will continue to work with the leadership of the MWRA to identify savings in its operations through privatization and other cost-efficiency initiatives in order to negate any impact on ratepayers.
But we cannot do the work of reviewing and reorganizing state agencies and the delivery of state services by ourselves. Shortly after we file this budget, we will establish a task force to build on the various streamlining initiatives put together by this and previous Administrations. We will look to involve the Legislature, state agencies, and related interest groups in this process, to gain the benefit of broad expertise and to build a consensus for the eventual implementation of these initiatives. Most important, we will undertake this reorganization of state government in light of the e-government initiatives proposed by our E-Government Task Force. In doing so, we can undertake "virtual" reorganization, as well as bricks and mortar reorganization, in order that we can get the full benefits of Internet access for the delivery of state services, and in order that we may transform the delivery of state services from an agency-by-agency model to a model which serves the intentions and the needs of our customers.
Finally, to get further help in this effort from those people who know state government best, we will propose an expanded Suggestion Awards Program to reward state employees for giving us their assistance in streamlining and improving the delivery of state services.
This message includes just a summary of the underlying strategic direction of this Administration's budget recommendations for Fiscal Year 2002, and certain of the key highlights within that strategy. The theme, plainly but profoundly, is fiscal discipline - a theme that has driven this Administration and its predecessors for ten years. Fiscal discipline has contributed mightily to the prosperity of our Commonwealth and now gives us the tools to preserve that prosperity, whatever the economic cycle.
Within the context of fiscal discipline, we will invest in those program areas which are critical to our economic well being or our social good, and we will demand accountability for those investments to assure that the money is well spent and that the public policy objectives are achieved. In a time of limited resources, we will be aggressive in using all of the resources at our disposal to assure the maintenance of essential state services, and we will challenge ourselves and our partners in state government to come up with innovative approaches to public policy challenges.
Finally, we will fight to maintain the confidence of the public we serve by opening up the legislative process to scrutiny and participation, by reducing the influence of money in our elections process and encouraging the candidacies of as many of our citizens as possible. We will continue to do our best to speak with candor and integrity about the issues which face us, and about the solutions we propose and challenges we face in addressing those issues.
Thank you for your continued support.
Argeo Paul Cellucci
Executive Office for Administration and Finance Fiscal Affairs Division
State House, Room 272
Boston, MA 02133