An Overview of the Governor's
Budget Recommendation 

Summary

Governor Swift’s 2003 budget continues a dedication to fiscal discipline and responsible spending.

Revenues and Spending

Revenues that fund the budget come from five sources:

• Taxes. The largest portion of revenues, 64 percent, comes from various taxes on individuals and businesses. Chart 2 shows the state income tax rate over time.
• Federal Reimbursements. The state also relies on federal reimbursements for 20 percent of its total revenue.
• Fees and fines. Mainly from Registry of Motor Vehicle fees, this category comprises 6 percent of total revenues.
• Rainy Day reserves. Due to extraordinary fiscal constraints, the Fiscal Year 2003 budget recommendation relies on 3 percent of its revenues from the state’s Rainy Day reserves.
• Lottery Revenues. With a 71 percent payout ratio, Massachusetts currently pays out more in Lottery prizes than any other state in the country. Lowering this ratio to approximately 63 percent (the average of the ten highest prize states), would make $274 million more available to pass through the state budget to cities and towns, helping to pay for schools, police, firefighters, and other municipal services. Lottery revenues included in the Fiscal Year 2003 budget recommendation reflect this change, and are used to fund various local aid accounts. Through Fiscal Year 2005, this additional revenue will be appropriated through specific local aid accounts in the budget. Beginning in Fiscal Year 2006, the additional revenue will begin to flow directly back to cities and towns through the Lottery aid formula, to be used at their discretion.

Chart 1 State Revenue: Where it comes from State government will collect an estimated $23.5 billion in revenues in 2003, about two—thirds of which come from income, sales, or other taxes.

Chart 2 Income Tax Rate With the tax cut passed by voters in 2001, income tax rates will continue to be rolled back significantly, dropping to 5.0 percent by 2003.

State government will spend an estimated $23.5 billion in 2003. The five broad categories of spending are shown in Chart 3:

Chart 3 State Spending: Where It Goes

Table 1. State Spending for Fiscal Year 2003 Spending on Health and Human Services, K—12 education, and debt service (used for capital spending on infrastructure) comprises more than two—thirds of spending.

Due to the tightness in the budget, funding increases are concentrated in only a few agencies. Most agencies will have no increase in funding for fiscal year 2003, and many will have cuts in funding. The table below highlights these changes.

Table 2. Changes in Spending for Fiscal Year 2003

Budget Highlights

FISCAL DISCIPLINE

Fiscal discipline begins with a timely and thoughtful budget process. This budget recommendation is submitted on time and in balance, while fully funding the state’s most critical programs and unavoidable obligations. In addition, it reflects the following continued efforts to limit the budget to budget—related matters, and provide state agencies with the much—needed flexibility that will help them manage through difficult fiscal times:

• Fewer line items. The Fiscal Year 2002 budget enacted by the Legislature is divided into 921 separate accounts. This recommendation includes 620. Reducing the number of line items by one—third allows agencies to manage scarce resources more effectively, and streamlines the state’s appropriation and accounting processes. Account consolidations would be particularly helpful to the Judiciary, so that funding for the courts could be allocated based on the needs of individual courts. At the Department of Social Services, fewer accounts will enable the agency to provide flexible, individualized services for abused and neglected children, rather than being limited by categorical restrictions in the current account structure.

• No earmarking. The Fiscal Year 2002 budget enacted by the Legislature contains hundreds of “earmarks”, or specific allocations for special projects within a particular line item. Often, these special allocations are not funded, forcing the agency to complete the special project at the expense of other routine services that the line item is supposed to provide. This budget recommendation contains virtually no earmarks. The few that are included are fully funded and reflect standard spending that has historically been part of those line items. This is especially important now, so that agencies can fulfill their core missions and maintain maximum flexibility in making difficult funding decisions.

• Fewer Outside Sections. Following the standard set by the Governor’s Fiscal Year 2002 budget recommendation, the Fiscal Year 2002 budget enacted by the Legislature contains just 76 outside sections, down from nearly 500 in the previous year. The Governor’s Fiscal Year 2003 budget recommendation continues this important limitation on extraneous law changes, and includes only 34 outside sections, all of which are directly related to the implementation of the budget.

Constraining spending.The Governor’s Budget Recommendation reflects the following efforts to reduce spending:

• Hiring Freeze. Agencies budgets have been reduced to reflect the continuation of a hiring freeze on most state positions through Fiscal Year 2003.

• Early Retirement. Agency budgets have been further reduced to reflect the savings achieved through an Early Retirement Incentive Program filed by the Governor in November and enacted by the Legislature in December. This program is projected to reduce the state workforce by over 4,000 employees, and to reduce the Fiscal Year 2003 budget by $136 million.

• General Savings. In addition, agency budgets have been reduced through general savings in specific areas. These include moratoria on management pay increases, out of state travel, and paid interns, as well as significant reductions in subscriptions, office supplies, equipment, contractors and consultants, and temporary staff.

• Additional reductions.While the above initiatives provide important controls on certain areas of administrative spending, they represent only a small portion of total spending. Savings in other areas were achieved using the following criteria:
  

  Avoid reducing accounts that:

  • Provide the most critical, direct services to families and children;
  • Provide direct public safety and security;
  • Put the state at risk of legal action if not funded;
  • Generate federal revenue;
  • Are entitlements;
  • Are assessed to insurance companies or other third parties, since they are revenue neutral;
  • Are funded from dedicated revenue.

  Focus on reducing accounts that:

  • Did not fall into any of the above categories;
  • Did not exist before Fiscal Year 1992, or had high rates of growth since Fiscal Year 1992.

Prudent use of reserves. Massachusetts is fortunate to have substantial “Rainy Day” reserve funds that were prudently set aside during good fiscal times to help the state manage through bad fiscal times. In Fiscal Year 2002, the Governor recommended using $390 million in Rainy Day funds, but the Legislature, over the Governor’s veto, enacted a budget that used $772 million. The Governor’s Fiscal Year 2003 recommendation relies on $750 million in reserve funds, a prudent amount that will allow the state to wean itself off this one—time source of funds gradually as the economy recovers in the coming years.

CONTINUED COMMITMENT TO QUALITY K—12
EDUCATION AND PERFORMANCE

The Swift Administration is committed to a high quality public education system. The landmark Education Reform Act of 1993 mandated increased funding and increased accountability for Massachusetts public school systems, and since 1993 the state has invested over $28 billion in K—12 education. With one of the most aggressive funding efforts in the country and the implementation of critical accountability and assessment tools, Massachusetts has been recognized as a national model for education reform. Even with the current fiscal constraints, the Governor’s Fiscal Year 2003 budget recommendation continues this commitment with $4.3 billion for public education, a $135 million (or 3%) increase in education spending.

The Fiscal Year 2003 budget recommendation for K—12 education includes:

• $3.4 billion in direct education aid to cities and towns, a $100 million increase over Fiscal Year 2002 (7061—0008);

• $113 million to implement a new reimbursement program to provide additional relief to cities and towns for the costs of special education placements for children with extraordinary special needs (7061—0012);

• $52.5 million to help students improve results on the Massachusetts Comprehensive Assessment System, including $2.5 million to provide direct grants to high school seniors who have not yet achieved a passing score on the MCAS (7061—9404);

• $24 million to allow the School Building Assistance program to fund 19 new school construction projects (7053—0003, 7052—0004);

• $15.6 million to provide nutritious meals for children at school, including $1 million in new funding to maximize federal matching funds and encourage participation in the federal breakfast program (7053—1909, 7053—1925, 7053—1927, 7053—1928); and

• $14 million to provide education services to children in institutional schools, including $5 million in new funding to improve the educational system at the Department of Youth Services (7028—0031). This expansion will support the implementation of a comprehensive education plan that meets the statutory requirement of the Commonwealth to deliver regular and special education services to youth placed in DYS custody.

This budget proposal also reflects the thoughtful and important recommendations of the Governor’s Commission on School Readiness to improve state services and programs to promote school readiness. These include comprehensively measuring indicators of school readiness, working with higher education institutions to remove barriers for early education and care providers seeking to continue their education, and developing a core application for services to eliminate the bureaucratic red tape families are forced to navigate in the current child care system.

The “Chapter 70” education aid formula determines the amount each city and town receives in state education funding. (Please see Chart 4 for details on Chapter 70 funding over time.) The formula will be changed in several important ways in subsequent legislation. The proposal includes a multi—year plan to increase funding for special education and technology; addresses historical inequities in aid and local contributions; redirects aid toward towns with high enrollment growth; and simplifies the current formula. The Swift Administration’s proposal draws on the best ideas that were put forth last year by the Administration and the House Ways & Means Committee. The proposal should, at long last, provide towns and districts with a predictable and equitable formula for this important local aid program.

The Fiscal Year 2003 funding recommendation will enable the Department of Education to achieve the education goals for children K—12 set forth by the Swift Administration.

Chart 4 Spending on Education Reform: “Chapter 70” Funding Chapter 70 education aid to cities and towns almost tripled from 1992 to 2002, and will continue to increase in Fiscal Year 2003 under the Governor’s proposed budget.

PUBLIC SAFETY

In response to the terrorist attacks in September, the Swift Administration reevaluated the Commonwealth’s deployment of public safety assets, particularly the deployment of law enforcement personnel. The costs of the Commonwealth’s initial response was largely funded from supplemental funds appropriated in Fiscal Year 2002. That commitment to enhanced public safety measures is further reflected in the Fiscal Year 2003 budget recommendation, which includes:

• $6.8 million for the salaries of 150 new State Police Troopers;
• $3.5 million for the training of 150 additional State Police recruits;
• $2.3 million to fully fund the Hazardous Materials Emergency Response Team program (HazMat) at the Department of Fire Services;
• $1.9 million for a grant program that will enable cities and towns to connect to the automated firearms recording keeping system; and
• $500,000 for the office of the Chief Medical Examiner.

TARGETED ASSISTANCE TO LOW—INCOME FAMILIES

Perhaps the most important part of any state budget is funding for our state’s neediest citizens. Over 43% of the Fiscal Year 2003 budget recommendation is dedicated to fully funding critical health and human services for millions of people across the state. The Fiscal Year 2003 budget recommendation includes the following increases to support the Commonwealth’s low—income families:

• $5.9 billion – 11.5 percent more than Fiscal Year 2002 projected spending – for Medicaid health benefits. The Commonwealth’s Medicaid program provides health care for 1.1 million people.

• $1 billion for the Department of Mental Retardation, including:

• $18 million to fully fund the second year of the Boulet settlement agreement, providing 400 new residential placements as well as day and support services to individuals on the Department wait list (5920—2020).
• $14 million increase, including $5 million for the transition of 150 individuals with mental retardation currently residing in nursing homes to appropriate community or residential placements (5920—2000).
• $6.9 million to fund 150 new residential placements and other services for the new class of Turning 22 graduates who will be leaving the Department of Education’s special education programs (5920—5000).
• $1.4 million to serve adults with mental retardation to participate in community based day and work programs (5920—2025).

• $680 million – a $33.8 million increase – for the Department of Social Services to protect abused and neglected children, including:

  • $29.1 million increase to ensure adequate funding for foster care, adoption, and guardianship subsidies, as well as residential placements;
  • $4.6 million increase to maintain 2500 social workers, and safe caseload ratios, at the department;
  • $117,000 increase for two domestic violence specialists not funded by the Fiscal Year 2002 General Appropriations Act, and to fund one additional specialist.

• $10.3 million, or 15.5%, increase for emergency family shelters (4403—2110). This account supports 1,650 homeless families who have been hit hardest by the downturn in the economy.

• $6.9 million in additional funding for emergency cash assistance to elderly, disabled, and children (4408—1000), enough to provide cash assistance to 15,700 individuals per month.

• $6.4 million in additional funding to provide adults with community mental health services and fully fund expansion initiated in Fiscal Year 2002, including 138 residential placements and the development of 2 teams for assertive community treatment. This additional funding improves the Department of Mental Health’s ability to serve individuals in the most appropriate, least restrictive environments (5046—0000).

• $4.5 million in additional funding for AIDS prevention and treatment programs. (4512—0103)

• $1 million increase for the Teen Living Program (4403—2119). This program provides shelter and support services to 120 teenage parents and their children per night across the Commonwealth.

• $1 million to expand head injury services to victims of brain injury (4120—6000) and $500,000 increase in head injury retained revenue to provide residential placements and supported living services for individuals in the statewide head injury program (4120—6002).

• $160K expansion to support Domestic Violence Specialists at Department of Transitional Assistance.

It is unfortunate that budget constraints often make it necessary to reduce funding in important programs that may help avoid future costs, but do not provide immediate and critical safety net services for low—income families. In order to fund a portion of the above increases, the Fiscal Year 2003 budget recommendation reduces funding for smoking prevention and cessation programs from $63 million to $19 million, and also reduces funding for certain disease prevention and research.

CONTINUED COMMITMENT TO ECONOMIC AND
WORKFORCE DEVELOPMENT

Over the last eight months, the Swift Administration has made great strides in evaluating the existing adult basic education and worker training programs as the initial step toward building a stronger, more integrated system of life—long learning opportunities in the Commonwealth. We have already taken important steps to strengthen the State Workforce Investment Board, develop consistent performance measures, and launch a new initiative to expand and improve incumbent worker training. The Fiscal Year 2003 budget recommendation takes the next steps in this reform process by consolidating program management, strengthening the statewide network of One—Stop Career Centers, adding resources to areas of critical need, and establishing new mechanisms for ensuring inter—agency collaboration.

Specifically, these recommendations bring together a number of existing employment services within the Division of Employment and Training (DET) to better leverage federal and state funded programs and to consolidate responsibility for guiding One—Stop Career Centers. At the same time, these recommendations provide $2 million in additional resources to the Commonwealth Corporation to improve its capacity for driving system—wide reform efforts and managing key strategic initiatives, such as the new Building Essential Skills through Training (BEST) program.

These recommendations draw on the $20 million of surplus revenues in the Workforce Training Fund (WTF), accumulated over the past four years, to provide $10 million for Emergency Training Grants for the unemployed. This new one—year initiative would be administered by DET, through grants to the One—Stop Career Centers. An additional $3 million of the WTF surplus will help fund BEST in Fiscal Year 2003.

On the capital side, the Swift Administration is re—examining capital spending priorities and spending levels to identify opportunities for economic stimulus here in the Commonwealth (please refer to the Capital Outlay section on page 21 for details). The Executive Office for Transportation and Construction’s five—year capital plan, for example, calls for $20 million of annual spending for the Public Works Economic Development (PWED) grants and the Small Town Road Assistance Program (STRAP). PWED grants are aimed at jump—starting local economies through construction, reconstruction of existing or newly located public access roads, streets, bridges, sidewalks, lighting systems, traffic control systems, and drainage systems and culverts associated with municipal economic development efforts. STRAP provides small towns with additional capital resources for local road construction costs. Spending is contingent upon the legislative passage of a bond bill filed by the Governor in June of 2001.

The following pages include a summary of state spending, as well as the Commonwealth’s balance sheets for Fiscal Years 2001, 2002, and 2003.

FISCAL YEAR 2003 RESOURCE SUMMARY ($000)

LOCAL AID

The Division of Local Services, within the Department of Revenue, annually notifies cities and towns of the aid and assessments the state will make to cities, towns, and regional school districts in the upcoming year. Originally, these notifications were printed on cherry—colored paper, and therefore were given the name “cherry sheets.” Cherry Sheet local aid comprises approximately 80% of total local aid; non—Cherry Sheet local aid consists primarily of state assistance to localities that is distributed on a targeted basis, as opposed to the more broad—based formula distributions that typify Cherry Sheet distributions.

Fiscal Year 2003 Cherry Sheet Overview

In Fiscal Year 2003, cherry sheet appropriations will total $5.3 billion, providing cities, towns, and regional school districts with a direct local aid increase of $105.4 million, 2% over Fiscal Year 2002 spending levels. This represents the ninth consecutive annual local aid increase. Since Fiscal Year 1993, cherry sheet aid has increased by $2.8 billion, or 112%.

In addition, average annual growth in cherry sheet aid over the past ten years has far outpaced growth in other state spending; cherry sheet aid has averaged an 8.8% increase, nearly double the rest of state spending, which has averaged 4.5% annual growth.

The direct local aid distributed to cities and towns through the cherry sheets comprised 24 line—item appropriations administered by a variety of state agencies and departments. The largest of these programs, and their Fiscal Year 2003 funding levels, are described below.

Lottery Aid

The Lottery distribution to cities and towns has grown by 137% since Fiscal Year 1993. In Fiscal Year 2003, the direct distribution of Lottery proceeds to cities and towns will be $778 million. The Governor’s FY03 recommendations also include language directing the State Lottery Commission to re—structure the prize payout rate of lottery games. With a 71 percent win ratio, Massachusetts currently pays out more in Lottery prizes than any other state in the country. Analysis has shown that bringing the Massachusetts Lottery prize payout rate down to 63 percent, in line with the average prize payout rate of the ten highest payout state lotteries, would generate $274 million in additional net revenues. Lottery revenues included in the Fiscal Year 2003 budget recommendation reflect this change, and are used to fund various local aid accounts. Through Fiscal Year 2005, this additional revenue will be appropriated through specific local aid line items in the budget. Beginning in Fiscal Year 2006, the additional revenue will begin to flow directly back to cities and towns through the Lottery aid formula, to be used at their discretion.

Education

The cherry sheet contains aid for several education programs: Education Reform ("Chapter 70"), School Building Assistance, School Transportation, and other education aid programs. Direct financial assistance distributed to school districts through the Education Reform formula will increase by $100 million, reflecting the Swift Administration's commitment to maintaining investments in education programs. Since Fiscal Year 1993, direct education aid has increased by $2.3 billion, which represents a 147% increase. State spending on direct education aid has consistently outpaced inflation and enrollment growth. Since Fiscal Year 1993, enrollment growth plus inflation has averaged 4.5%, whereas growth in cherry sheet education aid has averaged 10.2%.

School Building Assistance reimbursements, which provide municipalities and regional school districts with financial assistance for the planning and construction of school buildings, will increase by approximately $24 million in Fiscal Year 2003, funding an additional 19 new school projects. Since Fiscal Year 1993, funding for School Building Assistance has increased by 160%, in support of 450 new school construction projects.

Public Safety

The Executive Office of Public Safety administers the police career incentives program, through which the Commonwealth reimburses cities and towns for 50% of the costs associated with providing incentive education programs to police officers. These incentives are offered in the form of salary increases as the officers earn undergraduate and graduate degrees. These recommendations include a $3.7 million increase for police career incentive payments to fully fund the program. State assistance has grown 265% since the program’s inception in Fiscal Year 1994.

ECONOMIC OVERVIEW

After a decade of exceptional growth and diversification in the state’s economy, Massachusetts has now entered a period of slower growth and recession. These factors largely mirror—and are influenced by—broader economic trends in the national economy.

The Slowdown Has Arrived Nationally and in Massachusetts

The longest economic expansion in American history officially ended in March 2001, exactly 10 years after it began in March 1991. The downturn occurred after several years of strong economic growth: Gross Domestic Product (GDP)—a broad measure of economic output—grew more than 4 percent each year from 1997 to 2000 (see Chart 1). In 2001, however, GDP growth slowed considerably to an estimated 1 percent.

Economic growth in Massachusetts generally tracks the national economy, in direction if not in magnitude, as shown in Chart 1. In recent years, however, the state economy has considerably outpaced the nation. In 1999, in fact, Gross State Product (GSP)—a broad measure of state economic output—grew at about double the rate of national economic growth. In the past two years, however, economic growth in Massachusetts had slowed substantially, reaching a 2.2 percent growth rate in 2001. While that rate was low compared to the late—1990s, it is still more than double the economic growth rate of the nation in 2001. So far, therefore, it seems that the state is weathering the economic downturn considerably better than it did during the last recession, in the late 1980s and early 1990s, when the downturn in Massachusetts was much steeper than in the nation as a whole.

Chart 1 Economic Growth In 2000 and 2001, economic growth slowed considerably in Massachusetts from its recent peak in 1999. In 2001, the state economy grew by an estimated 2.2 percent.

A second important economic indicator is unemployment. The unemployment rate in Massachusetts generally declined from 1991 to 2000, and has been significantly below the national unemployment rate since 1996 (see Chart 2). Beginning in January 2001, however, the unemployment rate began to rise both in Massachusetts and the nation. The state unemployment rate in December 2001 was 4.2 percent, the same rate as in October. While this rate is considerably higher than the year before, it is still more than a percentage point below the national average.

Chart 2 Unemployment Rates Both state and national unemployment rates rose in 2001 for the first time in several years. The rate in Massachusetts remains below the national level.

Personal income in Massachusetts is another key economic indicator, measuring the sum total of income received by state residents. Chart 3 shows the annual growth rate in personal income since 1980. It shows that personal income in Massachusetts generally rose during the 1990s, and spiked upward in 2000, growing more than 10 percent that year. This spike likely reflects wage and salary growth from the tight labor market before unemployment began rising. In 2001, however, personal income grew at only about half that pace, rising by 5.3 percent. Nonetheless, the rate remained above those in the early 1990s.

Finally, the declining stock market has had a significant effect on the revenues available to state government. When the stock market falls, investors have fewer realized capital gains, since the value of their stocks tend to fall in a bear market. This, in turn, causes state revenues from capital gains taxes to fall. Chart 4 shows how capital gains tax revenues peaked in 2001 at just above $1 billion dollars. The estimate for 2002, on the other hand, is less than half that level, at $425 million. Capital gains tax revenues for 2003 are predicted to be even lower.

Chart 3 Growth in Personal Income: Massachusetts Total personal income grew at over 10 percent in 2000, the fastest pace since 1988. However, income grew more slowly in 2001, back to the rates of the mid—1990s.

Chart 4 Revenue from Capital Gains Taxes is Down The decline in the stock market has lead to a sharp fall in capital gains tax revenue, from over $1 billion in 2001 to a projected $425 million in 2002.

The Good News: The State Is Prepared

The slowdown in the state economy will require new responses from state government. Last year, the Governor waived the waiting period that unemployed individuals face before they are eligible for unemployment benefits. Nonetheless, it is important to note that the Massachusetts state economy is in much better shape than it was going into the last recession more than a decade ago. While many factors have contributed to this, two are particularly important: a commitment to fiscal discipline, and important efforts to lower taxes to create a more business—friendly climate in the state. Because of these forces—and others—the state is prepared to meet its economic challenges.

The state has controlled spending growth. A policy of fiscal discipline has kept government spending to a sustainable rate in recent years. For 2003, the Governor is proposing a 2.7 percent increase in spending (see Chart 5). In more recent years, from 1993 through 2003, spending growth has been constrained to 5.6 percent per year, on average, despite the booming economy. These rates of spending growth contrast with those that preceded the last recession: Annual spending grew by an average of 9.9 percent per year from 1983 through 1989.

Recent spending growth in Massachusetts has also been low compared to national standards. For example, a recent analysis by the Rockefeller Institute of Government compared changes in every state’s real (i.e. inflation—adjusted) per—capita spending from 1990 to 1999, using data from the U.S. Census Bureau. It found that Massachusetts had a 16.4 percent total increase in spending during this period—the ninth lowest in the nation and nine percentage points below the national average.

Chart 5 State Spending Growth Controlling state spending has been essential for maintaining fiscal discipline. Spending will increase 2.7 percent under the Governor’s FY03 budget recommendation.

The State has built up a healthy level of reserve funds. A direct and positive result of fiscal discipline and strong economic growth has been the state’s ability to set aside “rainy day” funds. These reserve funds are set aside in order to be used in an economic downturn—such as the slowdown we are currently experiencing. The increase in reserve funds in Massachusetts has been significant: the state had less than $60 million set aside in 1990, but $2.3 billion by 2002 (see Chart 6). These funds allowed the state to be considerably more financially prepared than it was before the last recession.

Chart 6 State “Rainy Day” Reserve Funds Fiscal restraint and a strong economy have led to dramatic increases in the rainy day fund balance, especially in the late 1990s.

With the onset of an economic slowdown in fiscal year 2002, the state has drawn from the rainy day fund to supplement its revenue. In 2002, the state is projected to use $772 million from the fund. In the Governor’s FY03 budget recommendation, $750 million is proposed.

Massachusetts has a much more competitive business environment. Thanks to 42 tax cuts in 11 years, the state has permanently banished its status as “Taxachusetts.” The state has also implemented a wide range of financial and business initiatives designed to encourage investment and stimulate economic growth. These include:

• a reduction of workers' compensation premiums by more than half since 1993, saving employers more than $2 billion;
• a streamlining of the environmental permitting process for new and expanding facilities;
• the establishment of the "Brownfields" law that provides liability protection, loans and grants, and tax credits for the environmental clean up of sites;
• the tripling of the investment tax credit;
• and the designation of 38 Economic Target Areas across the state to stimulate job creation, attract new business, and encourage business investment.

The number of jobs is near a record high.. Since December 1991, the state has gained more than a half—million jobs (see Chart 7), with the number of jobs rising from 2.8 million jobs to more than 3.3 million jobs in December 2001. While the total number of jobs in Massachusetts has fallen slightly since September 2001, the level is still near its all—time high—and significantly higher than the peak during the previous boom, in 1989.

Chart 7 Number of Jobs in Massachusetts The total number of nonagricultural wage and salary jobs in the state increased steadily from 2.8 million jobs in 1991 to more than 3.3 million jobs at the end of 2001.

More people are covered by health insurance. The Commonwealth’s commitment to providing health coverage to low—income children, their parents, disabled adults, chronically unemployed adults, and the working poor has brought important results. Since the expansion of MassHealth (our state’s Medicaid program) in 1997, combined with the strong economy of the late 1990s, a significantly higher share of individuals has health care coverage today than in recent years. Since 1996, in fact, the number of uninsured residents has been cut by 48 percent.

The state has a more diversified economy. Since the last recession, Massachusetts has diversified its industrial mix, with software development and other knowledge—based industries having emerged as growth sectors in the state economy. Moreover, the state has become less reliant on a few large employers because of strong growth among small businesses. For example, between 1989 and 2001 the share of employees in Massachusetts who worked in firms with over 1,000 employees declined by about a fourth, from almost 19 percent to less than 14 percent. At the same time, the share of employees in the small firms (those less than 250 employees) rose. Finally, Massachusetts' exports have grown significantly, reaching $22 billion in 2000 after increasing by 90 percent in the 1990s. This economic diversification will allow our economy to maintain stability in the face of national economic difficulties.

The Capital Budget

The Commonwealth’s capital budget supports the construction and maintenance of a variety of important public assets that contribute to the economic well—being and quality of life we enjoy in Massachusetts. These include:

• thousands of miles of state highways and over 4,400 state and municipal bridges;
• the five—campus University of Massachusetts system, nine state colleges, and 15 community, colleges;
• over 600,000 acres of protected open space;
• state parks and forests, rinks, pools, golf courses, and playgrounds;
• drinking water and sewer infrastructure;
• courthouses and prisons;
• development and preservation of affordable housing;
• public libraries;
• cultural attractions such as the Springfield Basketball Hall of Fame and the Massachusetts Museum of Contemporary Art;
• and State office buildings throughout the Commonwealth.

Sources of Capital Funding

In total, the state has invested over $20 billion in infrastructure improvements over the past ten years, excluding $3 billion invested so far on the Central Artery/Tunnel Project. Funding for these investments comes from four sources, shown in Chart 1 (next page). They include:

Bonds. The main source of funding for capital spending is proceeds from the sale of long—term debt. The state issues two types of bonds. The first is general obligation bonds that are backed by the full faith and credit of the Commonwealth. Debt service on these bonds is paid through the annual operating budget. The second is special obligation bonds, which are backed by and financed through a dedicated revenue stream, such as the gas tax. The Governor’s proposed budget calls for $1.9 billion in capital funding through the sale of bonds in FY 2003.

Federal funds. Federal reimbursement, especially in the case of state expenditures for transportation improvements, is the second largest source of capital spending. Just over $500 million in federal funds are expected in FY 2003.

Operating revenues. A portion of annual state surpluses, when available, is dedicated to pay for capital projects. The Governor’s proposed capital budget includes almost $300 million in operating revenues for capital projects.

Third—party reimbursements. These funds are received from Commonwealth authorities. Examples include an annual reimbursement from the Massachusetts Water Resources Authority to offset watershed land protection costs, and Massachusetts Port Authority funding of the Central Artery/Tunnel project. Over $100 million in third—party reimbursements are expected in FY 2003.

Chart 1 The Sources of Capital Expenditures Bond proceeds fund about two—thirds of the $2.8 billion in proposed capital spending for FY2003, while federal funds and operating revenues are also significant sources

Uses of Capital Funding

The uses of capital funding can be divided into six categories:

Transportation ($1,899 million) includes state and local roads and bridges, and the Central Artery/Ted Williams Tunnel project.

Economic development ($299 million) includes convention centers, local libraries, local parking garages, and cultural facilities such as the Massachusetts Museum of Contemporary Art.

Infrastructure ($238 million) includes such things as state colleges, universities, prisons, and state owned buildings.

Environment ($130 million) includes acquisition of open space and the construction and maintenance of state parks, forests, rinks, pools, golf courses, and playgrounds.

Housing ($102 million) includes the development and maintenance of publicly owned housing units.

Other ($120 million) includes information technology to upgrade state computer systems, and public safety expenditures for vehicles and equipment for state police and other public safety agencies.

Capital Plans and the Bond Cap

The Swift Administration remains committed to the fiscally responsible management of the Commonwealth’s capital spending needs. This discipline is manifest in the five—year capital spending plan process coordinated through the Executive Office for Administration and Finance (EOAF) and the Administration’s adherence to an overall bond—supported spending cap. As the economy slows, however, the Administration is also re—examining capital spending priorities and spending levels to identify opportunities for economic stimulus here in the Commonwealth.

The five—year capital spending plan process was implemented in Fiscal Year 1992 in response to outstanding debt burdens that, from Fiscal Years 1987 to 1991, had increased an average of 20% each year. The plan sets forth the total amount of bond—funded capital spending that the Commonwealth can undertake in each of five successive years as determined by existing legislative authorization and projected debt—service requirements. The annual spending total is divided among oversight agencies and designated departments based on spending plans approved by the Secretary of Administration and Finance and monitored by the Fiscal Affairs Division. Spending under the plan is divided among seven program areas: transportation, infrastructure, the environment, information technology, housing, economic development and water treatment, and public safety. Although approximately $9.3 billion in bond—funded capital spending is authorized but unissued under current law, the capital plan limits spending of general obligation bond funds to $1.2 billion per year in Fiscal Years 2002 through 2006. Furthermore, of this $9.3 billion in authorized but unissued debt, $1.8 billion is not general obligation debt and not subject to the cap, leaving $7.5 billion in capital authorization to support $6 billion in estimated capital spending over the next five years.

Strategic Review of Capital Financing and Cap Reallocation

So that the Commonwealth may be best positioned to maximize the effectiveness of its capital investments over the next several years, EOAF has been undertaking a comprehensive strategic review of the Commonwealth's capital planning practices. This review entails an examination of how capital spending priorities are established and financed, as well as whether or not there are additional or alternative planning tools that might be useful for determining the prioritization of capital investments and the resulting cap allocation process. This review also included an investigation of whether the capital spending cap is set at the appropriate level given such factors as historical patterns of capital spending and finance; the growth in the depth and breadth of the Massachusetts economy over the past decade; the need to invest in the infrastructure to assure a base for continued future growth; and preservation of the long—term viability of existing assets. As a result of this study, the Administration determined this past spring to increase the annual cap from $1 billion to $1.15 billion. In addition, the ramping down in annual capital spending for the Central Artery/Tunnel project generated an additional pool of unassigned cap. In tandem, these two sources yielded $1.25 billion in additional Commonwealth capital resources over the five—year period Fiscal Year 2002—06.

The Administration targeted this $1.25 billion in additional funding toward priority areas such as Housing, eGovernment, infrastructure improvements at Commonwealth facilities, including court houses, public health and mental health hospitals, and institutions of higher education, roads and bridges, and a number of public safety projects and improvements. Thus, the Administration committed an additional $150 million to the Housing cap, $30 million annually, to spur production of both public and private housing stock; an additional $180 million, or $36 million annually, toward new investment in information technology and innovative projects intended to improve and streamline business transactions for clients of state services; an additional $220 million committed to the Chapter 90 road and bridge program; an additional $150 million, $30 million annually, committed to constructing, improving, and maintaining state facilities; and an additional $102 million for open space protection and other environmental initiatives. Cap allocations are summarized in the table below (note that “Total Uses” exceeds the $1.15 billion bond cap because Transportation and Economic Development include spending not subject to the cap):

Pending Bond Authorization

The Administration’s efforts to use the capital budget to help reinvigorate the Massachusetts economy have been hampered by the delay in enactment of several bond bills pending in the Legislature. The Administration’s $460 million housing bond bill, filed February 6, 2001, has not yet reached the Governor’s desk, and has been pending in a legislative conference committee since September. The Governor’s $220 million request for additional Chapter 90 authorization to support road and bridge construction, filed May 9, 2001 has seen no legislative action. The Governor’s $1.55 billion omnibus bond authorization request, filed June 7, 2001, which included much needed authorization for the Division of Capital Asset Management, the Information Technology Division, the Executive Offices of Public Safety, Transportation, Administration and Finance, and Environmental Affairs, has likewise received limited legislative attention. In addition, this past November, the Governor filed a $13 million bond bill to re—capitalize two economic stimulus loan programs that provide much—needed capital for small and medium—sized Massachusetts business: the Massachusetts Capital Access Program and the Economic Stabilization Trust. As a result of this legislative inaction, many critical projects that would otherwise have gone forward have been halted due to a lack of sufficient bond authorization.

Transportation

Fiscal Year 2002— Fiscal Year 2006 capital plan highlights: Major components of the Central Artery/Tunnel project are planned for completion in Fiscal Year 2003. The connection of the Massachusetts Turnpike (Interstate 90) to the Ted Williams Tunnel is scheduled for opening by the end of calendar year 2002, significantly improving traffic flow to and from Logan airport. The initial opening of Interstate 93 northbound is scheduled for early 2003. Vehicle traffic will then cross the Charles River via the new Leonard P. Zakim/Bunker Hill Bridge.

Independent of the CA/T project, the Executive Office of Transportation and Construction’s (EOTC) capital investment plan focuses on economic stimulus, safety, minimizing traffic, and environmental quality throughout the Commonwealth. The aim of the plan is to continue the five—year trend of leading the nation with the lowest fatality crash rate. Over the last ten—years, the Commonwealth has spent an average of $138 million per year on replacement, rehabilitation and repairing bridges throughout the state. MassHighway is in its second year of a five—year commitment to spend at least $400 million on the Statewide Road and Bridge program. In Fiscal Year 2001, the department exceeded that commitment by spending approximately $449 million on the Statewide Road and Bridge program.

In the past two years, the Administration has awarded in excess of $29.5 million in Public Works Economic Development (PWED) grants, aimed at jump—starting local economies through construction, reconstruction of existing or newly located public access roads, streets and bridges, sidewalks, lighting systems, traffic control systems, and drainage systems and culverts associated with municipal economic development efforts. The five—year capital plan calls for $20 million of annual spending for PWED and the Small Town Road Assistance Program (STRAP). STRAP provides small towns with additional capital resources for local road construction costs.

New authorization needed: Four transportation—related bond bills await further legislative action: $220 million in additional Chapter 90 bond authorization to support the additional cap allocation for this critical local road and bridge program, filed by the Governor this past May; $40 million in new Public Works and Economic Development (PWED) grant authorization, filed June 7th; $150 million in additional CA/T bond authorization consistent with the October 2001 CA/T finance plan, filed September 17th; and a terms bill filed November 21st to allow the state Treasurer to issue $205 million in notes in anticipation of a $205 million contribution from the Massachusetts Port Authority toward the CA/T project, pursuant to Chapter 235 of the Acts of 1998. To carry forward with the transportation capital spending plan through Fiscal Year 2006, the Governor will likely file a transportation bond bill in the spring of 2002. This bond bill will include authorization for federally aided and non—federally aided highway related projects, as well as funding for marine transportation facilities, airport related upgrades, and for regional transit facilities.

Infrastructure

Fiscal Year 2002— Fiscal Year 2006 capital plan highlights for the Department of Capital Asset Management (DCAM) include:

• Courts. Over $330 million for court—related renovation, repair, and construction projects over the next five years. Major renovation projects include the historic Suffolk County Courthouse and courthouses in Newton and South Boston. New courthouse construction projects are planned for Worcester, Fall River, Plymouth, Taunton, and Brockton.

• Public Safety. Over $180 million in correctional and other public safety facility renovation, repair, and construction projects over the next five years. New construction projects planned include correctional facilities for Middlesex, Barnstable, Essex, and Franklin counties; house of correction expansions for Suffolk and Norfolk counties; a new Hampden County women’s correctional facility; a Boston pre—release facility; and new state police stations in Millbury and Dartmouth.

• Health and Human Services. Projects planned over the next five years at state public health and mental health hospitals, developmental centers, soldiers homes, and youth detention centers include a new Westfield youth center, a new 50—bed secure care unit in Worcester, and fire protection improvements at the Bryan Building at Worcester State Hospital.

• University of Massachusetts. Over $247 million in facility renovation, repair, and construction projects at the University of Massachusetts (UMass) campuses. Projects currently in the study, design, or construction phase include major renovations to the McQuaide Building at UMass Lowell, a project to replace the granite facade at the UMass Medical Center in Worcester, a new engineering and computer science complex at UMass Amherst, and a new campus center at UMass Boston.

• State and Community Colleges. DCAMM is planning over $240 million in renovations and new construction at state and community colleges. Projects include: the Danvers campus completion for the North Shore Community College, academic building renovations at Salem State College, a Learning Resource Center at Quinsigamond Community College, new athletic facilities at Bridgewater State College and Westfield State College, a new fine arts and computer center at Northern Essex Community College, new technology buildings at Cape Cod Community College and Holyoke Community College, and a major renovation at Mass College of Liberal Arts in North Adams.

• Environmental Agencies. Projects include a comprehensive renovation of the Steriti Rink in Boston’s North End, a new replacement stadium at Dilboy field in Somerville, replacement of the Vietnam Veterans pool in Chelsea, a new visitors center at the McLaughlin Fish Hatchery in Belchertown, and new bath houses at Constitution, Tenean, and Savin Hill beaches in Boston.

• State Office Buildings. DCAMM’s principal focus in this category will be the estimated $53 million effort underway to restore the exterior of the historic State House, one of the nation’s oldest capital buildings in continuous use.

New authorization needed: The Governor requested $315 million in new authorization for DCAMM in the omnibus bond bill filed June 7, 2001. This $315 million request, still pending before the Legislature, includes $177 million for state and community colleges, as well as the University of Massachusetts system; $120 million for public health and mental health hospitals, group care residences, the Soldiers’ Homes, and other facilities within the Executive Office of Health and Human Services; and $18 million for other state—owned buildings.

Economic Development

Fiscal Year 2002— Fiscal Year 2006 capital plan highlights: The Economic Development cap typically funds grants for off—street parking projects, such as those planned for Worcester at Union Station and Medical City, for Amherst, New Bedford, and for the regional transit authority in Lowell; library construction grants through the Board of Library Commissioners; Massachusetts Historical Commission grants through the Secretary of State; and Energy Conservation Improvement grants, administered by the Division of Energy Resources to promote energy savings in public schools. Other major economic development initiatives receiving funding include development of a conference center in Brockton; renovation of Memorial Hall in Plymouth; the Devens Commerce Center, in partnership with the Massachusetts Development Finance Agency; construction of a new facility for the Basketball Hall of Fame in Springfield; major expansion of the Massachusetts Museum of Contemporary Art in North Adams; and major renovations to MacMillan Pier in Provincetown.

New authorization needed: The Governor requested $85 million in new authorization for Economic Development, consisting of $75 million for grants for local public libraries and $10 million for historic preservation grants, in the omnibus bond bill filed this past June 7th. On November 28th, the Governor filed a $13 million capital outlay bill to replenish two economic stimulus loan programs that provide much—needed capital for small and medium—sized Massachusetts business. This legislation, likewise pending in the Legislature, includes $10 million to re—capitalize the Economic Stabilization Trust, and $3 million to re—capitalize the Massachusetts Capital Access Program.

CONVENTION CENTERS

The Massachusetts Convention Center Authority (MCCA) and the Boston Redevelopment Authority (BRA) are jointly developing the Boston Convention and Exhibition Center in South Boston. The 1.6 million square-foot facility will include approximately 516,000 square feet of contiguous meeting space on one level, 160,000 square feet of additional meeting space, and a 41,000 square-foot ballroom, as well as banquet and lecture halls. The BRA has acquired the site, construction commenced in the spring of 2000, and completion is expected in spring 2004. This project is being jointly financed by the City of Boston and the Commonwealth. The Convention Center Act, as amended, authorizes the Commonwealth to issue up to $694.4 million of special obligation bonds for the purposes of the Boston Convention and Exhibition Center ($609.4 million), the Springfield Civic Center ($66.0 million), and the Worcester Convention Center ($19 million). Debt issued to finance the convention center projects will not be a general obligation of the Commonwealth. Debt service on the bonds is to be paid from receipts of convention center fees on hotel rooms in the cities of Boston, Cambridge, Springfield, West Springfield, Chicopee, and Worcester, car rentals in the city of Boston, parking at the convention center facilities, site-seeing tours in the city of Boston, and sales and meals taxes within a finance district near the Boston Convention and Exhibition Center.

Environment

Fiscal Year 2002- Fiscal Year 2006 capital plan highlights: The Swift Administration will continue its support of the array of programs that preserve and protect the environmental assets of the Commonwealth.

The Executive Office of Environmental Affairs (EOEA) capital spending program encompasses a wide variety of activities ranging from open space acquisition to hazardous waste cleanup to infrastructure and facility maintenance to resource preservation and protection. EOEA has allocated $60 million to preserve open space, and $72 million other spending, including an unprecedented portion for maintaining park and recreational facilities—parks, beaches, rinks, pools, fish hatcheries—as well as infrastructure—roadways, bridges, dams, seawalls—under the jurisdiction of the Department of Environmental Management, the Metropolitan District Commission, and the Department of Fisheries, Wildlife, and Environmental Law Enforcement. This fiscal year, EOEA has re—energized its investment in parks by focusing on major visible and visitor—driven improvements that will expand and enhance outdoor opportunities and experiences for Massachusetts’s residents and tourists. EOEA devotes additional cap toward resource protection and pollution prevention activities, as well as to clean up environmental hazards throughout the Commonwealth. EOEA also contributes $4 million of its yearly cap toward the Seaport initiative, which supports an array of economic development and harbor revitalization projects as approved by the Seaport Advisory Council.

New authorization needed: The Governor requested $750 million in new authorization for Environmental Affairs agencies in the omnibus bond bill filed this past June 7th. This $750 million includes $259 million for open space acquisition and protection; $206 million for state forests, parks, and reservations; $161 million for resource protection, watersheds and biodiversity; and $124 million for hazardous waste clean up and other public protection measures. This $750 million new authorization request assumed de—authorization of over $375 million of Environmental Affairs’ current authorization, as proposed in the Governor’s capital account re—authorization/de—authorization legislation also filed last June 7th and likewise pending in the Legislature. Absent new authorization, funding for open space protection programs, such as the Agricultural Preservation Restriction program and Self—Help and Urban Self—Help municipal grant programs, as well as infrastructure improvement, the Watershed Initiative, and Community Preservation will be depleted as of June 30, 2002.

Housing

Fiscal Year 2002— Fiscal Year 2006 capital plan highlights: The Department of Housing and Community Development (DHCD) typically devotes approximately 60% of its capital allocation to public housing modernization efforts, primarily to support local housing authority improvements to their state—aided programs. Another 35% of DHCD’s capital budget supports efforts to expand private homeownership and rental opportunities, including the Housing Innovation Fund, which promotes alternative and special needs housing, and the Housing Stabilization Fund, which supports neighborhood redevelopment efforts to preserve and rehabilitate private housing stock. The final 5% supports community development and public infrastructure, targeted to areas unlikely to attract private investment, for example, repairs to sidewalks, water and sewer lines, and demolition projects.

New authorization needed: In order to continue support of the Housing Innovations Fund, the Housing Stabilization Fund, housing authority renovation grants, and community development action grants, DHCD needs new authorization as proposed in the Governor’s $460 million housing bond bill filed February 6, 2001. This legislation included bond authorizations totaling $350 million for public housing renovation, remodeling, reconstruction, redevelopment, and hazardous material abatement; $25 million for community development action grants; $35 million for the Housing Innovations Fund program, to support the creation and retention of alternative forms of rental and privately—owned housing, including single—room occupancy units, limited equity cooperative housing, transitional housing for the homeless, and battered women’s shelters; and $50 million for the Housing Stabilization and Investment program, for the acquisition, preservation, and rehabilitation of affordable housing, including foreclosed and distressed properties.

Information Technology

Fiscal Year 2002— Fiscal Year 2006 capital plan highlights: The Information Technology Division’s (ITD) five—year capital spending plan reflects a number of key initiatives necessary to maintain smooth business operations within the Commonwealth as well as a number of innovative projects intended to improve and streamline business transactions for clients of state services.

New authorization needed: The Governor requested $300 million in new authorization for the Information Technology Division in the omnibus bond bill filed this past June 7th. This $300 million includes $135 million to support improvements to and implementation of new major information technology systems statewide; $95 million for the E—Government Initiative, including further development of the Commonwealth’s enterprise portal; $30 million to complete the public safety statewide wireless communications network; $25 million for a second data center; and $15 million to complete the conversion of state agencies onto a single e—mail system, the MassMail Initiative.

Public Safety

Fiscal Year 2002— 2006 capital plan highlights: The Executive Office of Public Safety’s (EOPS) five—year capital plan reflects a $45 million investment in public safety infrastructure improvements, largely dependent upon pending authorizations. The plan includes $3.4 million for the purchase of a State Police helicopter, which will complete a 5—year overhaul of the State Police Air Wing. The plan also calls for: $25 million for the final construction phase of the Firefighter Training Academy campus at Stow; $9 million for the development of a State Police mobile data terminal network; $6 million for facilities and equipment upgrades at the Department of Fire Services; $1.5 million for the enhancement of the State Police crime labs; and $1.1 million for infrastructure upgrades at various EOPS facilities.

New authorization needed: The Governor requested $60 million in new authorization for the public safety capital initiatives in the omnibus bond bill filed this past June 7th, including $25 million for the firefighter training facility in Stow; $19 million for installation of mobile data terminals in police cruisers; $8.5 million for deferred maintenance at facilities throughout the Executive Office of Public Safety; and $7.5 million for specialty equipment and facility maintenance at the Department of Fire Services.

PRIVATE ACTIVITY VOLUME CAP

Federal tax law allows the Commonwealth and its agencies to issue a limited amount of tax—exempt debt for the benefit of certain private activities. At no cost to the taxpayer, the low interest rates provided by such tax—exempt financing are used for student loans, first—time homebuyers, multi—family housing, and economic development. In December 2000, Congress adopted a 50% increase in the statewide limit on tax—exempt debt issuance for private activities, the "private activity volume cap," from $50 per capita to $75 per capita, phased—in during 2001 and 2002.

This measure, combined with modest population growth, resulted in an increase in the Commonwealth's private activity volume cap of $88 million for 2001 and another $82 million for 2002. This increase has enabled the expansion of the bonding capacity for three large Commonwealth quasi—public authorities authorized to issue tax—exempt bonds: the Massachusetts Educational Financing Authority (MEFA), which supports student loans at Massachusetts colleges; the Massachusetts Housing Finance Authority (MHFA), which supports multi—family housing and first—time buyer programs; and the Massachusetts Development Finance Agency (MDFA), which supports a variety of economic development projects.

For 2001, the Governor allocated $9 million of this increase specifically for purposes of supporting new housing programs. For 2002, while the allocation of volume cap will continue to support the tax—exempt issuance capacity for MEFA, MHFA and MDFA, EOAF is reviewing the impact of the increase in private activity cap on the Commonwealth’s overall capital spending strategy, including how it may most effectively be targeted to stimulate economic recovery and meet other important capital spending priorities.