Executive Summary

Commonwealth's Fiscal Status

A slowing economy and steady increases in state spending have combined to reveal a large structural deficit in the Commonwealth’s budget.

Boom & bust

During the 1996-2001 boom, revenues outpaced state spending, temporarily masking a basic structural imbalance in the Commonwealth’s budget. A structural problem occurs when maintenance spending (the cost of maintaining existing programs) is driven by factors that are independent of state resources. Our fiscal stability will not automatically be restored when the economy recovers.

Revenue vs. Maintenance Spending (in $ millions)

Between 1992 and 2001, state revenues increased annually by 6.2 percent while spending grew by 5.7 percent. But in 2002, spurred by stock market losses that have resulted in lower capital gains tax receipts, revenues began to drop.

After reaching a $1 billion peak in 2001, capital gains tax receipts are projected to be just $259 million in 2003. The gap between anticipated revenues and maintenance spending in 2004 is projected at $3 billion.

The health and rehabilitation crisis

The cost of state programs is not directly connected to anticipated revenue. This is especially true for health and human service programs. Even as revenues have fallen, spending growth in these programs has accelerated. For the most part, these programs are heavily regulated by the federal government and cannot easily be modified by unilateral state action.

MassHealth, or Medicaid, has grown by 76 percent since 1997 and is projected to increase another 9 percent in 2004.

Although nearly all MassHealth expenditures are shared with the federal government, net state costs will be nearly $3 billion this year. The Division of Medical Assistance, which administers MassHealth, has implemented a number of cost control initiatives in recent years, but those efforts have been outpaced by health care cost inflation, new technologies, increased reliance on prescription drugs, increased use of long-term care services and overall increases in enrollment.

MassHealth Membership Trends

Other health and human service areas have also experienced rapid cost growth. Increased caseload for residential group care placements has driven a 54 percent increase in Department of Social Services spending since 1997. Although Department of Mental Retardation spending has grown at a slower pace – 21.9 percent over the past five years – its total 2003 budget will be just under $1 billion.

In addition, the current operation of the Uncompensated Care Pool puts financial pressure on hospitals and other providers. A solution will require a consensus approach that meets applicable federal requirements, draws upon additional federal dollars, and conforms to the Commonwealth's budgetary constraints.

Our challenge is to find efficiencies that will allow us to continue delivering core services to the most vulnerable among us.

Depleted reserves

The Commonwealth’s ability to bridge the gap between revenues and spending through the use of reserves is dwindling. At the end of 2001, the Stabilization or “Rainy Day” Fund reached $2.3 billion. But after two years of declining revenues, only $338 million remains. If the fund were to be tapped at the same rate as the last two years, it would be emptied in 2004.

Reserve Fund	As of Jan 03	Contingency	FY04 balance
Health Security Trust	515.0	-	515.0
Stabilization Fund	338.0	75.0	338.0
Tobacco/Health Protection Funds	59.0	59.0	2.8
Community Preservation Act Fund	60.0	-	60.0
Medical Security Trust	5.7	-	6.0
Caseload Mitigation	30.0	30.0	-
Total	1,007.7	164.0	844.0

Maxed out borrowing capacity

After health and human services and education, debt service is the largest item in the budget – over $1.5 billion in 2003. Massachusetts has the highest debt burden of any state in the nation so additional borrowing to close the 2004 budget gap would only exacerbate the fiscal crisis.

Net Tax Supported Debt Per Capita

Raise taxes or cut spending?

In any fiscal crisis, the gap between revenues and expenses may be bridged by a combination of revenue increases and spending reductions. In 2002, the Legislature passed the largest single tax increase in Massachusetts history.

The Romney administration has already taken the initiative in 2003 to raise non-tax revenues by maximizing federal reimbursements and increasing fees.

But the question remains: why not raise taxes in 2004 to fill the remaining gap instead of making cuts to programs that will inevitably cause some hardship to those now receiving state services?

Raising taxes carries its own set of costs. It hurts the working families of our state. It puts the brakes on our economy, costing people jobs and our state tax revenue. It diminishes our competitiveness with other states. And tax increases do nothing to solve the underlying structural imbalances in our state budget.

If we used taxes to resolve our fiscal crisis this year, we would need to:

• increase sales tax from 5 percent to 6 percent; and
• increase income tax from 5.3 percent to 6.5 percent.

This 20 percent increase in sales and income taxes would cost a typical family about $1,000 each year. And that would only take care of this year’s problem. If we don not reign in unsustainable spending increases, state government would be forced to raise taxes again next year.

The way we manage this crisis will define the Commonwealth of the future. Last year, Massachusetts was one of only a few states that resorted to broad-based tax hikes to solve the budget deficit. On the heels of this more than $1 billion increase, further tax hikes would recall the bad old days of “Taxachusetts,” send the wrong signal to businesses and families and delight our neighbors in New Hampshire who would be the net beneficiaries of our action.