|Fiscal Affairs Division|
The financial condition of the Commonwealth of Massachusetts continues
to reflect the dynamic fiscal recovery that began six years ago.
Instead of the debt and the deficit spending characteristic of
the late 1980's, the Commonwealth, according to its recently released
audited financial statements, ended Fiscal Year 1996 with a balance
of $1.172 billion in its budgeted funds. This marks the sixth
consecutive year in which revenues exceeded expenditures. Because
of the successive budget surpluses, the Commonwealth's Stabilization
(or "rainy day") Fund in Fiscal Year 1996 reached and
then exceeded its statutory limit for the first time, triggering
a deposit of $232 million into the Tax Reduction Fund. As a result,
the Legislature approved a one-time $150 million income tax cut
for Tax Year 1996 and legislation has been filed to authorize
an $84 million tax cut for Tax Year 1997. Symbolic of the turnaround
made in the last few years, the last of the Fiscal Recovery Bonds,
issued to finance the overspending of several years ago, will
be retired in Fiscal Year 1998.
The Commonwealth's robust financial health stems from six years
of prudent fiscal management, continued cooperation between the
Legislature and the Weld/Cellucci Administration, as well as an
expanding economy. On-going efforts to streamline government,
such as the recent reduction of secretariats from eleven to six,
have stemmed growth in government spending. Efforts to consolidate
overlapping or related government functions will continue through
Fiscal Year 1998 with the Administration's proposals to integrate
probation and parole services, abolish county government, and
institute several administrative reorganizations within secretariats.
Simultaneously, the Legislature and the Weld/Cellucci Administration
remain committed to increased support for the Commonwealth's cities
and towns and to tax relief for its citizens and businesses. The
phase-out of the cap on Lottery local aid distributions continues
apace, and distributions for education and water/sewer rate relief
will again increase in Fiscal Year 1998. These three commitments
alone will increase aid to cities and towns by $317.7 million
in Fiscal Year 1998. To further ease tax burdens, seven tax cuts
are included in this budget proposal.
However, changes in federal reimbursements and the prospect of
modest near-term economic growth dictate that the Commonwealth
remain persistent in its efforts to hold down spending. With the
passage of the federal Personal Responsibility and Reconciliation
Act early in Fiscal Year 1997, the Commonwealth henceforth will
be allocated fixed-sum block grants instead of receiving federal
reimbursement for state welfare spending. The federal welfare
reform legislation grants the state broad latitude in implementing
innovative welfare programs; however, the Commonwealth simultaneously
assumes more responsibility and risk associated with unforeseen
increases in welfare costs.
Although most market analysts are optimistic that the economy in Calendar Year 1997 will experience moderate growth, a few are bearish. The prospect of economic stagnation or perhaps contraction is realistic: over the last fifty years, expansions in business cycles have averaged fifty months and the current recovery is in its seventieth. The unpredictability of the market and the possibility of an unsettled economy require a cautious and conservative approach to budgetary considerations and long-term planning.
The Weld/Cellucci Administration's Fiscal Year 1998 budget recommendation
reflects not only the Administration's commitments to local aid,
tax relief, welfare reform, and public safety, but also its responsibility
to the citizens of Massachusetts not to repeat the overconfidence
and excesses of the late 1980's.
THE ECONOMIC CONTEXT
The condition of the economy determines, to a great extent, both
the resources available to state government and the demands upon
it. Employment, income growth, and inflation are important determinants
of tax and non-tax revenue collections. These variables also affect
spending requirements for Medicaid, public assistance, job training,
and many other programs supported with state revenues. Therefore,
it is important to gauge the economy realistically when projecting
budgetary revenues and spending.
Recent Economic Performance
The United States and Massachusetts experienced continued economic
growth in Calendar Year 1996, albeit at a slower rate than in
1995. Through the first three quarters of Calendar Year 1996,
the nation's economy, as measured by the gross domestic product,
grew at a rate of 2.9%.
Economic growth at the national level has been mirrored in Massachusetts where, between December 1991, the low point of the last recession, and October 1996, more than 250,000 jobs were created.
As shown in the chart below, the unemployment rate has fallen
in Massachusetts through each of the last five years. By November
1996, the rate in Massachusetts had dropped to 3.9%, compared
to a national rate of 5.4%, and is now the lowest of any large
Improvements in the employment picture are reflected in increased
personal incomes for Massachusetts residents. During Fiscal Year
1996, personal income in Massachusetts grew at an annual rate
An expanding economy translates directly into a broader tax revenue
base. Increased employment, incomes, housing starts, and business
activity directly impact sales, personal income, corporate, deeds,
and other tax collections. Compared to Fiscal Year 1995, Fiscal
Year 1996 income tax collections grew 12.3%, and sales tax collections
grew 5.2%. Overall, tax revenue available for the budget totaled
almost $12 billion in Fiscal Year 1996, a 7.9% increase from Fiscal
The Economic Outlook
Halfway through Fiscal Year 1997, the national economy continues
to expand at a moderate pace with little inflation. Most economic
forecasters believe that the economic outlook for the second half
of Fiscal Year 1997 and for Fiscal Year 1998 is one of continuing,
albeit slow, economic growth. Gross domestic product is expected
to grow between 2.1% and 2.2% annually throughout the next eighteen
months. Employment in the Commonwealth is expected to increase
at a rate between 1.1% and 1.6%, and personal income is expected
to grow at a rate from 4.4% to 5.6% over the same period. On the
inflation front, growth in consumer prices is expected to remain
low, between 2.4% and 3.4% over the next eighteen months.
Tax and non-tax revenue assumptions for the Fiscal Year 1998 budget
are organized by fund and revenue type in the following table.
Fiscal Year 1998 total revenues are projected to be $17.998 billion.
Tax revenues are projected to be $12.667 billion, which reflects
a reduction of $82 million for tax cuts proposed in this budget
recommendation (see the Proposed Tax Cuts table) and a reduction
of $84 million from the recently filed Tax Reduction Fund income
tax cut. This represents a raw increase of 2.9% over Fiscal Year
1997 projected tax revenues. Non-tax revenues are projected to
be $5.331 billion, a 3.5% increase over Fiscal Year 1997.
Revenue Shifts To and From Budgeted Funds
The above revenue estimates reflect several revenue (and associated
spending) shifts between budgeted and non-budgeted funds. These
shifts have no net effect on budgeted fund balances or the Commonwealth's
financial condition since both spending and revenue change in
equal amounts. However, they do affect gross spending and revenue
totals, changing the overall size of the state budget, and thus
should be noted. This budget incorporates the following revenue
and spending shifts between budgeted and non-budgeted accounts:
Moderate economic growth with low inflation is the basic assumption
underlying the Fiscal Year 1998 tax revenue forecast. Overall,
the Department of Revenue projects a slowing in the growth rate
of the tax revenue base (the tax estimate before the Fiscal Year
1998 impact of any tax law changes are incorporated), from the
6.5% rate in Fiscal Year 1996 to 5.8% in Fiscal Year 1997 and
4.6% in Fiscal Year 1998. Total Fiscal Year 1998 tax receipts
(the projected tax base with the Fiscal Year 1998 impact of any
tax law changes included) are estimated to increase by 2.9% over
Fiscal Year 1997 tax receipts. These estimates are consistent
with the forecasts of private economic forecasters and the Massachusetts
Continuing Tax Relief for Massachusetts Citizens
Over the past six years, the Commonwealth has made significant
advances in easing its citizens's tax burden. The Fiscal Year
1998 budget proposal continues the Weld/Cellucci Administration's
commitment to tax relief with seven new tax cuts that will benefit
individuals and encourage business investment and expansion in
Massachusetts. The proposals, all of which would become effective
January 1, 1998, are described below. The revenue impact for each
proposal is outlined in the table at the end of this section.
Under current tax law, Massachusetts residents pay a 12% tax on interest from non-Massachusetts banks, dividends, and short-term capital gains. Under the recently enacted capital gains reform, the 12% tax on long-term capital gains is being phased out. However, the 12% tax on other forms of investment, or Part A "unearned", income penalizes Massachusetts investors and discourages productive investment. Under this proposal, the Part A tax rate would be reduced by 1.2 % a year until the tax rate is 5.95%, the prevailing rate on "earned income"; i.e., wages, salaries, pensions, and business income.
Approximately 770,000 taxpayers would qualify for a tax cut under this proposal.
Since 1976, eligible personal income taxpayers have been allowed a deduction of $600 for dependents under age 12. (Only one deduction can be claimed regardless of the number of dependents.) The Administration proposes that the deduction be increased to $1,600 to adjust for Boston-area inflation since 1976, which has been approximately 260%. This would be the first adjustment to the deduction since it was enacted.
The proposal would benefit 350,000 to 425,000 Massachusetts families.
Because telecommunications is one of the fastest growing industries in the Commonwealth as well as in the nation, it is one of the most important to the Massachusetts economy. Under current law, purchases of telecommunications services are subject to the Commonwealth's 5% sales tax. The services include local and long distance telephone, internet access, paging, facsimile, and data transmission.
Under our proposal, the tax rate would be reduced by 1% a year for each of five years beginning January 1, 1998, until the tax is eliminated effective January 1, 2002. The tax on on-line and internet services would be eliminated effective July 1, 1997.
Almost all businesses in the Commonwealth would benefit from this
phase-out, especially those with large telecommunications usage
such as mutual fund companies, airlines, and banks. Most households
also would benefit since long distance and internet access charges
currently are fully taxable.
Under current law, retirement payments made by the United States military to Massachusetts residents are taxable at a rate of 5.95%.
Approximately 17,500 military retirees in Massachusetts would benefit from this proposal.
Under current law, life insurance companies domiciled in Massachusetts are subject to a 14% tax on net investment income, a tax life insurance companies located elsewhere do not pay. This tax puts Massachusetts life insurance companies at a competitive disadvantage vis-a-vis out-of-state insurers.
The investment tax credit is an important incentive encouraging capital investment by businesses. Although the investment tax credit rate is currently 3%, it is scheduled to be reduced to 1% effective July 1, 1999. Under this proposal, the rate would be set permanently at 3%, benefiting the approximately 2,600 companies doing business in Massachusetts that claim the credit each year.
Job training is a key element in preparing Massachusetts workers
for employment in a rapidly changing economy. This proposal would
offer a tax credit, up to $3,500 per eligible trainee, to expanding
Massachusetts businesses for the cost of training a new worker,
or retraining an existing employee for a higher position.
Three classes of non-tax revenue are shown in the Commonwealth's
financial statements: federal reimbursements and block grants
(spending for which the federal government reimburses the state,
or provides matching funds); departmental revenue (licensing and
user fees, fines, and miscellaneous revenue collected by state
agencies); and consolidated transfers (primarily state Lottery
profits deposited in the Local Aid Fund for distribution to the
cities and towns, and fringe benefit charges to off-budget funds).
The Weld/Cellucci Administration's Fiscal Year 1998 budget recommendation
assumes non-tax revenues of $5.331 billion, or $5.405 billion
when the shifts to and from off-budget accounts mentioned above
is removed. This projection represents an increase of $318.4 million
from Fiscal Year 1997. The major changes in non-tax revenue are
Federal Reimbursements and Block Grants
Federal reimbursements, including anticipated revenue from block
grants for TANF and Child Care programs, are projected to total
$ 3.303 billion in Fiscal Year 1998, or $3.265 billion when the
impact of shifts to and from off-budget accounts is removed. This
level of reimbursement represents an increase of approximately
$362 million over Fiscal Year 1997 federal revenues. This increase
is primarily the result of the way federal funds will be distributed
under the new block grant formulas.
Welfare Reform. On October 1, 1996, Massachusetts became eligible
to receive federal block grants for welfare and child care programs.
The TANF and Child Care Development Fund block grants replace
certain federal grants, as well as federal reimbursements that
provided the Commonwealth with approximately 50% of state expenditures
for eligible programs in prior years. Under the terms of the federal
law, the Commonwealth is entitled to a fixed block grant for state
programs related to needy families, including Transitional Aid
for Families with Dependent Children (TAFDC), emergency assistance,
employment services, child care, and administrative expenses in
support of these programs, provided that maintenance-of-effort
spending requirements are met.
The TANF block grant will total $459.4 million annually for six
federal fiscal years, or Massachusetts Fiscal Years 1997 through
The federal Child Care Development Fund block grant combines former
TAFDC-related child care reimbursements with the Child Care Development
Block Grant (CCDBG) and the At-Risk federal grant. The Child Care
block grant amount will be $76.1 million in Massachusetts Fiscal
Year 1998, which is $5.4 million more than Fiscal Year 1997 federal
grants and reimbursements. The Child Care block grant will increase
by 15% over the next six federal fiscal years to approximately
$87.9 million in federal Fiscal Year 2002.
In Fiscal Year 1998, three minor funds accounts were established
for the TANF, Child Care and Social Services block grants. The
creation of these funds provides specific accounting to ensure
that federal funds are spent on eligible programs and that maintenance-of-effort
spending requirements are met. The amount needed to support Transitional
Assistance for Families with Dependent Children (TAFDC) programs
in Fiscal Year 1998 is $325.6 million; the balance of the TANF
grant will be transferred to the Child Care and Social Services
minor fund accounts. In Fiscal Year 1998, $102.3 million will
be transferred from the TANF Fund to the Child Care Fund to support
child care programs, and $31.5 million will be transferred to
the Social Services Fund for programs at the Department of Social
Medicaid. In Fiscal Year 1998, federal reimbursement at the Division
of Medical Assistance (DMA) is projected to increase $145.5 million
to $2.027 billion, or a 7.7% increase from $1.882 billion in Fiscal
Year 1997. Of this increase, approximately $81.7 million is due
to federally reimbursable increases in spending in the traditional
Medicaid program, primarily due to medical inflation, increased
utilization of services, and changes in case mix.
In addition to the $81.7 million, the Commonwealth anticipates
receipt of approximately $72.7 million in federal reimbursements
as a result of DMA's federally approved health care waiver extending
Medicaid eligibility to individuals and families up to 133% of
the federal poverty level instead of the previous 100% cap, and
the implementation of Chapter 203 of the Acts of 1996 (the Health
Care Access Improvement Act). This $72.7 million in new federal
reimbursement will be credited to the Children's and Seniors'
Health Care Assistance Fund. Of the $72.7 million, approximately
$51.5 million will result from reimbursement due to Medicaid expansion
and other expanded DMA services, and $21.2 million will derive
from new federal revenues for Commonwealth medical programs previously
not reimbursed: the "CommonHealth" program, which provides
primary and supplemental medical care and assistance to disabled
working adults and children, and the Medical Security Plan, which
provides medical benefits to the unemployed. (The Medical Security
Plan is administered through the Division of Employment and Training
where its estimated $9 million in federal reimbursements, which
is included in the $72.7 million in new reimbursements, will be
In Fiscal Year 1998, departmental revenues are projected to total
$1.072 billion, or $1.185 billion when the impact of shifts to
and from off-budget accounts is removed. This projection is approximately
$70 million lower than the Fiscal Year 1997 departmental revenue
estimate. The most significant changes in projected departmental
revenues for Fiscal Year 1998 are from Registry of Motor Vehicle
registrations and licenses and the Revenue Optimization Program.
The departmental revenue estimate reflects the implementation
of lifetime driver licensing and vehicle registration. Beginning
in Fiscal Year 1998, licenses and registrations for non-commercial
passenger vehicles will be renewed automatically and free of charge.
The Commonwealth will continue to require that all parking tickets,
moving violation citations, excise taxes, and insurance premiums
be paid before license and registration renewals are processed.
The Commonwealth's cities and towns thus will be guaranteed not
to lose revenue from the change to lifetime licenses and registrations.
Free renewals of licenses will not result in a revenue loss until
Fiscal Year 2001. The savings to Commonwealth citizens in Fiscal
Year 1998 for free registration renewals will be $13.75 million.
When all vehicle owners become potentially eligible for free registration
in Fiscal Year 1999, revenues are projected to decline by about
$55 million. Revenue reductions due to lifetime licenses will
total approximately $11.25 million in Fiscal Year 2001. In Fiscal
Year 2002, when all drivers become potentially eligible for free
license renewals, the revenue reduction is expected to total approximately
In Fiscal Year 1998, the Revenue Optimization program, which provides
incentives for departments to generate additional revenues through
new initiatives, will be in transition. Enacted as part of the
Fiscal Year 1996 budget, the program first implemented numerous
revenue initiatives identified in a feasibility study conducted
during Fiscal Year 1995. Those projects generated a year-end General
Fund balance of $39.29 million in Fiscal Year 1996, and $57.5
million is projected for Fiscal Year 1997.
By the close of Fiscal Year 1997, the revenue optimization opportunities
identified in Fiscal Year 1995 will be exhausted. In addition,
changes in federal reimbursement policies since Fiscal Year 1996,
such as the institution of block grants, have further reduced
potential revenue flows into the program. As a result, the Fiscal
Year 1998 estimate reflects a reduction in revenue from the program.
After spending obligations, the General Fund will contain a year-end
balance of $10 million, which reflects a reduction of $47.5 million
from Fiscal Year 1997.
Fiscal Year 1998 activities include the implementation of two
new statewide revenue optimization projects in Fiscal Year 1998.
One of the new projects proposes licensing and marketing official
Commonwealth merchandise. The other project anticipates generating
revenue from leasing space on state-owned property to private
enterprises for the placement of communications antennae. These
activities, together with those which will be identified as the
result of new project feasibility studies, may enable the program
to move toward its historically higher revenue levels in Fiscal
Transfers from the Commonwealth's non-budgeted funds to its budgeted
funds are projected to increase by $26.1 million in Fiscal Year
1998. Lottery profits, the largest component of consolidated transfers,
are expected to rise by $17.1 million in Fiscal Year 1998. The
additional revenue will be distributed to the Commonwealth's cities
and towns as increased local aid.
The Weld/Cellucci Administration's Fiscal Year 1998 budget recommendation
projects spending of $18.150 billion, or $18.224 billion when
the impact of shifts to and from off-budget accounts is removed.
This represents a 2.9% increase over projected Fiscal Year 1997
expenditures. Several areas in which spending has changed, either
because of their importance to the Commonwealth's citizenry or
because they are non-discretionary in nature, are highlighted
Education Local Aid. The Weld/Cellucci Administration's Fiscal
Year 1998 budget proposal sustains the State's commitment to full
funding of the 1993 Education Reform Act. Education Local Aid
will increase by $259 million in Fiscal 1998 for a cumulative
increase of $1.32 billion in Education Local Aid over the last
Welfare Reform. The Weld/Cellucci Administration, in continuing
its commitment to welfare reform programs, recommends total welfare
spending of $1.01 billion for Fiscal Year 1998. This includes
$46 million to extend EAEDC income benefits to legal immigrants
who have lost their federal benefits. Also proposed is $7.5 million
for Adult Education and Job Search programs to afford welfare
recipients the opportunity to develop the skills necessary to
The Administration also proposes an additional $25.0 million for
day care for TAFDC recipients who are actively seeking employment,
and for low income working families. In addition, spending for
Food Bank programs is increased by $7.0 million to provide food
assistance for needy families who have lost federal Food Stamp
Medicaid. Under the Weld/Cellucci Administration's budget proposal,
Fiscal Year 1998 spending for the current Medicaid program will
total $3.511 billion, an increase of $123.5 million, or 3.5%,
over Fiscal Year 1997. The budget recommendation also includes
an additional $102.5 million for the expansion of the Medicaid
program to include approximately 55,000 adults and children not
previously eligible for Medicaid benefits, as well as for the
creation of a new state benefit plan enabling 31,000 adults to
qualify for health care coverage (of whom 18,000 previously had
received benefits under the EAEDC health program). The proposed
Fiscal Year 1998 expansion in Medicaid coverage conforms to the
terms of the Commonwealth's federal waiver and was authorized
by the Legislature in July 1996.
Lottery Local Aid. In accordance with the Administration's commitment
to phase out (over five years) the cap on State Lottery distributions
to the Commonwealth's cities and towns, this budget recommends
an additional $55.4 million in Lottery Local Aid distributions.
This will bring the cumulative increase in Lottery distributions
to more than $210 million over the last four fiscal years.
Criminal Justice. This budget proposes the transfer of post-sentencing
probation services from the Judiciary to the Executive branch,
effective July 1, 1998. During Fiscal Year 1998, the affected
agencies will map out the fiscal and operational details of the
transfer. There will be no spending or revenue shifts during Fiscal
Year 1998. However, an estimated $50 million will be transferred
in Fiscal Year 1999.
The Weld/Cellucci Administration's budget proposal also includes
a $21.8 million increase for the Courts and District Attorneys,
and a $1.5 million increase for the Attorney General, thus continuing
the Administration's commitment to public safety.
Employee Pensions and Health Insurance. Under the Administration's
Fiscal Year 1998 budget recommendation, spending on employee pensions
will decrease by $54 million, based on the Administration's proposed
new funding schedule. The savings is possible as the result of
a successful investment strategy and careful management. As a
further indication of the Commonwealth's dramatically improved
fiscal situation over the past six years, the revised pension
schedule recommends paying off the Commonwealth's unfunded pension
liability in just twenty years, a full ten years sooner than the
current schedule projects.
The budget recommendation for state employee health insurance
reflects a net savings of over $21 million attributable to a proposal
that state workers pay a 25% share of their health insurance premiums
in Fiscal Year 1998, versus the 15% share they currently pay.
Water and Sewer Rate Relief. In Fiscal Year 1998, the Sewer Rate
Relief Program is projected to distribute $50.3 million, or an
increase of $3.3 million over Fiscal Year 1997, to more than 100
communities statewide, including the forty-three members of the
Massachusetts Water Resources Authority. This aid has helped hold
the average MWRA household rate increase to only slightly more
than 3% annually for the four years since the program's inception
in Fiscal Year 1994.
Debt Service. The over-extended budgets of the late 1980's and
an aging infrastructure forced the Commonwealth to increase its
long- and short-term borrowing to fund operating shortfalls and
capital improvements. The Weld/Cellucci Administration has successfully
implemented a debt management policy such that the percentage
growth in general obligation debt outstanding has dropped from
29% in Fiscal Year 1991 to 2% in Fiscal Year 1997, and has averaged
1.5% in the last five fiscal years. In Fiscal Year 1998, the year
the Commonwealth retires its last Fiscal Recovery Bond, long-term
debt service appropriations are projected to decrease by 2%, or
$26.24 million, from Fiscal Year 1997. Short-term debt service
obligations are expected to increase to approximately $15 million
in Fiscal Year 1998, as Central Artery/Tunnel Project cash flow
requirements begin to outpace the inflow of federal revenues.
The Commonwealth will fund this planned-for interim cash shortfall
with Grant Anticipation Notes to be paid back as federal reimbursements
FISCAL YEAR 1997 MID-YEAR UPDATE
Through December 31, 1996, Fiscal Year 1997 tax revenue collections
totaled $5.81 billion, up 7.8% or $420 million from the same period
in Fiscal Year 1996 and well within the benchmark range forecast
by the Department of Revenue (DOR). While DOR estimates that the
tax base will grow by 5.8% in Fiscal Year 1997, they project total
tax receipts of $12.31 billion in Fiscal Year 1997, a raw increase
of 2.1% over Fiscal Year 1996. Two factors make this raw increase
much lower than the growth of the base: 1) DOR has estimated that
approximately $250 million of the Fiscal Year 1996 tax receipts
were one-time in nature, directly related to the outstanding performance
of the stock market in Calendar Year 1995; and 2) the Fiscal Year
1997 tax estimate incorporates the Tax Year 1996 $150 million
personal income tax refund resulting from the Commonwealth's Fiscal
Year 1996 deposit to the Tax Reduction Fund. The Administration
will continue to watch Fiscal Year 1997 tax receipts closely to
monitor any changes associated with the dynamic performance of
the stock market in Calendar Year 1996.
Total revenues in Fiscal Year 1997 are projected to equal $17.393
billion. Using conservative assumptions for the total amount of
authorizations that will remain unspent by the end of Fiscal Year
1997, spending is projected at $17.703 billion. In Fiscal Year
1997, the Commonwealth's Stabilization ("rainy day")
Fund is expected to earn $20 million in interest, increasing the
Fund's balance to $563 million.
FISCAL YEAR 1996 AUDITED RESULTS
In December 1996, the Office of the Comptroller released its annual
audited financial report on the Commonwealth's Fiscal Year 1996
operations (the Comprehensive Annual Financial Report, or CAFR).
As the Comptroller noted in his introduction to the CAFR, the
financial condition of the Commonwealth is excellent. For the
sixth consecutive year, revenues exceeded expenditures by a significant
amount and the Commonwealth improved its financial position as
measured according to generally accepted accounting principles
(GAAP). (See below: GAAP vs. Statutory Basis Accounting). For
the second year in a row, the Commonwealth achieved a budgeted
funds's GAAP surplus. By the end of Fiscal Year 1996, the GAAP
balance in these funds was a resounding $709.2 million, a marked
change from the Fiscal Year 1990 GAAP deficit balance of $1.9
In Fiscal Year 1996, the Commonwealth's Stabilization Fund was
funded to its statutory limit of $543.3 million. An additional
$232 million was available for deposit into the Fund but, because
it had reached its statutory ceiling, these funds flowed into
the Tax Reduction Fund, triggering a $150 million income tax cut
for Tax Year 1996 (as authorized by Legislative act during Fiscal
Year 1997); the Legislature and the Weld/Cellucci Administration
have recently agreed to authorize an additional tax cut of $84
million for Tax Year 1997. These one-time bonuses (increases in
the personal income tax deduction) are the first the citizens
of Massachusetts have been afforded since the Stabilization Fund
was established in 1986.
The Administration recently has filed legislation proposing to
increase the Stabilization Fund's statutory cap to 5% of total
revenues instead of the current ceiling of 5% of tax revenues.
This will ensure that the fund can reach and maintain a balance
of 3 to 5% of budgeted expenditures, as recommended by Wall Street
GAAP vs. Statutory Basis Accounting
The chart below compares the financial performance of the Commonwealth's
budgeted funds under generally accepted accounting principles
(GAAP) and under the statutory basis of accounting for the last
seven fiscal years.
Under the statutory basis of accounting, which is used to develop
the Commonwealth's budget and to control its daily activities,
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 year but recorded in
the next fiscal year. Accordingly, the Commonwealth's overall
financial condition at fiscal-year end might appear healthier
than it actually is. Under this method, the budgeted funds's ending
balances for each year shown progressed from a negative balance
of $1.104 billion in Fiscal Year 1990 to a positive year-end balance
of $1.172 billion in Fiscal Year 1996. The cumulative improvement,
then, is $2.277 billion.
In contrast, GAAP, the more stringent accounting system used in
the private sector, matches inflows pertaining to a fiscal year
to 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 a GAAP basis, the Commonwealth's budgeted
funds's balance in Fiscal Years 1990 through 1996 grew from a
deficit $1.896 billion to a positive $709.2 million, a cumulative
improvement of $2.605 billion.
Thus, the Weld/Cellucci Administration's lauded efforts to achieve
fiscal balance are even more impressive when viewed on a GAAP
|DEPARTMENT||Direct Budgetary Appro.||Budgetary Retained Revenue||Total Budgetary Spending||Intragov- ernmental Service||Federal Grant Spending||Trust & Other Spending||Total Spending||Budgetary Revenues|
|Sec. of the Commonwealth||40,124||30||40,154||125||445||3||40,727||68,669|
|State Ethics Comm.||1,279||0||1,279||0||0||0||1,279||43|
|Campaign & Political Finance||678||0||678||0||0||0||678||24|
|Disabled Persons Protection Comm.||1,475||0||1,475||0||0||0||1,475||0|
|Office of the Comptroller||53,194||20||53,214||22,900||0||0||76,114||1,993|
|Administration & Finance||960,026||26,455||986,480||67,421||1,928||14,229||1,070,058||316,781|
|Health & Human Services||7,169,135||243,051||7,412,185||7,675||306,548||366,835||8,093,244||3,388,849|
|Transportation & Construction||623,546||27||623,573||1,048||5,741||3,350||633,711||7,445|
|Board of Library Commissioners||24,588||0||24,588||0||2,938||1||27,526||1|
|Labor and Workforce Development||41,280||0||41,280||0||150,998||911,501||1,103,780||35,620|
|Consumer Affairs and Business Reg.||37,194||0||37,194||0||0||5,006||42,200||71,650|
|Department of Education||2,821,386||3,375||2,824,761||100||322,468||1,974||3,149,303||7,614|
|Board of Higher Education||676,594||241||676,836||0||73,925||1,560,461||2,311,221||3,046|
Executive Office for Administration & Finance
State House, Room 272
Boston, MA 02133
Last updated on January 22, 1997