FY99H1A Fiscal Health

Fiscal Affairs Division

Fiscal Health and Prospects

The fiscal health of the Commonwealth of Massachusetts remains robust, and the recovery from recession and the excessive government spending of the late 1980’s is complete. For the seventh consecutive year, the fiscal year ended with a budgetary surplus. According to the recently released Comprehensive Annual Financial Report for the Commonwealth, Fiscal Year 1997 closed with a $1.1 billion balance on a Generally Accepted Accounting Principles (GAAP) basis. The last of the Fiscal Recovery Bonds, issued in Calendar Year 1990 in response to a $1.9 billion budgetary GAAP deficit, were retired on schedule in Fiscal Year 1998. The Cellucci Administration’s task now is to manage the Commonwealth’s current economic prosperity into the future as prudently as it managed the recovery from the economic decline of several years ago.

The sound financial condition of the Commonwealth stems from both the willingness of the Legislature and the Cellucci Administration to address the state’s economic realities and the long economic expansion. In response to suggested Wall Street guidelines, legislation was enacted and approved in Fiscal Year 1997 to raise the statutory ceiling on the Commonwealth’s Stabilization (or "rainy day") Fund from 5% of tax revenues to 5% of total budgetary revenue. Including the Fiscal Year 1997 deposit of $234.3 million, the fund’s balance now stands at $799.3 million, a marked contrast to the zero balance carried in the fund when the Weld/Cellucci Administration took office in Fiscal Year 1990. Also in Fiscal Year 1997, a separate $229.8 million capital investment trust, funded with surplus revenue instead of bonded debt, was established to address immediate capital needs. In Fiscal Year 1998, the schedule for paying off the Commonwealth’s unfunded pension liability was shortened from 30 years to 20. Because federal welfare reform dictates that states bear much of the risk of rising welfare costs, the Commonwealth passed legislation to reserve a one-time Fiscal Year 1997 federal welfare-revenue windfall as a safeguard against future caseload increases. Wall Street took notice of the Commonwealth’s abiding fiscal prudence and raised the state’s credit rating to its highest level since 1989, saving taxpayers millions of dollars in interest costs.

The Cellucci Administration’s strategy for avoiding the economic pitfalls of the 1980’s is to use budgetary surpluses to provide tax relief, save for future contingencies, and fund one-time expenditures. These policies cushion the blow of a future economic downturn by not investing in new programs that cannot be sustained over time. It also ensures that revenue windfalls flow to their rightful beneficiaries, the citizens of the Commonwealth and their cities and towns. In Tax Year 1997, $91.8 million will be returned to the taxpayers in the form of an increased personal income tax deduction. This is the second such reduction in as many years. In all, the 21 tax cuts passed during the Weld and Cellucci Administrations will save taxpayers more than $1.2 billion in Fiscal Year 1998. For the Commonwealth’s cities and towns, this budget proposes an aggregate increase of $307.9 million in direct aid.

The Cellucci Administration’s Fiscal Year 1999 budget recommendation stays the same fiscal course. It incorporates revenue projections that have been forecast conservatively. Proposed spending reflects a modest increase of 3.4%, directed largely to increased funding for local aid and education, and to implement the Health Care Access Act. Mostly, it demonstrates the Cellucci Administration’s ongoing commitment to the citizens and taxpayers of Massachusetts to use fiscal restraint in the management of the affairs of the Commonwealth.

THE ECONOMIC CONTEXT

The vitality of the national and local economies, as well as the vagaries of federal financial participation, impact both the revenue and spending of state governments. Tax and non-tax revenue collections are dependent on employment levels, personal income, and inflation. In periods of economic decline, spending to support many publicly funded programs, including budget-busting entitlement programs such as Medicaid and public assistance, rises in inverse relation to revenues. Responsible fiscal management dictates that the economy be assessed realistically on an ongoing basis and that revenues, including windfalls such as the extraordinary capital gains generated by a booming stock market, be managed with an eye to the potential for escalating demands on government resources.

Recent Economic Performance

Overall, Calendar Year 1997 was another economically dynamic year for both the nation and Massachusetts. Nationally, preliminary estimates of first quarter Calendar Year 1997 growth (as measured by gross domestic product, or GDP) were so high that the Federal Reserve raised interest rates for the first time in two years. The move was a preemptive strike against the flare-up in inflation that is normally expected in a rapidly expanding economy with a tightening labor market. Instead, the year ended with low inflation (at the consumer-price level), up only 1.7%, the lowest rate of increase since 1967. This occurred despite estimated real GDP growth of a healthy 3.7% and unemployment just under a moderate 5% for the year. Economi sts suggest that the turmoil in Asia’s markets, and the concomitant favorable exchange rates and declining prices in Asian goods, is tempering inflation.

Growth in Real Domestic Product Chart

In Massachusetts, Calendar Year 1997 was a banner year both fiscally and economically. The Commonwealth retired the last of its Calendar Year 1990 fiscal recovery bonds; at $1.433 billion, the September 1990 bond sale constituted the seventh largest municipal bond issue in history. Also, Wall Street demonstrated its confidence in the Commonwealth’s fiscal policies by again raising the bond rating for Massachusetts. As outlined below, the rating for the Commonwealth’s bonds had dropped by December 1989 to only one step above speculative, or "junk", grade. Bond ratings are indicators of the investment quality of a security and the relative risk of default. As ratings are lowered, bonds become increasingly difficult and more expensive to market.

Massachusetts Bond Ratings History

Date	Standard & Poor’s	Moody’s	Fitch
July 1989	A	A	AA
October 1989	A	A	A
November 1989	A	Baa1	A
December 1989	BBB*	Baa1	A
March 1990	BBB*	Baa*	A
September 1991	BBB*	Baa*	A
December 1991	BBB*	Baa*	A
September 1992	A	A	A
October 1993	A+	A	A+
November 1994	A+	A1	A+
October 1997	AA-	A1	A+
January 1998	AA-	A1	AA-

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

Economically, the Commonwealth fared better than the nation as a whole in 1997. As shown in the graph below, the unemployment rate in Massachusetts has fallen almost consistently since the peak of 9.6% in mid-Calendar Year 1991, and has remained at or below that of the nation for the past three years. Monthly unemployment in Massachusetts in Fiscal Year 1997 averaged a low 4.0% as compared to a national rate of 5.2%. In November 1997, the rate in Massachusetts stood at 3.9% and was unchanged from the prior year, while the national rate was 4.6%.

Unemployment Rate Chart

Growth in the rate of employment has a positive impact on personal incomes for Massachusetts residents. Personal incomes in Massachusetts have outpaced the rate of growth in the national economy in most quarters since the depths of the recession in Calendar Year 1991. As charted below, in Fiscal Year 1997, Massachusetts personal income grew 6.0%, down only slightly from a robust 6.2% in Fiscal Year 1996.

The levels of employment, income, and general business activity directly affect the income, sales, corporate, and other tax revenues available to the Commonwealth. In Fiscal Year 1997, sales tax collections were up 10.2%, and income tax revenues increased by 7.1%, or $475 million, to $7.18 billion from Fiscal Year 1996. In the aggregate, tax revenues available for the budget totaled $12.865 billion in Fiscal Year 1997, up $815 million, or 6.8%, from Fiscal Year 1996.

Growth in Massachusetts Personal Income Chart

Growth in Massachusetts Personal Income Chart

Source: U.S. Department of Commerce, Bureau of Economic Analysis

The Economic Outlook

Halfway through Fiscal Year 1998, the U.S. economy continues to expand moderately with little inflation. Most economic forecasters believe that the economic outlook for the second half of Fiscal Year 1998 and for Fiscal Year 1999 is one of slowing growth. Real GDP in Fiscal Year 1999 is expected to fall off to a modest annualized growth rate of about 2.1%, which reflects the predicted impact of developments in Asia. Inflation as measured by consumer prices should range near 2.6%. Unemployment is expected to hold steady at approximately 4.5% - 4.7% through Calendar Year 1998, but then to edge up to at least 5.0% by the end of Calendar Year 1999.

Overall, economic growth in Massachusetts over the next eighteen months is expected to roughly mirror that of the nation. Unemployment is projected at 3.7% through Fiscal Year 1998 and to remain steady at 3.7% - 3.9% annually through Calendar Year 2000. Growth in personal income is expected to decline from the Fiscal Year 1997 rate of about 6.0% to approximately 5.7% in Fiscal 1998. It is expected to fall further in Fiscal Year 1999 to 4.3% - 4.5%, and remain at that rate through the next few years. However, the rate of inflation (as measured by consumer prices), at least in metropolitan Boston, should continue to outpace that of the nation by approximately 0.5%. The downside risks for Massachusetts include the shortage of skilled labor, low net population growth which will further constrain job creation, and the prominence of the financial services industry in the economy coupled with a relatively high proportion of non-wage income, both of which are sensitive to the performance of the financial markets.

REVENUES

Tax and non-tax revenue assumptions for the Fiscal Year 1999 budget are organized by fund and revenue type in the following table. Total Fiscal Year 1999 revenues are projected to be $18.961 billion. Tax revenues are projected to total $13.665 billion, which reflects a reduction of $244.8 million for the tax cuts proposed in this budget recommendation (see the Proposed Tax Cuts table below). This represents an increase of 3.9% over Fiscal Year 1998 projected tax revenues. Non-tax revenues are projected to total $5.297 billion, a 5.3% decrease from Fiscal Year 1998. After accounting for the proposed transfer of certain programs off-budget, non-tax revenues are projected to increase 0.6% in Fiscal Year 1999.

Fiscal Year 1999 Revenue by Source and Budgeted Fund
(in millions of dollars)


Source	All Budgeted Funds	General Fund	Local Aid Fund	Highway Fund	Other Budgeted Funds

Tax Revenue
Alcoholic Beverages	55.0	55.0	0.0	0.0	0.0
Commercial Banks	151.0	151.0	0.0	0.0	0.0
Savings Institutions	26.0	26.0	0.0	0.0	0.0
Cigarettes	184.5	94.0	0.0	0.0	90.5
Corporations	1,038.0	618.1	412.1	0.0	7.8
Deeds	50.0	50.0	0.0	0.0	0.0
Income Tax	7,821.2	4,692.7	3,128.5	0.0	0.0
Estate/Inheritance	101.0	101.0	0.0	0.0	0.0
Insurance	324.5	324.5	0.0	0.0	0.0
Motor Fuels	613.0	82.1	0.0	523.2	7.6
Utilities	96.0	96.0	0.0	0.0	0.0
Racing	10.2	10.2	0.0	0.0	0.0
Room Occupancy	104.5	56.6	0.0	0.0	48.1
Sales: Regular	2,255.5	1,336.5	891.0	0.0	28.0
Sales: Meals	390.0	233.9	155.9	0.0	0.2
Sales: Motor Vehicles	439.0	263.4	175.6	0.0	0.0
Miscellaneous	5.3	5.3	0.0	0.0	0.0
Total Tax Revenue	13,664.7	8,196.3	4,763.1	523.2	182.1

Non-Tax Revenue
Federal Reimbursements	3,216.4	2,620.9	0.0	2.7	592.9
Departmental Revenue	1,129.7	730.8	1.6	275.8	121.4
Consolidated Transfers	950.4	315.3	662.7	0.0	(27.5)
Total Non-Tax Revenue	5,296.6	3,667.0	664.3	278.5	686.8
Total Budgeted Fund Revenue	18,961.3	11,863.3	5,427.4	801.7	868.9

Revenue Transfers to and from Budgeted Funds

The Fiscal Year 1999 revenue estimates reflect several proposed revenue (and associated spending) transfers between budgeted and non-budgeted funds. These movements have no net effect on the Commonwealth’s statutory balance or financial condition. However, they do affect gross spending and revenue totals, changing the overall size of the state budget. This budget incorporates the following revenue and spending transfers between budgeted and non-budgeted accounts:

The Cellucci Administration proposes moving the Children’s and Seniors’ Health Care Assistance Fund and the Children’s Medical Security Plan off-budget, resulting in a shift of $403 million in spending to a trust fund, which would not require further appropriation. The move will afford greater administrative flexibility in carrying out the objectives of the programs. This budget recommendation also proposes that $37 million in "safety net" payments for the uninsured be transferred off-budget to the Medical Assistance Intergovernmental Transfer Payments Trust within the Division of Health Care Finance and Policy.

To provide a more uniform funding stream for the cities and towns that participate in the Mosquito and Greenhead Fly Control Program, the Administration proposes moving the $5.1 million Mosquito and Greenhead Fly Fund off-budget in Fiscal Year 1999. Currently, these pest-control efforts are funded by the cities and towns via state appropriations. The transfer off-budget will allow the cities and towns to fund the programs directly through a trust fund, while also ensuring adequate controls on spending without affecting levels of service.

The Administration proposes moving the State Building Management Fund off-budget in Fiscal Year 1999. The fund receives rent payments from the Transportation Building in Boston, the Massachusetts Information Technology Center in Chelsea, and the Springfield State Office Building. Moving this fund off-budget will allow rent payments to flow directly to maintenance and small capital improvement projects at these three state-owned buildings, preserving their useful life.

The Administration proposes creation of a new off-budget trust for administration of the Low-Income Housing Tax Credit (LIHTC). Fees for the LIHTC currently are held in a retained revenue account and are projected to total almost $713,000 in Fiscal Year 1999. The proposed change would ensure compliance with federal guidelines mandating that LIHTC revenue be dedicated to the program.

The transition of Middlesex and Franklin Counties into state government will be completed in Fiscal Year 1998. The Administration's commitment to eliminating the duplication of services and avoiding needless state spending on county insolvency will continue with the assumption by the Commonwealth of the operations of Hampden and Worcester Counties as of July 1, 1998 (earlier if these counties default on debt obligations). The consolidation of these two counties into state government will result in additional state spending of $13.3 million in Fiscal Year 1999 as responsibility for the counties’ court building maintenance, Registries of Deeds, and Sheriffs' departments shifts to the Commonwealth. However, the added spending being assumed by the Commonwealth will be offset by county revenues that will be credited to the State.

Tax Revenue

Moderate economic growth with low inflation is the basic assumption underlying the Fiscal Year 1999 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 1999 impact of any tax law changes are incorporated). In Fiscal Year 1999, the tax revenue base is expected to increase 4.9%, as compared to 5.2% in Fiscal Year 1998, and 8.5% in Fiscal Year 1997.

Total Fiscal Year 1999 tax collections (the projected tax revenue base adjusted by the Fiscal Year 1999 impact of any tax law changes) are estimated to increase by a net 3.9% over Fiscal Year 1998 levels. These projections are fiscally conservative and fall below the forecasts of most private economic forecasters, including the Massachusetts Taxpayers Foundation. Given the potential impact of further erosion in Asia’s financial markets, this Fiscal Year 1999 revenue forecast is realistic and achievable.

Continuing Tax Relief for Massachusetts Citizens

Over the past seven years, the Commonwealth has made significant advances in easing its citizens’ tax burden. The Fiscal Year 1999 budget proposal continues the Cellucci Administration’s commitment to tax relief with seven new tax proposals aimed at helping the individual taxpayer and encouraging savings and investment in Massachusetts. The proposals, organized in five categories, are described below. The revenue impact for each is outlined in the table at the end of this section.

Reduction of Part B ("earned income") tax rate from 5.95% to 5.00% over three tax years

When state policy makers raised income taxes in Calendar Year 1990 to finance large operating budget deficits, the increase was touted as being temporary. Today, the last of the fiscal recovery bonds has been retired and the number of Massachusetts residents employed is at an all-time high. Approval of this proposal would fulfill the promise made to the Commonwealth’s taxpayers in 1990 to repeal the 5.95% tax rate when the fiscal recovery was complete. Reduction of the earned income tax rate to 5.00% would be phased in over three calendar (tax) years. Approximately 2.5 million taxpayers (all filers who pay taxes on so-called "earned" income) would qualify for a tax cut under the terms of this proposal.

Reduction of Part A ("unearned income," i.e., interest from non-Massachusetts banks, dividends, and short-term capital gains) tax rate from 12% to 5.00% over five tax years

Under current tax law, Massachusetts residents pay a 12% tax on interest from non-Massachusetts banks, dividends, and short-term capital gains. Under the terms of Capital Gains Reform passed in 1994, the 12% tax on long-term capital gains is being phased out. However, the 12% tax on other types 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 1.4 % per year until the tax rate is 5.00%, consistent with the proposed rate on "earned income," i.e., wages, salaries, pensions, and business income.

Approximately 800,000 taxpayers would qualify for a tax cut under this proposal.

Personal income tax credit and exemptions to encourage saving for children’s higher education

The Cellucci Administration proposes three new tax changes to help families afford the cost of higher education. This proposal would allow both an annual 5% personal income tax credit (capped at $250 per individual) and a tax exemption on earnings and withdrawals in state-approved managed investment plans for higher education, such as the "U-Plan." Earnings and withdrawals from such plans would be tax-exempt as long as the funds were expended for higher education tuition, fees, and related expenses. This proposal would also exempt earnings and withdrawals of income from "Roth" and education IRA’s, which is consistent with the new federal tax law.

Approximately 75,000 taxpayers would qualify for a tax cut under this proposal.

Capital gains tax exemption on the sale of a principal residence

To mirror recent federal tax law changes, the Administration proposes the exemption of capital gains from the sale of a principal residence of $250,000 for single filers and $500,000 for joint filers. This change, in conjunction with the Administration’s proposal to reduce the tax on unearned income, will create a tax environment that encourages savings and investment in Massachusetts.

Personal income tax exemption for providing care to an elderly relative

The Administration proposes a $5,000 personal income tax exemption for taxpayers who provide more than one-half of the support for a relative over the age of 70 who resides with the taxpayer for more than eight months in the tax year. The exemption would be limited to taxpayers with adjusted gross incomes of less than $100,000.

An estimated 13,000 - 14,000 taxpayers would qualify for a tax cut under this proposal.

Proposed Tax Cuts	Fiscal Year 1999 Revenue Impact ($ millions)

1. Reduce tax on "earned" income from 5.95% to 5.00%	$205.8
2. Reduce tax on "unearned" income 12.00% to 5.00%	30.0
3. Higher Education tax credits and exemptions	3.0
4. Capital gains exemption on sale of a house	2.0
5. Exemption for the care of an elderly relative	4.0
Total Reduction in Tax Collections	$244.8

Non-Tax Revenue

Three classes of non-tax revenue are shown in the Commonwealth’s financial statements: federal reimbursements (revenue associated with spending for which the federal government reimburses the State or provides matching funds), which includes block grants; 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 cities and towns, and fringe benefit charges to off-budget funds).

The Cellucci Administration’s Fiscal Year 1999 budget recommendation assumes budgeted non-tax revenues of $5.297 billion. This amount totals $5.624 billion after adjusting for the transfers to and from off-budget accounts mentioned above and represents an increase of $30 million from Fiscal Year 1998. The major changes in non-tax revenue are described below.

Federal Reimbursements and Block Grants

Federal reimbursements for Medicaid and revenue from block grants for Temporary Assistance to Needy Families (TANF) and Child Care programs are projected to total $3.216 billion in Fiscal Year 1999, or $3.518 billion when adjusted for the impact of transfers to off-budget accounts. This level of reimbursement represents a decrease of approximately 4.7% from Fiscal Year 1998 federal revenues. The decrease is the result primarily of changes in federal reimbursement for Medicaid programs.

Medicaid. Division of Medical Assistance (DMA) revenue in Fiscal Year 1999 is projected to total $1.986 billion, which reflects a decrease of $195 million from Fiscal Year 1998 including an estimated drop of $168.3 million in federal reimbursements. The decrease is due primarily to three factors. First, the Cellucci Administration’s Fiscal Year 1999 budget recommendation to convert the Children’s and Seniors’ Health Care Assistance Fund to a trust fund will result in moving approximately $72.6 million in federal reimbursements off-budget. Second, revenue projections for Fiscal Year 1999 assume that $37 million in "safety net" payments for the uninsured, previously carried on budget, will occur off-budget in Fiscal Year 1999 through the Medical Assistance Intergovern-mental Transfer Payments Trust Fund account established in Fiscal Year 1998 as part of health care reform. Finally, $75 million in Fiscal Year 1998 federally reimbursed disproportionate share revenue was a carry-forward from Fiscal Year 1997, and therefore is not reflected in Fiscal Year 1999 revenue projections. The balance of the decrease, $10.4 million, stems from one-time federally reimbursed spending that occurred in Fiscal Year 1998 and will not reoccur in Fiscal Year 1999.

Welfare. In Fiscal Year 1998, Massachusetts implemented its first full year of welfare reform. The Commonwealth will meet federal maintenance-of-effort requirements to collect its share of the Temporary Assistance to Needy Families (TANF) block grant in the amount of $459.4 million.

In Fiscal Year 1999, the Commonwealth will again collect $459.4 million in federal TANF block grant funds. The amount needed to support Transitional Assistance to Families with Dependent Children (TAFDC) benefits and employment and related child care assistance is $321.6 million. The balance of the TANF grant will be transferred to the Child Care and Social Services Funds. In Fiscal Year 1999, $91.9 million will be transferred from the Commonwealth’s Transitional Aid to Needy Families Fund to the Child Care Fund to support child care programs, and $45.9 million will be transferred to the Social Services Fund for programs at the Department of Social Services.

$321.6 million in federal revenue from the TANF block grant will be deposited into the Transitional Aid to Needy Families Fund for TAFDC benefits, child care, and employment assistance programs.

$169.2 million in federal revenue will be deposited into the Child Care Fund: $77.3 million from the Child Care Development block grant, and $91.9 million transferred from the Transitional Aid to Needy Families Fund.

$97.7 million in federal revenue will be deposited into the Social Services Fund: $51.8 million from the Social Services block grant, and $45.9 million transferred from the Transitional Aid to Needy Families Fund.

Departmental Revenues

In Fiscal Year 1999, departmental revenues are projected to total $1.13 billion, or $1.16 billion after adjusting for the impact of transfers to and from off-budget accounts. This projection is approximately $115 million lower than the Fiscal Year 1998 departmental revenue estimate, due primarily to the implementation of lifetime drivers’ licensing and vehicle registration at the Registry of Motor Vehicles and the Revenue Optimization Program.

Beginning in Fiscal Year 1998, drivers’ licenses and registrations for non-commercial passenger vehicles are renewable automatically and free of charge. To ensure that the Commonwealth’s cities and towns do not lose revenue during the changeover to lifetime licenses and registrations, all parking tickets, moving violation citations, excise taxes, and insurance premiums must be paid before license and registration renewals are processed. The revenue reduction in Fiscal Year 1998 for free registration renewals is estimated to total $13.75 million. In Fiscal Year 1999, the first full year in which all vehicle owners become eligible for lifetime vehicle registrations, revenues are projected to decline by approximately $55 million.

Free renewals of drivers’ licenses will not result in a revenue loss until Fiscal Year 2000 when revenue reductions will total approximately $11.25 million. In Fiscal Year 2001, when all drivers become eligible for free license renewals, the revenue reduction is expected to total approx-imately $45 million.

The Revenue Optimization program continues to be a successful mechanism by which departments identify and generate new sources of non-tax revenue. Largely due to new initiatives identified in a recent statewide study, the program is expected to generate $43.9 million in General Fund revenue in Fiscal Year 1998. By the close of Fiscal Year 1998, many projects pertaining to federal reimbursements of state expenditures, a mainstay of Revenue Optimization initiatives to date, will have been exhausted. As a result, General Fund revenue generated from the program is expected to decrease from $43.9 million in Fiscal Year 1998 to $14 million in Fiscal Year 1999.

Initiatives to be developed further in Fiscal Year 1999 include the licensing and marketing of official Commonwealth merchandise; the sale of licenses to private enterprises for the placement of communications antennae on state property; the sale of government-generated data; and the sale of advertising space on Commonwealth Web sites and other government media.

Consolidated Transfers

Transfers from the Commonwealth’s non-budgeted funds to its budgeted funds are projected to increase by $4.3 million from Fiscal Year 1998 levels. Lottery profits, the largest component of consolidated transfers, are expected to remain constant in Fiscal Year 1999.

The Cellucci Administration, in cooperation with the State Comptroller, proposes the elimination of three inactive trust funds which would result in a positive one-time revenue of $8.78 million in Fiscal Year 1999.

SPENDING

The Cellucci Administration’s Fiscal Year 1999 budget recommendation projects spending of $19.06 billion, or $19.49 billion when adjusted for the impact of the proposed transfers to and from off-budget accounts. This represents a 3.4% increase over projected Fiscal Year 1998 expenditures. The following highlights several areas in which spending levels would change:

Education Local Aid. Since Education Reform was implemented in Fiscal Year 1993, the Commonwealth has spent an aggregate of more than $13 billion on K -12 education. In Fiscal Year 1999, the Cellucci Administration sustains this commitment by recommending in this budget $357 million in additional funding for the Department of Education, a 12.5% increase over Fiscal Year 1998. The proposed increase includes $269 million in new funding for Education Reform. This budget also proposes $40 million in assistance to the Commonwealth’s cities and towns for additional teachers, $25 million in expansion for the School Building Assistance program, and $15 million for the Early Education and Care program.

Welfare. In sustaining the Cellucci Administration’s commitment to welfare reform, this budget recommends total welfare spending of $936.6 million in Fiscal Year 1999. The proposal includes an additional $3 million for transportation and expanded employment support for recipients in need of additional assistance to ensure their transition from public assistance to the workforce.

In Fiscal Year 1999, Massachusetts will receive approximately $20 million in federal Welfare-to-Work grants. These funds will be administered by the Department of Labor and Workforce Development and will further support the Department of Transitional Assistance's efforts to provide job training and better prepare TAFDC recipients for work.

The Administration’s budget also incorporates proposals for an additional $18 million to provide child care for TAFDC recipients who are seeking employment or who are in their first year of full-time work, and an additional $10 million for assistance to low-income working families on waiting lists to receive child care services.

Medicaid. The Cellucci Administration’s Fiscal Year 1999 budget recommends spending by the Division of Medical Assistance (DMA) of $3.688 billion, a decrease of $133.4 million, or 3.5%, from Fiscal Year 1998. Simultaneously, the Administration supports health care reform initiatives whereby comprehensive health care coverage or medical insurance premium assistance will be extended to approximately 60,000 adults and 63,000 children. Spending in support of these initiatives is not reflected in the Division’s Fiscal Year 1999 budget recommendation due to the proposed movement off-budget of the Children’s and Seniors’ Health Care Assistance Fund. The Fund was established in Fiscal Year 1997 to fund expansions in the population eligible for health care assistance. The proposed Fiscal Year 1999 expansion in Medicaid coverage conforms to the terms of the Commonwealth’s federal waiver and was authorized by legislation enacted in July 1996 and July 1997.

Lottery Local Aid. In accordance with the Administration’s commitment to phase out the cap on Lottery distributions to the Commonwealth’s cities and towns by Fiscal Year 2000, this budget recommends an additional $34 million in Lottery Local Aid. The projected total Lottery distribution to cities and towns for Fiscal Year 1999 is $597 million.

Criminal Justice. In continuing the Administration’s commitment to public safety, this budget proposes additional Fiscal Year 1999 funding of $20.8 million for the Judiciary and District Attorneys and $1.3 million for the Attorney General. The Judiciary will assume responsibility for the court facilities of Worcester and Hampden counties effective July 1, 1998, and will open new courthouses in Lawrence and Boston in Fiscal Year 1999.

The Fiscal Year 1999 budget recommendation for the Department of Correction includes an additional $24.77 million for the new maximum security facility in Shirley that is scheduled to open in Fiscal Year 1999, and an additional $2 million for community policing.

Employee Pensions and Health Insurance. The Administration’s Fiscal Year 1999 budget recommendation reduces spending for employee pensions by $93.88 million. The savings stem from the elimination in Fiscal Year 1998 of the Commonwealth’s responsibility for funding cost-of-living adjustments (COLAs) incurred by local pension systems. In addition, the Fiscal Year 1999 budget proposes a $20 million reserve to meet the Commonwealth’s obligation to reduce the unfunded pension liabilities of former employees and retirees of the county governments of Worcester, Hampden, Middlesex and Franklin, and for the incremental pension liabilities associated with the veterans’ buy-back for active military service, in accordance with Chapter 32, Section 4 of the General Laws. It is anticipated that the fiscal impact of these changes will be reflected in the next pension funding schedule, which is to be revised in the spring of 1998.

The budget recommendation for state employees’ health insurance reflects net savings of more than $34 million attributable to a proposal that state workers pay 25% of the cost of their health insurance premiums in Fiscal Year 1999, instead of the current 15% contribution.

Higher Education. The Fiscal Year 1999 budget recommendation reflects the Cellucci Administration’s effort to enhance the affordability of higher education. The Administration supports the Board of Higher Education’s proposal to reduce tuition by 5% at the campuses of the University of Massachusetts. State college and community college students would receive an average tuition reduction of 7% and 10%, respectively, which would result in a $5 million revenue loss to the Commonwealth in Fiscal Year 1999.

The Cellucci Administration’s Fiscal Year 1999 budget also proposes an additional $8 million in scholarship funds for low- and moderate-income students, and an added $2 million for the Performance Improvement Program which provides cash grants to campuses that meet the Board of Higher Education's performance criteria. Finally, the Administration recommends $2 million to establish a new adult-education grant program to be administered at the community colleges. The new grants, in conjunction with private contributions, will provide working adults with the training needed to develop and maintain marketable job skills.

Water and Sewer Rate Relief. In Fiscal Year 1999, the Sewer Rate Relief Program is projected to distribute more than $55.7 million, or an increase of approximately $5 million over Fiscal Year 1998, to more than 100 communities statewide, including the 43 members of the Massachusetts Water Resources Authority (MWRA). In the five fiscal years before the program’s inception in Fiscal Year 1994, the average annual rate increase per household was 24.14%. In Fiscal Years 1994 through 1998, the rate relief program has helped hold the average MWRA household rate increase to only 3.04% annually.

Debt Service. Much of the Commonwealth’s fiscal difficulties in the late 1980’s stemmed from an escalation in state borrowing that arose from financing operating shortfalls with bonded debt. The Weld/Cellucci Administration’s debt-management policy has resulted in a drop in the percentage growth of outstanding general obligation debt from 29% in Fiscal Year 1991 to 2% in Fiscal Year 1997. The average annual increase in the growth of debt for Fiscal Years 1998 through 2002 is estimated at only 3.3% despite the burden of finishing construction of the Central Artery/Tunnel Project, scheduled for completion in Calendar Year 2004.

Short-term debt service obligations are expected to increase to $49 million in Fiscal Year 1999, as Central Artery/Tunnel Project cash flow requirements begin to outpace the inflow of federal and other third-party revenues. The Commonwealth will fund the interim cash shortfall with Grant Anticipation Notes (GANs) to be repaid as federal reimbursements are received and Bond Anticipation Notes (BANs) on third-party financing.

In Fiscal Year 1998, legislation was approved to construct a new convention center in Boston and to expand existing facilities in Worcester and Springfield. The projects will be financed with increases in certain taxes on hotels and vehicle rentals, and the dedication of state taxes on new businesses in Boston’s Convention Center Finance District. These new revenue sources will be sufficient to pay the interest on the general obligation notes that will be sold to finance construction. The notes will be permanently financed with special obligation revenue bonds when construction of the new facility is completed, probably in 2002.

FISCAL YEAR 1998 MID-YEAR UPDATE

Through December 31, 1997, Fiscal Year 1998 tax revenue collections totaled $6.147 billion, up 5.9%, or $341 million, from the same period in Fiscal Year 1997. Collections are $104 million, or 1.7%, over the midpoint of the benchmark range forecast by the Department of Revenue (DOR). DOR projects that the tax base will grow by 5.2% in Fiscal Year 1998. The Administration projects Fiscal Year 1998 total tax receipts of $13.154 billion, an increase of 2.25% over Fiscal Year 1997. The change is lower than the projected tax-base growth because six recent tax law changes, and the phase-in of six others approved in prior fiscal years, are being implemented in Fiscal Year 1998.

FISCAL YEAR 1997 AUDITED RESULTS

The Fiscal Year 1997 audited financial report on the Commonwealth’s operations (the Comprehensive Annual Financial Report, or CAFR) was issued by the State Comptroller in December 1997. The CAFR reports the Common-wealth’s financial position as measured according to generally accepted accounting principles (GAAP), the more stringent accounting system used in the private sector. This is in comparison to the statutory basis of accounting, which is defined in Massachusetts law and is used to develop the Commonwealth’s budget and to control its daily fiscal activities.

Below is an explanation of how the two accounting systems demonstrate the fiscal health of the Commonwealth.

GAAP vs. Statutory Basis Accounting

With the statutory basis of accounting, expenditures and revenues are, for the most part, equivalent to cash disbursements and receipts. If, for example, Medicaid bills incurred in a fiscal year remain unpaid at year-end, the expense or liability is not accounted for in that fiscal year, but recorded in the next fiscal year. Accordingly, the Commonwealth’s overall financial condition at the end of the fiscal year may appear healthier than it actually is. As indicated on the chart below, according to the statutory basis of accounting, the budgeted funds’ ending balances for Fiscal Years 1990 through 1997 progressed from a negative year-end balance of $1.104 billion in Fiscal Year 1990 to a positive year-end balance of $1.394.0 billion in Fiscal Year 1997. The cumulative improvement in the Commonwealth’s year-end balances during the Weld and Cellucci Administrations is therefore $2.5 billion.

Trends in Budgeted Funds Balance Chart

In contrast, GAAP matches inflows pertaining to a fiscal year with outflows for the same period using a modified accrual basis of accounting to recognize certain assets and liabilities (or, in state finance parlance, revenues and expenditures). Under GAAP, the unpaid Medicaid bills are accounted for in the year in which they were incurred despite no cash having been disbursed for payment. GAAP, therefore, provides a more realistic picture of the Commonwealth’s financial condition. On the GAAP basis of accounting, the Commonwealth’s budgeted funds’ balance in Fiscal Years 1990 through 1997 grew from a deficit $1.896 billion to a positive $1.096 billion, a cumulative improvement of a resounding $2.99 billion.

FISCAL YEAR 1999 RESOURCE SUMMARY ($000)

*COMMONWEALTH OF MASSACHUSETTS*	Budgetary Direct Appro.	Budgetary Retained Revenue	Total Budgetary Spending	Intragov- ernmental Service	Federal Grant Spending	Trust & Other Spending	Total Spending	Budgetary Revenue
Judiciary	499,805	0	499,805	0	220	125	500,150	66,405
District Attorneys	70,226	0	70,226	0	0	2,239	72,464	2
Sheriffs	119,709	0	119,709	0	0	0	119,709	0
Executive	5,279	0	5,279	0	0	0	5,279	10
Secretary of the Commonwealth	28,519	1,801	30,320	125	771	18	31,234	78,626
Treasurer and Receiver-General	2,838,239	597,454	3,435,693	0	1,773	3,233	3,440,699	913,933
State Auditor	13,057	0	13,057	0	0	300	13,357	0
Attorney General	26,845	0	26,845	0	5,224	2,467	34,536	5,203
State Ethics Commission	1,403	0	1,403	0	0	0	1,403	42
Inspector General	1,887	300	2,187	0	0	0	2,187	300
Office of Campaign and Political Finance	809	0	809	0	0	0	809	44
Disabled Persons Protection Commission	1,505	0	1,505	0	0	0	1,505	0
Office of the Comptroller	14,541	1,845	16,387	17,334	0	0	33,721	13,127
Executive Office for Administration and Finance	1,055,252	8,059	1,063,311	71,934	2,942	45,590	1,183,777	290,469
Executive Office of Environmental Affairs	191,586	1,877	193,464	1,010	22,204	24,078	240,756	68,150
Executive Office of Health and Human Services	7,119,015	252,511	7,371,526	7,735	295,708	1,131,111	8,806,080	3,293,816
Executive Office of Transportation & Construction	703,349	27	703,376	320	7,942	609,645	1,321,283	7,389
Board of Library Commissioners	29,248	0	29,248	0	3,452	1	32,701	0
Department of Labor and Workforce Development	45,865	0	45,865	0	177,003	809,647	1,032,516	19,410
Department of Housing and Community Development	134,356	0	134,356	0	249,813	1,755	385,923	3,003
Office of Consumer Affairs and Business Regulation	47,655	121	47,776	0	1,378	11,326	60,480	58,321
Department of Economic Development	25,670	0	25,670	0	6,368	434	32,472	300
Department of Education	3,220,406	0	3,220,406	0	477,538	1,396	3,699,340	5,100
Board of Higher Education	872,043	247	872,290	0	4,226	1,162,214	2,038,730	144,303
Executive Office of Public Safety	842,519	26,109	868,628	7,750	46,028	11,126	933,532	325,295
Executive Office of Elder Affairs	138,166	3,000	141,166	0	29,474	73	170,712	3,353
Legislature	51,475	0	51,475	0	0	0	51,475	19
TOTAL	18,098,429	893,351	18,991,781	106,208	1,332,064	3,816,779	24,246,831	5,296,620

Financial Statements

Fiscal Year 1999 Projected Financial Statement
Fiscal Year 1998 Projected Financial Statement
Fiscal Year 1997 Financial Statement

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

Last updated on January 27, 1998