Governor Deval Patrick's Budget Recommendation - House 2 Fiscal Year 2013

Governor's Budget Recommendation FY 2013

FY 2013 Budget Recommendation


Annual Change in Budgetary Resources, FY 2012 vs. FY 2013
(dollars in millions)
  FY 2012 FY 2013 Change
Projected Tax Collections (excluding one-time FAS 109 Delay): 20,964.0 21,950.0 986.0
Required Transfers to/from Reserves*: (268.1) (238.0) 30.1
Prior Year Funds Used to Support Current Year Non-Recurring Budgetary Spending: 173.9 - (173.9)
Transfer for Annual Pension Contribution: (1,478.0) (1,552.0) (74.0)
Transfers of Tax Revenue to MBTA, SBA and Workforce Training Fund: (1,463.0) (1,506.2) (43.2)
Federal Reimbursements: 7,823.6 8,014.7 191.1
Departmental Revenues: 3,108.3 3,165.2 56.8
Transfers from Non-Budgeted Sources: 1,833.4 1,781.8 (51.6)
One-Time Sources for Recurring Budgetary Costs (including certain Prior Year Funds and FAS 109 Delay): 573.0 446.0 (127.0)
Proposed New Budgetary Revenues:
Modernize Bottle Redemption: - 22.3 22.3
Agency Revenue Initiatives: - 10.8 10.8
Enhanced Tax Enforcement: - 22.3 22.3
New Tax Initiatives (not-including one-timers): - 86.2 86.2
CHANGE IN BUDGETARY RESOURCES (INCLUSIVE OF PENSION CHANGE):     935.9
Additional Off-Budget Revenues Dedicated to Health Care Through the Commonwealth Care Trust Fund: - 72.9 72.9
Additional Off-Budget One-Time Resources: 47.0 95.0 48.0
TOTAL CHANGE, FY 2012 vs FY2013     1,056.8
*Includes one-time tax settlements transferred in FY 2012 to Rainy Day Fund, transfer to General Fund of Rainy Day funds for Gaming Oversight Costs, annual Statutory Carry Forward, Capital Gains receipts above $1 B transferred to Rainy Day Fund and FY 2013 transfer of 10% of Master Tobacco Revenue for retiree health care contribution.

 

Annual Change in Budgetary Spending by Selected Area, FY 2012 vs. FY 2013
(dollars in millions)
Spending Category FY 2012
Estimated
FY 2013
Projected
Change
Health Care:
MassHealth (Medicaid)*: 10,619.5 11,137.8 518.3
Commonwealth Care**: 687.4 737.1 49.7
Employee / Retiree Health Care**: 1,577.6 1,582.0 4.4
       
Safety Net (non Health Care): 3,895.6 3,984.3 88.7
       
Legal Obligations:
Debt Service: 2,257.0 2,435.5 178.5
Pensions: 1,478.0 1,552.0 74.0
Collective Bargaining: - 174.6 174.6
Chapter 70: 3,990.8 4,136.4 145.6
       
All Other Spending: 8,346.6 8,122.7 (223.8)
TOTAL ANNUAL SPENDING CHANGES 32,852.5 33,862.5 1,009.9
TOTAL ANNUAL SPENDING CHANGES (EXCLUDING PENSIONS) 31,374.5 32,310.5 935.9

 

FY 2013 Spending Growth

The Governor’s FY 2013 budget is balanced and fiscally responsible, which reflects the fact that state spending must align with the resources available.  Total state FY 2013 spending is projected to be $32.310 B, a 2.98% increase from FY 2012 estimated spending. Since FY 2009, total state spending has grown by $3.018 B, an average of 2.58% over the four fiscal years. The year-on-year spending growth of $935.9 M is significantly less than it would have otherwise been without significant program reductions, position eliminations and reforms.  Once again a number of efforts will be made in FY 2013 to control the largest cost drivers in the state budget, particularly health care costs. Even with these cost-saving measures, however, funding for these costs drivers will increase and many areas of state government will consequently see flat or reduced funding levels. In the aggregate, total funding for state government outside of health care, safety net and certain legally-obligated fixed costs will be reduced from FY 2012 levels.

Spending Growth, FY 2009 vs FY 2013
(dollars in millions)
  FY 2009 FY 2013
Spending 29,292 32,310
Growth (FY 09 to FY 13)   3,018
AVERAGE ANNUAL GROWTH (4 YEARS)   2.58%

 

Changes to State Revenue

As noted in the preceding section, FY 2013 tax revenues are projected to total $21.950 B, or $940 M greater than the current FY 2012 tax projection. Of the $21.950 B, approximately $1.1 B is estimated to be generated from taxes on capital gains. Under a budget reform proposed by the Governor and adopted by the Legislature in FY 2011, all capital gains receipts in excess of $1 B must be sequestered and deposited directly into the state’s rainy day fund, also known as the Stabilization Fund. (Under the same reform 5% of any amount above $1B will be further transferred from Stabilization Fund to the State Retiree Benefits Trust Fund or SRBTF to fund retiree health insurance liabilities).

In addition to the transfer of $100 M in capital gains receipts in FY 2013 to the Rainy Day or Stabilization Fund, other items that impact the amount of available FY 2013 resources include:

  • In FY 2012 the state is projected to make $163 M in deposits to the Stabilization Fund corresponding to one-time settlements (tax and non-tax) that are greater than $10 M;
  • $5 M in one-time transfer from the Stabilization Fund to the General Fund for the start-up costs associated with the oversight activities of expanded gaming in the Commonwealth;
  • $27 M transfer in FY 2013 to the State Retiree Benefits Trust Fund. FY 2013 is the first year in which a portion (10%) of the state’s annual master tobacco settlement will not be deposited into the General Fund, but will instead be transferred to the SRBTF to help address the state’s unfunded retiree health care liability. While the FY 2013 payment of $27.6 M is only a fraction of the state’s liability, the total transfer will grow incrementally by 10 percentage points each year of the master tobacco settlement (e.g., in FY 2014 20% of the settlement will be transferred) until FY 2022 when 100% of the annual tobacco settlement is fully dedicated to meeting the state’s OPEB liability; and,
  • $5M increase in FY 2013 in required reserves corresponding to the annual Statutory Carry-Forward reserve that must equal of 1 percent of total yearly projected tax revenues.

The net impact of these changes is that in FY 2013, the state budget will have $30 M more in estimated resources than in FY 2012.

As noted in a previous discussion, total FY 2011 spending that was authorized to continue into FY 2012 totaled $380 M, of which all but $4.1 M supports budgetary expenditures. Of this amount, A&F estimates that $174 M supported one-time expenses in FY 2012, with the remaining $202 M treated as one-time resources in FY 2012 since it supports ongoing budgetary expenses.

The state transfer to fund the annual contribution for retiree pensions increases in FY 2013 to $1.552 B from $1.478 B, or $74 M. This amount was determined in FY 2012 budget reforms that identified annual contributions over a 5-year period (FY 2012 – FY 2017). Finally, under current law, a portion of the taxes collected by the state annually are transferred to non-budgetary funds and entities, including the School Building Authority, the Workforce Training Fund and the Massachusetts Bay Transportation Authority (MBTA). For FY 2013, the growth in these transfers equals $43 M.

FY 2013 Tax Consensus Figures
(dollars in millions)
Original FY12 Tax Consensus Figure: 20,615
Revised FY12 Tax Projection: 21,010
FY12 Revised vs. Original: 395
FY13 Tax Consensus Figure: 21,950
FY13 Consensus vs. FY12 Revised Estimate 940
Required Transfers to Other Funds*: 30
Prior Year Funding used to Support Non-Recurring Costs: (174)
Transfer for Annual Pension Contribution: (74)
Transfers to Non-Budgetary Funds or Entities: (43)
TOTAL INCREASED FY 2013 TAX REVENUE 679
*Reflects the net change from FY 2012 to FY 2013 accounting for transfers of tax revenue to Stabilization Fund for capital gains above $1 B; transfer in FY 2012 of one-time settlements to Stabilization Fund; FY 2012 transfer to General Fund for Gaming oversight start-up costs; and, FY 2013 transfer to SRBTF of 10 percent of tobacco settlement revenue.

 

After accounting for these transfers the additional tax revenues (and related resources) available in FY 2013 total $679 M.

Non-tax revenue is projected to grow in FY 2013 by $196 M, which reflects increased federal Medicaid reimbursements and other revenues of $191 M and limited departmental revenue growth of $57 M offset by reduced transfers from non-budgetary sources of $52 M. Transfers were reduced substantially from estimated FY 2012 levels due to the reduction in unclaimed property receipts and the loss of annual fringe costs (i.e., employee benefits such as health care) recovered from federal and other non-budgetary sources.

Increase (Decrease) in Non-Tax Revenue, FY 2013
(dollars in millions)
Federal Reimbursements: 191
Departmental Reimbursements: 57
Transfers from Non-Budgetary Sources: (52)
TOTAL NET CHANGE IN NON-TAX REVENUE 196

 

As noted previously, the FY 2012 budget relies on an estimate $620 M in one-time resources. For the FY 2013 budget, total one-time sources total $541 M. Key one-time items are: $400 M in Stabilization Fund resources (a further discussion follows this section); $11 M in quasi-public contributions to support ongoing programs that would otherwise be funded on the state operating budget; $46 M for continuing the delay of the FAS 109 corporate tax deduction that would otherwise become effective during tax year 2013; and $84 M in one-time non-budgetary fund resources from the Group Insurance Commission and the Commonwealth Health Connector Authority. At $541 M, total FY 2013 one-time sources are $79 M less than the FY 2012 budget. Of the $541 M in one-time sources, $446 M represent budgetary resources, while the remaining correspond to non-budgetary resources that are used to help offset expenditures that occur outside of the annual state operating budget. When compared to FY 2012, which relied on $573 M in budgetary one-time resources, the annual change in FY 2013 in one-time revenues is a reduction of $127 M.

FY 2013 One-Time Resources
(dollars in millions)
Budgetary Resources:
Stabilization Fund Resources: 400
Delay FAS 109 Deduction: 46
Non-Budgetary Resources:
Group Insurance Commission Trust Funds: 40
Commonwealth Connector Trust Surplus: 44
Quasi Public Contributions: 11
TOTAL ONE TIME RESOURCES 541

 

The following is a description of the proposed one-time resources to support the FY 2013 budget:

  1. Stabilization Fund – The Fund serves as a critical tool in helping the state manage periods during which annual tax receipts have fallen or under-perform with respect to long-term forecasted trends. It is also reasonable and appropriate to use a limited amount of reserves for the preservation of state services when the state is experiencing cyclical tax revenue shortfalls during a recession or while the state economy is growing its way back to recovery. The projected FY 2012 year-end closing balance is $1.342 B. After accounting for the $100 M deposit for taxes on capital gains in excess of $1 B ($5 M of which will be further transferred to the OPEB reduction trust), and assuming a $400 M draw in FY 2013, the total projected closing balance at the end of FY 2013 is $1.037 B. With this amount, it is expected that Massachusetts will still have one of the largest rainy-day funds in the country. (Please see the sections entitled, Specific and General Financial Policies and Long-Term Forecasting, for a more complete description of A&F’s policies regarding the use of one-time resources to support the budget and withdrawals and deposits to the Stabilization Fund.)

Stabilization Fund Balances by Fiscal Year.  Reaching a peak of $2,335 million in 2007, and a low of $669 M in 2010.  $1037 M in 2013.

 

  1. Quasi-Public Contributions – Over the past several years the state has benefited from the commitment by several different quasi-public agencies to preserve state programs that would otherwise have been cut from the operating budget. In FY 2013, the state budget will rely on $11 M in quasi-public contributions, as outlined in the chart below.
FY 2013 Quasi-Public Contributions
Program or Services Preserved Quasi-Public Agency H2
Energy and Environmental Affairs Massachusetts Clean Energy Center $1,000,000
Mass Cultural Council Grants Massachusetts Development Finance Authority $3,000,000
Economic and Business Development Massachusetts Development Finance Authority $1,000,000
Tourism Promotion and Marketing Massachusetts Convention Center Authority $5,000,000
Mass Broadband and Economic Development Mass Tech Collaborative $500,000
International Trade and Investment Promotion Mass Tech Collaborative / Mass Port Authority $600,000
TOTAL QUASI-PUBLIC CONTRIBUTIONS   $11,100,000

 

  1. Delay FAS 109 Deduction - The Governor’s FY 2013 budget recommendation delays the implementation of FAS 109 until FY 2014, rather than allowing it to begin. This will increase the amount of taxes collected by the state next year by nearly $46 M. As noted, savings generated from the delay in the implementation of the FAS 109 corporate tax rate deduction would be one-time in nature, since they are only proposed to be delayed until FY 2014. (A further discussion of this item continues in a following section that discusses new revenue proposals for FY 2013).
  1. Health Care Trust Fund Resources – The FY 2013 budget assumes that health care expenditures by the Group Insurance Commission (GIC) and the Commonwealth Connector Authority (CCA) can be partially offset by using non-recurring trust funds available to each agency. These funds can be appropriately made available in FY 2013 and one-time savings will occur by lowering the state’s annual budgetary contribution to each agency’s health care programs for just FY 2013.

Based on the changes in tax and related revenues, growth in non-tax sources and the impact of the change in budgetary one-time resources, A&F projects that a total of $794 M in additional resources in FY 2013 from FY 2012 projections.

Increase (Decrease) in Available Resources, FY 2013
(dollars in million)
Net Increase in FY 2013 Tax Revenues*: 725
Growth in Non-Tax Sources: 196
Change in Budgetary One-Time Sources*: (127)
TOTAL CHANGE IN AVAILABLE BUDGETARY RESOURCES: 794
*Increased Tax Revenues are increased by $46 M which corresponds to the delay of the FAS 109 corporate rate deduction in FY 2013. For the purpose of comparison this adjustment is reflected in the change in budgetary one-time sources.

 

Proposed New Revenue Initiatives

The Governor’s FY 2013 budget proposes a responsible and modest level of additional resources, totaling an additional $260 M. The chart below identifies these by major category (please note that $46 M in one-time tax revenue corresponding to the FAS 109 deduction has already been accounted for previously). The four major categories of new revenue proposals include: modernizing the state’s bottle-redemption law ($22 M); agency revenue initiatives ($11 M); enhanced tax enforcement by the Department of Revenue ($22 M); and new tax initiatives ($159 M, excluding $46 M for the delay of the FAS 109 corporate rate reduction).

New Revenue Proposals, FY 2013
(dollars in millions)
Modernize Bottle Redemption: 22
Agency Revenue Initiatives: 11
Enhanced Tax Enforcement: 22
New Tax Initiatives (excluding one-time delay of FAS 109 corporate rate deduction): 86
TOTAL NEW BUDGETARY REVENUES 142
Additional Off-Budget Revenues Dedicated to Health Care Through the Commonwealth Care Trust Fund: 73
Delay FAS 109 (counted as one-time source) 46
TOTAL ALL NEW REVENUES 260

 

Modernizing Bottle Redemption

The Massachusetts Bottle Bill, enacted in 1982, is designed to encourage consumers to return their empty soda and beer containers by means of a redeemable $0.05 deposit.  The $0.05 refundable deposit is placed on all carbonated sodas, beer and malt beverages. Most bottle deposits are redeemed through two types of sites, redemption centers and large retail stores. When the Bottle Bill was enacted in 1982, the beverages covered by the law were limited to carbonated soft drinks, mineral water, beer and other malt beverages. Since that time, the beverage market has changed with bottled water, fruit drinks, iced tea and sports drinks now being some of the most popular choices available. However, these non-carbonated beverages are not covered by the Bottle Bill and often end up in landfills or along the side of the road.

By revising the definition of “beverages” in Massachusetts General Law, the Bottle Bill can be brought up to date. Consumers will be required to pay an additional $0.05 cents on water, flavored waters, iced teas, coffee based drinks and sports drinks. The amounts paid for deposits for expanded beverages will be returned to consumers if they return the empty bottles for recycling. The Governor’s FY 2013 budget assumes that by adopting these changes, the state will collect at least $22 M in additional revenues next year, allowing for $5 M in investments in state recycling coordination and redemption efforts. 

Agency Revenue Initiatives

In FY 2013 agencies will generate a modest amount of new revenue through efforts to generate at least $5 M in fees by allowing limited types of advertising using state-owned assets, such as vehicles. This effort will build off of similar projects already underway at the Department of Transportation by looking to broaden the opportunity across all areas of state government. In addition, agencies will generate close to $6 M in expanded state revenues by increasing a limited number of fees, including:

  • Environmental Protection - Department of Environmental Protection (DEP) permitting and compliance activities ensure that private and public sector development meet Commonwealth environmental standards.  The fees that DEP collects for these services have not been raised since 2004. This proposal raises fees by $2.5 M in accordance with the Consumer Price Index from 2004-2011 (17%). All of the new revenue would be retained by DEP to support permitting and compliance activities.
  • Adult Day Health - The Adult Day Health Center Program is a new Department of Public Health (DPH) program. The licensing program will involve a series of activities, including regulation writing, license waiver reviews, application processing, provider suitability determination, on-site licensing inspection, provider and consumer information services, incident review and processing, complaint investigations, plan review and enforcement action which may include fines, penalties, and program closure action. Statewide, the total revenue generated from the new fee to cover the cost of this new regulatory responsibility is approximately $750 K.
  • Hospital Fees - DPH is required to license health care facilities operating in Massachusetts. A licensing fee is recovered to offset the state's associated costs. Over $1 M will be generated from establishing a new fee charged for satellite locations or license amendments. The fee will be paid by approximately 433 nursing homes, 118 hospitals with 297 satellites and 323 clinics with 330 satellites.
  • Other Agency Fees – For a limited number of items, fees at the Division of Standards (DOS) will be increased, including for licenses paid by private gas stations that sell retail motor oil; licenses required of private auctioneers and licenses paid by “peddlers and hawkers”. Fees have not been increased for these licenses since 2003 and are anticipated to generate over $500 K in additional revenues.

Enhanced Tax Enforcement

The Department of Revenue (DOR) will generate an additional $22.3 M ($18.3 M after accounting for investments and offsetting investments) in state tax revenue in FY 2013. The revenue would be generated from DOR’s investment in IT software that will perform advanced analytics to identify tax collection and audit opportunities involving the sophisticated use of historical data, data mining and statistical probability.

New Tax Revenues

The table identifies new tax revenue initiatives that are proposed for the FY 2013 budget. In total, these initiatives will generate an estimated $205 M in additional resources for the Commonwealth next year. All but one of the proposals will require legislative changes to the state’s existing tax laws to implement. This language is provided in an outside section of the FY 2013 budget recommendation.

FY 2013 Tax Initiatives in Governor's Budget Recommendation
Tax Revenue Initiatives FY 2013
Additional
Revenue
Transfers to
Non-Budget
Sournces
FY 2013
After Transfer
Revenue
Increase Cigarette Tax by $0.50* 62,500,000 (62,500,000) -
Eliminate Sales Tax Exemption on Sales of Candy and Soda** 61,500,000 (9,840,000) 51,660,000
Delay FAS 109 Deductions 45,860,105 - 45,860,105
Update Tobacco Taxes for Other Tobacco Products* 10,400,000 (10,400,000) -
Market Sourcing for Corporate Excise Sales Factor 10,000,000 - 10,000,000
Enforce Room Occupancy Tax on Hotel Room Resellers 7,213,281 - 7,213,281
Taxation of Non-Insurance Subsidiaries of Insurance Companies 7,000,000 - 7,000,000
Disallow Tax Deductions for Losing Lottery Tickets 500,000 - 500,000
TOTAL TAX INITIATIVES 204,973,386 (82,740,000) 122,233,386
TOTAL TAXES (Excluding FAS 109 Delay) 159,113,281 (82,740,000) 76,373,281
*Additional revenues are transferred directly to the Commonwealth Care Trust Fund.
**A portion of sales tax revenues are transferred to non-budgetary entities (e.g., School Building Authority).

 

  1. Increase Cigarette Tax Per Pack by $0.50 – $62.5 M in FY 2013 revenue will be generated by increasing the sales tax on a pack of cigarettes by $0.50 from $2.51 to $3.01. All of these new revenues will be dedicated to the Commonwealth Care Trust Fund, from which the state pays the annual costs of subsidized health care costs to families and individuals under Massachusetts’ 2006 health care reform.
  1. Eliminate Sales Tax Exemption on Sales of Candy and Soda – $61.5 M in new revenues would be generated by eliminating the current exemption from the sales tax for the sale of candy and soda. These revenues, which will be $51.5 M after accounting for transfers of a portion of the new revenue to off-budget items in accordance with certain statutory requirements, will be dedicated to a new Health and Prevention Trust Fund. Programs and services supported from this fund will consist of those aimed at targeting major health risks in the Commonwealth (e.g., smoking and obesity) through preventative health measures and increasing awareness of risk factors.
  1. FAS 109 Deduction - The FAS 109 corporate rate deduction allows publicly traded corporations subject to combined reporting under the 2008 corporate tax reform law to take a deduction of all or some of an amount that will offset the increase in the combined group's net deferred tax liability that would otherwise be shown on its financial statements, as a result of the move to combined reporting. "FAS 109” refers to the financial accounting standards bulletin that requires such corporations to report their deferred tax liabilities (or expected benefits, like credits) to shareholders. Please Note: For the purposes of calculating the available resources for FY 2013 (in comparison to FY 2012), the FAS 109 delay is treated as an FY 2013 one-time resource included in the total $541 M of one-time budgetary resources assumed next year.
  1. Update Tobacco Taxes for Other Tobacco Products – By updating the state tobacco taxes to apply the proposed rate of taxation on cigarettes to all forms of tobacco, including cigars and “smokeless” products, the state will generated an estimated $10.4 M in additional revenue in FY 2013. All of this new revenue will be dedicated to the Commonwealth Care Trust Fund.
  1. Market Sourcing for Corporate Excise Sales Factor – This proposal will modernize the sales factor (one of 3 factors by which the Massachusetts corporate excise is apportioned among states) by sourcing it based on where services are delivered, rather than where they originate, by calculating corporate taxes in a way that more fairly allocates profits of primarily out-of-state companies selling services to Massachusetts customers.
  1. Enforce Room Occupancy Tax on Hotel Room Resellers – The proposed change would require an Internet room reseller to register with DOR and collect and remit the existing state and local room occupancy excise on the reseller’s mark-up. The hotels and motels in Massachusetts would continue to collect and remit tax on amounts they are actually paid, as is the current practice. The revenue impact from this proposal in FY 2013 is $7 M with an August 1, 2012 effective date. Cities and towns that have adopted a local option hotel/motel tax would also realize up to $7 M statewide in additional revenue. This change is primarily technical, serving to clarify present law for collecting an existing tax from resellers, as well as hotels.
  1. Taxation of Non-Insurance Subsidiaries of Insurance Companies – Insurance companies do not pay tax on their income. Instead, there is a 2% tax on premiums charged. The proliferation of Limited Liability Companies (LLCs) and other pass-through entities have enabled insurance companies to exempt non-insurance businesses that they own from paying any corporate excise tax. For example, if an insurance company owns a subsidiary business operating a brokerage or a hotel, the income of the brokerage or hotel subsidiaries is exempted from the corporate tax if the subsidiary’s operations are organized in an LLC, whose income flows through to the insurance company parent for tax purposes. The proposal would subject operating income from non-insurance subsidiaries of insurance companies to the corporate tax as if these subsidiary entities were business corporations. This proposal has been made by the Governor previously (in the 2007 corporate-tax-loophole closing bill) and has been the subject of study by the Multistate Tax Commission.
  1. Disallow Tax Deductions for Losing Lottery Tickets – In Massachusetts, there is a cottage industry of so-called “ten percenters” who buy winning lottery tickets at a discount, receive the payout of the winnings and offset that income with losing lottery tickets gathered from multiple locations. This scheme enables the actual ticket winners to avoid intercepts of unpaid tax or child support that would otherwise be withheld by the lottery. It is a form of tax and child support fraud that is difficult to prove in any individual case, and that needs a statutory fix. The proposal specifies that losing lottery tickets cannot be claimed as trade or business expenses.

After accounting for additional tax, non-tax and other one-time sources, the total amount of additional budgetary resources in FY 2013 above FY 2012 levels is $935 M.

 

FY 2013 Spending Summary

Spending Growth

As noted earlier, year-on-year spending growth must be restrained to fit within available budgetary resources. The Commonwealth’s tax revenues are growing, but only modestly, after having experienced an historic drop in tax revenues during the recession. With many of our safety net and health care programs facing all-time highs in demand, the cost to continue our current level of services outpaces our budgetary resources. In addition, the state is legally required to fund certain fixed costs which are increasing next fiscal year, such as pensions, collective bargaining, debt service and K-12 school aid to cities and towns. Consequently, we are unable to support all but a few modest investments and service restorations, and further cuts and cost-controlling measures to many programs and services will be necessary in FY 2013.

FY 2013 Spending

After accounting for growth in tax collections and other non-tax resources, additional revenue initiatives and the change in of one-time sources, total state expenditure growth is limited to $935 M. This need to limit spending growth is particularly challenging due to the cost pressures in our health care and safety net programs and certain fixed costs as described above.

State Budgetary Spending by Governmental Area, FY 2012 and FY 2013
  FY 2012 FY 2013 FY 2013 Projected
vs FY 2012 Spending
Government Area GAA Final
Enacted
Amount
Total Estimated
Spending
This Year
Total Budgeted
Spending
Next Year
$ Change % Change
Labor and Workforce Development 35,589,881 59,418,415 42,815,789 (16,602,626) -27.94%
Housing and Economic Development 352,509,764 392,096,351 428,367,718 36,271,367 9.25%
Administration and Finance 313,704,101 460,558,926 453,023,331 (7,535,595) -1.64%
Sheriffs 476,350,497 501,641,668 501,585,381 (56,287) -0.01%
District Attorneys 97,884,987 98,704,598 97,884,989 (819,609) -0.83%
Constitutional Officers and Other Independent Agencies 297,709,147 312,442,300 312,392,020 (50,280) -0.02%
Judiciary 709,223,115 760,717,483 630,963,761 (129,753,722) -17.06%
Education (except Higher Ed. And Chapter 70) 1,011,404,307 1,023,450,889 1,032,233,299 8,782,410 0.86%
Transportation 362,933,728 363,934,869 348,214,221 (15,720,648) -4.32%
Debt Service 2,265,308,442 2,257,042,623 2,435,503,391 178,460,768 7.91%
Higher Education 923,962,337 924,462,336 935,732,595 11,270,259 1.22%
Chapter 70 3,990,812,680 3,990,812,680 4,136,391,547 145,578,867 3.65%
Unrestricted Local Government Aid 833,980,293 898,980,293 833,980,293 (65,000,000) -7.23%
Public Safety 913,090,725 954,113,334 1,069,693,880 115,580,546 12.11%
Energy and Environmental Affairs 187,007,717 194,062,786 206,918,316 12,855,530 6.62%
Health and Human Services 4,713,394,065 4,824,649,768 4,908,566,138 83,916,370 1.74%
MassHealth 10,367,467,834 10,619,492,582 11,137,768,822 518,276,240 4.88%
Transfers to Non-Budgetary Sources 1,122,536,822 1,081,917,074 1,132,647,286 50,730,212 4.69%
Group Insurance 1,623,053,506 1,656,042,754 1,665,775,952 9,733,198 0.59%
TOTAL SPENDING 30,597,923,948 31,374,541,729 32,310,458,729 935,917,000 2.98%

 

Reflecting government re-organizations outlined further below, there is a substantial increase in the Public Safety budget and a large decrease in the Judiciary budget. This increase corresponds to funding shifted from the Judicial branch to reflect reforms of the state’s Probation Department. After adjusting for this shift and savings adopted in FY 2013 for probation, the actual year on year spending changes are the following:

  • Public Safety, 1% Increase
  • Judiciary, 0% Increase

 

Non-Executive Branch Agencies

Non-Executive Branch Spending by Governmental Area, FY 2012 and FY 2013
  FY 2012 FY 2013 FY 2013 Projected
vs FY 2012 Spending
Government Area GAA Final
Enacted
Amount
Total Estimated
Spending
This Year
Total Budgeted
Spending
Next Year
$ Change % Change
Sheriffs 476,350,497 501,641,668 501,585,381 (56,287) -0.01%
District Attorneys 97,884,987 98,704,598 97,884,989 (819,609) -0.83%
Constitutional Officers and Other Independent Agencies 297,709,147 312,442,300 312,392,020 (50,280) -0.02%
Judiciary 709,223,115 760,717,483 630,963,761 (129,753,722) -17.06%
TOTAL SPENDING 1,581,167,746 1,673,506,049 1,542,826,151 (130,679,898) -7.81%

 

Agencies outside of the Executive branch including Constitutional Officers, the Judiciary, District Attorneys and Sheriffs, among others comprise $1.543 B of the FY 2013 budget recommendations. Some areas of note include –

  • Judiciary –The Governor’s FY 2013 budget reflects his proposed legislation to consolidate the Department of Probation within the Executive Office of Public Safety and Security. The funding amount being transferred is $101.6 M, which reflects that probation responsibilities for youths will remain within the state’s Trial Court Department. In combination with $19.6 M in fiscal year savings in indigent counsel services (see below), the overall budget for the Judiciary is 17 % below the FY 2012 estimated spending. In fact, the Governor’s budget will level-fund all other Judicial agencies to FY 2012 estimated spending levels, while providing salary reserves of $27 M under the Executive Office for Administration and Finance (A&F) to offset increased costs in FY2013 associated with existing or anticipated collective bargaining agreements.

    The FY 2013 budget will also continue efforts to reform the Committee for Public Counsel Services (CPCS) within the Judiciary’s budget by proposing to shift more cases from private counsel to state public defenders. Current A&F projections assume total FY 2013 CPCS spending will be $165 M. By shifting 50 % of the caseload to public defenders by the end of FY 2013 the state will save $19.6 M next year, and a savings of $33 M from pre-reform levels in FY 2011. Total caseload at CPCS has declined in FY 2012 and the Governor’s budget assumes further reductions by improving the way in which client indigency is verified in collaboration with other state agencies as well as continued projected reductions in CPCS caseload in FY 2013.

  • Sheriffs – The Governor’s FY 2013 budget proposal level-funds the operations of state sheriffs at FY 2012 estimated spending levels. Additionally, increased costs corresponding to existing or pending collective bargaining agreements is funded under A&F to mitigate a portion of the increased costs next year in sheriffs’ facility budgets.
  • District Attorneys – Funding for District Attorneys is level-funded to FY 2012 General Appropriations Act (GAA) levels. This funding level sustains the 5% increase received by the DAs in FY 2012 that was originally proposed by the Governor for FY 2012 in January 2011. This funding includes the additional $500K that was provided in FY 2012 for retention of assistant district attorneys across the state.
  • Other Constitutional Officers – With very limited exceptions, the funding for the Constitutional offices (Attorney General, Treasurer, Auditor, Secretary of State) has been level-funded at FY 2012 levels. Increased funding is provided to meet the projected expenses of the Secretary of State projected to oversee the 2012 elections, including local, state and national presidential elections. In addition, the Governor’s budget makes modest investments at the State Attorney General’s Office and the State Auditor’s Office for expanded activities to prevent, detect or prosecute cases of fraud, waste and abuse of state funds. These investments of roughly $2.3 M will generate at least $11 M in additional revenue from recoveries in FY 2013.
  • Lottery – The state’s Lottery Commission oversees the state’s various lottery and gaming operations. The Commission generates over $900 M in annual revenue, of which a large portion is used to support unrestricted local aid distributions to the state’s cities and towns. Funding in fiscal year 2013 for Lottery operations is level-funded to FY 2012 levels. However, the Governor does propose a $3 M investment to fund the Lottery Commission’s effort to expand lottery advertising and marketing, resulting in an additional $7 M in FY 2013 lottery revenues for the state. The Governor’s budget also provides a reserve under A&F to fund increased costs associated with Lottery collective bargaining unit members in FY 2013.
  • Governor – Funding for the Governor’s office is level-funded to FY 2012 estimated spending levels.
  • Legislature – The funding for the annual operations of the House, Senate and Joint Legislative activities in FY 2013 is level to estimated spending levels in FY 2013, after accounting for one-time investments in legislative redistricting needed in FY 2012.

 

Debt Service

State Debt Service Spending, FY 2012 and FY 2013
  FY 2012 FY 2013 FY 2013 Projected
vs FY 2012 Spending
Government Area GAA Final
Enacted
Amount
Total Estimated
Spending
This Year
Total Budgeted
Spending
Next Year
$ Change % Change
Debt Service 2,265,308,442 2,257,042,623 2,435,503,391 178,460,768 7.91%
TOTAL SPENDING 2,265,308,442 2,257,042,623 2,435,503,391 178,460,768 7.91%

 

In order to fund the necessary improvements to the state’s transportation infrastructure as well as to make investments in our higher education system, housing, high-tech industries, and other job-creating projects, the state borrows money through the issuance of bonds and it and pays the borrowing back with annual debt service appropriations in the operating budget.

State debt service spending in FY 2013 totals $2.435 B, an increase of 7.91% from FY 2012 levels of $2.257 B. This increase compares to the 7.1 % increase adopted in the FY 2012 GAA. Most debt service costs are funded from within the budget of the State Treasurer, who is responsible for the day-to-day oversight of all Commonwealth debt service and debt financing activities. In a limited number of cases, annual debt service payments are paid by A&F.

 

Executive Branch Agencies

Executive Branch Agency Spending by Governmental Area,
FY 2012 and FY 2013
  FY 2012 FY 2013 FY 2013 Projected
vs FY 2012 Spending
Government Area GAA Final
Enacted
Amount
Total Estimated
Spending
This Year
Total Budgeted
Spending
Next Year
$ Change % Change
Labor and Workforce Development 35,589,881 59,418,415 42,815,789 (16,602,626) -27.94%
Housing and Economic Development 352,509,764 392,096,351 428,367,718 36,271,367 9.25%
Administration and Finance 313,704,101 460,558,926 453,023,331 (7,535,595) -1.64%
Education 1,011,404,307 1,023,450,889 1,032,233,299 8,782,410 0.86%
Transportation 362,933,728 363,934,869 348,214,221 (15,720,648) -4.32%
Chapter 70 3,990,812,680 3,990,812,680 4,136,391,547 145,578,867 3.65%
Public Safety 913,090,725 954,113,334 1,069,693,880 115,580,546 12.11%
Energy and Environmental Affairs 187,007,717 194,062,786 206,918,316 12,855,530 6.62%
Health and Human Services 4,713,394,065 4,824,649,768 4,908,566,138 83,916,370 1.74%
MassHealth 10,367,467,834 10,619,492,582 11,137,768,822 518,276,240 4.88%
Transfers to Non-Budgetary Sources 1,122,536,822 1,081,917,074 1,132,647,286 50,730,212 4.69%
Group Insurance 1,623,053,506 1,656,042,754 1,665,775,952 9,733,198 0.59%
TOTAL SPENDING 24,993,505,130 25,620,550,428 26,562,416,299 941,865,871 3.68%

 

Funding for Executive Branch Agencies for programs and services that fall within each of these government areas totals $26.562 B in FY 2013, which represents an increase of 3.68% from FY 2012 spending. However, after accounting for funding shifted in FY 2013 to the Executive Office for Public Safety and Security from the Judiciary and collective bargaining reserves under A&F for Non-Executive Branch agencies, the total annual growth in FY 2013 is 3.28%.  Highlights of major funding changes in the Executive Branch include:

  • Executive Office of Education (EOE) – The budget recommendation for the Secretariat for Education (excluding Chapter 70 and aid to Higher Education campuses discussed below) increases by 0.86%, or $8.7 M above FY 2012 estimated spending.

    The FY 2013 budget level funds or increases almost all education programs, particularly those that will support the Governor’s efforts to address the achievement gap among the state’s residents with respect to academic achievement and career readiness. These increases in funding include $10 M in funding for programs focused on children in Gateway Cities and $12 M in additional funding to other programs identified to close the achievement gap. The Secretariat for Education will continue to target funding to those programs and services that best position the state to leverage $250 M in federal Race to the Top education aid, provided over a four-year period, to find innovative solutions to improving the state’s education systems. The Governor’s budget continues to support child care access to quality after school and day care programs for children within the Department of Children and Families, the Department of Transitional Assistance, and other qualified low income eligible families. Funding for early education and care remains a vital component to addressing the achievement gap and, this budget reflects the commitment through level funding the Reach Out and Read, Head Start Grants and Universal Pre-Kindergarten programs.

  • Executive Office of Health and Human Services (EOHHS) – The non-health insurance portion of the EOHHS budget totals $4.9 B in FY 2013. Funding under EOHHS supports a wide range of services, including transitional assistance to families, services to persons with disabilities, care for veterans, public health and disease prevention activities, protection of children at risk of abuse or neglect and the care for youthful offenders. Recognizing the importance of maintaining critical safety net programs and services, the Governor preserved to the greatest extent possible funding within EOHHS for programs and services that affect the state’s most vulnerable residents. Key programs for which funding is level in FY 2013 or increased include substance abuse services, cash and nutritional assistance for low income families, early health screenings for children, suicide prevention services and domestic violence prevention treatment. In addition, the Governor proposes to make a $1.7 M investment in smoking prevention and cessation services and increases funding for services and benefits provided to veterans living in Massachusetts. The Governor’s budget also provides $10 M in funding for Safe and Successful Youth Initiative grants, which provide assistance to 11 cities for targeted intervention programs with high impact youth and their families providing education, job, trauma and street outreach program services. A $2.9 M investment is proposed for a Children, Youth and Families initiative that enhances data-sharing and coordination of services between EOHHS and other relevant agencies and Secretariats, such as EOE. Finally, the Governor’s budget funds the FY 2013 cost increases associated with the Chapter 257 reforms that require updates to human services contracts with respect to the actual costs of providing services under a variety of programs. Across all EOHHS agencies, the FY 2013 additional costs of implementing Chapter 257 totals $32 M. 
  • Executive Office of Public Safety and Security (EOPSS) –The Governor’s FY 2013 budget achieves targeted savings at the new Department of Re-entry and Community Supervision and the Department of Correction (DOC) through criminal justice reforms and health care savings. The consolidation of large portions of the Office of the Commissioner of Probation into a new department under EOPSS will provide more efficient and effective transition to the community for appropriate offenders with strong monitoring, accountability and support. The budget also invests in re-entry programs to better transition offenders back into the community. At DOC, the Commonwealth will realize the operating cost savings of sentencing reform by closing a medium security facility and stepping down appropriate offenders into less secure facilities. DOC will achieve health care savings through re-negotiation efforts with the inmate health care contractors and maximizing federal reimbursement opportunities. The State Police will train 150 new officers in a cadet class to begin in June 2013, and the State Police Crime Lab will take over the duties of the Department of Public Health Drug Lab, which will reduce the case backlog and accredit the lab to provide more opportunities for federal funding.
  • Massachusetts Department of Transportation (MassDOT) – FY 2013 funding for MassDOT and related transportation purposes is reduced by $15 M from FY 2012 funding levels. The funding provided to MassDOT ($348 M in FY 2013) only represents a portion of the state’s annual transportation costs, which are also supported by state capital funds, federal grants for highway maintenance and revenues generated from the Massachusetts Turnpike that are restricted for dedicated purposes. To mitigate this reduction in state funding, MassDOT will need to increase revenues, and has plans underway to best utilize state assets to generate annual operating revenues from non-state parties interested in advertising and other business opportunities using state properties. The agency will continue to leverage its new structure to seek efficiencies and savings in areas such as procurement and personnel spending. If MassDOT is not successful in generating additional revenues, it will likely need to eliminate a number of positions and potentially reduce operations across its various functions, including highway maintenance and motor vehicle registry services.
  • Executive Office of Energy and Environmental Affairs (EOEEA) – FY 2013 funding for EOEEA is approximately 6.6 % above FY 2012 estimated spending. This reflects a $5.25 M investment for increased efforts to promote recycling coordination across the state, which is funded through increased revenues generated by expanding the bottle deposits to include bottled water, juices and sports drinks. With the support of industry stakeholders, a $2.5 M investment in permitting and compliance services at the Department of Environmental Protection was made to reflect the increasing cost of providing critical environmental oversight at the speed of business.
  • Executive Office of Housing and Economic Development (EOHED) – FY 2013 funding for EOHED is approximately $36 M greater than FY 2012 estimated spending, reflecting an increase in the demand for services for homeless families in the Commonwealth. To help control the increased costs, while improving the way in which homeless families are served in the Commonwealth, the Governor’s budget proposes to reform the state’s emergency shelter and housing programs. The Department of Housing and Community Development (DHCD) will strengthen the state’s family homelessness programs by limiting emergency shelter for families that truly need it while providing the remaining families at risk of homelessness with more appropriate and cost-effective housing alternatives. In FY 2013 these reforms will save at least $26 M in homeless services-related spending, allowing for an equal amount to be re-invested for other permanent affordable housing solutions. 
  • Executive Office of Labor and Workforce Development (EOLWD) – Compared to the FY 2012 GAA, funding at EOLWD is increased by over $7 M in FY 2013. This corresponds to increased investments proposed by the Governor for the Summer Jobs program, which subsidizes employment opportunities for low-income youth primarily during the summer. Along with supplemental funding proposed by the Governor in FY 2012, the Governor’s budget will fund summer 2012 summer jobs opportunities at over $8 M, greater than the summer 2011 funding levels. The Governor’s investment will also allow for a similar amount of funding to be expended for the summer of 2013, ensuring funding for this program can be restored to levels prior to the recession.
  • Executive Office for Administration and Finance (A&F) – Annual funding levels under A&F can vary greatly from year-to-year since A&F typically houses reserve or other short-term appropriations that are not continued from year-to-year. In the Governor’s budget for FY 2013, roughly $127 M in collective bargaining reserves are funded for existing or pending contracts with state union employees across all areas of state government, including for employees within executive branch departments, higher education campuses, and state sheriffs’ facilities. This increased funding is offset by a number of one-time spending measures in FY 2012, such as reserves to offset state costs for emergency response to natural disasters that occurred in 2011 (e.g., the June 1 Tornado and Tropical Storm Irene). Cost increases for A&F agencies continue to be offset by a number of reform initiatives across the Secretariat.  The Group Insurance Commission was able to successfully reduce spending in FY 2013 compared to its original projection using several strategies, including leveraging the use of federal Early Retiree Reinsurance Program (ERRP) funds and working closely with its health plans to negotiate a lower premium increase.  Also, the Human Resources Division will continue to roll out its Shared Services Time and Attendance initiative that will pool resources and create savings through error reduction and efficiency gains.  In addition, the Department of Revenue, through the use of advanced analytics, will continue to refine its auditing techniques to maximize revenue collections. 

 

School Aid for Public K-12 Education

State K-12 Aid, FY 2012 and FY 2013
  FY 2012 FY 2013 FY 2013 Projected
vs FY 2012 Spending
Government Area GAA Final
Enacted
Amount
Total Estimated
Spending
This Year
Total Budgeted
Spending
Next Year
$ Change % Change
Chapter 70 (K-12 School Aid) 3,990,812,680 3,990,812,680 4,136,391,547 145,578,867 3.65%
TOTAL SPENDING 3,990,812,680 3,990,812,680 4,136,391,547 145,578,867 3.65%

 

The FY 2013 budget provides an additional $146 M in Chapter 70 funding to cities and towns, bringing total public K-12 aid to $4.136 B. This represents the highest funding level ever provided for Chapter 70 assistance. The state’s contribution to quality education and opportunities for all of its residents is a core priority of the Patrick-Murray Administration. The Governor’s budget continues to build off of the state’s earlier commitments to preserve Chapter 70 investments in our K-12 education, a fundamental tool in addressing the achievement gap and ensuring that today’s students will be prepared to compete for the jobs of tomorrow.

 

Aid to Higher Education Campuses

State Higher Education Funding, FY 2012 and FY 2013
  FY 2012 FY 2013 FY 2013 Projected
vs FY 2012 Spending
Government Area GAA Final
Enacted
Amount
Total Estimated
Spending
This Year
Total Budgeted
Spending
Next Year
$ Change % Change
Higher Education 923,962,337 924,462,336 935,732,595 11,270,259 1.22%
TOTAL SPENDING 923,962,337 924,462,336 935,732,595 11,270,259 1.22%

 

The state funding provided to the University of Massachusetts (UMASS) and state university systems is level-funded in the Governor’s FY 2013 budget to FY 2012 spending levels. In addition, under A&F the Governor proposes collective bargaining reserves corresponding to the increased costs in FY 2013 of existing or pending collective bargaining agreements for higher education employees. The Governor proposes to increase funding for Massachusetts community colleges by 5 % above FY 2012 and consolidate all community college funding under the Department of Higher Education, which will allocate funding to campuses based on cost data, enrollment and other factors. The Governor also proposes reforms to the state’s community college system, including better coordination focused on promoting job training and creation across the Commonwealth.

 

MassHealth (Medicaid) Spending

MassHealth (Medicaid) Spending, FY 2012 and FY 2013
  FY 2012 FY 2013 FY 2013 Projected
vs FY 2012 Spending
Government Area GAA Final
Enacted
Amount
Total Estimated
Spending
This Year
Total Budgeted
Spending
Next Year
$ Change % Change
MassHealth 10,367,467,834 10,619,492,582 11,137,768,822 518,276,240 4.88%
TOTAL SPENDING 10,367,467,834 10,619,492,582 11,137,768,822 518,276,240 4.88%

 

The Massachusetts Medicaid program (MassHealth) provides comprehensive health insurance to approximately 1.3 million low-income Massachusetts children, adults, seniors and people with disabilities. The Administration’s FY 2013 budget includes $11.14 B for the MassHealth program, including $187 M in budgetary resources for the Delivery System Transformation Initiative (DSTI). DSTI payments, which cost the state $82 M after accounting for federal revenues, are made to safety net hospitals in the Commonwealth to reform the delivery of care models to Medicaid members.

Notwithstanding the funding for DSTI, MassHealth’s budget allows for approximately 5% spending growth from FY 2012 estimated spending to FY 2013. In FY2012, MassHealth was tasked to maintain an essentially level funded budget at 1.56% growth through a number of aggressive cost containment measures. Between these two fiscal years, MassHealth’s budget has been successfully held at an average annual growth of 3.25%. According to a recent report from the CMS Office of the Actuary, Medicaid costs across the country are projected to increase at an average annual rate of 8.3% over the next 10 years. 

Governor Patrick’s and Lieutenant Governor Murray’s FY 2013 budget builds upon ground-breaking progress in health care cost containment – with a vision for maintaining the Commonwealth’s historic coverage gains and high-quality care while making health care spending more affordable for the state and taxpayers.  In FY 2013, Massachusetts is poised to once again provide a model for the nation by leveraging opportunities to control health care costs that: 1) promote care delivery in lower-cost, high-quality settings; 2) improve the coordination and management of care; 3) expand support for primary care; 4) place a greater emphasis on prevention; and 5) promote innovative payment models that reward high-value care instead of high-volume care.

 

Budgetary Transfers to Non-Budgetary Funds

Transfers to Non-Budgetary Funds, FY 2012 and FY 2013
  FY 2012 FY 2013 FY 2013 Projected
vs FY 2012 Spending
Government Area GAA Final
Enacted
Amount
Total Estimated
Spending
This Year
Total Budgeted
Spending
Next Year
$ Change % Change
Transfers to Non-Budgetary Sources 1,122,536,822 1,081,917,074 1,132,647,286 50,730,212 4.69%
TOTAL SPENDING 1,122,536,822 1,081,917,074 1,132,647,286 50,730,212 4.69%

 

Transfers to Health Care and Other Funds – In total, the state will transfer $1.13 B in FY 2013 to support health care spending in the Commonwealth Care Trust Fund (CCTF) and the Medical Assistance Trust Fund (MATF). These transfers represent the state budgetary contribution to these trust funds, but are not necessarily the only funding source used to support annual spending from these funds.  The transfer to the CCTF will increase by $50 M in FY 2013 over estimated spending in FY 2012. The increased funding is necessary to support the increased costs of the Commonwealth Connector programs next year. In addition, the Governor’s budget proposes to increase the tax collected on retail cigarette sales and apply the updated sales tax to cigars and smokeless tobacco products.  Combined, these revenues will generate over $70 M for the Commonwealth Care Trust Fund.

 

Unrestricted General Government Aid

Unrestricted Local Aid, FY 2012 and FY 2012
  FY 2012 FY 2013 FY 2013 Projected
vs FY 2012 Spending
Government Area GAA Final
Enacted
Amount
Total Estimated
Spending
This Year
Total Budgeted
Spending
Next Year
$ Change % Change
Unrestricted Local Government Aid 833,980,293 898,980,293 833,980,293 (65,000,000) -7.23%
TOTAL SPENDING 833,980,293 898,980,293 833,980,293 (65,000,000) -7.23%

 

Unrestricted General Governmental Aid (UGGA) is funded at $834 M in the Governor’s FY 2013 budget, which is equal to the amount funded in the FY 2012 GAA. However, in the GAA, the Legislature authorized that up to $65 M in one time FY 2011 surplus should be made available for one-time additional local aid, bringing actual FY 2012 UGGA spending to $899M. When compared to FY 2012 funding levels, the Governor’s FY 2013 recommendation is $65 M, or 7.23% less. The Governor’s FY 2013 budget contains a similar provision, however, that would allocate an additional $65 M for UGGA to cities and towns if there is a sufficient FY 2012 surplus. If a sufficient surplus materializes to fund the additional $65 M distributions, unrestricted local will be level-funded in FY 2013.


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