Critical Factors for the FY 2013 Budget Development
There are typically three major factors that impact the state’s budget from year to year; change in available budgetary revenues, including tax collections and other non-tax sources; the impact from the loss of any one-time resources utilized in the preceding year’s budget; and the extent to which costs grow to operate state programs and services from the previous year. Since the state budget must be balanced each year, the year-to-year impact of these factors –and how they affect available budgetary resources- will play a critical role in how challenging it will be for developing a balance budget for any given year.
Unlike FY 2012, the state budget next year will not need to account for the loss of an unsustainable level of one-time resources. Incrementally, since FY 2009 the Governor and the Legislature have successfully been able to reduce the amount of one-time resources required to maintain a balanced budget, from over $3 B in FY 2009 to $620 M in FY 2012. The level of one-time resources being used in FY 2012 is sustainable since they are less than the cyclical shortfall in tax revenues as the state continues to recover from the recession. They also represent only a small percentage of the total state operating budget (2% of FY 2012 estimated expenditures vs. 11% of FY 2009 expenditures). Even so, the starting point for developing the FY 2013 budget assumes a reduction of $620 M as a result of one-time resources in FY 2012 that will not be available in FY 2013.
Cost Growth and Major Budget Increases
While state tax revenues experienced an historic drop in FY 2009 and are continuing to recover, increased enrollment in state health care and other safety net programs have significantly increased costs in these programs, putting further demand on diminished state resources. Beyond health care and safety net costs, there are also a limited number of items in the state’s budget for which the state is legally obligated to incur costs each year, such as debt service, collective bargaining, pension contributions for existing and retired employees and the costs of funding K-12 school aid under the state’s chapter 70 education reforms. Controlling annual costs in these areas is a challenge, and such costs represent a significant share of the state’s annual funding.
As the following table shows, the costs of health care, chapter 70 and debt service alone represent 61% of annual estimated spending in FY 2012. In addition, A&F estimates that non-health care safety net expenditures across all other state spending total $3.985 B (primarily in Health and Human Services, Housing and Economic Development and Education) in FY 2012 and, together with health care, chapter 70 and debt service, makes up roughly 73% of all budgetary spending. Areas where annual cost pressures are the greatest make up roughly three-quarters of the state budget.
Other areas in the state budget typically experience modest cost increases from year to year, mostly related to negotiated wage increases, leasing, the cost of fuel or related factors that are sensitive to annual cost inflation. As funding for the major budget cost drivers outlined above has increased, funding for other parts of state government has been reduced and agencies have needed to find new ways to control and reduce costs, often eliminating staffing, cutting or limiting contracts or curtailing other investments.
As discussed in greater detail below, FY 2013 tax revenues are projected to increase next year, as the state economy continues to recover from the recession. Tax revenues in FY 2013, however, will still be substantially below what they would have been in FY 2013 without the economic recession. The FY 2013 consensus tax projection totals $21.950 B. When one considers what revenue would have been since FY 2008 if taxes had grown at the rate of inflation over the 5-year period, then FY 2013 tax collections would have been an estimated $22.9 B next year, or $1 B more than what is currently assumed will be available for the budget. This gap is even more pronounced after accounting for the fact that the sales tax was increased in FY 2010 by 20%, generating roughly $1 B in additional revenues each year for the state.
FY 2013 Tax Revenue Consensus Forecast
Tax revenues comprise nearly 63% of all revenues (including new revenues proposed in the H.2 recommendations) used to support the Commonwealth's operating budget. Each year the Administration and the House and Senate consult with economists and other groups to gather information and analysis on the condition of the U.S. and Massachusetts economies. They use that information to project state tax revenue for use in the state budget. The following is a general description of the consensus revenue process followed to establish the budgetary tax revenue estimate.
FY 2013 Consensus Tax Revenue Estimate of $21.950
(in $ Billions)
General Information Regarding Consensus Revenue
The consensus revenue process is required under M.G.L. c.29, s.5B, and states that on or before January 15 the Secretary for Administration and Finance shall meet with the House and Senate Committees on Ways and Means and shall jointly develop a consensus tax revenue forecast for the budget for the next fiscal year, which shall be agreed to by the Secretary and the House and Senate. The law requires that the consensus revenue estimate be placed before the General Court in the form of a joint House and Senate Resolution for full consideration.
On December 12, 2011, the Secretary for Administration and Finance and the House and Senate Committees on Ways and Means held a public hearing in Boston and heard testimony from the Massachusetts Department of Revenue (DOR), the Massachusetts Taxpayers Foundation and the Beacon Hill Institute and economists from the University of Massachusetts and Northeastern University. The three branches subsequently agreed upon a FY 2013 tax revenue estimate of $21.950 B, consistent with testimony presented at the hearing.
As part of the statutorily required consensus revenue process, the Secretary, House and Senate also agree on the amount of tax revenues that will need to be transferred to support the State's Retiree Pension Fund, the School Building Authority, the MBTA (Massachusetts Bay Transportation Authority) and the Workforce Training Trust Fund pursuant to statutory requirements.
For FY 2013, these transfers are estimated to total $3.05 B and will be directed to the following funds in the following amounts:
FY 2012 tax revenues are estimated to be $21.010 B, representing an actual increase of 2.4% and a baseline increase of 3.1% from FY 2011 collections (the baseline calculation adjusts for the impact of tax law and processing changes, which is a better indicator of underlying economic activity). Through December 2011, FY 2012 year-to-date tax revenues were up 2.6% actual and 2.9% baseline, and were $49 M below the year-to-date benchmark based on the revised FY 2012 estimate of $21.010 B (including the impacts of the revenue initiatives in the FY 2012 budget, the Sales Tax Holiday in August 2011, and the statutorily-required reduction in the personal income tax rate as described above). It is expected that as the economy continues to recover and grow slowly, tax collections for the remainder of FY 2012 will increase by $241.4 M, or 2.2% actual, and $360.4 M, or 3.3% baseline, from the same period in FY 2011.
The FY 2013 consensus tax revenue estimate is $21.950 B, representing revenue growth of 4.5% actual and 5.4% baseline from the FY 2012 estimate of $21.010 B. The FY 2013 estimate assumes that the national and state economies will grow slowly throughout the fiscal year. In developing the consensus estimate, the Commonwealth relied on economic forecasts from Moody’s Economy.com, Global Insight, and the New England Economic Partnership (NEEP). The economic forecasts upon which the consensus revenue estimate is based are as follows:
In addition to the economic forecasts described above, the consensus revenue estimate takes into account forecasts for capital gains realizations and taxes. The consensus agreement capital gains forecast is based on the following considerations:
The charts below show the national and state economic forecasts presented at the December 12, 2011 consensus revenue hearing as well as the consensus estimate assumption for capital gains realizations and taxes, all of which were taken into consideration in developing the FY 2012 and FY 2013 consensus revenue estimates.
Based on these economic projections and actual tax collections through December 2011, FY 2013 tax collections are projected to grow by $940 M, or 4.5% actual and 5.4% baseline from FY 2012 tax collections, with income tax collections growing by 5.2% actual and 6.2% baseline, sales tax growing by 4.2% actual and 3.7% baseline, and corporate/business taxes growing by 2.5% actual and 6.1% baseline, as shown in the chart below.
The chart below shows historical trends in actual and baseline tax revenue growth. Under the FY 2011 reform, $100 M of the projected capital gains receipts (the amount in excess of $1 B) is required to be deposited into the Stabilization Fund and not available for budgetary purposes.
State Corporate Excise Rate
The FY 2013 budget assumes that there will be no changes to the phase down of the corporate tax rate, scheduled in law to decline from 8.25% in tax year 2011 to 8.00% in 2012. Next fiscal year, the Department of Revenue estimates this will save thousands of businesses statewide roughly $15 M from this change. These changes will help to ensure the Patrick-Murray Administration’s commitment to support the state’s small businesses, and to ensure they are best positioned to continue their economic recovery.
State Income Tax Rate Reduction
The FY 2013 tax projection assumed in the Governor’s budget reflects the January 1st, 2012 reduction in the state’s income tax rate, which decreased from 5.3% to 5.25%. The FY 2013 value of this reduction in the rate is estimated to total $110 M.
The Commonwealth collects and receives revenues from several non-tax sources, including the federal government, various fees, fines, court revenues, assessments, reimbursements, interest earnings and transfers from non-budgeted funds. These revenues are deposited in the General Fund, the Commonwealth Transportation Fund and other operating budgeted funds. The Governor’s FY 2013 budget recommendation assumes approximately $12.96 B in non-tax revenues. Reimbursements from the federal government make up 62% of the Commonwealth’s projected FY 2013 non-tax revenue. The remaining non-tax revenues come from departmental revenues (25%) and operating transfers from off budget funds (13%). Sections 1B and 1C of this document detail the different types of non-tax revenues.
House 2 Total Non-Tax Revenues: $12.963 B
(in $ Billions)
Federal revenues are collected through reimbursements for the federal share of entitlement programs such as Medicaid and through block grants for programs such as Temporary Assistance for Needy Families (TANF) and Child Support Enforcement. The amount of federal reimbursements to be received is determined by state expenditures and federal regulations that govern federal programs. Staff from the A&F work with agencies to project spending levels for these federally-supported programs and the resulting federal reimbursements those expenditures will generate. Federal revenues are projected to increase by $191 M next year, largely reflecting increased Medicaid expenditures, for which the federal government typically reimburses the state $0.50 for every dollar expended.
Departmental revenues are derived from licenses, tuition, fees for programs and services, reimbursements and assessments for services including, but not limited to, revenues from the Registry of Motor Vehicles, reimbursement of healthcare costs from municipalities participating in the state’s Group Insurance Commission (GIC) health care programs, drug rebate money received by the Executive Office of Health and Human Services, interest earnings received on the state’s budgeted fund balances and fees collected by the Secretary of State’s Office. To the extent possible, the Administration has minimized fee increases. However, MGL Chapter 7:3B provides for an annual review of fees to confirm that they are sufficient to defray the cost of providing the service. As part of this exercise, A&F analyzes historical non-tax revenue receipts and works with agencies to develop budget-year projections for these revenues. During the budget process, agencies are asked to review the fees to ensure they are current and reflect the actual cost of doing business. In FY 2013, total departmental revenues are projected to grow modestly ($57 M) before accounting for additional revenue proposals, largely due to increased economic activity and cyclical fee collections.
As mentioned above, the Governor’s budget includes two sections that give a detailed overview of projected non-tax revenue for FY 2013. Section 1B details projected FY 2013 non-tax revenue receipts by the department, board, commission or institution that administers and collects the respective revenue source. The online version of the Governor’s budget allows the user to further examine each governmental area and view a title and description of each revenue source contributing to that area’s total non-tax revenue. Additionally, the fund statements, which are included in the “Financial Statements” section of the budget document, offer another view of departmental revenues by operating fund.
Consolidated transfers reflect inflows to the General Fund from non-budgeted funds which include annual tobacco settlement proceeds received as part of the Master Settlement Agreement with tobacco companies, net revenues from the State Lottery Fund, fringe revenue to recoup the cost of various statewide benefits assessed on non-budgeted funds and revenues from the Commonwealth’s Abandoned Property Division. The Executive Office for Administration and Finance solicits agency feedback and uses historical data to project transfers to and from the budgeted funds for the proposed budget year. Section 1C of this document provides further detail behind this revenue type. In FY 2013, consolidated transfers are projected to decline by $52 M, largely due to reduced unclaimed property and projected decreases in fringe revenue collections, offset by increased lottery revenue collections.