- Budget Development
- Financial Statements
- Capital Budget
- Appropriation Recommendations
- Agency Information
- Operating Transfers
- Local Aid - Section 3
- Outside Sections
- Tax Expenditure Budget
FY 2014 Development
Critical Factors for the FY 2014 Budget Development
When developing the annual operating budget, there are three factors that must considered:
- Loss of any one-time resources utilized in the preceding year’s budget;
- Growth in costs to operate state programs and services from the previous year; and,
- Annual change in available budgetary revenues, including tax collections and other non-tax sources.
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 determining how challenging it will be for developing a balanced budget will be for any given year.
As noted in the preceding section, the state budget in FY 2013 relies on an estimated $919 M in one-time resources, after accounting for the December 4 fiscal action plan, to remain in balance. This amount is above one-time resources used in FY 2012, but still within the sustainable level of one-time resources as documented by A&F’s released long-term fiscal policy framework. The policy, however, stresses the importance to limit the reliance on one-time sources, particularly as the economy recovers. Given the limited availability and appropriateness of one-time sources, therefore, the FY 2014 budget was developed from the starting point that it was necessary to ensure that FY2014 one-time sources were less than the level budgeted in FY 2013. A more detailed section follows addressing the state’s Stabilization Fund (also referred to as the rainy day fund).
Cost Growth and Major Budget Increases
Since state tax revenues experienced an historic drop in FY 2009 (falling over $3 B in one year) the state has need to control state spending through reductions, reforms and other savings initiatives across almost every area of state government. This has been in the face of growth in program caseloads to historic highs among state-operated safety net programs, such as MassHealth (Medicaid), Supplemental Nutrition Assistance Program (formerly known as Food Stamps) and family homelessness. Enrollment and utilization growth in these and other related programs has required the state to shift resources away from other areas in order to preserve the state’s safety net for those populations most impacted by the economic downturn.
In FY 2014, for most areas in state government only a modest level of cost growth can be sustained within existing budgetary resources. However, there are a limited number of areas where cost growth is likely and must be accounted for in preparing the FY 2014 budget proposal. This list of items includes state health care spending on subsidized care for low-income residents and on employee and retiree health care costs; human services/safety net spending; K-12 aid to cities and towns (Chapter 70); debt service; and annual state pension contributions. Over the past several fiscal years these cost drivers have constituted the majority of year-on-year increases that have had to be accounted for in developing the annual operating 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.
Annual Change in Budgetary Resources
The third critical factor in developing next year’s budget is the amount of budgetary resources that will be available to support operating expenses next year. As discussed in further detail below, tax revenues make up the largest component of state budgetary resources, representing 63 percent of the total estimated FY 2013 budgetary revenues. Tax revenues also typically represent the greatest contributor to new state revenues in any given year. Other important resources include non-tax revenues such as federal reimbursements and departmental revenues. Historically, these revenues have increased consistently with related programmatic expenditures. Similarly, other budgetary transfers from non-budgeted sources have been relatively flat from year-to-year.
FY 2014 Tax Revenues
As discussed in greater detail below, tax revenues in FY 2014 are projected to increase over FY 2013 levels, as the state economy continues to recover from the recession. Tax revenues in FY 2014, however, will still be substantially below what they would have been in FY 2014 without the economic recession. The FY 2014 consensus tax projection totals $22.334 B.
|dollars in millions|
|Original FY13 Tax Consensus Figure*:||22,011|
|Revised FY13 Tax Projection (Dec. 4, 2012):||21,496|
|FY13 Revised vs. Original:||(515)|
|FY14 Tax Consensus Figure:||22,334|
|FY14 Consensus vs. FY13 Revised Estimate||838|
|*Includes $46 M for one-time tax increase associated with the delay of FAS 109 corporate tax deduction.|
FY 2014 Tax Revenue Consensus Forecast
Tax revenues comprise nearly 63% of all revenues used to support the Commonwealth's operating budget. Each year, the Administration and the House of Representatives 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 2014 Consensus Tax Revenue - Estimate of $22.334 - dollars 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 11, 2012, 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, Beacon Hill Institute and economists from the University of Massachusetts and Northeastern University. The three branches subsequently agreed upon a FY 2014 tax revenue estimate of $22.334 B, consistent with testimony presented at the hearing. This estimate also assumes that the state will collect $1.06 B in capital gains-related revenues in FY 2014, $37 M of which will be deposited into the Stabilization Fund under the state law that caps the amount of this volatile revenue source that can annually be included in the operating budget.
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 2014, these transfers are estimated to total $3.154 B and will be directed to the following funds in the following amounts:
- School Modernization and Reconstruction Trust Fund = $ 703.6 M;
- MBTA State and Local Contribution Fund = $ 799.6 M;
- Pension Reserves Investment Trust Fund = $ 1.630 B; and
- Workforce Training Trust Fund = $21.6 M.
Basis for the FY 2013 Consensus Revenue Forecast
On December 4, 2012, the Executive Office for Administration and Finance reduced the FY 2013 revenue estimate of $22.011 B (The $22.011 B estimate reflects the FY 2013 consensus tax estimate of $21.950 B adjusted for the impact of FY 2013 revenue initiatives and the sales tax holiday) by $515 M, to $21.496 B. Based on updated economic forecasts and testimony taken at the consensus revenue estimate hearing held on December 11, 2012, the FY 2013 tax revenue estimate has been kept unchanged at $21.496 B, and the FY 2014 revenue estimate has been set at $22.334 B (http://www.mass.gov/anf/press-releases/fy2013/consensus-on-fy-2014-revenue-forecast-announced.html). The basis for these revenue estimates is described below.
All three economic forecasters used by the Commonwealth in developing its revenue forecasts (Economy.com, Global Insight, and the New England Economic Partnership) assume that the Massachusetts economic growth will remain slow in FY 2013 but improve in FY 2014, though the uncertainty is still very high mostly due to U.S. fiscal policy challenges and the Eurozone’s recession and sovereign debt/banking crisis.
The FY 2013 and FY 2014 tax revenue estimates are based on the following economic assumptions, as presented at the December 11, 2012 consensus estimate hearing:
- The growth of the national economy is expected to remain slow in FY 2013 but improve in FY 2014. Uncertainties related to the global economic slowdown (particularly in the Eurozone economies) and U.S. fiscal policies continue to be sources of risk to economic growth. Real GDP growth for the full FY 2013 is projected to be 1.9% compared to growth of 2.0% in FY 2012 and 2.2% in FY 2011. In FY 2014, real GDP growth is projected to range from 2.3% to 3.0%;
- Massachusetts employment levels are expected to growth by 0.8% to 1.2% over the remainder of FY 2013, and by 0.9% to 1.2% for FY 2013 as a whole. For FY 2014, Massachusetts employment is expected to increase by 1.0% to 1.3%;
- Massachusetts personal income (excluding capital gains) is expected to grow by 3.7% to 3.8% over the remainder of FY 2013 and 3.9% for FY 2013 as a whole. For FY 2014, Massachusetts personal income is projected to grow by 4.3% to 6.0%;
- Massachusetts wages and salaries are projected to increase by 4.1% to 4.7% for the remainder of FY 2013 and 4.2% to 4.7% for the year as a whole. For FY 2014, the growth in Massachusetts wages and salaries is projected to range from 4.2% to 6.8%;
- Massachusetts retail sales growth is expected to range from 3.6% to 4.4% over the remainder of FY 2013 and 4.0% to 5.2% for the FY as a whole. For FY 2014, Massachusetts retail sales are projected to grow by 2.6% to 4.2%;
- Corporate profits at the national level are expected to increase by 4.4% to 10.0% over the remainder of FY 2013, and by 6.8% to 12.1% for the FY as whole (there are no forecasts for state corporate profits). For FY 2014, growth in corporate profits is projected to range from 2.1% to 4.8%;
- The stock market, as measured by the average of the S&P 500 over the entire year, rose by 8.7% in calendar year 2012 (which largely determines FY 2013 capital gains taxes), and is expected to increase by 3.9%-6.9% in calendar year 2013 (which largely determines fiscal year 2014 capital gains taxes). Massachusetts capital gains realizations are projected to increase by 17.8% in calendar year 2012 and increase by 2.7% in calendar year 2013.
In the first half of FY 2013, tax revenue collections increased by $204 M, or 2.1% actual and 2.7% baseline (the baseline measure adjusts for tax law and processing changes that affect revenue collections) compared to the same period in FY 2012. Based on the economic assumptions and other factors described above, tax collections for the remainder of FY 2013 are projected to increase by $177.6 M, or 1.6% actual, and $234.0 M, or 2.1% baseline, from the same period last year. FY 2014 tax revenues are projected to grow by $838 M, representing a 3.9% actual increase and a 4.3% baseline increase from the updated FY 2013 forecast. The details of the forecast are set out in the two tables below.
|Tax Type||FY13 YTD Baseline Growth through 12/12||% Baseline Growth Remainder of FY13||% Baseline Growth Full Year FY13||FY13 Full Year Revenue Estimate||FY13 Estimate Change From FY12
|FY13 Revenue Estimate Change from GAA Estimate*
Capital Gains Taxes
|* Includes impacts of revenue initiatives and the Sales Tax Holiday in August 2012|
** Includes impact of one-time corporate/business tax payments for FY12 and FY13
|Tax Type||% Actual
Capital Gains Taxes
House 1 Total Non-Tax Revenues: $14,581 B - dollars 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 $453.4 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 2014, total departmental revenues are projected to grow modestly by $69.6 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 2014. Section 1B details projected FY 2014 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 the 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 Unclaimed 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 2014, consolidated transfers are projected to decline by $91.9 M.
top of page