Summary of Fiscal Year 2014 Budget

Investments in Education, Transportation and Innovation

The Governor’s FY 2014 budget proposes new investments in education, transportation infrastructure, and innovation to support economic growth and opportunity throughout the Commonwealth. These investments are critical to continue to strengthen Massachusetts’ economy and workforce allowing each to compete in the 21st century global economy.

The Governor proposes $553 M in new education investments across a spectrum of programs and services focused on early education, K-12, and post-secondary education. As a result of the Administration’s strategic investments in education and innovation to date, and cutting-edge education reform efforts like the Achievement Gap Act of 2010, the Commonwealth’s students perform at the top in national, and in some cases, international assessments of academic achievement.  The proposed new investments will build upon these accomplishments while addressing the continued challenges of a segment of Massachusetts’ students and workers who continue to face major barriers to achievement.

In addition to the Patrick-Murray Administration’s $13 B capital investment over 10 years in transportation projects in the Commonwealth, a $269 M increase is included in the Governor’s FY 2014 operating budget recommendations, which begin to fund the transportation needs highlighted in the “The Way Forward: A 21-st Century Transportation Plan”. In FY 2014, this investment will:

Finally, the Governor’s budget provides $74 M in additional funding for innovation and job creation, including the following:

Strategic Goals in Serving our Commonwealth

The new investments described above are needed to drive economic growth and further many of the strategic goals of the Patrick-Murray Administration. The following is a summary of the four top goals and the ways in which this budget supports them.

Closing the Achievement Gap – To continue taking steps to close the achievement gap and ensure that all students, regardless of their zip code, have the opportunity to achieve academic, career and lifelong success, the Administration is making an unprecedented investment in education. The Administration will invest a total of $6.79 B in education in FY 2014, including over $550 M in new targeted investments. This investment includes increased funding in achievement gap related programs, including: moving towards universal access to high quality early education programs from birth to age five; enhancing the quality of early education programs and the effectiveness of the early educator workforce; doubling the available funding for English language learners and related programming; and dedicating new resources to support the expansion of locally-designed and implemented initiatives in the Gateway Cities. The Administration will also increase K-12 Chapter 70 funding by $226 M, completing the 2007 Chapter 70 reforms while also ensuring that all school districts receive increased funding of at least $25 per pupil. The FY 2014 budget will quadruple funding for MASSGrant, providing $112 M in new funds to allow more students in Massachusetts have the opportunity to enroll in and succeed in college.  Completing the comprehensive investment in education, $57 M will be directed to the University of Massachusetts, the State Universities, and Community Colleges to enable the campuses to deliver high-quality educational and extracurricular opportunities to students while mitigating the need to increase tuition and fees. 

Job Creation – The Governor’s FY 2014 budget includes significant new investments in education and transportation, which will increase employment opportunities, link job seekers with expanding industries, and continue our record of success in leveraging education, innovation, and infrastructure to grow jobs. Building on past success to lower the unemployment rate and put residents back to work, the Governor is proposing targeted investments to improve the Commonwealth’s competitive business climate, especially in innovative fields, including: completing the “Last Mile” of the MassBroadband 123 project to extend affordable broadband access in western and north central Massachusetts; advancing innovation economies such as the life sciences and advanced manufacturing through research grants and accelerator loans; and funding an infusion of new MassWorks local infrastructure grants.

Controlling Health Care Costs – The Commonwealth of Massachusetts is a national leader in ensuring access to affordable, high quality health care. Massachusetts has achieved the highest rates of insurance coverage in the country, but increasing health care costs remain an underlying challenge for government, employers and individuals. Containing the growth of health care costs is a key priority of the Administration. In August 2012, the Commonwealth passed Chapter 224, comprehensive cost containment legislation aimed at containing and reducing costs while maintaining high quality care. The FY 2014 budget funds initial implementation of Chapter 224. It also funds implementation of the Affordable Care Act in Massachusetts, including the expansion of MassHealth and enhanced subsidies to keep coverage for low-to-moderate income adults affordable through the Health Connector.

Positive Youth Development and Violence Prevention – The FY 2014 budget supports many initiatives to provide opportunities for positive youth development and violence prevention through summer job programs, youth violence prevention funding, and performance-driven services in communities with the greatest demand for intervention.  The Administration is employing a first-in-the-nation new model of pay-for-success contracts to reduce youth recidivism and continuing investments in the Safe and Successful Youth Initiative, a multi-layered and proven strategy for reducing youth violence in the Commonwealth.

Raising Revenue for Critical Investments

The Patrick-Murray Administration inherited a structurally imbalanced budget, the highest per capita debt in the country, a lack of transparency around state budgeting, and the absence of sound fiscal policies and a long-term framework for spending and borrowing.  Additionally, when Governor Patrick took office, the state faced large unfunded liabilities for the pension system and retiree health insurance benefits.  Moreover, chronic under-investment in our transportation infrastructure left our roads, bridges, and railways crumbling and portions of the state severely underserved.

Massachusetts Tax Revenue FY03-FY13.  Revenue Gap FY09-FY13 - Realized versus 4% Typical Growth.  Revenue collections are shown rising at a steady 4% typical growth rate, from $15 billion in 2003, to over $20 billion in 2008.  Then revenues decline in 2009 and 2010, and then rise up through 2013.  This leaves a revenue gap of $21.25 billion over several years.  2013 actual revenue collections are about $20 billion, but they would have been over $25 billion if they had followed the 4% typical growth.

These problems were compounded when Massachusetts – like virtually every other state in the nation – experienced an unprecedented fiscal collapse during the 2008-09 global economic downturn.  This culminated in a one-year drop in tax revenues of over $3 B and an estimated cumulative loss in revenue of $21.25 B between FY 2009 and FY 2013 (compared to typical revenue growth patterns and the typical minimum level of growth required to maintain government services).

Filling the Revenue Gap.  Spending Cuts/Savings $11.13 billion.  Increase in Sales Tax $3.57 B.  One-Time Revenue Sources include:  Federal Stimulus Reserve $5.07 B, Rainy Day Funds $863 million, Other One-Time Revenue Sources $622 M.

The Patrick-Murray Administration and the Legislature took a number of steps to address these fiscal challenges.  Governor Patrick has maintained balanced budgets throughout difficult fiscal times, relying principally on spending cuts and savings from reforms and efficiencies. He instituted – and has adhered to – sound fiscal policies to ensure the state budget is structurally balanced.  The Governor also tackled long-term fiscal liabilities, achieving pension reforms and proposing additional changes to retiree health care benefits, which in combination would save the state and municipalities $25 B over the next 30 years.  As a first step towards a better transportation system, Governor Patrick increased transportation investments by billions of dollars and secured over $500 M in savings to date through a series of reforms, including consolidating the state’s transportation organizations in order to operate the state’s highway, bridge, and transit systems more effectively and efficiently.

On account of these actions, Massachusetts has achieved the highest credit ratings in its history under this Administration – AA+ from all three rating agencies – saving taxpayers $100 M in interest costs over the next 30 years.  The state also now has among the highest rainy day fund balances in the country.

This strong track record of fiscal reform and savings initiatives has enabled the Patrick-Murray Administration to continue to make some key investments in education, infrastructure and innovation, but it has not had the resources to make the level of investments in these areas required to support long-term growth and opportunity across the Commonwealth.  Indeed, in many areas the level of state services and investment has been scaled back significantly in order to live within even more constrained resources. Aid to cities and towns has been reduced, impacting local services such as police, fire, and public libraries.  Valuable state investments in state parks, economic development, affordable housing, and college affordability have all been curtailed.

We cannot meet the Commonwealth’s needs by cutting deeper or depleting the Rainy Day Fund.  Sustainably financing critical services and investments that are essential to long-term prosperity requires new revenue.  We have a generational responsibility to ensure a sustainably financed Commonwealth for our future prosperity.

Summary of Spending Changes from FY 2013

The table below outlines changes in major spending categories in the Governor’s FY 2014 budget proposal.

Annual Change in Budgetary Spending by Selected Area, FY 2013 vs. FY 2014
dollars in millions
Spending Category FY 2013
Estimated
FY 2014
House 1
Change
Investments in Education:
Early Education: 499.3 630.3 131.0
K-12 Programs and Services: 4,711.5 4,978.5 267.0
Higher Education: 976.5 1,128.5 152.0
Investments in Transportation (Does not include $25 M in off-budget gaming-funded investments): 348.9 592.9 244.0
Investments in Innovation: 165.2 239.2 74.0
Health Care: 13,355.6 14,549.8 1,194.2
Safety Net (non Health Care): 4,298.0 4,434.2 136.3
Legal Obligations:
Debt Service: 2,366.5 2,428.4 61.9
Pensions: 1,552.0 1,630.0 78.0
All Other Spending: 5,846.1 5,843.0 (3.0)
TOTAL ANNUAL SPENDING CHANGES 34,119.6 36,455.0 2,335.4
TOTAL ANNUAL SPENDING CHANGES (EXCLUDING PENSIONS) 32,567.6 34,825.0 2,257.4

 

In addition to the new investments, the Governor’s FY 2014 budget preserves funding for the state’s health care and safety net programs. These programs and services have witnessed record-high levels of demands for services as the economy has slowly recovered from the 2008 recession, and many residents still rely on these programs to help support their daily lives. Massachusetts health care spending also will increase to reflect increased enrollment associated with the federal Affordable Care Act, which will be effective on January 1, 2014. These increased costs will be more than offset by reduced spending elsewhere and additional revenues available to the Commonwealth in FY 2014 and beyond as the federal ACA is gradually implemented. All other areas in the budget, including the state’s obligations for debt service and employee pensions, increase next year by $136.9 M in combined additional spending.

Annual Change in Budgetary Resources, FY 2013 vs. FY 2014
dollars in millions
Revenue Category FY 2013
Estimated
FY 2014
House 1
Annual
Change
Projected Base-Line Tax Collections (excluding one-time FAS 109 Delay in FY13): 21,450.0 22,334.0 884.0
Transfer of Capital Gains in Excess of Maximum for Budgetary Purposes to Rainy Day Fund: (100.0) (37.0) 63.0
Transfer for Annual Pension Contribution: (1,552.0) (1,630.0) (78.0)
Transfers of Tax Revenue to MBTA, SBA, Workforce Training Fund and OPEB Liabilities: (1,490.7) (1,529.0) (38.3)
Federal Reimbursements: 8,158.4 8,611.8 453.4
Departmental Revenues: 3,348.2 3,417.8 69.6
Transfers from Non-Budgeted Sources: 1,749.5 1,657.7 (91.9)
Prior Year Funds Used to Support Current Year Non-Recurring Budgetary Spending: 173.4 28.0 (145.4)
One-Time Sources for Recurring Costs (including eliminating Carry-Forward and FAS 109 Delay): 820.1 513.0 (307.1)
Other New Revenues Supporting the Budget:
Increased Tax Revenue (Includes Motor Fuel Taxes): - 791.0 791.0
Revenue Anticipation Notes:   400.0 400.0
Gaming Budgetary Revenues: - 83.0 83.0
Employer Responsbility Health Care Assessment: - 94.0 94.0
Modernize Bottle Redemption: - 24.0 24.0
Enhanced Tax Enforcement: - 27.0 27.0
Amazon Agreement and Expansion of Hotel Tax to Rental Units: - 29.0 29.0
CHANGE IN BUDGETARY RESOURCES (INCLUSIVE OF RESOURCES FOR THE PENSION CHANGE):     2,257.4
Additional Off-Budget One-Time Resources: 99.0 10.0 (89.0)
TOTAL CHANGE, FY 2013 vs FY2014     2,168.4

 

Revenue Initiatives and Other Budget Solutions

Tax Receipts:  Baseline tax revenue growth is forecast to grow by $884 M after accounting for one-time revenues collected in FY 2013 that will not be collected by the state in FY 2014, bringing total tax receipts to $22.334 B. After adjusting for inflation, this revenue is still roughly $2 B less than the level of taxes collected in FY 2008, the last fiscal year that immediately preceded 2008 economic downturn. A portion of the tax revenues are not available for the budget ($37 M) corresponding to the state’s fiscal policy to limit the amount of capital gains revenue included within the state budget. Finally, transfers of tax revenues for pension and other dedicated purposes, such as the Massachusetts School Building Authority and the Massachusetts Bay Transportation Authority, are expected increase by $116 M in FY 2014.

New Tax Revenue: The Governor’s budget calls for $791 M in additional tax revenues this year through restructuring a variety of provisions within the state tax code. This funding plan assumes that $400 M of the anticipated new tax revenue in FY15 and FY16 is borrowed to support investments in FY 2014 when the full-year revenue impact of the tax law changes will not be realized.

Non-Tax Revenues: Total non-tax revenues in FY 2014 total $13.7 B, up from $13.3 B in FY 2013. Growth in these revenues is mostly due to the increased federal revenues the state receives for operating the federal Medicaid program (in Massachusetts known as MassHealth). In addition, modest increases are proposed in departmental revenues and other budgetary transfers from non-budgeted sources, such as the state lottery fund.

In addition, other budgetary revenues in FY 2014 include approximately $83 M in gaming revenues projected to be collected next year as new gaming facilities are licensed under the 2011 expanded gaming legislation. The state will also retain $94 M in employer assessments currently collected to support health care costs for laid-off workers to help support its restructured subsidized health insurance programs starting in 2014. Other revenue changes include $24 M from modernizing the state’s existing bottle redemption law to include bottled water and sports drinks, $27 M in tax enforcement initiatives at the Department of Revenue and $26.2 M associated with an agreement with the online retailer, Amazon, to begin to collect sales tax for goods sold in Massachusetts and from the expansion of the hotel surcharge to rental properties.

One-Time Resources: In early 2012, the Patrick-Murray Administration released its new long-term fiscal policy which called for limiting the use of one-time solutions to operating budget shortfalls to levels that are sustainable within long-term forecasted tax revenues. In agreement with that policy, the Governor’s budget proposes to utilize only $555 M in one-time resources next year, down from $919 M in FY 2013. The largest one-time solution in next year’s budget will be the use of $400 M in rainy day funds. However, the state is forecast to continue to have a balance in excess of $1 B and remain one of the highest rainy day funds in the nation.

Building on Record of Reforms

In order to address a reduced workforce and the need to control costs, the Administration has explored options to help limit cuts to critical state services through reforms and other efficiencies.  The Administration continues to demonstrate that the state is stretching each tax taxpayer dollar further and is relentlessly pursuing all avenues for changes that improve performance.  Governor Patrick has signed into law several bold reforms that change the way government does business, including pension reform, municipal health reform and health care cost containment.  The FY 2014 budget builds on these efforts and proposes more reforms, including: