FY 2015 Development

Critical Factors for FY 2015 Budget Development

When developing the annual operating budget, there are three factors that must be considered:

Since the state budget must be balanced each year, the year-to-year impact of these factors – and how they affect available budgetary resources – plays a critical role in determining how challenging it will be to develop a balanced budget for any given year.

One-Time Resources

As noted in the preceding section, the FY 2015 state budget relies on an estimated $334 M in one-time resources to remain in balance.  This figure is $224.6 M after accounting for capital gains in excess of the General Fund threshold into the Stabilization Fund. This amount is $333 M below ($384.6 M on a net basis) one-time resources used in FY 2014 and within the sustainable level of one-time resources as documented by A&F’s long-term fiscal policy framework released in January 2014. The policy framework stresses the importance of limiting the reliance on one-time resources, particularly as the economy recovers. Given the limited availability and appropriateness of one-time resources, A&F developed the FY 2015 budget as to ensure that FY 2015 utilized significantly fewer one-time resources than the FY 2014 budget. A more detailed section follows on 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 more than $3 B in one year), the state has needed to control 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), the Supplemental Nutrition Assistance Program (formerly known as Food Stamps) and family homelessness. Enrollment and utilization growth in safety net programs has required the state to shift resources away from other areas in order to preserve subsidized benefits for the populations most adversely impacted by the economic downturn.

In FY 2015, most state agencies reported modest levels of cost growth. However, there are several areas where more robust cost growth is likely, such as subsidized health care for low-income residents; employee and retiree health care; human services/safety net spending, including rates for human service providers through Chapter 257; 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 constitute the majority of year-on-year increases that have 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 other factors that are sensitive to annual cost inflation.

Annual Change in Budgetary Resources

The third critical factor in developing the FY 2015 budget is the amount of budgetary resources that are available to support operating expenses. As discussed in further detail below, tax revenues make up the largest component of state budgetary resources, representing 62% percent of the total estimated FY 2015 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 2015 Tax Revenues

As discussed in greater detail below, FY 2015 tax revenues are projected to increase over FY 2014 levels, as tax revenue forecasters expect continued improvement in Massachusetts’s economic outlook. Tax revenues, however, are still substantially below what they would have been in FY 2015 without the economic recession. The FY 2015 consensus tax projection totals $24.337 B.

FY 2015 Tax Consensus Figures
dollars in millions
Original FY14 GAA Estimate*: 22,797
Revised FY14 Projection (Jan. 14, 2014): 23,200
FY14 Revised vs. Original: 403
FY15 Consensus Figure: 24,337
FY15 Consensus vs. FY14 Revised Estimate 1,137
* Here includes $46 M for one-time tax increase associated with the delay of FAS 109 corporate tax deduction.

 

FY 2015 Consensus Revenue Forecast

Each year, the Administration, the House of Representatives and the 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.

FY 2015 Consensus Tax Revenue Estimate of $24.337
(dollars in billions)
Title: FY 2014 Consensus Tax Revenue Estimate of $22.334 Billion - Description: The pie chart shows the constituent pieces of the $22.334 billion fiscal year 2014 tax consensus estimate.

General Information Regarding Consensus Revenue

The consensus revenue process is required under M.G.L. c.29, s.5B, which states that on or before January 15th, the Secretary of Administration and Finance (A&F) shall meet with the House and Senate Committees on Ways and Means to jointly develop a consensus tax revenue forecast for the next fiscal year’s budget. 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, 2013, the Secretary of 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 2015 tax revenue estimate of $24.337 B, consistent with testimony presented at the hearing. This estimate also assumes that the state will collect $1.17 B in capital gains-related revenues in FY 2015, $122 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 be included in the operating budget.

As part of the 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 Massachusetts Bay Transportation Authority (MBTA) and the Workforce Training Trust Fund pursuant to statutory requirements. For FY 2015, these transfers are estimated to total $3.398 B and will be directed as follows:

Basis for the FY 2015 Consensus Revenue Forecast

FY 2014 tax revenues are estimated to be $23.2 B, representing an actual increase of 4.9% and a baseline increase of 4.0% from FY 2013 collections. The baseline calculation adjusts for the impact of tax law and processing changes, so it is a better indicator of underlying economic activity. Through December 2013, FY 2014 year-to-date tax revenues were up 7.1% actual and 6.5% baseline, which was $282 M above the year-to-date benchmark based on the FY 2014 General Appropriation Act (GAA) estimate of $22.797 B (including the impacts of the revenue initiatives in the FY 2014 budget and the Sales Tax Holiday in August 2013). It is expected that as the economy continues to recover, tax collections for the remainder of FY 2014 will increase by $363.6 M (3.0%) actual and $236.4 M (2.0%) baseline from the same period in FY 2013.

The FY 2015 consensus tax revenue estimate is $24.337 B, representing revenue growth of 4.9% actual and 5.0% baseline from the FY 2014 estimate of $23.2 B.  The FY 2015 estimate assumes that the national and state economies will grow moderately in FY 2014 and growth will accelerate in FY 2015. In developing the consensus estimate, the Commonwealth relies 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 11, 2013 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 revised FY 2014 and FY 2015 consensus revenue estimates.

Based on these economic projections and actual tax collections through December 2013, FY 2015 tax collections are projected to grow by $1.137 B, or 4.9% actual and 5.0% baseline from FY 2014 tax collections, with income tax collections growing by 5.0% actual and 5.4% baseline, sales tax growing by 5.8% actual and 4.9% baseline, and corporate/business taxes decreasing by 1.4% actual and 0.8% baseline, as shown in the chart below.

FY15 Consensus Tax Revenue Forecast
(dollars in millions)
Tax Type % Actual
Revenue
Growth
from FY14
% Baseline
Revenue
Growth
from FY14
FY15
Revenue
Estimate
FY15 Growth
from FY14
Total Income 6.1% 6.7% 14,021 810
Withholding 5.0% 5.4% 10,929 516
Sales 5.8% 4.9% 5,820 319
Corporate/Business -1.4% -0.8% 2,384 -33
Other 2.0% 0.7% 2,112 42
Total 4.9% 5.0% 24,337 1,137
Memo: Capital Gains Taxes 10.4% 10.4% 1,170 110

 

The chart below shows historical trends in actual and baseline tax revenue growth.

House 2 Total Non-Tax Revenues: $15,099 B
dollars in billions)
Title: House 1 Total Non-Tax Revenues: $14,581 B - Description: Federal Reimbursements in FY 2014 are assumed to be $8.612 B, or 59% of total non-tax revenues; Consolidated Transfers are assumed to be $2.094 B in FY 2014, or 14%; and Departmental Revenue is assimed to be $3.875 B in FY 2014, or 27% of non-tax revenues. Non-tax state revenues in FY 2014 will total $14,581 B.

Federal Revenues

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.  A&F staff 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 $927 M next year, largely reflecting increased Medicaid expenditures, for which the federal government typically reimburses the state $0.50 for every dollar expended. Due to the implementation of the federal Affordable Care Act (ACA), a significant amount of Medicaid spending will be reimbursed at higher rates ranging from 75% to 100%, providing $350 M in additional federal revenue for MassHealth members that were in subsidized programs (MassHealth waiver programs, Commonwealth Care and Medical Security Program) prior to ACA implementation.

Departmental Revenues

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 health care 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, M.G.L. c.7 s.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 review the fees to ensure they are current and reflect the actual cost of doing business. In FY 2015, total departmental revenues are projected to grow modestly by $120.7 M before accounting for additional revenue proposals, largely due to increased economic activity and cyclical fee collections.

In addition to underlying growth, the Governor’s budget includes $24.2 M in increased departmental revenue generated by expanding a 5 cent bottle deposit to include non-carbonated beverage containers such as water, juice and tea.  This initiative is both a revenue generator for the Commonwealth and a cost saver, as the increased incentive to recycle is anticipated to save municipalities up to $7 M in solid waste management costs.    

As mentioned above, the Governor’s budget includes two sections that give a detailed overview of projected non-tax revenue for FY 2015. Section 1B details projected FY 2015 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 enables users 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

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. A&F 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. In FY 2015, consolidated transfers are projected to decline by $274.5 M.