Introduction

The development of the state budget is one of the most important responsibilities of state government. The state budget has wide-ranging and far-reaching impacts on the well-being of the citizens of the Commonwealth. It is the vehicle through which we as a citizenry make investments together for the benefit of all of us - investments for the "commonwealth". It reflects our collective judgment about the state's role in our society, the fellow citizens we want to help, the investments in our future we want to make and the cost we are each willing to bear to pay for the things that we as a citizenry need and want to do together.

There are a number of factors that have made it challenging to develop a fiscally responsible and balanced budget for fiscal year 2009, which begins on July 1, 2008 and ends on June 30, 2009. A significant structural deficit in the fiscal year 2008 budget will persist into fiscal year 2009. In addition, growth in expenses to simply maintain the same level of state services exceeds the estimated growth in state tax revenue for fiscal year 2009. This structural shortfall between revenues and expenses to maintain existing levels of services is the starting point for building a state budget for fiscal year 2009, even before taking into account the many new, worthy programs or investments the Governor, legislators, stakeholders and other citizens would like to fund in the budget.

In order to provide the level of state services and investments the citizens of the Commonwealth expect, need and deserve, it is critical that we use the taxpayers' money as efficiently and effectively as possible. This means that the state must do everything possible to control costs, particularly in areas like health care which already consumes almost half of the state budget and in which costs are growing at a rate much higher than the growth in state tax revenues. This also means that the state must make investments to grow its way out of its persistent structural deficit and onto a course of financial sustainability. Targeted investments to support long-term economic growth will yield new state tax revenues from new businesses, new jobs and higher levels of economic activity. As discussed in greater detail in the Governor's message, the Secretary of Administration and Finance's message and the budget narrative above, the Governor has undertaken a number of efforts to realize efficiencies and to control costs, and he has made and proposed a number of targeted investments to spur economic growth.

The discussion below provides a description of the relevant issues faced by the Administration and the process that was used to develop the Governor's proposal for the fiscal year 2009 state budget.

Massachusetts Government Structure

The government of the Commonwealth is divided into three branches: the Executive, the bicameral Legislature and the Judiciary.

Executive Branch

Governor - The Governor is the chief executive officer of the Commonwealth. Other elected members of the executive branch are the Lieutenant Governor (elected with the Governor), the Treasurer and Receiver-General (State Treasurer), the Secretary of the Commonwealth (State Secretary), the Attorney General and the State Auditor. All are elected to four-year terms. The terms of the current office holders began in January, 2007.

The Executive Council, also referred to as the "Governor's Council," consists of eight members who are elected to two-year terms in even-numbered years. The Executive Council is responsible for the confirmation of certain gubernatorial appointments, particularly judges, and must approve all warrants (other than for debt service) prepared by the Comptroller for payment by the State Treasurer.

Also within the Executive Branch are certain independent offices, each of which performs a defined function, such as the Office of the Comptroller, the Office of the Inspector General, the State Ethics Commission and the Office of Campaign and Political Finance.

Governor's Cabinet - The Governor's Cabinet, which assists the Governor in administration and policy making, is comprised of the secretaries who head the eight Executive Offices, which are the Executive Office for Administration and Finance, the Executive Office of Health and Human Services, the Executive Office of Transportation and Public Works, the Executive Office of Public Safety and Security, the Executive Office of Housing and Economic Development, the Executive Office of Labor and Workforce Development, the Executive Office of Education and the Executive Office of Energy and Environmental Affairs. Finally, the Governor chairs an informal Development Cabinet to coordinate business development in the Commonwealth; it includes the Secretaries of Administration and Finance, Housing and Economic Development, Transportation and Public Works, Energy and Environmental Affairs and Labor and Workforce Development. Cabinet secretaries and executive department chiefs serve at the pleasure of the Governor. Most other agencies are grouped under one of the eight Executive Offices for administrative purposes.

The Cabinet structure described above results from a constitutionally provided reorganization plan proposed by the Governor and approved unanimously by the legislature, which took effect on April 9, 2007 and the Governor's recently proposed legislation, reflected in these Budget Recommendations, to organize the education agencies under a new Secretary of Education . (See Commonwealth Organization Chart)

The Governor's chief fiscal officer is the Secretary of Administration and Finance. The activities of the Executive Office for Administration and Finance fall within five broad categories: (i) administrative and fiscal supervision, including supervision of the implementation of the Commonwealth's budget and monitoring of all agency expenditures during the fiscal year; (ii) enforcement of the Commonwealth's tax laws and collection of tax revenues through the Department of Revenue for remittance to the State Treasurer; (iii) human resource management, including administration of the state personnel system, civil service system and employee benefit programs and negotiation of collective bargaining agreements with certain of the Commonwealth's public employee unions; (iv) capital facilities management, including coordinating and overseeing the construction, management and leasing of all state facilities; and (v) administration of general services, including information technology services.

State Treasurer - The State Treasurer has four primary statutory responsibilities: (i) the collection of all state revenues (other than small amounts of funds held by certain agencies); (ii) the management of both short-term and long-term investments of Commonwealth funds (other than the state employee and teacher pension funds), including all cash receipts; (iii) the disbursement of Commonwealth monies and oversight of reconciliation of the state's accounts; and (iv) the issuance of almost all debt obligations of the Commonwealth, including notes, commercial paper and long-term bonds.

In addition to these responsibilities, the State Treasurer serves as Chairperson of the Massachusetts Lottery Commission, the State Board of Retirement, the Pension Reserves Investment Management Board, the Massachusetts Water Pollution Abatement Trust and the Massachusetts School Building Authority. The State Treasurer also serves as a member of numerous other state boards and commissions, including the Municipal Finance Oversight Board.

State Auditor - The State Auditor is charged with improving the efficiency of state government by auditing the administration and expenditure of public funds and reporting the findings to the public. The State Auditor reviews the activities and operations of approximately 750 state entities and contract compliance of private vendors doing business with the Commonwealth.

Attorney General - The Attorney General represents the Commonwealth in all legal proceedings in both the state and federal courts, including defending the Commonwealth in actions in which a state law or executive action is challenged. The Attorney General also brings actions to enforce environmental and consumer protection statutes, among others, and represents the Commonwealth in public utility and automobile and health insurance rate setting procedures. The Attorney General works in conjunction with the general counsel of the various state agencies and executive departments to coordinate and monitor all pending litigation.

State Comptroller - Accounting policies and practices, publication of official financial reports and oversight of fiscal management functions are the responsibility of the Comptroller. The Comptroller also administers the Commonwealth's annual state single audit and manages the state accounting system. The Comptroller is appointed by the Governor for a term coterminous with the Governor's and may be removed by the Governor only for cause. The annual financial reports of the Commonwealth, single audit reports and any rules and regulations promulgated by the Comptroller must be reviewed by an advisory board. This board is chaired by the Secretary of Administration and Finance and includes the State Treasurer, the Attorney General, the State Auditor, the Chief Administrative Justice of the Trial Court and two persons with relevant experience appointed by the Governor for three-year terms. The Commonwealth's audited annual reports include audited financial statements on both the statutory basis of accounting (the Statutory Basis Financial Report, or SBFR) and the GAAP basis (the Comprehensive Annual Financial Report, or CAFR).

State Secretary - The Secretary of the Commonwealth is responsible for collection and storage of public records and archives, securities regulation, state elections, administration of state lobbying laws and custody of the seal of the Commonwealth.

Legislative Branch

The Legislature (formally called the General Court) is the bicameral legislative body of the Commonwealth, consisting of a Senate of 40 members and a House of Representatives of 160 members. Members of both the Senate and the House are elected to two-year terms in even-numbered years. The Legislature meets every year. The joint rules of the House and Senate require all formal business to be concluded by the end of July in even-numbered years and by the third Wednesday in November in odd-numbered years.

The House of Representatives must originate any bill that imposes a tax. Once a tax bill is originated by the House and forwarded to the Senate for consideration, the Senate may amend it. All bills are presented to the Governor for approval or veto. The Legislature may override the Governor's veto of any bill by a two-thirds vote of each house. The Governor also has the power to return a bill to the chamber of the Legislature in which it was originated with a recommendation that certain amendments be made; such a bill is then before the Legislature and is subject to amendment or re-enactment, at which point the Governor has no further right to return the bill a second time with a recommendation to amend but may still veto the bill.

Judicial Branch

The judicial branch of state government is composed of the Supreme Judicial Court, the Appeals Court and the Trial Court. The Supreme Judicial Court has original jurisdiction over certain cases and hears appeals from both the Appeals Court, which is an intermediate appellate court, and in some cases, directly from the Trial Court. The Supreme Judicial Court is authorized to render advisory opinions on certain questions of law to the Governor, the Legislature and the Governor's Council. Judges of the Supreme Judicial Court, the Appeals Court and the Trial Court are appointed by the Governor, with the advice and consent of the Governor's Council, to serve until the mandatory retirement age of 70 years.

Independent Authorities and Agencies

The Legislature has established a number of independent authorities and agencies within the Commonwealth, the budgets of which are not included in the Commonwealth's annual budget.

Local Government

All territory in the Commonwealth is in one of the 351 incorporated cities and towns that exercise the functions of local government, which include public safety, fire protection and public construction. Cities and towns or regional school districts established by them also provide elementary and secondary education. Cities are governed by several variations of the mayor-and-council or manager-and-council form. Most towns place executive power in a board of three or five selectmen elected to one- or three-year terms and retain legislative powers in the voters themselves, who assemble in periodic open or representative town meetings. Various local and regional districts exist for schools, water and wastewater administration and certain other governmental functions.

Municipal revenues consist of taxes on real and personal property, distributions from the Commonwealth under a variety of programs and formulas, local receipts (including motor vehicle excise taxes, local option taxes, fines, licenses and permits, charges for utility and other services and investment income) and appropriations from other available funds (including general and dedicated reserve funds). Because property tax levies are limited by Proposition 2½, an initiative petition approved by the voters in 1980, local governments have become increasingly reliant on distribution of revenues from the Commonwealth to support local programs and services, although the amount of aid received varies significantly among municipalities.

The cities and towns of the Commonwealth are also organized into 14 counties, but county government has been abolished in seven of those counties. The county governments that remain are responsible principally for the operation of courthouses and registries of deeds. Where county government has been abolished, the functions, duties and responsibilities of the government have been transferred to the Commonwealth, including all employees, assets, valid liabilities and debts. The Governor proposes to move the remaining County Sheriffs to the state in this budget. (See Budget Narrative)

Overview of the Operating Budget Process

Generally, funds for the Commonwealth's programs and services must be appropriated by the Legislature. The process of preparing a budget begins with the Executive branch early in the fiscal year preceding the fiscal year for which the budget will take effect. The Massachusetts Constitution requires that the Governor recommend to the Legislature a budget which contains a statement of all proposed expenditures of the Commonwealth for the upcoming fiscal year, including those already authorized by law, and of all taxes, revenues, loans and other means by which such expenditures are to be defrayed. State finance law (Chapter 29 of the M.G.L) requires the Legislature and the Governor to approve a balanced budget for each fiscal year, and the Governor may approve no supplementary appropriation bills that would result in an unbalanced budget.

After working with agencies to analyze spending plans submitted in the fall of each year and under the direction of the Governor's Office, the Executive Office of Administration and Finance (A&F) prepares the Governor's budget recommendations, otherwise known as House 1 (in odd years) and House 2 (in even years). For this year's budget, each Secretariat held hearings across the state to solicit input on programs and services from the general public. This information was considered by agencies in the development of their spending plans. Under the state Constitution the Governor is required to file his budget by the third Wednesday in January - the fiscal year 2009 budget will be filed on January 23rd. The budget recommendations are filed with the House of Representatives.

The Governor's budget is referred for consideration to the House Ways and Means Committee, which in turn proposes a budget to the full House of Representatives. Once approved by the House, the budget is referred to the Senate Ways and Means Committee, which in turn proposes a budget to be considered by the full Senate. In recent years, the legislative budget review process has included joint hearings by the Ways and Means Committees of the Senate and the House. After Senate action, a legislative conference committee develops a joint budget recommendation for consideration by both houses of the Legislature, which upon adoption is sent to the Governor.

Before signing the appropriations act, the Governor may veto the budget in whole or disapprove or reduce specific line items (line-item veto). The Legislature may override the Governor's veto or specific line-item vetoes by a two-thirds vote of both the House and Senate. The annual budget legislation, as finally enacted, is known as the general appropriations act (GAA).

Displays the Commonwealth's Budget Calendar as a cyclical process.  Agencies submit spending plans in September or October, ANF analysis in October and November, develop the Governor's budget in December, submit Governor's budget in January, mid-year review in March, House submits in April, Senate in May, conference in June, veto in June, the GAA signed at the end of June, and finally the end fiscal year review in July.

General Financial and Budget Policies

This budget document provides the Governor's budget recommendations for the fiscal year beginning July 1, 2008 and ending June 30, 2009. The budget is balanced, with the projected revenues from taxes and other sources being sufficient to cover recommended expenses. The Commonwealth uses a statutory basis of accounting to define balance where actual revenues received within the fiscal year must meet or exceed actual expenditures.

The state's finance laws are contained in Chapter 29 of the Massachusetts General Laws. They require that the Governor file a balanced budget, that the House and Senate each produce a balanced budget, and that the final GAA be in balance. Any supplemental budget bill cannot impair the overall fiscal balance. One method of achieving balance may be through accessing the Commonwealth's Stabilization Fund, also known as the Rainy Day Fund.

Prior to the Governor's submission of the budget, the Secretary for Administration and Finance, and the House and Senate Committees on Ways and Means are required to agree on a "consensus tax revenue forecast" from which to build their spending projections. The consensus revenue process for fiscal year 2009 is laid out in more detail further on in this section.

Generally, expenditures may not exceed the level of spending authorized for an appropriation account. However, the Commonwealth is statutorily required to pay debt service, regardless of whether such amounts are appropriated.

State finance law requires the Commonwealth to monitor revenues and expenditures during a fiscal year. For example, the Secretary of Administration and Finance is required to provide quarterly revenue estimates to the Governor and the Legislature, and the Comptroller publishes a quarterly report of planned and actual revenues. Department heads are required to notify the Secretary of Administration and Finance and the House and Senate Committees on Ways and Means of any anticipated decrease in estimated revenues for their departments from the federal government or other sources. Those same parties are also notified if a department projects that any appropriation will be insufficient to meet all expenditures required in the fiscal year by any law, rule, regulation or order not subject to administrative control.

The budget may be amended through the filing of a supplement budget request, which is submitted by the Governor to the House of Representatives. Supplemental budgets follow the same process as the overall budget, going first to the House Committee on Ways and Means, then to the House for approval, followed by the Senate Committee on Ways and Means and the full Senate. If there are differences between the House and Senate versions, a conference committee produces a final supplemental bill that is then enacted by both chambers and then sent to the Governor for approval. The Governor has the same line-item veto powers as with the general budget, where he is able to veto specific amounts from particular line items, entire line items, or entire provisions of language.

The Secretary of Administration and Finance is responsible for monitoring revenue collections throughout the year, and updating them as needed. If a revenue shortfall is identified, the Governor is required by section 9C of Chapter 29 to reduce agency appropriations or recommend a transfer from the Stabilization Fund. If additional revenues are available, the Governor may recommend a supplemental budget. At the end of the fiscal year, the Comptroller determines the statutory balance of the budgeted funds and transfers any excess funds to the Stabilization Fund.

Overview of Budget Funds

Government Fund Types account for the general governmental activities of the Commonwealth and are organized as follows:

Budgeted Funds - are the primary operating funds of the Commonwealth. They account for all budgeted governmental transactions. Major budgeted funds include the General, Stabilization and Highway funds, which are identified by the Comptroller as the operating funds of the Commonwealth.

Non-Budgeted Special Revenue Funds - are established by law to account for specific revenue sources that have been segregated from the budgeted funds to support specific governmental activities such as federal grants, funds related to the tobacco settlement and the operations of the state lottery.

Capital Projects Funds - account for financial resources used to acquire or construct major capital assets and to finance local capital projects. These resources are derived from proceeds of bonds and other obligations, operating transfers authorized by the Legislature and from federal reimbursements.

Individual Budgeted Funds

Statutory balance is defined as a measure of the fiscal condition which includes current year budgeted revenues and expenditures plus any designated revenues from prior years, stabilization deposit, and funds carried forward. It also includes any use of stabilization or any other non-budgeted reserves. Although the Commonwealth's overall fund balance is positive, there are several funds that are running in deficit. Because the General Fund, Highway Fund (renamed Transportation Fund), Workforce Training Fund, and the Massachusetts Tourism Fund all contribute to overall balance, the deficits in one fund may be offset by surpluses in other funds. The Governor's budget proposes to change this by requiring the Comptroller to eliminate deficits in funds using surpluses from other funds. This will ensure that each year will begin and end with a zero or positive fund balance. A more general discussion of the funds is below:

The General Fund - The General Fund is the Commonwealth's primary Governmental Fund. All governmental activities not specifically directed to another fund are accounted for in the General Fund. As a result, most budgeted expenditures of the Executive secretariats, the Legislature, Constitutional offices, Judiciary, institutions of higher education and independent commissions are paid for from the General Fund. It similarly receives a significant portion of sales, individual income and corporate taxes, and the full amount of most other governmental taxes.

Highway Fund (Transportation Fund) - This fund accounts for highway user taxes including the gas tax and fees. The fund is used to finance highway maintenance and safety services, and provide matching funds for federally sponsored highway projects as required. For fiscal year 2009, the Governor proposes to rename the fund the Transportation Fund and further recommends restructuring the fund to ensure that all transportation-related revenues are directed to the new fund, and to make sure that all funding for transportation-related expenses (including debt service on bonds issued for transportation purposes) are paid from this fund. This reform would provide the Commonwealth and the public with a more transparent and true accounting of our transportation revenues and expenses and to the extent to which transportation expenses need to be subsidized by non-transportation-related General Fund receipts.

Infrastructure Fund (Sub-fund of the former Highway Fund) - As part of the reform, this fund is being eliminated and all of the revenues and expenditures paid from the fund will be directed to the new Transportation Fund.

The Workforce Training Fund, authorized in section 2RR of Chapter 29 of the M.G.L. and administered by the Executive Office of Labor and Workforce Development, provides employers with matching grants of up to $250,000 or more to help train new and incumbent workers. The Workforce Training Fund is a state fund enacted into law in July 1998 and financed entirely by Massachusetts employers. The Workforce Training Fund in fiscal year 2007 was financed by an employer surcharge of $8.40 per employee, as part of their overall unemployment insurance contribution. The flat rate Workforce Training Contribution is 0.06% of the taxable wages in calendar year 2008. This payment, which is in addition to the Unemployment Insurance contribution payment, is deposited in the Workforce Training Fund which is used to award grants to companies to provide workforce training and education programs for incumbent workers. Annual state revenues from employer contributions total approximately $21 million, and state appropriations for competitive training grants are continually rolled forward into future fiscal years to provide for multiple-year grant awards.

The Massachusetts Tourism Fund, authorized in section 35J of Chapter 10 of the MGL, is funded with 35 percent of the State's annual revenues received from the hotel occupancy tax authorized in section 3 of Chapter 64G. In fiscal year 2008, Tourism Fund revenues are estimated to total $44 million. The Fund's use is proscribed in Chapter 10, which includes a formula that assigns various funding levels for tourism promotion programs and activities, including the Massachusetts Office of Travel and Tourism, regional tourism promotion agencies, the Massachusetts Office of International Trade and Investment, and the Cultural Facilities Fund. While funding for the purposes prescribed in the section are being made in this budget, the specific requirements of the fund have been suspended through an outside section for the last several years.

The Commonwealth Stabilization Fund - This fund is a reserve to enhance the Commonwealth's fiscal stability. (A later section describes the Stabilization Fund in more detail.)

Administrative Control Funds account for the revenues generated by certain administrative functions of government, for which the Legislature has required that separate funds be established. These funds include:

If the Bay State Fund has less than $75 million after life sciences investments, the funding would be allocated proportionally among these purposes.

Inland Fisheries and Game Fund - to account for revenues from license and permit fees for inland fishing, hunting, trapping, and sporting licenses and revenue producing stamps or the sales of land, rights and properties, gifts, interest, and federal grant reimbursements; used for developing, maintaining and operating the Division of Fisheries and Wildlife.