Treasurer Grossman's Testimony on Treasury's FY2012 Budget
STATE TREASURER STEVEN GROSSMAN
TESTIMONY ON TREASURY'S FY 2012 BUDGET
JOINT COMMITTEE ON WAYS AND MEANS
Friday, March 4, 2011
Chairmen and Members of the Committee, I am pleased to appear before you for the first time since officially taking office as State Treasurer. As you know, I was here unofficially for the Consensus Revenue Hearings last December during the transition period. The testimony we heard that day warned that the 2012 fiscal year would be one of the most difficult the Commonwealth has faced as the economy slowly recovers from The Great Recession at the same time as federal stimulus funds have ended.
I would like to focus my remarks today on how the Treasury is responding to this economic and budgetary environment - and how, where we have the tools to do so, we are taking steps to change the situation for the better.
First, I am delighted to announce today that we are well on the way to implementing the Treasurer's Small Business Banking Partnership, which will move at least $100 million in state deposits into small local, regional, and community banks that are prepared to step up their lending to creditworthy small businesses and help boost that critical sector of the economy.
We have finalized guidelines for the program and are preparing a RFQ (request for qualifications) that will go to Massachusetts banks later this month, seeking their participation in the program. We published draft guidelines in February and received a large and overwhelmingly positive response to them. We believe that government should be fast, flexible, and entrepreneurial, and we took to heart the requests we received to create a process that imposes as little bureaucracy and red tape as possible while still safeguarding the public's money.
According to state data, small businesses and sole proprietorships make up 85% of businesses in our Commonwealth. Experts say that historically two-thirds of the new jobs created in the Commonwealth come from small businesses. Clearly a strong small business sector is critical to the recovery from the current economic downturn and to Massachusetts's economic future.
As someone who successfully and profitably ran a fourth-generation, family-owned business for more than 35 years, I know first hand that small businesses need credit to grow. Tightened credit markets in the wake of the 2008 financial crisis resulted in profound difficulties for small businesses seeking loans. However, a number of financial institutions, primarily smaller local and regional banks, have continued to maintain or expand their small business loan portfolios. We are moving state deposit money into local banks that will help small businesses grow.
Second, the Treasury has worked closely with the Governor's Office and the Executive Office of Administration and Finance on Governor Patrick's proposals for pension reforms that will save $5 billion - $3 billion at the state level - over the next 30 years. The financial markets have reacted positively to this plan. Last month Standard & Poors raised the state's bond rating to "AA with a positive outlook." A "positive outlook" means that the state's bond rating has a likelihood of increasing in the coming year. This upgrade in the rating can save the Commonwealth millions of dollars in the future by decreasing the cost of borrowing. We are the only state since 2007 that has received a positive rating from S&P.
We need to be absolutely clear about this: Massachusetts is not Wisconsin. Or Indiana. Or Ohio.
We have been fiscally prudent in managing our pension liabilities. Last year, the Pension Reserves Investment Trust (PRIT) earned a 13.6% return. The unfunded liabilities for the Commonwealth's pension systems - State and Teachers - as of Jan. 1, 2010 declined to just under $20 billion, down from $22 billion the year before. Early analysis by the Public Employee Retirement Administration Commission (PERAC) indicates that we continued to reduce our unfunded liabilities during the 2010 calendar year.
Accordingly, we need thoughtful reforms of our pension system to ensure that we live within our means and protect the hard-won improvement in our bond rating. But we do not need to resort to extreme, radical measures that would abolish the current public pension system and undercut the legitimate rights of public employees. The problems here are manageable and resolvable, provided that that we act responsibly now.
Third, let me discuss my department's budget. As the supporting documents show, the Treasury's operating budget has been steadily reduced since 2003, and H.1 would do so again. In the spirit of necessary shared sacrifice required to make the FY12 budget work, I accept that reduction.
I am determined to make the Treasury more "customer-service" focused, providing more effective delivery of services to the people of Massachusetts. As one example, we have put in place a new leadership team at the Abandoned Property Division. I have instructed them to find new ways to reunite people with their unclaimed assets. One immediate effort will provide you and all your House and Senate colleagues next Tuesday with CDs that have the names of your constituents who we believe have unclaimed property worth $500 or more so that you can join us in reaching out to them. We will continue this process with other groups or organizations that have constituencies they can reach with information about abandoned assets.
H.1 projects one-time Abandoned Property revenues of $99 million in FY12 reflecting the sale of stocks, mutual funds, and stock reinvestment plan holdings. We should note that this projection is, of course, subject to market fluctuations. The estimates we made for H.1 were based on valuation as of the time the budget was prepared while the sales will not occur until after July 1, 2011.
The Treasury will support these customer service programs with existing resources and greater operating efficiencies.
However, I do want to call the Committee's attention to a number of issues with respect to other budget lines involving the Treasury.
H.1 provides $85,000 in urgently needed funding to expand the Treasury's financial education and empowerment program, and we respectfully ask the Committee to support this program.
The Massachusetts Asset Development Commission, co-chaired by Senator James B. Eldridge and Tina Brooks, undersecretary of Housing and Community Development, reported in 2009 that more than 40% of all Massachusetts households were either in financial distress or one bit of bad news away from financial distress. The commission said: "Financial education is a cornerstone [of personal financial health] because of the need to have the knowledge to analyze financial information, make wise and informed decisions, and respond to opportunities and emerging events." This need is especially critical for low- and moderate-income families struggling in this economy.
My predecessors established an Office of Financial Education in the Treasury that made pioneering strides in advancing financial literacy in Massachusetts. But times change, needs change, communications and teaching methods change - and our programs must change with them.
We will be working with the Department of Education to develop curricula and teaching materials that will make financial literacy a part of public school mathematics or social science teaching. We will seek to encourage innovation through a program of awards and recognition. We will modernize our existing programs such as Saving Makes Cents (for schools), Caution with Credit (for college students), and Tomorrow's Money (personal finances) to make them more relevant to today's challenges. We will leverage our Welcome Home Bonus program that provides money to veterans along with work being done by the Department of Veterans Services to provide financial education outreach to veterans. We will partner with organizations that are helping senior citizens deal with an unforeseen environment in which their savings do not provide the returns toward retirement that they expected.
Also, we will broaden the delivery of our programs so that they reach Gateway Cities and all regions of the Commonwealth. We are working with other state agencies, federal officials, not-for-profits, and private companies to build a collaborative network that can provide expanded financial education services statewide. We plan to change our signature Money Conference from large conferences based in Boston and Springfield to a series of smaller, more specialized events that will be held in communities across the state.
The funding in this budget line will help us provide the staffing and outreach assistance needed to move forward with this ambitious, yet necessary program.
Turning to H.1 provisions for Long-term Debt Service, we estimated that the Commonwealth's FY12 needs would be $1.894 billion. We respectfully disagree with the administration's calculation that this figure can be reduced to $1.865 billion.
The Obama administration's highly successful Build America Bond program, which helped the municipal finance market for the last two years, has not been renewed. We therefore have to return to the traditional, more limited tax-exempt bond market - one that, as a result, is being crowded with competing bond offerings. Further scare stories about state and municipal finance have worried investors and caused an exodus from the market. The result is that we anticipate that borrowing costs will increase in Fiscal 2012, not decline.
While we support the Long Term Debt Service Retained Revenue account the administration proposed to help fill the gap, we believe it will yield substantially less than half of the $18 million allocated in H.1. Short-term interest rates on the cash deposits for the General and Stabilization Funds simply are too low to produce that amount of revenue.
Moreover, we must caution the Legislature that the contracts for the Commonwealth's major cash banking accounts are up for renewal this year. Massachusetts received an exceptionally favorable deal in the current contract, but that was before the financial crisis resulted in more conservative deal-making and much higher fee structures by the banking industry.
We believe that H.1 will fall $10-14 million short in funding for debt service and, in the interests of transparency and proactive communication, we want to alert you now to the fact that we may need further budgetary adjustments once the new banking contracts are in place.
Finally, I want to turn to a subject that has been a constant source of tension between the Treasury and the administration and legislature: the Massachusetts Lottery.
I would like today to mark the start of a new era of reform at the Massachusetts Lottery, beginning with new openness and cooperation between the Lottery and other branches of Massachusetts government.
I named Paul Sternburg of Watertown as the new Executive Director of the Lottery. An experienced lottery professional who was Vice President, Sales and Marketing for the Connecticut Lottery and previously Director of Sales and before that Assistant Director of Regional Operations for the Massachusetts Lottery, Paul is now putting his new leadership team in place in Braintree and working to bring innovative new programs to the Lottery.
We have formed a working group consisting of representatives of the Lottery, the Treasury, Administration and Finance, and Ways and Means to review the budgetary processes of the Lottery and ensure that we are all speaking the same language when it comes to the Lottery's budget and financial projections.
You are tired of surprises from the Lottery - and so are we. The Lottery is moving to improve its monthly financial reports and increase its lines of communication with budget officials and committees. That is why we are alerting this committee to the fact that, as a result of the dismal weather this winter, Lottery revenues have fallen $5 million behind the projections made at the Consensus Revenue Hearing. We are hopeful that better weather - and a few giant jackpots! - will allow the Lottery to catch up before the fiscal year is out. But we think you should know the situation now, not wait in hope of better news later. We will continue to provide alerts on a continuous basis and not just in formal hearings such as this one.
We also want to join with you in modernizing the Lottery statutes to provide a more accurate and transparent accounting of Lottery revenues and expenditures. For example, the so-called "Arts Lottery" was abandoned years ago, yet every budget year $78.6 million of the Lottery's net revenues is transferred to the general fund as a legacy of the arts lottery. And then, depending on the local aid allocation, money gets transferred back from the general fund to close a non-existent "deficit" in Lottery profits. This is not transparent. It's opaque. You do not like the process. The administration does not like the process. The cities and towns don't like the process. The public distrusts the process. It is long overdue that we reform it.
The Lottery has $4.5 billion in sales annually and profits of nearly $900 million. If it were a publicly held company, it would be the 11 th biggest in Massachusetts. A business of that size should be run like a business at all times. We will want to work with you to find mechanisms such as retained revenue accounts or a mutually acceptable manner to determine profits so that the Lottery can undertake the product development, market research, and promotional work it needs to grow it sales. I do not accept the premise that the Lottery's best days to are behind it. We will find new markets and new products to grow sales and revenue that local towns and communities rely on.
To that end, we respectfully ask the committee to reject H.1's $1 million cut in the Lottery's administrative budget and to instead provide $1.46 million for FY12 to fund two new initiatives that Paul Sternburg and his team are proposing that have the potential to increase profits by as much as $25 million annually:
- Player Activated Terminals (P.A.T.s): The Lottery already has vending machines for instant games - scratch tickets - in place. What the industry calls "P.A.T.s" takes them to a new level with a machine that also dispenses online games - the Numbers Game, Mega Millions, Powerball, Cash WinFall, Megabucks Doubler. With these machines, the Massachusetts Lottery can expand into new markets such as Logan Airport terminals, visitor centers, and retail outlets such as CVS (335-340 stores in Massachusetts) that will only accept this kind of Lottery sales presence. The cost for 350 P.A.T's would be $5.3 million, with a return on investment over a 5-year period as high as $40 million. We would pay for these machines over five years at $1.06 million per year.
- Raffle-Style Games: These would be special high jackpot games run potentially twice a year. They can be done through the existing retail outlet computer terminals (called "ISYS" machines), but a one-time $400,000 programming cost is required to set up the capability to offer these games. The net return on investment would be an estimated $8,460,000 on a $20.00 ticket (based on an assumption of 1 million tickets sold). Done twice a year, this would produce $16,920,000 in additional profits.
Finally, to secure the future of the Lottery, we have to look to the future.
The demographics of Lottery players is aging. Meanwhile, Internet gaming is becoming a major competitive threat. During my transition, I opposed a move by Senate Majority Leader Harry Reid to legalize online poker for existing casino operators. This measure was a direct threat to the Lottery and the revenues it generates for local aid. While the measure failed, we learned in the process that many corporations along with state and local governments want to participate in this business.
The New Jersey Legislature has enacted a measure to allow Atlantic City casinos to run Internet games for that state's residents. If it goes forward, other states and jurisdictions may follow New Jersey's lead. The same casino interests behind Senator Reid's bill are ready to try again.
I will ask Paul Sternburg to head up a task force at the Lottery to look at ways Massachusetts can be an integral part of the Internet gaming business. We are a high-tech state where computer and technology expertise is plentiful. We should be a leader in developing products that can compete in this marketplace while at the same time developing policies that ensure that online betting does not come with heavy social costs. I hope that members of the Legislature and the governor's administration will join us in taking on this issue so that together we can have an extensive dialogue on this public policy matter and its serious budget implications for Massachusetts.
When I was sworn in, I said that whether in business, politics, or working on behalf of not-for-profits, I have always found that a collegial, collaborative approach produces the best results and that I intend to work cooperatively with the Governor and his team, the legislature, mayors, local officials, activists and other stakeholders to implement bold new ideas that serve the needs of our fellow citizens. I meant it. And I hope that today's testimony is a step toward fulfilling that pledge.