Fiscal Year 2010 Budget Gap

New Structural Gap in Fiscal Year 2010

Spending estimates for FY 2010

In Fiscal Year 2010, we estimate that the Commonwealth would need to pass a budget of at least $34.0 billion ($1.52 billion more than the current FY 2009 budget) to maintain the current level of services being provided in Fiscal Year 2009, even after those services had been reduced in October. This is referred to as a “maintenance budget.” A maintenance budget is sometimes also referred to as a “current services” budget or a “level services” budget which estimates the cost of continuing into the next year the current year’s level of service, while adjusting for inflation and caseload changes assuming no policy shifts – department by department and program by program. A maintenance budget does not include any new programmatic expansions or contractions, and does not assume any policy changes affecting funding or service levels.⁵ Maintenance budget estimates depend, of course, on the assumptions made about the inflation rate, and about caseload shifts.

The Commonwealth currently does not make public a true “maintenance budget” with accurate estimates of the costs of maintaining current service levels into the next fiscal year. This document would be an invaluable tool for understanding the budgetary process, as it would allow the public an opportunity to understand the true extent of proposed programmatic cuts or expansions within each budget proposal. Because an official maintenance budget does not exist, this Budget Brief seeks to estimate FY2010 maintenance costs. The numbers below should be understood simply as estimates based on the limited data available.

Key components of the FY 2010 maintenance estimate

In most instances, to make an FY 2010 maintenance budget estimate, we take current FY 2009 budget levels and increase them by an inflationary adjustment of two percent. This is likely to be a low estimate of a true maintenance increase. For those areas of the budget which constitute the state’s human services safety net, we also make an upward adjustment to account for the increased demand for services during a recession. For areas where we made special assumptions, our rationale for our maintenance budget estimate is described below:

Health Care

We estimate in a maintenance budget that health care costs would rise by approximately $965 million. Health care inflation is typically substantially more than the general inflation rate, causing health care costs to rise faster than the rest of the Commonwealth’s budget.

Health care costs, particularly MassHealth and Commonwealth Care costs are also affected by caseload changes, and the demand for publicly-subsidized health care always increases during a recession. To adjust for these anticipated increases, we estimate that health care costs will increase by approximately eight percent. It is important to note that the FY 2009 health care budget included more than $60 million in certain one-time spending postponements. Although postponing costs in FY 2009 reduced that year’s budget, those postponed costs will now need to be paid in FY 2010.

Moreover, during the mid-year “re-balancing” of the FY 2009 budget and the implementation of 9C cuts, the Legislature counted on certain mental health trust funds to pay for the some of FY 2009 mental health costs. (We include mental health spending as part of total health care spending). The use of these trusts is a one-time funding source totaling approximately $24 million that is paying for ongoing services which would need to be made up in the FY 2010 budget.

Human Services

We estimate that a maintenance budget for human service costs would rise by $178 million. Because the demand for human service safety net programs increases during a recession, we have estimated that in order to account for increases associated with inflation as well as caseload increases, human service programs would increase by five percent.

Education (Chapter 70 education funding)

We estimate that a maintenance budget for Chapter 70 education funding would increase by $227 million, based on an assumption that the state would freeze implementation of its FY 2007 funding plan and ensure simply that each district would receive no less than it did in FY 2009 and that all districts would reach their FY 2010 foundation budget. Because some of the data needed to determine Chapter 70 costs – such as district by district enrollment – is not available, this is only an estimate. If on the other hand, the Commonwealth were to fully fund the fourth year of implementation of the revised Chapter 70 funding formula, funding in FY 2010 would likely be closer to $300 million.

School Building Assistance

School building assistance will drop by $61 million. The amount of money transferred to the School Modernization and Reconstruction Trust for the purposes of school building assistance is set in statute. In FY 2010, this amount will be 95 percent of 20 percent of tax revenue from regular and motor vehicle sales. The estimate for this total in FY 2010 is approximately $641 million.

Mass. Bay Transit Authority

Funding for the Mass. Bay Transit Authority will drop by $943,000. The amount of money transferred to the Massachusetts Bay Transportation Authority State and Local Contribution Fund is set in statute as 20 percent of sales tax revenue, but there is an established floor for this contribution. The estimate for this total in FY 2010 is approximately $767 million.

Pensions

Pension funding will increase by $63 million. Because of a statutory change made in November 2008 (Chapter 377 of the Acts of 2008), there is a change in the schedule for funding the state pension system. The FY 2010 estimated pension total will be $1.376 billion.

Other

All other spending would increase by approximately $154 million. For other categories of spending, such as transportation, higher education, housing and economic development and law and public safety spending, we estimate that the average increase in costs to maintain current services will be two percent. We have estimated that debt services will remain constant.

Revenue estimates for FY 2010

The most recent revenue estimates for FY 2010 suggest that there will be approximately $19.53 billion in tax revenue available for the budget, a $180 million baseline increase. We also estimate approximately $7.27 billion in federal revenue, and $2.47 billion in fees and other departmental revenues. Assuming that certain revenues transferred from non-budgeted trusts would stay constant, our total revenue estimate for FY 2010 is approximately $31.22 billion. This is an increase of $563 million over currently anticipated FY 2009 revenue.

New Structural Gap in FY 2010

With increased costs to maintain current spending of $1.52 billion, and $563 million in anticipated new revenue, the new structural gap anticipated for the FY 2010 budget is $962 million.

Total Structural Gap in FY 2010

The total estimated structural budget gap for FY 2010 is $3.142 billion: $2.180 billion carried forward from FY 2009 and the additional $962 million created by FY 2010 revenues not keeping pace with expected costs.

Options to Fill the FY 2010 Budget Gap

The Legislature is legally required to pass a balanced budget each fiscal year. In order to fill the gap presented by the FY 2010 budget, the Commonwealth will need either to reduce spending or increase revenues. Spending options include the use of one-time spending reductions such as state worker furloughs or postponing certain costs into the next fiscal year. Spending options also include permanent spending cuts. Spending cuts could mean eliminating funding for services for certain vulnerable populations, limiting eligibility or benefits for human service programs, reducing education spending and other local aid, closing state-funded recreational areas, reducing the number of state employees staffing state agencies, or other state-funded services.

Revenue options to close the budget gap include the additional use of one-time revenue sources such as drawing from state reserve funds or trusts. The state’s Stabilization Fund, for example, is now scheduled to have approximately $1.7 billion at the end of FY 2009. Already the Commonwealth has withdrawn close to $600 million from the fund to balance the FY 2009 budget, and has also forgone a required $100 million deposit into the fund. Because this fiscal crisis is likely to last several years, it is important that spending from the Stabilization Fund be considered only after careful deliberation.

The Commonwealth could also hope for additional revenue from the federal government to fill its budget gap. It looks increasingly likely that such federal assistance will be a major part of Massachusetts’ budget solution, but this would likely only be a temporary solution. Finally, the Commonwealth could raise permanent revenues such as fees or taxes.

 5. There are a number of elements that are used to determine the FY 2009 maintenance budget. The FY 2010 maintenance estimates include any supplemental appropriations since the General Appropriations Act, funding reductions associated with the 9C cuts made in October, and projections for inflation and projections for caseload changes in the following year.