INTRODUCTION

This Budget Brief describes and compares the budgets presented by the Governor (first as presented in January, then as amended in April and finally as revised in May), and by the House, the Senate, and the Conference Committee, in order to determine how these budgets balance, and how they differ in their uses of revenues. ¹

One of the biggest challenges facing the Commonwealth in crafting a budget for the upcoming fiscal year has been trying to predict how much revenue will be available. The deteriorating economy has had an unprecedented and unpredictable impact on tax revenues – the largest source of funding for the state’s budget. In January, when the Governor first proposed his budget, the official estimates for FY 2010 tax revenues (the “consensus tax revenue estimate”) was $19.53 billion. By May, however, when the Senate began developing its version of the budget, tax revenue estimates for the upcoming year had dropped by close to $1.5 billion.² Accordingly, all other things being equal, the Senate faced a $1.5 billion larger budget gap than either the House or the Governor originally did.

In fact, because consensus tax revenues have dropped precipitously, the Governor filed a revised and dramatically scaled-back version of his budget, reflecting the lowered revenue estimates. This budget proposal is referred to as the Governor’s “revised” budget in this Budget Brief.

The second significant change in revenues for FY 2010 has been the funding made available through the American Reinvestment and Recovery Act (ARRA), also referred to as federal stimulus funding.³ When the Governor first published his budget proposal, the federal stimulus bill had not yet been signed, so there was no way to know exactly how much new federal revenue would be available. Accordingly, the Governor’s original budget proposal includes an estimate of $711 million in new federal revenue. When estimates for the amount of federal stimulus money became available in April, the Governor amended his original budget proposal, reducing the proposed cuts in his original budget by adding more than $830 million in spending paid for by these new federal funds. The House and the Senate both had more reliable estimates for how much new federal revenue would be available for the state to use in FY 2010. Accordingly, the House budget proposal, the Senate budget proposal and the Governor’s revised budget proposal include approximately $1.5 billion in these new federal revenues, mostly in the form of enhanced federal Medicaid reimbursements (FMAP), as well as “State Fiscal Stabilization Funds” made available primarily to support education funding.⁴

As crucial as these new dollars are for the Commonwealth’s FY 2010 budget, they are not a permanent solution to the Commonwealth’s budget challenge. First and foremost, these new dollars are temporary revenues which will disappear after FY 2011 (unless the federal government passes additional stimulus legislation); and second, the amounts that will be available in FY 2011 from these sources are significantly less than the amounts that are available for FY 2010.

The federal stimulus funding is designed to help states address the elements of the fiscal crisis brought on by the national economic recession. The federal government has determined that it is important to the national economy that states maintain spending for essential services during the recession. Such spending increases economic activity, pushes back against the downward cycle of the economy, and makes investments in people and infrastructure that will create a strong foundation for future economic growth. The federal stimulus money also allows the state to avoid budget cuts that would harm the safety net for vulnerable populations affected by the economic downturn.

While this new federal money will help the Commonwealth weather the recession, it will not solve the state’s longer term structural budget problems. As the economy recovers, the state will need to make difficult choices to address its structural budget challenges. To be prepared for periods of recession, states should strive to maintain fiscal policies that allow them to generate surpluses in periods of economic growth so that they can build substantial reserves and do not immediately fall into deficit in down business cycles.

In the decade leading up to the current recession, Massachusetts had adopted revenue policies that eliminated surpluses that the state was able to maintain during the economic recovery of the 1990s. This left the Commonwealth with a budget deficit even before the effects of the current recession were felt in Massachusetts.⁵

In examining the budget gap the Commonwealth now faces, it is important to recognize that there are both cyclical revenue declines that are appropriately addressed with one-time revenues, and structural problems that the Commonwealth will have to address with longer term solutions.

¹ For details on these various budget proposals, refer to the MassBudget Budget Monitors, available at www.massbudget.org

² In addition to this total, the Administration anticipated $145 million from cigarette excise taxes associated with a recent increase in tobacco tax that would be directed to pay for a portion of the costs of health reform. By April, this estimate dropped to $105 million.

³ For a description of the American Recovery and Reinvestment Act, see Massachusetts Budget and Policy Center, “The American Recovery and Reinvestment Act: Federal Stimulus in Massachusetts,” March 20, 2009, available at http://www.massbudget.org/documentsearch/findDocument?doc_id=664

⁴ The federal stimulus bill’s “state fiscal stabilization funds” are made available for use by the Governor, and do not require legislative appropriation. Accordingly, the Legislature’s budgets do not include these dollars (approximately $330 million) in their appropriations. Even so, the Legislature’s budgets assume that the Governor will use certain amounts of federal funds in FY 2010. This Budget Brief includes these funds that are under the control of the Governor in the totals for each of the budget proposals.

⁵ For details on the history of the Commonwealth’s fiscal policy, see Substantial Surpluses to Dangerous Deficits: A Look at State Fiscal Policies from 1998 to 2008 I(Massachusetts Budget and Policy Center, January 14, 2009), available at http://www.massbudget.org/documentsearch/findDocument?doc_id=638