Massachusetts hit by $300M year-end budget shortfall

Secretary of Administration and Finance Kristen Lepore testifies before the Committee on Ways and Means about Gov. Charlie Baker's budget proposal on Feb. 2, 2016. (SHIRA SCHOENBERG / THE REPUBLICAN)

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By Shira Schoenberg | sschoenberg@repub.com
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on June 15, 2016 at 6:15 AM

State budget

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BOSTON — Lower-than-expected tax collections are punching an anticipated hole of more than $300 million in the current state budget — and a hole of up to $750 million in the budget that lawmakers are considering for next year.

Dominick Ianno, chief of staff for the Massachusetts Department of Administration and Finance, said the hole for this year is "manageable." But as lawmakers finalize the fiscal 2017 budget, Ianno said, "It's important for legislators to remain proactive in making adjustments in spending to keep it in line with below-expected revenues."

The state government released the information in bond-related financial disclosures that were updated on Tuesday.

"While the state's economy remains healthy, we now expect fiscal year 2017 tax revenue to come in lower than expected primarily due to the below-benchmark tax revenue collections in fiscal year 2016," Secretary of Administration and Finance Kristen Lepore said in a statement. "As the budget process wraps up, it is important for the administration and our partners in the Legislature to remain proactive and make adjustments in spending in line with expected revenues."

The state's fiscal year ends June 30. As of May, the state had taken in $311 million less than was projected. By the end of June, the shortfall is expected to be $320 million to $370 million.

According to the administration, the shortfall is due to lower-than-expected income and corporate tax payments, which can be attributed to lower investment returns and stock market volatility.
Gov. Charlie Baker said last week that the state is doing well economically, as measured by income tax and sales tax withholdings and unemployment rates. But Massachusetts, which has a lot of financial service organizations, was hit by volatility in the stock market.


Many states have had similar issues to Massachusetts. The problems first became apparent in February, when people began applying for tax refunds based on incorrect estimates of their income from the stock market in 2015.

"The underlying employment and traditional tax revenue generators are in Massachusetts in pretty good shape relative to what you see in other places," Baker said. "But the adjustment associated with the flattening out of the stock market is something that we need to deal with this year, and we are dealing with."

Budget shortfalls this late in the year are problematic because there is no time left to significantly curb spending. But administration officials say they have no plans for layoffs or emergency cuts or to dip into the state's rainy day fund.

The financial disclosure says the Office of Administration and Finance "will actively manage the budget" for the rest of the fiscal year. This could include things like delaying purchases or hiring until the next fiscal year, ensuring that any revenue left unspent by agencies or in trust funds is returned to the state's general fund, and speeding up the process of collecting fees, federal reimbursements or other sources of revenue.

The state is also now facing a potential fiscal problem next year. In January, the administration and lawmakers agreed to base their fiscal 2017 budget proposals on 4.3 percent tax growth — or $26.86 billion. But revised projections now put anticipated tax collections at $450 million to $750 million below that.

"It means they have to cut some of the spending line items." - Eileen McAnneny 

The total state budget is close to $40 billion, after accounting for federal money and other sources of revenue besides taxes.

The House and Senate already passed their versions of the state budget, and a committee of House-Senate negotiators is in the process of hammering out a final version. Ideally, Baker would sign the budget before the July 1 start of the next fiscal year, although lawmakers can craft short-term budgets if they need an extra few weeks.

The revised revenue projection means lawmakers will have to consider whether to cut some of the spending now included in their budget proposals. Baker has spoken with legislative leaders about the shortfall. House Speaker Robert DeLeo, D-Winthrop, said last week that lawmakers will be watching the revenue numbers and may adjust spending accordingly.

Eileen McAnneny, president of the fiscally conservative Massachusetts Taxpayers Foundation, said the Legislature should revise its spending down for fiscal 2017. "Whether they solve the whole amount now, I'm not sure, because things are fluid and subject to change, but they should absolutely be taking it into account and solve for a portion of it," McAnneny said.

Lawmakers can do that by cutting spending, not depositing money into the rainy day fund, or finding revenue from other sources.

"I think they have to recalibrate and revise some of the thinking," McAnneny said. "Ultimately, it means they have to cut some of the spending line items."

Baker said his administration will work with lawmakers to make sure the budget they send him is balanced.

"We're still going to have about 3 percent growth in tax revenue, year over year, we're just not going to have four percent, which is where we started," Baker said Tuesday.

Baker added that while a $450 to $750 million gap out of a $40 billion budget "is a big number" in absolute terms, "Within the context of the budget overall, we have a full year here to deal with this."
Lt. Gov. Karyn Polito said the goal will be to have a balanced budget at the beginning of the fiscal year, even with the new revenue forecast.

"It's not in anyone's best interest for the budget to be set up to fail, and we certainly wouldn't want to be in a position midyear to have to make adjustments, so getting it right from the outset is the goal, and that's something all of us are working together on," Polito said.

MassLive.com reporter Gintautas Dumcius contributed reporting.