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FY10 Current Year Update
Budget Development
The Executive Office for Administration and Finance (A&F) is the state agency responsible for preparing the Governor’s budget recommendations and monitoring of the annual budget enacted by the Legislature, known commonly as the General Appropriations Act or the GAA. Under state law, every state agency is required to annually prepare a budget for review and evaluation by the Secretary of A&F. The spending plan typically includes expenditure and revenue estimates for the current fiscal year (2010) as well as the agency’s anticipated expenses and receipts for the next fiscal year (2011) based on the assumption that they will maintain the same level of services and programs from one year to the next.
In most cases, agencies recommendations as to the appropriate “maintenance” level of funding for an agency or program. A maintenance budget is defined as the level of funding necessary to provide the same level of services in a fiscal year as those provided for in the prior fiscal year and to cover expenses for which the Commonwealth will be obligated to pay. In developing maintenance budgets and ultimately budget recommendations, agencies incorporate projected changes in the programs they provide, such as caseload growth, or increases in fixed costs such as fuel and energy costs. Agencies also take into account changes in laws, regulations and policies that will impact programs and services for the next fiscal year.
During the summer and fall of 2009 agencies prepared “spending plans” corresponding to fiscal years 2010 and 2011 and filed them with the A&F for review in the fall.
Fiscal Year 2010 Update
The budget process has entailed a continuous review of all spending and revenue assumptions using the best possible economic data available. Since the fall of 2008 when the national recession began to drastically affect the tax revenue collections for Massachusetts. To put fiscal year 2010 into context, it is important to understand the significant measures that were taken in fiscal year 2009 to maintain a balanced state budget.
The Governor made four major downward revenue revisions totaling $3.14 billion in fiscal year 2009 reflecting a 12.5% decline in tax revenue from fiscal year 2008. The decline represented a nearly $4 billion loss in state revenues. On top of declining revenues, increases in caseloads in certain programs required supplemental funding and budgetary transfers. To accommodate both revenue shortfalls and programmatic caseload increases, budget solutions in fiscal year 2009 totaling $3.9 billion were needed. The Governor used a balanced approach to closing the gap including budget reductions, savings, modest new revenues and some one-time funding in order to meet the constitutional requirement of maintaining a balanced budget. Budget cuts totaled approximately $1.3 billion including $1 billion from 9C reductions and voluntary contributions from non-Executive Branch agencies. When the American Recovery and Reinvestment Act was signed into law in February of 2009 by President Obama, the Commonwealth was able to utilize nearly $1.3 billion to maintain a balanced fiscal year 2009 budget.
The swift and decisive action taken by the Patrick – Murray Administration during fiscal year 2009 proved successful when, at the end of the fiscal year, sufficient funding was available to make a $10 million transfer to the Life Sciences Center and a $65 million deposit into the State’s Rainy Day fund. The additional deposit brought the ending balance in the Stabilization Fund to $841 million at the close of fiscal year 2009.
As the Administration managed through fiscal year 2009, the Governor and legislative leaders took unprecedented action in preparing for fiscal year 2010. Amidst developing the fiscal year 2010 budget, the Administration and the Legislature further reduced the fiscal year 2010 revenue estimate by an additional $1.5 billion in May of 2009. The new revenue estimate of $18.879 billion prompted Governor Patrick to re-file his House 1 recommendation for fiscal year 2010. In June of 2009, the Governor re-filed his budget recommendation to address a projected budget gap of nearly $5 billion. Despite these challenges, the budget for fiscal year 2010, which began on July 1, 2009, was balanced and signed on time. The fiscal year 2010 General Appropriation Act (GAA) totaled $26.930 billion and was predicated on a tax forecast of $18.879 billion.
Due to continued uncertainty caused by the national recession, the Administration anticipated that it may be necessary to budget for a revenue shortfall during fiscal year 2010. To prepare for this inevitability, agencies were asked early in the fiscal year to submit strategies to achieve mid-year savings if fiscal year 2010 revenue fell below benchmark.
For the first quarter of fiscal year 2010, revenue collections were approximately $212 million below the consensus forecast. In an effort to understand the potential revenue declines that the Commonwealth might experience for the remainder of fiscal year 2010, the Governor met with his Council on Economic Advisors and a Joint Legislative hearing was called to gather information from economists and other experts regarding the revenue projection for the remainder of fiscal year 2010. Subsequently, on October 15th, the Secretary of Administration and Finance notified the Governor that based on year-to-date revenue performance and information obtained through consultation with economists, forecasted revenues for fiscal year 2010 should be lowered by $600 million. Based upon this guidance and pursuant to chapter 29, section 9C of the Massachusetts General Laws, the Governor revised the revenue forecast downward to $18.279 billion and filed a fiscal action plan to close a $600 million budget. Once again, the Governor proposed a balanced set of solutions including cuts, revenues, federal stimulus funds and reserves.
Since the October 2009 revenue revision, Massachusetts tax revenue has been performing above the monthly benchmark. The increase is attributed primarily to increased state income tax estimated withholdings as well as one-time tax collections that were not assumed in the revised forecast. In an effort to relieve some of the pressure felt by specific agencies due to budget reductions, the Governor has used a portion of the above benchmark revenue to revise the consensus number up to $18.460 billion and restore some of the 9C reductions taken in October 2009. The Department of Revenue (DOR) and A&F continue to monitor closely the state revenue collections for the current fiscal year to assess any remaining exposure to shortfalls that would necessitate further reductions or other solutions. We remain cautious as we are only half way through fiscal year 2010 and there are large revenue collections due in January and April.
In the fall of 2009, A&F completed a detailed review of all fiscal year 2010 spending and revenue assumptions. Throughout the first half of the fiscal year there were several changes that have had an impact on the bottom line of the budget. A summary of the changes to the fiscal year 2010 budget are highlighted in the following table. They include:
- Recognition of $92.3 million in fiscal year 2009 appropriations that were continued into fiscal year 2010;
- Line Item reductions totaling $292.2 million through the 9C process;
- The restoration of $43.9 million of the initial 9C reductions taken in October;
- Deficiencies primarily driven by increased caseload; some of these deficiencies are included in the January supplemental filed in conjunction with House 2, however others are continuing to be mitigated by the agencies; and
- Surpluses recognized through hiring and spending controls.
| FY09 Spending | 27,373.7 |
|---|---|
| FY10 GAA | 26,930.1 |
| PACs | 92.3 |
| Supplemental Budgets Signed | 262.5 |
| 9C Reductions | (292.2) |
| 9C Restorations | 43.9 |
| Deficiencies Recognized (not yet appropriated) | 426.1 |
| Surpluses Recognized | (75.0) |
| FY10 Estimated Spending | 27,387.7 |
| FY10 GAA (% Change from FY09 Spending) | -1.62% |
| FY10 Estimated Spending (% Change from FY09 Spending) | 0.05% |
Fiscal Year 2011 Tax Revenues
Tax revenues comprise nearly 70% of all revenues used to support the Commonwealth's operating budget. Each year the Administration and the House and Senate consult with the Department of Revenue, economists, budget watchdog groups and others to gather information and analysis on the condition of the U.S. and Massachusetts economies. They use that information to project state tax revenue allowable for use in the state budget. The following is a general description of the consensus revenue process.
General Information Regarding Consensus Revenue
The consensus revenue process is required under M.G.L. c.29, s.5B and states that on or before January 15 the Secretary for Administration and Finance shall meet with the House and Senate Committees on Ways and Means and shall jointly develop a consensus tax revenue forecast for the budget for the next fiscal year, which shall be agreed to by the Secretary and the House and Senate. The law requires that the consensus revenue estimate be placed before the General Court in the form of a joint House and Senate Resolution for full consideration.
On December 16, 2009 the Secretary for Administration and Finance and the House and Senate Committees on Ways and Means held a public hearing in Boston and heard testimony from the Massachusetts Department of Revenue (DOR), the Federal Reserve Bank of Boston, the Massachusetts Taxpayers Foundation , the Beacon Hill Institute, and economists from Harvard University and Northeastern University. The three branches of government subsequently agreed upon a fiscal year 2011 tax revenue estimate of $19.050 billion, consistent with testimony presented at the hearing.
As part of the statutorily required consensus revenue process, the Secretary of A&F, House and Senate also agree on the amount of tax revenues that will need to be transferred to support the State's Pension Fund, the School Building Authority and the MBTA (Massachusetts Bay Transportation Authority). For fiscal year 2011, these transfers are estimated to total $2.853 billion and will be directed to the following funds:
- School Modernization & Reconstruction Trust Fund = $ 644.3 million
- MBTA State and Local Contribution Fund = $ 767.1 million
- Pension Reserves Investment Trust Fund = $ 1.442 billion
$ 2.853 billion total
$ 16.197 billion remaining
Basis for the Fiscal Year 2011 Consensus Revenue Forecast
Fiscal year 2010 tax revenues are estimated to be $18.460 billion, representing an actual increase of 1.1% and a baseline decline of 3.5% from fiscal year 2009 collections (the baseline calculation adjusts for the impact of tax law and processing changes, so is a better indicator of underlying economic activity). Through December 2009, fiscal year 2010 year-to-date tax revenues were up 1.2% actual and down 4.2% baseline, and were $230 million above the year-to-date benchmark based on the October 15, 2009 revised estimate of $18.279 billion. It is expected that as the economy emerges from the recession, tax collections for the remainder of fiscal year 2010 will increase by $548.4 million, or 6.0% actual, and $162.3 million, or 1.8% baseline, from the same period in fiscal year 2009, with most of the increase over the remainder of fiscal year 2010 the result of the increase in the sales tax rate that took effect on August 1, 2009.
The fiscal year 2011 consensus tax revenue estimate is $19.050 billion, representing revenue growth of 3.2% actual and 2.5% baseline from the fiscal year 2010 estimate of $18.460 billion. The fiscal year 2011 estimate assumes that the national and state economies will continue a moderate recovery throughout the fiscal year. In developing the consensus estimate, the Commonwealth relies on economic forecasts from Moody’s Economy.com, Global Insight, and the New England Economic Partnership (NEEP). The economic forecasts upon which the consensus revenue estimate is based are:
- The national economy is beginning to emerge from recession. Following declines in the first quarter and second quarter of calendar year 2009, real GDP growth turned positive in the third quarter and grew at an annualized rate of 2.8%, and is expected to remain positive in the fourth quarter and through calendar year 2010. Real GDP growth for the full fiscal year 2010 is projected to be 0.4% compared to growth of 2.2% in FY08 and -2.2% in FY09. In fiscal year 2011, real GDP growth is projected to range from 2.4% to 2.7%;
- Massachusetts employment is expected to decline by 1.2% to 3.0% over the remainder of fiscal year 2010, and by 1.8% to 3.2% for fiscal year 2010 as a whole. For fiscal year 2011, Massachusetts employment is expected to change by -0.6% to 0.5%;
- Massachusetts personal income (excluding capital gains) is expected to grow by -1.6% to 0.7% over the remainder of fiscal year 2010 and -1.9% to -0.1% for fiscal year 2010 as a whole. For fiscal year 2011, Massachusetts personal income is projected to grow by 2.6% to 3.5%;
- Massachusetts wages and salaries are projected to decline by 0.7% to 5.1% for the remainder of fiscal year 2010 and 1.7% to 5.1% for the year as a whole. For fiscal year 2011, the growth in Massachusetts wages and salaries is projected to range from 1.1% to 3.4%;
- Massachusetts retail sales growth is expected to range from -0.6% to 1.0% over the remainder of fiscal year 2010 and -0.4% to -1.9% for the fiscal year as a whole. For fiscal year 2011, Massachusetts retail sales are projected to grow by 3.5% to 4.4%;
- Corporate profits at the national level are expected to increase by 11.8% to 33.5% over the remainder of fiscal year 2010, and by 3.8% to 22.6% for the fiscal year as whole (there are no forecasts for state corporate profits). For fiscal year 2011, growth in corporate profits is projected to range from 2.9% to 6.4%.
In addition to the economic forecasts described above, the consensus revenue estimate takes into account forecasts for capital gains realizations and taxes. The consensus agreement capital gains forecast is based on the following considerations:
- Preliminary tax year 2008 data indicates that Massachusetts capital gains realizations decreased by approximately 60.4% in tax year 2008, to $14.6 billion. Fiscal year 2009 taxes on those capital gains realizations totaled approximately $541 million, a decrease of approximately $1.632 billion, or 75.1%, from fiscal year 2008 (taxes on tax year 2008 capital gains realizations were paid mostly in fiscal year 2009).
- The stock market, as measured by the average of the S&P 500 over the entire year, declined by 22.5% in calendar year 2009 (which largely determines fiscal year 2010 capital gains taxes), and is expected to increase by 15.6%-24.7% in calendar year 2010 (which largely determines fiscal year 2011 capital gains taxes). Massachusetts capital gains realizations are projected to decline by 13.5% in calendar year 2009 and increase by 10.3% in calendar year 2010.
Because taxpayers were slow to adjust their 2008 estimated payments in the first half of calendar year 2008 (the second half of fiscal year 2008), capital gains tax payments were reduced in fiscal year 2009 substantially as taxpayers adjusted their payments when they filed their final tax returns. Similar end of year reductions are not expected to recur in fiscal year 2010 (since taxpayers have already reduced their estimate payments substantially), therefore, the fiscal year 2010 forecast assumes that capital gains taxes will actually increase by $160 million in fiscal year 2010 compared to FY09, despite the decrease in tax year 2009 capital gains realizations.
The charts below show the national and state economic forecasts presented at the December 16, 2009 consensus revenue hearing as well as the consensus estimate assumption for capital gains realizations and taxes, all of which were taken into consideration in developing the fiscal year 2011 consensus revenue estimates.
The consensus tax revenue estimate for fiscal year 2011 is $19.050 billion, consistent with testimony presented at the hearing. The estimate for fiscal year 2010 has been revised to $18.460 billion. Section 1A of this document details the consensus revenue estimate by tax category and budgeted fund.
Based on these economic projections and actual tax collections through December 2009, fiscal year 2011 tax collections are projected to grow by $590 million, or 3.2% actual and 2.5% baseline from fiscal year 2010.
| Tax Type | % Actual Revenue Growth from FY10 | % Baseline Revenue Growth from FY10 | FY11 Revenue Estimate ($ Millions) | FY11 Growth from FY10 ($ Millions) |
|---|---|---|---|---|
| Total Income | 3.8% | 4.0% | 10,630 | 388 |
| Withholding | 3.3% | 3.3% | 8,957 | 289 |
| Sales | 7.0% | 3.0% | 4,817 | 317 |
| Corporate/Business | -6.9% | -4.7% | 1,891 | -139 |
| Other | 1.4% | 0.6% | 1,712 | 24 |
| Total | 3.2% | 2.5% | 19,050 | 590 |
| Memo: Capital Gains Taxes | 13.9% | 13.9% | 798 | 97 |
The chart below shows historical trends in actual and baseline tax revenue growth.
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