Financial Statement Explanation

Financial Statement Explanation

The following financial statements for FY 2011 (prior fiscal year), 2012 (current fiscal year) and 2013 (upcoming fiscal year) seek to the answer the question: Will the state’s operating budget end the year in balance?

But what does “in balance”, in this instance, mean? And how do the financial statements go about determining whether the Commonwealth ends a year in balance in accordance with that definition?

The definition of statutory balance can vary significantly from that of GAAP or structural. Statutory balance is just that, a reflection of statutory conditions informed by the Legislative process. Statutory balance is outlined in state finance law (Massachusetts General Law Chapter 29).

Here is the definition of “balanced budget” according to state finance law:

“Balanced budget'', a condition of state finance in which the following requirements are met:

  1. the consolidated net surplus at the end of the fiscal year is greater than or equal to one-half of 1 per cent of state tax revenues for such fiscal year; and
  2. the amount transferred to the stabilization fund under subsection (a) of section 5C is greater than or equal to 1/2 of 1 per cent of state tax revenue for such fiscal year.

So what is the “consolidated net surplus”?

"Consolidated net surplus in the budgetary funds'' is the sum of the undesignated balances in the budgetary funds, except funds established by section 2H and section 2I and by section 2C of chapter 131.

So what is a “budgetary fund”?

"Budgetary funds'' are state funds that are subject to appropriation as provided in section six (of Chapter 29).

Budgeted operating funds are subject to appropriation of the state Legislature and receive most of the non-bond and non-federal grant revenues of the Commonwealth. Two of the budgeted operating funds account for most of the Commonwealth’s spending: the General Fund and the Commonwealth Transportation Fund. Further background on each of the operating budgeted funds can be found in the “Budget Development” section of this document.

In essence, statutory balance is a measure of the fiscal condition of the Commonwealth that requires, after accounting for current year revenues and expenditures plus any designated revenues from prior years, stabilization deposit and funds carried forward, that four of the nine active budgetary funds (General Fund, Commonwealth Transportation Fund, Massachusetts Tourism Fund and the Commonwealth Health and Prevention Fund) close the fiscal year with an ending balance in those funds equal to 1% of that years tax revenue, of that amount to be carry forward into the following fiscal year and the other to be deposited into the Stabilization Fund. Any remaining undesignated balances after the calculation of the Consolidated Net Surplus would be deposited into the Stabilization Fund. It is important to note that not all of the budgeted operating funds are used to calculate Consolidated Net Surplus. Some of them, such as the Inland Fisheries and Game Fund and the Stabilization Fund, are excluded by law from the calculation. Therefore any remaining balances in these funds at the end of the year due not count toward whether the Commonwealth remains in balance.

As stated earlier, we are speaking in terms of “statutory balance” and that the Legislature can amend the definition of balance as it sees fit. For example, in recent years the Legislature has suspended the of 1% deposit to the Stabilization Fund. It has also provided for the first $10 M of any remaining surplus to be dedicated to the Massachusetts Life Sciences Center. A further review of each fiscal year’s financial statement yields greater clarity about what amendments the Legislature may have made to the definition of balance for that respective year.

Now that we have a better understanding of what the term “balance” means in this instance, let us review a number of the lines from the Financial Statement to understand how balance is arrived at after accounting for all of the various inflows, outflows and statutory conditions placed on the state budget.

There are three main components to the Financial Statement: beginning balances, current year revenue and spending, and ending balances.

Section 1. Beginning Balances

Picture of the Beginning Balances portion of the balance sheet.

“Undesignated Fund Balance”

This line represents the undesignated closing balances in the budgeted funds from the preceding year. This line usually is comprised with whatever the of 1% carry forward turned out to be and any of the budgeted funds that are not part of the Consolidated Net Surplus calculation and are allowed to retain any year end balances that they may have. The Inland Fisheries and Game Fund is one such example.

“Stabilization Fund Balance”

This line, unsurprisingly enough, reflects the ending balance of the Stabilization Fund. The purpose of the fund was to create and maintain a reserve to which any available portion of a consolidated net surplus in the operating funds would be transferred to and from which appropriations may be made for the following purposes: “(1) to make up any difference between actual state revenues and allowable state revenues in any fiscal year in which actual revenues fall below the allowable amount and (2) to replace the state and local loss of federal funds or (3) for any event which threatens the health, safety or welfare of the people or the fiscal stability of the commonwealth or any of its political subdivisions”.

“Designated for Continuing Appropriations into FY2013”

This line includes the value of "Prior Appropriations Continued'' or "PACs'', which are re-appropriated unexpended and unencumbered monies from one fiscal year for the subsequent fiscal year. In essence, the Legislature appropriated money in one fiscal year that for one reason or another went unspent by the time that fiscal year closed. This money is then carried forward to be made available for expenditure in the next fiscal year.

“Designated for Debt Service”

This line represents unspent balances reserved for debt service (where money must remain with the escrow agent after being transferred there during the fiscal year). Due to certain covenants in debt service trust agreements (for example gas tax bonds) the Commonwealth is required to deposit specific streams of revenue with bond trustees. At the end of each fiscal year, this revenue is held by the fiscal agent and applied to the following year’s debt service. These amounts show as reserved or designated on the Commonwealth’s financial statements, and reduce the undesignated balances.

Section 2: Current Year Revenue and Spending

Picture of the Current Year Revenues and Other Sources portion of the balance sheet.

“Current Year Revenues and Other Sources”

This section includes budgeted revenues and other financial resources pertaining to the budgeted funds, such as inflows from tax and non tax sources, including Taxes, Federal Reimbursements, Departmental Revenue and Consolidated Transfers, that are directed by law to be accounted and reported to a fund which is subject to annual appropriation. Descriptions of each revenue category are provided below.

“Gross Tax Revenues”

On or before January 15 of each year, the Secretary is required to develop jointly with the House and Senate Committees on Ways and Means a consensus tax revenue forecast for the following fiscal year. The “Gross Tax Revenues” figure represents this consensus revenue estimate, upon which the three branches base their respective budgets on, before adjusting for statutorily required transfers to off budget trust funds (see descriptions of “Sales Tax Dedicated to the MBTA”, “Sales Tax Dedicated to the SBA” and “Annual State Contribution to State Pension System” below for further background on these transfers).

“Tax Related Revenue Initiatives”

This line reflects tax related revenue initiatives recommended by the Governor - further detailed in the “Budget Development” section of this budget document.

“Sales Tax Dedicated to the MBTA”

The amount dedicated to the Massachusetts Bay Transportation Authority is the amount raised by a 1% sales tax (not including meals), with an inflation-adjusted floor.

“Annual State Contribution to the State Pension System”

Beginning in FY 2005, state finance law has required that the consensus tax revenue forecasts be net of the amount necessary to fully fund the pension system according to the applicable funding schedule, which amount is to be transferred without further appropriation from the General Fund to the Commonwealth’s Pension Liability Fund. 

“Sales Tax Dedicated to the SBA”

The amount dedicated to the School Building Authority is the amount raised by a 1% sales tax (not including meals).

“Workforce Training Trust Fund Transfer”

The FY 2012 General Appropriations Act included a reform to the funding structure of the Workforce Training Fund by funding the program through an “off-budget” trust fund.  Tax revenues are now transferred into the non-budgetary trust fund and the recently established trust fund is not subject to appropriation.

“Federal Reimbursements”

Federal revenues are collected through reimbursements for the federal share of entitlement programs such as Medicaid and through block grants for programs such as Transitional Assistance to Needy Families (TANF).  The amount of federal reimbursements to be received is determined by state expenditures for these programs.

“Departmental Revenue”

Departmental and other non-tax revenues are derived from licenses, tuition, fees and reimbursements and assessments for services. 

“Consolidated Transfers”

Consolidated transfers reflect inflows to the General Fund from non-budgeted funds which include annual tobacco settlement proceeds received as part of the Master Settlement Agreement with tobacco companies, net revenues from the State Lottery Fund, fringe revenue to recoup the cost of various statewide benefits assessed on non-budgeted funds and revenues from the Commonwealth’s Abandoned Property Division.

“SRBTF Portion of Tobacco Settlement Payment”

In FY 2013, 10% of the state’s annual tobacco settlement receipts, or $27 M, will be set aside to help prepare for this liability. This percentage will grow each year by 10 percentage points (e.g., in FY 2014, 20% of tobacco settlement payments), until 100%, or an estimated $276 M, is dedicated annually to help offset these costs.

Picture of the Expenditures and Uses, and the Reserved and Undesignated Fund Balances portions of the balance sheet.

“Sections 2 & 3 Direct Appropriations”

This line represents all appropriations made through various appropriation vehicles – for the most part by the budget act (General Appropriations Act or GAA) and supplemental spending bills.

It also captures:

“Section 2E Operating Transfers”

This line reflects a transfer of funds from a budgeted fund to non-budgeted funds. An example of this is the transfer from the General Fund to the Commonwealth Care Trust Fund. The distinction between these transfers and the SBA, MBTA and Pension transfers is that those are required by law to be netted from the Consensus Revenue estimate and are not subject to appropriation.

“Contingency Reserve”

This row captures estimates for any potential further appropriations that may be requested through supplemental budget legislation for projected funding deficiencies.

“Unspent Appropriations Continued to FY 2014”

This row reflects current year available spending that will be carried forward to be spent in the next fiscal year, in other words it represents current year PACs. PACs are reflected as a negative figure because they are reducing the current year spending total. The distinction between this row and the PACs carried in the “Direct Appropriations” row is that the latter is spending PACs from the previous fiscal year whereas the former is PACing money to the next fiscal year.

“Designated for Continuing Appropriations”

You may recall that the current year spending number does not count PACs as being spent; instead it counts PACs as a reduction in total available and therefore a reduction in total spending. However, showing PACs as unspent would increase the Undesignated Fund Balance in a misleading way since the extra balance created by the negative PAC entry is not undesignated and cannot be calculated as part of the Consolidated Net Surplus. The PACs must be considered spent or reserve for the calculation of surplus. This row accomplishes this by adding the PAC number back in so that we can have an accurate representation of “undesignated fund balances” that will ultimately be calculated as part of the Consolidated Net Surplus.

“Fund Balance Deficit Elimination Transfers”

Prior to calculating the Consolidated Net Surplus, the state Comptroller is under law required to eliminate deficits in any of the budgeted funds by transferring positive balances, proportionally, in any other budgeted funds that contribute to the Consolidated Net Surplus:

(c) all transfers specified in this section shall be made from the undesignated fund balances in the budgetary funds proportionally from those undesignated fund balances, but no such transfer shall cause a deficit in any of those funds; provided, however, that prior to certifying the consolidated net surplus in accordance with this section, the comptroller shall, to the extent possible, eliminate deficits in any fund contributing to the surplus by transferring positive fund balances from any other fund contributing to the surplus.

“Balances Reserved in Other Budgeted Funds”

As mentioned earlier, state finance law excludes balances in certain budgeted funds from being used as part of the calculation of the Consolidated Net Surplus. This line eliminates those balances from the calculation as well as eliminating any funds that were reserved for future use, e.g., PACs.

Section 3. Ending Balances

Picture of the Fiscal Year Ending Balances portion of the balance sheet.

“Statutory Carry Forward to FY 2014”

This is where the first measure of the Consolidated Net Surplus is calculated:

“(a) an amount equal to 1/2 of 1 per cent of the total revenue from taxes in the preceding fiscal year shall be available to be used as revenue for the current fiscal year... “

“Statutory Transfer to Stabilization Fund”

This where the second measure of the Consolidated Net Surplus is calculated:

“…and 1/2 of 1 per cent of the total revenue from taxes in the preceding fiscal year shall be transferred to the Stabilization Fund.”

“Remaining Surplus Deposited In Stabilization Fund”

Any remaining funds available after the calculation of the Consolidated Net Surplus would be deposited into the Stabilization Fund.

“(b) any remaining amount of such consolidated net surplus after amounts made available in clause (a) shall be transferred to the Stabilization Fund;”

Of course the Legislature could put further restrictions on how the surplus is allocated. For example the Governor’s FY 2013 budget recommendation includes an outside section that would transfer the first $15 M in any surplus to the Massachusetts Life Sciences Center. Such a condition was also put in place in the FY 2012 GAA.

“Undesignated Fund Balance” & “Stabilization Fund Balance” & “Designated for Continuing Appropriations in FY 2014” & “Designated for Debt Service”

The definitions of these four rows are identical to their counterparts in the “Beginning Balances” section, albeit with different figures due to the current year activity that took place.