Governor Deval Patrick's Budget Recommendation - House 1 Fiscal Year 2012

Governor's Budget Recommendation FY 2012

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Governor Patrick    FY2012 House 1 Budget Recommendation:
    Issues in Brief

    Deval L. Patrick, Governor
    Timothy P. Murray, Lt. Governor


Governor’s Investment Proposal

The fiscal year 2012 budget must reflect the loss of nearly $1.9 billion in one-time resources, primarily from federal stimulus aid, which will only be partially offset by growth in the state’s tax collections from fiscal year 2011 levels. The federal stimulus aid has allowed Massachusetts and most other states to better manage a dramatic decline in state tax revenues.  The dependency on this aid, however, highlights the need for the state to limit its reliance on non-recurring resources to support ongoing expenses. The Governor’s House 1 proposal dramatically reduces the amount of one-time resources relied upon in fiscal year 2012 and includes further measures to replenish its reserves and limit its reliance on volatile tax revenues.

Long-Term Financial Planning

The Patrick administration has been working to enhance its long-term financial planning based on best practices prescribed by the Government Finance Officers Association (GFOA).  Best practices include the use of a sound conceptual approach, ensuring that near-term decisions measure long-term impacts, and developing a solution framework that is aligned with policy goals.  The Executive Office for Administration and Finance (ANF) implemented a conceptual approach of “structural balance“ that is designed to delineate among different causes of fiscal imbalance.  The application of this approach identified three critical challenges facing the Commonwealth: a remaining structural deficit due to the significant reduction in tax revenue since the recession, cost inflation on safety net and health care programs, and the need to improve policy measures to address economic volatility.

The goal of structural balance is to base spending on policy priorities and a predictable level of sustainable revenue.  Our supporting analysis includes a five-year forecast for revenue and spending based on historical trends as well as the outlook for the state economy. The forecast includes a projection of tax revenue, based on input from local economists, which also provides the basis to develop an estimated long-term trend-line for tax revenue.  The forecast indicates that the state economy will be below trend during a four year recovery period beginning in fiscal year 2012 before reaching a “steady-state” level of long-term tax revenue growth of approximately 5% in 2016.  The analysis also indicates that the forecast for tax revenue in FY12 is approximately $500 million below the estimated long-term trend-line for tax revenue. 

Application of Long-Term Planning to Inform Near-Term Decisions

The revenue forecast and trend-line allows us to employ the $500 million “cyclical shortfall” as a guideline for the maximum use of one time resources that are sustainable over time.  Any spending in excess of this amount would continue to sustain a structural deficit or require budgetary spending that is not sustainable.  This is based in part on the assumption that the state would also restrain spending during a strong economy when tax revenue is above the then current trend-line.  The fiscal year 2012 budget incorporates this guideline by limiting the use of one time resources to an amount below the $500 million threshold.

Use of One-Time Resources, FY2009 - FY2012
(dollars in millions)
FY 2009 FY 2010 FY 2011 FY 2012
3112 2,479 1,857 385


Relying on Less One Timers

In fiscal year 2012 the state budget will rely on $385 million in one-time resources outlined in the table below. This corresponds to a roughly 80 percent reduction in the state’s annual reliance on one-time or short-term measures in order to balance its budget. This limited use of one-time resources in fiscal year 2012 positions the state to eliminate the long-standing structural imbalance between sustainable revenue and recurring spending. Further efforts will be required to control costs and limit spending growth, but the fiscal year 2012 budget responsibly puts the state on a path to meet this challenge.

Fiscal Year 2012 One-Time Resources
(dollars in millions)
OneTime Sources: 385
Stabilization Fund Reserves 200
Delay FAS 109 Reporting 46
Quasi-Public Contributions 25
Abandoned Property Proceeds 99
Sale of Assets 15


Replenishing State Reserves

The House 1 budget proposes to use $200 million in reserves from the Stabilization Fund to support fiscal year 2012 spending. After accounting for a projected $100 million deposit at the close of fiscal year 2011, the end of year balance at the close of fiscal year 2012 will be $569 million (see chart below). The use of Stabilization Fund reserves was a vital tool used to mitigate the need for further cuts to core programs and services and additional layoffs during the recession. In recognizing the need to rebuild the state reserves, the House 1 proposal calls for a new statutory requirement that any tax collections generated from a tax settlement that exceeds an amount of $10 million will be segregated and deposited directly into the Stabilization Fund. This reform builds on another effort, adopted in fiscal year 2011, to responsibly manage the state’s most volatile source of revenue, taxes on capital gains, by setting aside depositing any collections from this source above $1 billion into the Stabilization Fund. In combination, these changes will reduce the state’s reliance on the tax sources that fluctuate the most from year-to-year, while building back essential reserves for future years.

Bar chart depicting Stabilization Fund Balances for fiscal years 2001 through 2010.  A peak of $2.335 billion in 2007.  Down to $669 million in 2010.  $769 million in 2011 reflects supplemental legislation that canceled the $100 million draw from the fund adopted in the GAA and deposit of $100 million into the fund.  $569 million in 2012 is projected fund balance after $200 million transfer.

Prepared by Mike Esmond, Executive Office for Administration and Finance ·
For more information contact: (617) 727-2040

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