History will record that a budget deficit exceeding half a billion dollars is being transferred to my administration.Gov. Charlie Baker, in his inaugural address on Thursday
BOSTON — Massachusetts is currently wrestling with a mid-fiscal year budget shortfall estimated to be somewhere between $500 million and $1 billion.
To help us understand how we got here and what can be done, I spoke with Andrew Bagley, director of research at the Massachusetts Taxpayers Foundation (MTF), a nonpartisan watchdog group. Below, he helps us navigate six key questions surrounding the budget gap.
How Much Of A Deficit Is The State Facing?
The total state budget, which runs from July 2014 through June 2015, is $36.5 billion.
On its way out the door, the previous administration estimated the state was facing a $70 million budget gap.
But the new governor, Charlie Baker, has said the current shortfall is at least $500 million.
Bagley and his team at the taxpayers foundation insist the deficit is closer to $750 million. (Previously, his organization calculated a deficit around $1 billion, but proposals from the Patrick administration in November (see below) reduced that figure by $250 million.)
"Seven hundred and fifty million dollars is an awful lot of money when you're over halfway through the budget year," Bagley said.
Adjusting the budget in the middle of the fiscal year is relatively routine, but Bagley said the current gap is "enormous" — particularly because it's occurring at a time when the state economy is in a recovery.
Why Are There So Many Deficit Estimates?
The Patrick administration's estimated shortfall of $70 million is an outlier that's nowhere near other assessments.
Bagley said the main reason the Baker estimate of $500 million differs from the MTF number of $750 million is because of a temporary Medicaid issue. It's a wildcard factor the Baker team hasn't fully accounted for yet.
When the Health Connector website failed last year, thousands of people were temporarily placed into Medicaid without certifying if they were actually income-eligible for the program.
Now, the state needs to clean up that mess and verify who among those thousands of people were, in fact, eligible for Medicaid.
"I think that's going to be a major part of ... what that magic [deficit] number may be," House Speaker Robert DeLeo said at a press conference with Baker earlier this week.
The Massachusetts Taxpayers Foundation calculates the transitional Medicaid issue will cost the state an additional $180 to $300 million.
How Did We Get Into This Budget Hole?
"There's no singular cause," Bagley said. He attributes the current budget gap to a combination of factors:
-- 1) "soft" revenues
-- 2) higher spending
-- 3) temporary Medicaid kerfuffle
The revenue picture is less than ideal because as of Jan. 1, the state's income tax rate automatically fell from 5.2 percent to 5.15 percent. That'll cost the state an estimated $70 million this budget cycle, Bagley said.
As for spending, Bagley said some areas of state government were underfunded, leading to higher expenditures. But some additional spending is because of unexpected adjustments. The $80 million economic development bill passed in 2014, for example, is a new source of additional spending; the Legislature did not secure any new revenue streams to support it.
What Solutions Are Being Offered So Far?
Former Gov. Deval Patrick cut the budget by $250 million in November through a series of so-called 9C cuts, which shaved away spending at executive branch agencies.
On his first full day in office, Baker issued a hiring freeze across state government, effectively immediately. His administration estimates this move affects roughly 300 jobs and will save the state $6.5 million.
"I think [the hiring freeze] makes perfect sense," Bagley said. "They're going to have to squeeze money from everywhere they possibly can."
Baker also ordered his new Cabinet members to review all operations in the first 100 days with a goal of streamlining government and cutting costs.
What Options Does Baker Have To Plug The Remaining Gap?
Baker has not yet detailed how he intends to prune state government, but at a Monday press conference he said "administrative actions" would be a "big part of the solution."
Bagley said Baker is in a challenging position.
"Over half the budget is very difficult, if not impossible, to cut because these are non-discretionary spending," Bagley said. Those fixed costs include items like pensions, MBTA spending and debt services, he said.
"When you start looking at all the things that are off the table, you're left with things like higher education, human services, public safety — those types of programs, which is where whenever we have to make 9C cuts, the governor turns to because there's more flexibility."
Bagley advised Baker to look at the safety net, but he paused and then added, "I don't know how you can make all these cuts and leave lives unaffected."
What Legislative Leaders And The Governor Will Not Do
Legislative leaders and Baker agree they will not cut local aid.
Baker has also repeatedly pledged that he will not raise fees or taxes.
And he's resistant to tapping into the rainy day fund, which is the state reserve that currently holds about $1.1 billion.
Bagley said the Massachusetts Taxpayers Foundation reached out to the administration and suggested they may need dip into the rainy day fund as a matter of necessity.
"Our thinking is, look at this as an 18-month problem ... and if you were to take moneys out of the rainy day fund to solve this gap in '15, just make a commitment that you'll put those moneys back in FY16," Bagley said. "If you look at this more as a long-term problem ... we think that would be a reasonable approach."
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