Baker Reopening Budget To Address $295 Million Deficit

Continuing to chase after state budget solutions, Gov. Charlie Baker's administration on Friday identified what it sees as a $295 million deficit in the $39.25 billion budget just three months into the fiscal year, prompting the governor to pursue a reduction in workforce and contemplate likely spending cuts across state government.

The estimated deficiency lines up closely with the amount the Republican governor tried to slash from the budget in July before the Democrat-controlled Legislature steamrolled through most of his vetoes.

Revenue collections rebounded in September after a sluggish July and August, settling within $11 million of projections. But overly optimistic estimates of sales tax revenues and chronically underfunded programs that Baker wants to shore up led to the actions taken at the mid-October deadline to reasses state finances, officials said.

Baker's budget chief Kristen Lepore on Friday wrote a letter to Baker explaining that she was reducing the state's tax revenue estimate by $175 million due to slower than projected growth in sales taxes, and would attempt to achieve savings by offering one-time payouts as incentives for state employees to retire or leave their jobs.

The remainder of the gap, according to Lepore, is attributable to accounts that the administration believes were left underfunded by the Legislature for indigent defense legal costs, projected snow and ice removal costs and exposures for shelter services, settlements and judgments.

Lepore said savings plans and spending reductions sufficient to reduce total spending by 1 percent across executive branch agencies could be necessary, but said local aid to cities and towns and school districts and funding for core services at the Department of Children and Families would not be touched.

The annoucement established Baker's authority to use his so-called "9c" powers to make emergency mid-year budget cuts, but the administration did not explicitly commit to cutting the full $295 million in spending from the budget or outline any specific reductions.

Instead, Lepore said she has "commenced an exercise with Executive Branch agencies to identify spending reductions or other solutions that will be needed to balance the budget..."

"The administration will bring the budget into balance with savings initiatives and spending reductions that could reduce Executive Branch spending by about 1% of overall spending. Accounts such as local aid to cities and towns, local school aid, and core services at DCF will not see reductions. We will work with our executive branch agencies to identify solutions to close this gap," Lepore said in a statement.

In revising the revenue estimate ahead of Saturday's deadline, Lepore reduced the estimate of tax collections to support state spending in fiscal 2017 from $26.231 billion to $26.058 billion. The new estimate reflects 3.1 percent growth in tax revenues, or $789 million, above actual fiscal 2016 collections.

The administration now expects sales tax collections to grow by 2.3 percent, in line with year-to-date growth through September, but considerably lower than the 5.2 percent growth rate relied upon in the state budget signed by Baker in July.

To help close the gap between spending and revenue, the administration on Monday will begin offering state employees a one-time payout to leave the public sector. Retirement eligible employees can receive a one-time $15,000 payout to leave their position, while other executive branch employees will be eligible for a $5,000 payout to leave their job.

The program will run through Nov. 14 at which point the administration will reassess whether further workforce reductions are necessary. The administration said furloughs or early retirement incentives allowing employees to add years to their age or time of service to boost pensions will not be offered this year after Baker used an early retirement incentive program last year to address similar budget problems.

The administration would not provide an estimate of how many employees it expects to take advantage of the one-time payout, or of how much it hopes to save.

Baker in July vetoed $265 million in spending from the budget, but the Legislature overrode $231 million of those spending vetoes. At the time, Baker identified similar deficiencies that he felt lawmakers left underfunded. Legislative budget leaders did not respond to a request for comment on Friday.

Noah Berger, president of the Massachusetts Budget and Policy Center, said he agreed with Baker's push to fund expected costs for programs such as snow and ice removal up front rather than deliberately wait until later in the year. "Each year's budget should fund the costs that you know will occur that year," he said.

Berger, however, said the administration and lawmakers should look beyond simply cutting programs that have already absorbed budget reductions in recent years to tax expenditures that provide questionable value to the economy.

"I think it has less to do with what's happening in the economy now and more to do with problems that have been in the budget for awhile, such as a reliance on one-time revenues and underfunded accounts. The governor is, I think, being pretty cautious by downgrading revenue assuptions, but against that backdrop I think the biggest issue is getting out of the process where we're making these mid-year cuts. The budget process should scrutinize the special business tax breaks like the state single sales factor for mutual fund companies and manufacturing that are worth a billion dollars a year and get no scrutiny."

Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, said it's important that the governor recognize the problem early and begin to deal with it rather than wait until later in the year. She said it's more difficult to recoup sales taxes because consumers are unlikely to "double up" on purchases after they have made a decision to cut back on spending early in the year.

"Unemployent numbers are down and withholding did rebound, so it's somewhat of an enigma," McAnneny said about the slowing saes tax growth.

McAnneny posited that increasing health care and housing costs could be eating into disposable income, and said there is some evidence that businesses are holding back on spending and investments due to a variety of global economic uncertainties.

Even with the downgrade in revenue estimates to 3.1 percent growth, the projection still exceeds the MTF's expectation of 2.8 growth in fiscal 2017.

"We might be even more conservative, but I think the fact that they're taking action now is prudent and a good thing," McAnneny said. "I don't think you have to solve for the entire deficit today, but they have to be willing to control spending throughout the year."