Later this morning Governor Deval Patrick will unveil his proposal(s) for financing the Massachusetts Transportation system. The Governor has done quite a good job of keeping the key provisions under wraps, but it is safe to say that the Governor will recommend some level of new revenues. This week the Governor will give his state of the state address, and we can expect his annual budget as well. Say what you want about the Governor but he is certainly not coasting in the last two years of his term. From pensions, municipal workers compensation, to housing authorities, and now to transportation, the Governor has (will) unveiled major proposals that will certainly keep the Legislature busy, and are substantive in nature.

The Governor’s budget will once again be a challenge, as there remains the after effects of the fiscal storm that has done so much damage to our national economy. What can be expected?

Revenue estimates for the new fiscal year (FY14) show growth of about $835 million, an increase of 3.9% over the FY13 number, according to the Massachusetts Taxpayers Foundation. The FY 13 number was revised downward mid-year by the Administration as revenues lagged. That reduction was over $500 million, and if the target is hit then FY 13 would show an increase in revenues over FY12 of $420 million, or 2%. I give some of those numbers because the initial estimate for FY13 was about the same as the new estimate for FY14, and we were forced to change that estimate mid-year. (by that $500 million). The Taxpayers Foundation, in the press release, acknowledges the doubling of the FY14 number, but looks to increased growth in U.S. GDP to provide that state revenue growth. From the Foundation Press Release:

The Foundation’s fiscal 2014 forecast anticipates a slightly better revenue picture due to an improving national economy as real U.S. GDP growth is projected to double from 1.8 percent in 2013 to 3.9 percent in 2014. However, while national employment is expected to grow by nearly 2 percent in fiscal 2014, the Foundation projects that state employment will increase by less than 1 percent, adding roughly 20,000 jobs.While 3.9 percent revenue growth in 2014 is nearly double the rate in fiscal 2013, it is well below the 5.8 percent average annual growth in total tax collections – excluding capital gains taxes – from fiscal 2003 to 2008 following the last recession and half the 8 percent average annual growth rate from 1990 to 2008.

I have great confidence in the work of Michael Widmer and the Taxpayers Foundation, but I am not sure we are going to see that level of revenue growth. I certainly hope that we do, and again accept the wisdom of folks that are much smarter than me.

As the Governor prepares to file his FY14 budget the Massachusetts Budget and Policy Center has put out a budget primer, and some of the numbers listed are not pretty. Lets take a look at some of the key numbers, as I see them. The Budget Center looks at how the FY13 budget was balanced, and points out that the original budget came in balanced with $743 million in one time revenues and savings. After the revenue downgrade the Governor has recommended additional utilization of one time revenues and savings of about $270 million, driving the FY13 budget utilization of one time savings, revenues (including utilization of rainy day funds) to over $1 billion. Ouch. From the Budget Center:

USE OF TEMPORARY REVENUES AND SAVINGS IN THE INITIAL FY 2013 BUDGET

The enacted FY 2013 budget relied on $743 million in temporary revenues and savings. This included a withdrawal of $350 million (plus $9 million in interest) from the Rainy Day Fund, and about $90 million from other reserves. The budget also postponed a special corporate tax break saving close to $46 million, and counted on $10 million in one-time revenue from the disposition of abandoned property.

In addition, the FY 2013 budget relied on some savings strategies in the state Medicaid program. These strategies included cash management policies that shifted $256 million of costs into future years. Since half of Medicaid costs are reimbursed by the federal government, the net savings to the state in FY 2013 of this shift would be approximately $128 million.

The Commonwealth also relied on $110 million in temporary savings realized by cancelling a requirement to reserve a portion of the state’s revenues in order to carry forward that amount into the next fiscal year.3

SUBSEQUENT USE OF TEMPORARY REVENUES AND SAVINGS IN THE FY 2013 BUDGET

In early December, the Secretary of Administration and Finance announced a downward adjustment of $515 million in the revenue estimate for FY 2013. To keep the budget balanced, the Governor announced a series of emergency budget cuts, called for the Legislature to enact additional cuts, and proposed balancing the budget with the use of additional temporary revenues. These measures withdrew an additional $200 million from the Rainy Day Fund, counted on $60 million from other state reserves and temporary federal revenue sources, and $10 million in other one-time savings.4

Despite the fact that the state budget can seem to be very complicated, the Budget Center uses some pretty straight forward methodology to estimate what it believes the FY14 budget deficit is as we prepare that budget.

FY 13 Utilization of one time revenues, rainy day fund, one time expense reduction: $1.1 billion
FY 14 growth in state expenses: $1.1 billion
Total: $2.2 billion
Less FY 14 growth in state revenues: $900 million.

Starting Deficit: $1.2 billion

A couple of quick notes. That starting deficit includes a revenue number with growth of $903 million. The Mass Taxpayers Foundation, listed above, has estimated an increase of $835 million. Both numbers are certainly ambitious, and bear close scrutiny. The starting deficit also does not take into account additional utilization of one time resources. The Budget Center estimates that the Rainy Day Fund will end FY13 with $1.2 billion in available cash. Another budget number that is interesting is health care spending. What are the numbers, and what does the next fiscal cycle look like?

Massachusetts will spend approximately $7.6 billion on publicly-funded health insurance in FY 2013. This consists of roughly $12.7 billion on MassHealth and other health reform programs, for which the federal government reimburses the state for approximately half of these costs, leaving the state with a net state cost of approximately $6.4 billion. The Commonwealth will also spend approximately $1.3 billion on health care for public employees.

Although it is difficult to project health care costs, we estimate that these costs will grow in line with the 3.6 percent growth rate identified in last year’s health care cost containment law. At this growth rate, MassHealth and health reform programs would increase by $229 million, and state employee health insurance would increase by $46 million. We also assume a 3 percent growth in enrollment in MassHealth, which adds another $191 million.

With these estimates, we project health care spending growth would add approximately $466 million in new costs in FY 2014. This is in addition to the $128 million in FY 2013 costs shifted into FY 2014 (discussed above).

The Governor will face great challenges, as he has every year during his tenure. The numbers listed obviously do not include the major deficiencies the Governor will try to address through his transportation package, unveiled later today. Looking forward to the Governor’s new budget format, which will be “program based”, which I really believe will be (potentially) a huge improvement over the traditional “line item” format. This budget cycle will present the Legislature with some difficult choices, with the Governor loading up the plate with plenty of policy options and changes.

We will try to cover this process as much as we can, and if possible will do an interview or two with some of the major stakeholders. Stay tuned.