What does the proposed state budget filed today by Governor Charlie Baker mean for Massachusetts employers?
The bottom line is pretty simple – state spending is growing at twice the rate of tax revenue and that trend is unsustainable. The new administration must therefore make difficult choices to close a projected $1.5 billion budget shortfall for next fiscal year just weeks after addressing an unexpected $750 million gap in the current budget.
It's something that that the CEO of almost every member company of Associated Industries of Massachusetts has had to do at one time or another.
Secretary of Administration and Finance Kristen Lepore said the administration will not raise taxes or fees, nor tap the state’s rainy day fund, meant for fiscal emergencies. At the same time, the allocation of scarce budget resources provides an insight into the new governor’s long-term priorities, from having state employees pay an increased share of their health insurance premiums to increased aid to cities and towns.
“For two consecutive years, our spending growth has outpaced our revenue growth. After over $1 billion in budgetary reductions last year, state spending still grew at 7.8% more than the year before, while tax revenue only grew at 4%. This is simply an unsustainable path for Massachusetts - we must live within our means,” the governor said in his budget message.
“This proposal keeps spending growth around 3%, and allows us to begin to address long-term structural changes and reduce our reliance on one-time revenue. We protect our rainy day fund, because in a largely healthy economy it is clear our issues are based on a need to prioritize spending and make state government more efficient. We also avoid layoffs through an early retirement package that will reduce the size and cost of the state workforce.”
Fiscal discipline and predictability are welcome themes for Massachusetts employers who, according to the Massachusetts Taxpayers Foundation, pay approximately $150 million more in taxes each year than they did a decade ago. CEOs expect the government to conduct its financial affairs in the same responsible manner as the corner grocery store, the young biotechnology company or millions of citizens managing the household budget.
“The 4,500 member companies of Associated Industries of Massachusetts typically pay more attention to the budget as a proxy for the ability of state government to manage its affairs, rather than to individual line items,” said John Regan, Executive Vice President of Government Affairs at AIM.
“The governor’s proposed budget takes constructive steps toward ensuring that the commonwealth lives within its means.”
The projected shortfall for Fiscal Year 2016 is driven by two factors, according to the Taxpayers Foundation.
The first is a significant increase in costs for items and programs considered nondiscretionary — such as Medicaid, the state-federal health program for poor and disabled people, and pensions — just to keep the same level of service next year. The second is the state’s heavy reliance on one-time sources of money — pots of cash that are tough or impossible to tap again — this fiscal year.
Those sources of money total about $1 billion and include tax settlements with corporations, a temporary diversion of tax revenue intended for the state’s rainy day fund, and casino licensing fees.
Here are the key elements of the Baker budget proposal:
- A $34 million increase, or 3.6%, in unrestricted local aid to $980 million
- A $105.3 million increase in Chapter 70 funding, which increases funding for all 321 school districts
- A phase in of the Earned Income Tax Credit to 30% of the federal limit while phasing out the Film Tax Credit
- Funding local aid by 75% of revenue growth, a 3.6% increase
- Increasing transportation spending by 20%, including $187 million, or a 53% increase, in direct aid to the MBTA
- An early retirement incentive program to responsibly reduce the state’s administrative spending