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How will the state government pave our way to an equitable recovery? What to watch this FY 2022 budget season.

As state lawmakers sprint from one budgeting season to the next, many in Massachusetts are still reeling from the effects of COVID-19. The Fiscal Year (FY) 2022 state budget will be a vital tool to sustain Massachusetts communities through the crisis.

Faced with economic uncertainty, will state leaders craft a budget that meets the immense needs of students, those facing hunger or homelessness and those who are jobless? Here are a few issues to watch during the FY 2022 state budget debate.1

Key Questions

  • How will the state transition from reliance on these one-off revenues to reliance on ongoing revenue sources?
  • Will lawmakers catch up on lost progress on school funding?
  • If state lawmakers do allow businesses to continue deferring Unemployment Insurance (UI) payments, how will they ensure the state catches up with its UI debt obligations?
  • Will the state try to restore service in FY 2022, or will public transit continue to languish?
  • How will lawmakers fund programs to ensure housing stability?

1. How will the state generate enough revenue to meet everyone’s needs?

Before state lawmakers even begin creating a budget, they need to determine how much money the state will likely collect for that fiscal year.

For FY 2022, state leaders now estimate Massachusetts will bring in $30.12 billion in tax revenue, which is a 3.5 percent increase from the amount the Governor now projects will be collected in FY 2021 — a far more optimistic outlook than many experts had adopted only a few months ago.

Nevertheless, both the recently revised FY 2021 estimate of $29.09 billion and the newly minted FY 2022 estimate of $30.12 billion are below the original FY 2021 estimate of $31.15 billion which lawmakers agreed to one year ago (not to mention that final FY 2020 collections fell short of expectations by some $700 million). Needs have grown over the course of the pandemic, not fallen, and stagnant revenue collections cannot be expected to adequately address the urgent crises in our communities.

Moreover, despite lawmakers’ optimism, the state’s revenue and budget outlooks remain uncertain. The health crisis still is unfolding and its effect on the economy and the increasing need for public services is still not fully understood. While there is cause for hope for greater federal aid to state and local governments, this, too, is uncertain. What we do know is that during hard economic times, tax collections — the main source of state revenue — decline and the number of people who face eviction, hunger, and unemployment rises.

The state was able to use federal emergency relief and may draw from the Rainy Day Fund (its savings account) to help balance the FY 2021 budget with only modest cuts to services. These two sources of budget support likely will play an important role in lawmakers’ attempts to balance the FY 2022 budget as well. Importantly, the latest federal COVID relief package passed by Congress in December will provide substantial aid to Massachusetts businesses, our public education systems, public health efforts, and more. Estimated by the Governor as delivering some $9 billion to address COVID-related challenges in Massachusetts, it remains to be seen how this will impact the FY 2021 and FY 2022 state budgets.

Key revenue questions about this coming budget include:

  • How will the $9 billion in new federal relief help support the state’s public programs? And will more federal aid be forthcoming soon?
  • Will lawmakers balance the FY 2022 budget without making deep and widespread cuts to essential public programs?
  • How will the state transition from reliance on these one-off revenues to reliance on ongoing revenue sources in future years?

Some lawmakers have demonstrated reluctance around raising taxes but, in a new MassINC poll, a large majority of Massachusetts voters do not share these concerns. Respondents made clear that a top priority was to make sure all taxpayers — including corporations — are paying their fair share in taxes. These same respondents said that the wealthy and large corporations currently pay too little in taxes. There are myriad ways to generate substantial revenue in a progressive way (meaning the wealthiest taxpayers pay the largest percentage of their incomes in taxes, while low-income households pay the smallest share). Budget watchers will want to see if and how lawmakers use the FY 2022 budget to raise new, progressive revenue.

2. Will lawmakers begin fulfilling their promise on school funding?

Governor Baker announced last week that he will fund the first of a seven-year overhaul of the school funding system, the Student Opportunity Act (SOA). While this is welcome news, it seems likely this would still leave us a year behind the original SOA timeline that aimed at fully funding schools by FY 2027.

Lawmakers delayed the first year of the SOA due to the economic downturn, while schools faced many new challenges with remote learning and keeping their students and staff safe from COVID-19 while attempting to restart in-person learning. To compensate for the delay, lawmakers would have to fund one-sixth of the SOA plan in FY 2022 through FY 2027 to complete the K-12 funding reforms on the original timeline.

The goal of the SOA is to make sure every child — regardless of their race, economic background, or needs — can receive a good education. It has a particular focus on increasing support for disadvantaged kids including low-income and English Language Learners.

Policymakers also should adjust school enrollment numbers thrown off by COVID-19 to be as accurate as possible ahead of some kids and families likely returning to school districts when the virus subsides. (This is important because, under state law, FY 2022 school funding depends on enrollment numbers from October of 2020, which were highly impacted by COVID-19). The state could consider several ways to account for enrollment disruptions caused by the virus. For example, it could continue using enrollment figures from FY 2021, before the pandemic, or make adjustments as we get new data throughout the FY 2022 budget process and update funding levels accordingly. A combination of these and other methods should help the state get the most accurate count possible despite the unsettled conditions.

During the pandemic, school districts have been able to save some money at times with the transition to remote learning in areas such as transportation but also had new costs and challenges that fell particularly hard on disadvantaged communities. Significant federal funding that has been available in FY 2021 helped meet some of these new challenges. As health experts deem it safe for schools to move to a hybrid learning model and towards more in-person over time, the costs of successfully navigating COVID-19 will continue to present challenges because schools will have to pay for both in-person and remote learning for a significant period before returning to normal.

Significant additional federal aid approved at the end of 2020 or forthcoming in 2021 should help schools get by, depending on how flexibly it can be used. Even so, progress on the SOA is essential for student well-being and should not come at the expense of other vital services like higher education, child care, elder care, and disability services.

3. Will the state’s unemployment insurance system continue to be shortchanged?

In a year of mass lay-offs and widespread economic hardship, Unemployment Insurance (UI) saved the Massachusetts economy by allowing unemployed people, including those not traditionally eligible for UI, to continue putting food on the table and spending money at local shops.

Economic recovery is going to take an extended period and maintaining the systems that support those who have lost employment will be vital.

In the meantime, many business groups have called for lawmakers to suspend rules requiring them to contribute sufficient payroll taxes to the Unemployment Insurance Trust Fund. (These rules help keep the fund solvent — financially healthy and able to meet its debt obligations.) Lawmakers have, even during better economic times, suspended this obligation for businesses. As a result, the UI Trust Fund has been underfunded and forced to take on billions of federal debt to make its payments.

While this may be an appropriate time to freeze UI payments and alleviate costs for businesses suffering from the pandemic, doing so will only worsen the state’s ability to pay its UI debts (which could later affect the state’s ability to borrow money). Official estimates showed the UI Trust Fund likely had a $2.4 billion deficit as of December. And this is just one of many problems facing the state’s UI system — there are many other problems that disfavor smaller businesses and lower-income workers, for instance.

Governor Charlie Baker appeared to align with business groups when he submitted a bill at the end of the last legislative session that would have frozen payment rates into the UI Trust Fund for two years. Baker refiled the bill, which would not restore the state’s UI fund but would allow the state to stretch out repayment by borrowing money through bonds that would not get repaid until as late as 2055. One item to keep an eye on in the FY 2022 cycle is whether any budget proposals will include provisions to address unemployment insurance.

COVID’s devastation gives Massachusetts people a recent example of what happens when shortsighted policy decisions result in poor preparation for a crisis. One question to ask is: if state lawmakers do allow businesses to continue deferring payments to the UI Trust Fund, how will they ensure the state catches up with its obligations?

4. Will the state allow public transit to languish?

The MBTA, the Boston-area’s main public transportation system, saw cuts to its bus, subway, commuter rail, and ferry services last year.

These cuts are scheduled to proceed even while the MBTA is expected to receive $250 million to $300 million from the latest round of emergency federal relief.

State leaders argue that these cuts will save money during a time of lower ridership, but many argue that these cuts will be difficult to reverse and will harm essential workers and others who need public transit most. Recent polls found that most Massachusetts residents opposed the originally proposed cuts, which were more extensive.

The state budget proposals will be one indicator of the value lawmakers place on the MBTA and on public transit that serves people outside the Boston-area, the Regional Transit Authorities. Will the state try to restore service in FY 2022, or will public transit continue to languish?

5. How will lawmakers fund programs to ensure housing stability?

The latest round of federal aid and the extension of the federal eviction moratorium could provide some short-term relief for those at risk of losing their housing because of lost income during the crisis, but many note that this is not enough. Even with the moratorium, some renters still are getting evicted because landlords are ignoring the rules or renters are unaware of their rights.

In December, about half of Massachusetts adults said they are having some difficulty paying for usual household expenses and almost 200,000 adults said they are either behind on rent or mortgage payments or that they are not confident that they can make their next rent or mortgage payment on time.2 Further, a recent report found that in Boston, eviction filings often occur in areas where most residents are people of color,3 meaning an eviction and foreclosure crisis is likely to hit households of color harder.

While state lawmakers did give a $101 million boost in FY 2021 for homelessness assistance and housing supports compared with the previous year, they failed to take up a bill that could have offered more sweeping protections to renters and small homeowners.

Given that housing is such an essential foundation for all families, it will be an important area of the budget to watch during the FY 2022 debate.

Endnotes

1 The state’s fiscal year runs from July 1 to June 30. Every January through June state lawmakers debate the state budget for the upcoming fiscal year. We are in FY 2021 and lawmakers are creating the state’s budget for FY 2022, which begins this July 1.

2 U.S. Census Bureau, Household Pulse Survey, (Week 21 Data Collected December 9-21, 2020) https://www.census.gov/data-tools/demo/hhp/#/?measures=HIR

3 David Robinson, Justin Steil, and City Life/Vida Urbana, “Evictions in Boston,” (June 2020) https://www.bostonevictions.org/

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