A Preview of the Fiscal Year 2018 Budget

May, 2017

Our state budget is how our Commonwealth funds the things we
together to strengthen our communities, make life better for our
people, and build a vibrant economy. The budget process works best when
the choices are clear to everyone and made in as deliberate a manner
as possible, considering long-term issues as well as immediate

As budget writers prepare for Fiscal Year (FY) 2018, it appears that
the Commonwealth again faces a significant gap between ongoing revenue
sources and the cost of maintaining current services. This has been the
case for many years in Massachusetts, with a series of budgets balanced
using temporary revenue sources and savings initiatives that may prove
to be temporary in nature (such as early retirement strategies that can
lose their fiscal effectiveness if it turns out that the people who
retired need to be replaced). Because the Commonwealth has been using
temporary revenue to balance the budget during this period of economic
expansion, we have not been able to build up the level of reserves to
be prepared for the next recession.

We have also seen a pattern of instability, with mid-year budget cuts
and, this year, major changes to the budget very late in the budget
process. This pattern is caused partly by a lack of adequate
transparency in the budget process.

Two steps by state government would allow for a significantly
transparent process and, likely, fewer unwanted budget surprises in the

The public
release of a maintenance

that discloses the projected costs of maintaining current services from
one fiscal year to the next.
Nineteen other
states publish such a document.2
Massachusetts does
not. One of the major issues that led to mid-year budget cuts and use
of temporary revenue in FY 2017 was the Administration’s
determination that the Legislature had failed to provide needed funding
for a number of accounts. There is not, however, any public document
available at the beginning of the budget process that provides baseline
information on the funding needed in each account to maintain current
services. The Governor’s budget provides proposed spending
levels for each line item, but there is no systematic way to know
whether those recommendations constitute a cut below the cost of
current services, an increase above that cost, or are a continuation of
funding at the “maintenance level.” For instance,
if the budget proposes a decrease in funding for a particular child
care account, that could be because of a projected reduction in the
number of people who will be eligible for the program or a decision to
serve fewer of those who are eligible.

While the Administration likely provides some such data to the
Legislature, it is not publicly available. If that information were
disclosed publicly, it might decrease the likelihood of budgets being
enacted that fail to provide needed funding that ultimately must be
appropriated by supplemental budget later in the year. And while many
accounts that are funded below maintenance levels do not require
supplemental funding during the year – because in some cases
a lower level of services can be provided to match the lower funding
level – it would allow for greater public understanding of
the choices made during the budget process if there were a clear way to
identify when funding levels require such service reductions.

The public
release of a
baseline tax revenue growth estimate.
The initial tax
revenue growth estimates for FY 2017 were unusually optimistic, but
there was no easy way to see that because of the way the estimates were
presented. In determining the tax revenue estimate for the next fiscal
year, budget writers need to take two steps:

  1. Determine how much new revenue (or
    less revenue) there will be due to economic growth (or, in a recession,
    economic decline). This is called baseline growth.

  2. Determine how already-enacted tax
    policy changes will affect the amount of tax revenue available. Because
    several tax cuts were being phased in during FY 2017 (including an
    increase in the state Earned Income Tax Credit (EITC)), the revenue
    estimate derived from looking at growth in the state economy alone
    would need to be adjusted down to reflect the expected revenue loss
    from these policy changes.

Looking carefully at the projections made at the start of the FY 2017
budget process, we see that while the announced projection for actual
tax revenue growth was a seemingly reasonable 4.3 percent, the baseline
growth that would have been needed to achieve that amount of tax
revenue growth was actually 5.55 percent (because some of the revenue
growth would be used to pay for already enacted tax cuts and thus
wouldn’t be available to fund the budget). Further, the
announced 4.3 percent revenue growth projection was a projection of
growth above a newly increased FY 2016 projection. The decision to
increase the FY 2016 revenue projection in January proved to be a
mistake. While revenue growth was looking good in January of 2016, it
could have been anticipated that the final FY 2016 collection numbers
would not exceed the original estimates. Late in 2015 the stock market
declined significantly. While this would not affect tax revenue growth
immediately, it could have been anticipated that it would affect
revenue collections come April of 2016 (when people would file their
2015 taxes), thus affecting FY 2016 collection totals. That’s
exactly what happened. In order to hit the announced 4.3 percent tax
revenue growth rate, the baseline tax estimate would have needed to be
6.1 percent above the initial estimate upon which the FY 2016 budget
was built – a very high
growth rate and one that might have raised red flags with the public.
Had that information been publicly available, it is likely that the
fiscal problems that emerged towards the end of the FY 2017 budget
process would have been recognized much earlier in the year.


To determine the challenges budget writers will need to address in FY
2018, we need to examine three sets of issues: the use of temporary
revenue and the underfunding of accounts in the FY 2017 budget; the
likely changes in the cost of providing current services in FY 2018;
and the likely growth in tax revenue in FY 2018.

Temporary Revenue and
Underfunded Accounts in the FY 2017 Budget

Because budget writers will need to find different sources of
(or new savings) in FY 2018 to fund the portion of the budget funded
with temporary solutions in FY 2017, it is important to determine the
total amount of temporary solutions in the FY 2017 budget. The chart
below provides a list, totaling $679.2 million. The following are among
the largest:

  • Using capital gains tax revenue that is dedicated by law to
    the State Stabilization Fund (otherwise known as the Rainy Day Fund)
    instead to fund the operating budget. Because capital gains tax revenue
    is highly volatile, Massachusetts has a law dictating that when the
    state expects to receive more of this type of revenue than roughly the
    long-term average, the excess amount is supposed to be deposited into
    the state Stabilization Fund. This ensures that we don’t
    budget based on temporarily elevated levels of capital gains tax
    revenue, and it also helps to build our Stabilization Fund, which is
    our reserve account to help the state weather the next recession. In
    the FY 2017 budget, the state relied on $150 million of such one-time

  • Use of revenue in trust funds. The state has a number of
    trust funds in which money has been set aside for specific purposes.
    The state plans to use $145.6 million from these trust funds to help
    balance the current year’s FY 2017 budget.

  • Use of end-of-year account balances. The FY 2017 budget
    assumed that there will be $200 million in unspent appropriations
    (otherwise known as reversions) available to fund operating costs
    elsewhere in the budget. The Administration has undertaken a number of
    initiatives, such as hiring freezes, to achieve these savings. It is
    hard to know for sure what the long-term effects of these strategies
    will be. But to the extent that agencies are delaying hiring or other
    expenditures that ultimately will be necessary, these savings will only
    be temporary. Absent a clear public description of where and how these
    savings can be sustained over the long term, it is prudent to treat
    them as temporary savings.

  • Underfunded accounts and 9C (mid-year) budget cuts. In the
    enacted FY 2017 budget, there were a number of accounts that were
    underfunded. (These include Emergency Shelter Assistance for Families
    in Need, MassHealth, Private Counsel Compensation, Snow and Ice
    Removal, and various Sherriff’s accounts.) Recognizing that
    additional revenue would be required mid-year to fully fund these
    accounts during FY 2017, in October of 2016 the Administration
    identified additional federal revenue as well as excess revenue in a
    number of state trust funds, sufficient to fully fund several of these
    accounts. In December of 2016, the Administration identified additional
    underfunded accounts and made mid-year cuts to free up revenue to fund
    these accounts. (These mid-year funding reductions are called
    “9C cuts” after
    the section in Massachusetts General Law that gives the Governor the
    power to make such unilateral mid-year cuts in order to keep the budget



FY 2018
Cost of Providing Current Services

Only the Administration has
access to the data needed to provide a reasonably precise estimate of
FY 2018 costs to maintain current services. Such an estimate requires
examining likely caseload levels for programs (particularly those where
all who are eligible have a legal right to the services); projected
needs in specific areas (like child protective services); and inflation
rates for different types of costs (health care inflation, for example,
has been higher than overall inflation rates).

In some cases, that analysis will identify costs growing
rapidly, and
in other cases it will show maintenance costs declining (for example,
in a strong economy when more people can find work, costs for some
income support programs decline).

Because such detailed data isn’t publicly available,
budget brief uses broad estimates. We assume that most costs will grow
at the rate of inflation. While costs in some areas will grow at a
higher rate and others at a lower rate (with the exception of health
care costs), there is not a more reliable way to predict overall costs.
While there are some specific costs that we could project with more
certainty (and those are likely to grow at more than the rate of
inflation), there are others that are not easy to project accurately,
yet are likely to grow at less than the rate of inflation or decline.
Thus it is likely more accurate to use one general adjustment for most
of state government. The one exception we make is health care. Health
care costs are a very large share of the budget and have a clear
pattern of growing at a significantly higher rate than overall
inflation. Our projections assume that the cost of most of state
government (everything other than health care) will grow at the
projected rate of inflation: 2 percent. Since state spending other than
health care totals $24.8 billion, two percent growth represents $496.2
million in new costs in FY 2018.

Because of health care cost growth and increasing enrollment in
MassHealth, healthcare spending in the state budget has grown faster
than the rate of inflation and there is every reason to believe that
trend will continue. It would allow for a more transparent and orderly
budget process if the Administration were to publish a projection of
costs for maintaining our current health care programs and policies
after accounting for projected caseload and cost changes. Absent such
an estimate, this brief assumes that health care costs in the state
budget will grow at the rate the state has adopted as a target for
overall health care cost growth: 3.6 percent.3
Since state
health care spending (net of reimbursements from the federal
government) is $9.4 billion, 3.6 percent growth will mean $339.2
million in new health care costs in FY 2018.

FY 2018
Revenue Growth

The state Department of Revenue (DOR) has projected baseline
growth of 4.2 percent during FY 2018.4
While some have projected slower
revenue growth and others higher, we use the baseline revenue growth
rate projected by DOR. Because some of that potential new revenue will
be offset by previously enacted tax cuts, 4.2 percent baseline revenue
growth would result in 3.5 percent actual
revenue growth.5
would generate $898.9 million in new revenue for the FY 2018 budget,
beyond the amount projected to be available in FY 2017.6

Other state revenue sources are not likely to grow
significantly or are
already accounted for in our projections. While the state receives
significant revenues from fees, that revenue is not projected to
increase substantially. Revenue from the lottery is also not projected
to grow – and may decline. Federal Medicaid reimbursements
are likely to grow significantly, but we already account for that in
our calculation of health care costs. We count health care cost growth
as only the cost growth on the portion of health care spending
ultimately paid by the state (that is total state spending, net
federal revenue). We treat the cost growth on the federal share as
essentially cancelled out by the corresponding increased federal

Looking only at the changes in spending and revenue that are projected
to occur during
FY 2018 (see discussions above), MassBudget calculates
a negative net total of $63.5 million, meaning that revenues are
expected to grow slightly faster in FY 2018 than expenses, thus
slightly reducing the gap carried over from FY 2017. This net total
combines our estimates of expected cost growth in FY 2018 with the DOR
estimate of projected actual revenue growth in FY 2018 (see table



The Initial FY 2018
Budget Gap

As the FY 2018 budget process begins, the state likely will
face an
initial gap of approximately $615.7 million. This is composed of: 1)
the gap carried over from FY 2017 because of the use of temporary
solutions in that budget, and 2) the difference between projected cost
growth and projected revenue growth in FY 2018 (see table below). This
gap will need to be filled by some combination of temporary revenue and
savings, permanent cuts, ongoing savings, and new revenues.

Table 3



Such a process is described in Section 3 of
Chapter 29 of the General

“Better State Budget Planning Can Help Build Healthier
Economies,” Center on Budget and Policy Priorities (2015),
Figure 5, page 12. See http://www.cbpp.org/sites/default/files/atoms/files/10-15-15sfplookingahead.pdf

The anticipated health care cost growth rate is based on the benchmark
set in Chapter 224 of the Acts of 2012, using the rate of growth of
total health care expenditures. For 2013-2017, the rate is 3.6 percent,
the growth rate of the potential gross state product. See http://www.mass.gov/anf/budget-taxes-and-procurement/oversight-agencies/health-policy-commission/.

Mid-point estimate for baseline growth over
updated FY 2017 forecast.
Department of Revenue, Briefing
Book  FY2018 Consensus Revenue Estimate Hearing

(see page 7): http://www.mass.gov/dor/tax-professionals/news-and-reports/state-budget-documents/briefing-book/

Mid-point estimate for actual growth over updated FY 2017 forecast.
Department of Revenue, Briefing
Book  FY2018 Consensus Revenue Estimate Hearing

(see page 7): http://www.mass.gov/dor/tax-professionals/news-and-reports/state-budget-documents/briefing-book/

Range of estimates for actual growth = 2.9 percent to 4.0 percent.
Midpoint = 3.45 percent.

Current estimated FY 2017 benchmark
collections = $26.056 billion (See DOR FY 2018 Briefing Book, pg. 7)

$26.056 billion * 0.0345 = $899 million


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