Business group says Mass. needs to build up reserves
As lawmakers hear requests to increase public funding on everything from human services to education and the environment, a business-backed foundation is calling on Beacon Hill to make a concerted effort to significantly build up the state's reserves.
In a new report, the Massachusetts Taxpayers Foundation warns against the continued use of state stabilization fund resources to pay operating expenses during an economic recovery. The practice, according to the report, is setting the state up to lack the funds required to address the next inevitable recession, when demand for public services will rise just as tax revenues slow or even decrease.
Between fiscal 2013 and fiscal 2015, a period when the state's jobless rate dropped to 4.6 percent from 7.2 percent, the Legislature transferred or diverted a "staggering" total of $2.2 billion from the stabilization fund to pay operating expenses, the report said.
The 29-year-old fund last featured a balance equaling 5 percent of state spending in 2008, before a major recession and state budget fiscal crisis, according to the report, which pegs the current stabilization fund balance at just 3 percent of state spending.
At the start of the 2002 recession, Massachusetts had a rainy day fund balance equal to 7.6 percent of state spending. It had 8.1 percent of state spending in reserves in 2009 as the effects of the 2008 recession were kicking in, the report said.
"The current $1.25 billion balance falls far short of the approximately $2.5 billion to $3 billion the state is likely to need to help mitigate the impact of the next downturn," according to the report, which calls on state officials to boost the fund's balance to 10 percent of annual state tax revenues within five years.
MTF is also requesting that policymakers dedicate at least 1 percent of annual budgeted tax revenues each year to the stabilization fund as a "pre-budget transfer," which would take those funds off the table during the annual debate over state spending priorities. Lawmakers should return to the practice of steering all tax settlement revenues in excess of $10 million into the stabilization fund. And until the 10 percent balance is reached, fund transfers to support the operating budget should only occur when there is a year-over-year decline in state revenues, according to the report.
Gov. Charlie Baker in July signed a fiscal 2016 budget that for the first time in years did not include a draw from the stabilization account, but the budget did freeze the automatic deposit of capital gains revenues above $1 billion into reserves to help pay for spending. Baker and the Legislature used a similar tactic earlier in the year to close a mid-year budget gap.
Last week, Baker signed off on another budget bill that made a $120 million deposit into reserves, and House Ways and Means Chairman Brian Dempsey said lawmakers recognized the need to "replenish" the fund.
The National Conference of State Legislators suggests a "healthy" stabilization fund balance includes reserves equal to 5 percent of state expenditures. However, the Pew Charitable Trust says the optimal fund balance also hinges on the volatility of revenues in a particular state. In Massachusetts, which ranks as the eleventh most volatile state due to its reliance on income taxes and taxes on investment gains, reserves should exceed 5 percent under Pew's standard, the report said.
A graph included with the report shows the stabilization fund featured negligible balances over its first five years before growing to $1.715 billion in fiscal 2001, slumping to $641 million in fiscal 2003, surging back up to a record-high $2.335 billion in fiscal 2007 and then diving back to $670 million in fiscal 2010.
The report's authors also noted that more accurate forecasting of tax revenues in the last few years has led to less "excess" tax revenues, prompting lawmakers to dip into reserves to meet spending demands even though the economy has been expanding.
"The state's stabilization fund balance inadequacy comes at a particularly difficult time," the report says. "State tax revenue growth is slowing and global economic risks are rising. Should another recession occur, it is likely that the state will have to rely on its own reserves to manage the impacts unlike the last fiscal crisis where the federal government provided the state with $4.7 billion in aid to mitigate the fiscal calamity."
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