Charlie Baker, Taxes and Budget Issues

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Rainy day funds have a natural rhythm. They shrink during a recession when reserves are drawn down to offset declining tax revenues. Once the economy rebounds and tax revenues start growing again, the fund is replenished as reserves are built up to weather the next fiscal storm.

But the rhythm has been way off lately in Massachusetts. Over the last four years, the amount of money in the rainy day fund has fallen by 28 percent even as state tax revenues have grown 17 percent. The diverging trend lines suggest the state is using the fund to live beyond its means and not setting aside money for the next economic downturn.

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One of the biggest hits to the fund came in fiscal 2015, when Gov. Charlie Baker, worried about a projected $768 million deficit, pushed through legislation diverting capital gains tax revenues that were supposed to go into the rainy day fund and using them to deal with the shortfall. Baker had originally expected the move to net him $200 million, but an unexpected surge in capital gains tax revenues toward the end of the fiscal year gave him $621 million.

The diversion of the capital gains tax revenues, along with a series of spending cuts and other revenue measures, helped eliminate the projected budget shortfall and replace it with a roughly $240 million surplus. But the rainy day fund was left in worse shape than it was the year before. The fund now contains $1.129 billion, which would increase to $1.179 billion if the Legislature goes along with a Baker administration recommendation to shift $50 million of the fiscal 2015 surplus into the rainy day fund.

Even with the $50 million addition, however, the size of the fund would be $69 million less than it was a year ago and $473 million less than it was in fiscal 2012.

Getting the rainy day fund back in rhythm won’t be easy. The fiscal 2016 budget brings spending in line with forecasted tax revenue growth, something that didn’t happen the previous three years. The budget also relies on fewer one-time revenue sources to fund state programs — $609 million in one-time sources compared to $1.65 billion in one-time sources in fiscal 2015.

Even so, Baker, with the Legislature’s approval, plans to balance the fiscal 2016 budget by diverting another $300 million in capital gains tax revenues that would have gone into the rainy day fund and use that money to fund programs.

A bond statement recently issued by the state treasurer’s office also indicates the Baker administration believes the state is likely to face more budget problems this year. The statement says the administration “has identified potential deficiencies in the fiscal 2016 budget in the range of approximately $200 million to $250 million, in addition to potential shortfalls from budgetary savings initiatives, additional spending associated with budget veto overrides, and revenue reductions anticipated in connection with the two-day suspension of the sales tax.” Combined, the shortfall is probably in the $400 million range.

Meet the Author Bruce Mohl Editor , CommonWealth About Bruce Mohl Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester. About Bruce Mohl Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester.

Andrew Bagley, the vice president for policy and research at the Massachusetts Taxpayers Foundation, says what’s happened to the state’s stabilization fund over the last four years is troubling. “This trend is worrying due to the state’s reliance on one-time revenues in the middle of an economic recovery,” he said in an emailed statement. “But that understates the growing structural problem with the budget because the state was forced to rely on approximately $1 billion in capital gains tax revenues in excess of the statutory cap to help balance the 2015 and 2016 budgets rather than to shore up the stabilization fund.”

The Baker administration says it is determined to reduce the reliance on one-time revenue and get spending and revenue growth back in line. “The state has historically relied on one-time solutions to balance the budget, including the stabilization fund,” Dominick Ianno, chief of staff to Baker’s budget chief Kristen Lepore, said in a statement. “As we saw in fiscal years 2015 and 2016, the combination of excessive spending and the reliance on one-timers is unsustainable. It is our priority to bring spending in line with recurring revenue growth while reducing our reliance on one-time solutions. We have made significant progress in the past eight months and will continue to make this a priority.”

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