Reflecting on Massachusetts’ Fiscal State Under the Patrick Administration

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Report Finds Massachusetts Economy Resilient, But Strategic Risks Exacerbated by Unwise Fiscal Policy

State budget continues to shortchange retiree obligations and proven education programs, MBTA and its retirement fund remain sore points

BOSTON – The Massachusetts economy has endured the financial crisis better than the rest of the country, but the state government has stepped back from critical reforms in education, public transit and retiree benefits, according to Pioneer Institute’s analysis of the commonwealth’s fiscal 2015 budget.

The report finds state spending has largely remained in line with the tax base in the 21st century, but there is a growing misalignment between strategic priorities and the distribution of funding.

“After approving a multibillion-dollar infrastructure spending spree and neglecting to address looming public employee pension costs, state legislators have cut already meager funding for proven education programs that benefit underprivileged children,” said Pioneer Executive Director Jim Stergios. “State leaders should stop underfunding key policy priorities to splurge on pet projects.”

Before this year’s budget process, Massachusetts’s transportation infrastructure had reached dangerous levels of disrepair due to years of underinvestment. A transportation bill was signed into law before the budget, but much of the $13 billion in new spending is going for expansions of uncertain value such as South Coast Rail rather than towards improving the quality of existing roadways and public transit services.

Meanwhile, debt and unfunded retiree liabilities at the MBTA have reached $8.3 billion and its operating expenses far outstrip the revenue it gets from sources like sales tax revenue, local assessments and fares.

The state has been using pension funding as a piggy bank during times of crisis without returning the borrowed money after the crisis subsides. Unfunded retirement liabilities for pensions and health care had reached $42.2 billion as of fiscal yearend 2013 and remain a critical long-term threat to the commonwealth’s fiscal stability.

The state’s long-term debt also surpassed $24 billion in 2013, up from $15.8 billion 10 years earlier. Local indebtedness rose from $9.47 billion to $11.7 billion over the same period.

Taken together, the state’s long-term debt and unfunded retiree obligations amounted to some $66 billion, or nearly twice the state’s FY 2013 budget.

Overall state education funding increased at an annualized rate of just 2.21 percent from FY 2008 to FY 2015 – barely matching gross domestic product (GDP) growth and inflation for the period – down from 4.66 percent annually during the Romney administration. Even harder hit was local aid, a major source of funds for school districts, which grew at 4.73 percent in FY 2004-2007, but has been cut at an aggregate rate of over 4 percent annually since.

Amidst increasing school segregation, the only desegregation program in the commonwealth, which has been very successful, is threatened because receiving districts are forced to reconsider their continued participation due to increasing costs and token state support. Per-pupil allocations for the Metropolitan Council for Educational Opportunity (METCO) have fallen by 18 percent while total grants and funding is down by more than 10 percent since Governor Patrick took office.

By far the strangest provision passed with a state budget in recent years was the repeal of a transparency amendment adopted with the FY 2014 budget intended to make the financials of the MBTA Retirement Fund (MBTARF) a matter of public record.

This repeal was one of the few budget items vetoed by Governor Deval Patrick, who said that the pension accountability law can be enforced and its removal would be a step backward for transparency.

The report finds that Massachusetts’ per capita GDP has surpassed its previous 2007 peak, while, as of yearend 2013 the national economy had still not reversed all of the contraction that occurred in the wake of the financial crisis. As in the rest of the economy, traditional forms of employment in wage and salaried jobs have been declining steadily in Massachusetts. Fewer than 80 percent of all employed persons held such jobs in 2012, down from about 85 percent in 2000.

About the Authors

Iliya Atanasov is Pioneer’s Senior Fellow on Finance, leading the research tracks on pension portfolio management, infrastructure and municipal performance. Iliya is a PhD candidate in Political Science and Government and a former Presidential Fellow at Rice University. He also holds BAs in Business Administration, Economics and Political Science/International Relations from the American University in Bulgaria.

Katherine Apfelbaum is Pioneer’s Peters Fellow in Education, conducting the Institute’s research initiatives on the financial impact of charter schools and school choice programs in Massachusetts. She earned a master’s degree in comparative social policy at the University of Oxford in 2013, and prior to that, she worked with the Foundation for Education Reform and Accountability in Albany, New York, on charter school and parent trigger research.

About Pioneer Institute Pioneer Institute is an independent, non-partisan, privately funded research organization that seeks to improve the quality of life in Massachusetts through civic discourse and intellectually rigorous, data-driven public policy solutions based on free market principles, individual liberty and responsibility, and the ideal of effective, limited and accountable government.