What’s driving the state’s budget gap?

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With 2015 revenues off by a sliver ($18 million), the state is facing a $750 million hole in the budget.  My friend at the Massachusetts Budget and Policy Center, Noah Berger, notes that tax cuts in the 1990s led to decreased state revenues on the order of $3 billion.

I find his view unconvincing for a number of reasons, including the fact that those tax cuts were part of changing the brand and the reality of living and doing business in Massachusetts.  Notwithstanding my own view that taxes (and the regulatory costs of doing business) are too high in the state, it is really hard today to assail the state with the worn slur of Taxachusetts.  The change in brand and the lowering of costs has undoubtedly helped increase economic activity in the state and therefore state revenues of one form or another.

But there is also the fact that the fact that we have seen enormous growth in the state budget since 2005 — growth that is not remotely aligned with growth in average household income.  Consider the size of the 2005 state budget (not including intergovernmental transfers) — $24 billion budget.  The most recent budget, for fiscal year 2015, stands at $36.5 billion.  That’s growth of more than 50 percent over the decade (and not inconsequential $12 billion).

Given that Massachusetts is not a state with a fast-growing population, that is not what is driving the pace of increase.  And growth in state governmental spending has far outpaced household income growth over the decade.  In 2005 median household income (in nominal dollars) stood at $57,184; in 2013, the last year for which we have data, it reached $66,768 (an increase of less than 17 percent). Massachusetts household incomes are not keeping pace with the national inflation rate; if they had, they would have averaged $1,500 more ($68,210).

How large would state government have been if it had simply grown at the inflation rate?  It would have grown from $24 to around $29 billion.  It’s $7-9 billion more than that — and of course that is due to policy choices and program expansions (the state budget office claims current spending is on a $38.5 billion pace, not aligned the $36.5 billion budgeted for in FY15).  Some of the program expansions are helpful, some less so.

That’s the context, but here is what is driving this year’s yawning budget gap:

The rose-colored glasses worn by budget officials, who weren’t frankly very good at their jobs.  The budget did not take into consideration the $70 million decrease in revenues due to the lowering of the income tax (triggered by increases in state revenues). Expectations around fee revenues were far too high ($179 million), as were those associated with tax and non-tax settlements ($100 million).

State agencies were simply left to their own devices and badly managed.  MassHealth is said to be experiencing a $230 million overrun due to higher enrollment, rate increases for managed care organizations and Affordable Care Act fees.  The Group Insurance Commission, which is in charge of public employee health insurance, has seen much higher utilization.  And, of course, as Pioneer had been saying since August, the failure of the Health Connector led to over 300,000 people being placed on temporary Medicaid due to the failed website.  The state did not check the eligibility of people they were allowing onto Medicaid because they could not leave them without insurance as a result of the failed website.  That would have been a political disaster in an election year.  So they covered everyone who asked, even some that never should have been on a public program.  The Baker folks estimate the cost to the state in FY15 to be  $109 million, but that number will grow as tens of thousands of enrollees are still enrolled and slated to be switched over this month.  The Administration insist they will get their arms around this quickly given that it could be a 2016 problem as well.  Pioneer believes that the overall cost for FY15 and FY16 is in the $200 to $400 million range.

In some ways, you could say that what is driving the budget gap in 2015 is that the state budget managers were asleep at the wheel.

So that leaves the new administration trying to solve a $765 million mess in 5 months.  That’s the equivalent of a $1.5 billion cut in a single fiscal year.  With the Department of Children and Families, homelessness programs and local aid off the table, the Baker administration says that it will allow capital gains revenues above $1 billion to go to the operating budget rather than automatically deposited into the state’s rainy day account (as is usual practice).

So where will they cut?

Where the money is – and that’s squarely in the state’s office of Health and Human Services, which accounts for nearly 50 percent of the state budget.

Follow me on twitter at @jimstergios, visit Pioneer’s website, or check out our education posts at the Rock The Schoolhouse blog.