A State of Fiscal Confusion

Governor Romney claimed Mass-achusetts is headed for a billion-dollar surplus and can afford a tax cut without sacrificing services, then made emergency spending cuts because the state is contending with an unbalanced budget.

Governor Patrick restored Romney’s spending cuts, then warned that the state is facing a billion-dollar deficit in this year’s budget.

Is it any wonder that the public is confused about the true condition of the state’s fiscal affairs?

The saga began more than a year ago when Romney started holding monthly press conferences to announce state tax revenues. He claimed they were rising at a rate that would produce a billion-dollar surplus in fiscal 2006 and called for an immediate income tax cut. During the gubernatorial campaign, Lieutenant Gov. Kerry Healey and Attorney General Thomas Reilly joined the billion-dollar surplus bandwagon, using the claim to justify their support of a lower income tax rate.

Unfortunately, Romney’s assertions had no basis in fact. Although tax revenues in 2006 did rise by a billion more than estimated, the budget depended on $600 million in reserves, so the actual surplus was much smaller.

For fiscal year 2007, which started on July 1, the Legislature once again ill-advisedly balanced the budget with reserves, betting that revenues would exceed the forecast and not actually require their use. In the meantime, however, growth in tax revenues was slowing markedly — from an increase of more than 8% in fiscal 2006 to an estimated 4% in FY ’07.

In October, Romney suddenly announced more than $400 million in emergency spending cuts, citing slowing revenue growth and the budget’s dependence on reserves. The amount of reserves in question — about $250 million at this stage — is too small to warrant ‘emergency’ action with six months remaining in the fiscal year. While Patrick’s decision to restore the cuts leaves the state with a tight 2007 budget, there is still a reasonable likelihood of ending the fiscal year on June 30 without drawing on reserves.

The back and forth on FY ’07 has created an unnecessary and confusing distraction from the real problem, namely how to produce a balanced budget for FY ’08.

Patrick’s estimate of a billion-dollar shortfall is based on calculating the cost of maintaining current state programs next year, plus funding new obligations like post-retirement medical care, while assuming that the growth in tax revenues will continue to slow.

Although the precise shortfall is hard to project, this bleak fiscal picture is consistent with the numbers presented by Romney’s fiscal experts in briefing Patrick’s Budget and Finance transition working group, which I chaired.

In September, the Taxpayers Foundation released a detailed analysis of state finances for the next five years. Even with optimistic revenue assumptions, the study concluded that the state will fall billions of dollars short in meeting priorities like healthcare, local aid, higher education, and capital investments.

The Patrick administration faces a huge challenge in managing sky-high expectations with limited resources, a task made more difficult by the overblown rhetoric and confusion surrounding state finances.

Michael J. Widmer is president of the Massachusetts Taxpayers Foundation.