[statecom-discuss] Fwd: Preliminary Analysis of the Governor's FY 2008 Budget

[Merelice]

Greetings,

I didn't get to email yesterday and I'm catching up. Below is an
analysis of the state budget sent to an email list addressed primarily
to Haitians. Gerthy Lahens (a Haitian GRP member) put several of us
Rainbow Coalition folks on the list. Thought it would be of interest
to others in the GRP.

Merelice


---------- Forwarded message ----------
From: Milorin, Henry <Henry.Milorin at fmr.com>
Date: Mar 1, 2007 9:33 PM
Subject: Preliminary Analysis of the Governor's FY 2008 Budget
To: Henry Milorin <henry.milorin at verizon.net>

Greetings,

The proposal released yesterday by the Governor is a bare-bones
budget. Faced with a budget gap of close to one billion dollars there
were three options for balancing the budget: reducing spending;
finding new revenue; and using reserve funds. The budget proposed
yesterday employs all three strategies.

The House One budget includes modest new initiatives, such as
expanding community policing, funding a longer school day for
interested schools, and expediting permitting to make it easier for
the state to attract new businesses. There are also several areas in
which funding levels appear to be below the cost of providing the same
level of services provided in FY 2007. Finally, this budget does not
provide the resources to restore many of the deep cuts in higher
education, public health, environmental protection, and other areas
where the tax cuts of the 1990s forced deep spending cuts during the
recession.

On the revenue side, the budget calls for reforms that would
significantly improve the fairness and efficiency of the
Commonwealth's corporate tax system. These proposals would make it
much harder for corporations to shift money around among subsidiaries
to take advantage of loopholes that allow them to pay less in taxes
than companies that do not engage in these aggressive tax avoidance
strategies. The administration projects that these reforms will
generate $295 million to help balance the budget this year.

The budget also uses some one-time and reserve funds, such as money
from the Health Care Security Trust Fund and a portion of the interest
earned by the stabilization fund. In addition, the budget would not
make a deposit into the rainy day fund that is ordinarily made.

This preliminary analysis provides a quick overview based on our first
few hours analyzing the budget. A more complete analysis will be
provided in our Budget Monitor, which will be released late next week.

Aid to Cities and Towns
• With lottery revenues expected to be relatively flat in FY 2008,
lottery aid to cities and towns increases by only $15 million, or 1.6
percent. Payment in Lieu of Taxes (PILOT) funding for communities with
large quantities of state land will increase by $2.5 million. With the
Additional Assistance category of local aid remaining flat, as has
been the case for several years, total non-education aid to cities and
towns will increase by only 1.3 percent between FY 2007 and FY 2008,
likely not keeping up with inflation.

• A new Municipal Police Grants program is proposed to enable cities
and towns to hire additional police officers. The program, funded at
$30.7 million, with no more than $300,000 for program administration,
charges the Executive Office of Public Safety with devising a formula
for the distribution of funds. This is a 44.1 percent increase over
the $21.3 million provided for community policing in FY 2007. While
not traditionally considered local aid, if this $9.4 million increase
is combined with other categories of local aid, then support to cities
and towns will increase by 2.0 percent between FY 2007 and FY 2008.

• The Governor's budget includes a transfer of $634 million for school
building assistance, which the administration identifies as another
component of aid to cities and towns. This reflects a $62 million
increase over the $572 million transferred according to the FY 2007
budget. This funding level is determined by formula, and monies are
diverted from revenue rather than appropriated. This represents
valuable aid to cities and towns in maintaining their educational
infrastructure, but it is not unrestricted local aid.

K-12 Education
• The Governor's budget would increase funding for Chapter 70 aid for
K-12 education from $3.505 billion in FY 2007 to $3.705 billion in FY
2008, an increase of $200 million or 5.7 percent. While the formula
used in calculating aid to cities and towns is the revised formula
used in FY 2007, cities and towns with excess local effort will find
their required local contribution reduced by 30 percent of the excess
effort rather than the 40 percent that was scheduled to be used in FY
2008. All districts have been kept at or above their foundation
funding level and all districts have received an increase of at least
$50 per pupil.

• Two grant programs highlight the Governor's budget in K-12
education. Kindergarten expansion grants, allowing districts to
migrate from half day to full day kindergarten classrooms, are
proposed to increase from $27.3 million to $39.5 million. Funding for
extended time learning grants, allowing schools to lengthen the school
day, is doubled from $6.5 million to $13 million.

Higher Education
• The Governor's budget would increase core funding to the University
of Massachusetts system, state colleges, and state community colleges
from about $898 million in FY 2007 to $909 million in FY 2008. While
the increase is beneficial, it is probably well below the rate of
inflation these institutions will face in their costs.

• While core funding for the state's higher education institutions
will increase slightly under the Governor's budget, overall higher
education funding is flat. This reflects the elimination of earmarks
for particular programs or projects at some of the state's
institutions.

Public Health
• The current FY 2007 budget for public health includes more than
$40.1 million added to the FY 2007 General Appropriation Act by
supplemental appropriations, particularly the health reform act
(Chapter 58 of the Acts of 2006). The Governor's budget recommendation
does not continue the increased funding provided by these supplemental
funding budgets in certain line items. For example, community health
centers and substance abuse programming received funding increases in
the FY 2007 supplemental appropriations, and the Governor's budget
recommends less funding in FY 2008 for these areas than their totals
in FY 2007. The Governor also consolidated certain health promotion
and disease prevention programs, but the Governor's total funding
recommendation for these items is slightly less than in FY 2007.

• The Governor does recommend significant increases in certain line
items, most notably funding for smoking prevention and cessation
services. The Governor recommends almost doubling funding, from $8.3
million in FY 2007 to $16.3 million in FY 2008. The Governor also
increases by two-thirds the funding for the universal immunization
programs, adding $24.8 million more for a total of $61.2 million.
Other public health line items that receive significant funding
increases include early intervention and support for the public health
hospitals.

• The Governor's budget recommends a total of $547.0 million in
funding for public health, a $32.6 million – six percent – increase in
funding from the current FY 2007 total. Nevertheless, the Governor's
recommendations still lag 12 percent below total funding in FY 2001.

Human Services
• Human services spending in the Governor's budget increases from
about $4.5 billion in FY 2007 to $4.6 billion in FY 2008. Human
services, in this context, includes early education and care, elder
affairs, income supports, mental health, mental retardation, social
services, and services for veterans and the disabled. This 1.5 percent
increase in spending, lower than inflation, will likely not be enough
to keep every program at the same level of service as was provided in
FY 2007. Furthermore, FY 2008 spending levels, despite the increase,
remain 2.0 percent below the inflation-adjusted levels of human
services spending in FY 2001.

Group Insurance Commission
• The Governor's budget appropriates $803 million for the Group
Insurance Commission (GIC). This is a drop of 24 percent compared to
FY07. It appears that this is a result of changing how retired
employees' health care is funded.

Medicaid/MassHealth and Other Health Programs
• The Governor's budget recommendations account for
Medicaid/MassHealth line items slightly differently than in FY 2007.
One significant difference is that Medicaid rate enhancements for
nursing home facilities, formerly funded through the off-budget Health
Care Quality Improvement Trust, is now reflected as a direct
appropriation of $288.5 million. The Governor has also consolidated
funding for a variety of health care programs, including the
MassHealth program for persons with HIV, the MassHealth program for
women with breast or cervical cancer, and health insurance for
pregnant women. The Governor's recommendations also continue support
for the reforms initiated with the Commonwealth's health reform,
including expanded benefits and eligibility for the MassHealth
programs, and support for a new wellness initiative. Although the
Governor's documents suggest that there are $179 million in savings
from the Medicaid program, it is not immediately clear where these
savings will come from.

Revenue
• Along with the budget, the Governor filed legislation to reduce
corporate tax avoidance by approximately $295 million in FY 2008. We
recently released a Facts at a Glance report showing that business
taxes in Massachusetts are currently among the lowest in the nation.
The tax legislation accompanying the budget closes corporate tax
loopholes in several ways:


o implementing combined reporting so that companies cannot shift
income between subsidiaries to reduce their taxes.
o conforming to federal rules so that companies cannot avoid taxes by
being classified as partnerships in one state and corporations in
another state;

o requiring that businesses owned by insurance companies pay the same
taxes as other businesses;
o prohibiting corporate taxpayers from placing real estate in a
subsidiary entity and selling that entity rather than the real estate
itself to avoid the real estate transfer tax;

o ensuring that internet sites that sell hotel rooms remit the sales
tax on the full cost of the rooms they sell (rather than on the
wholesale price they pay to the hotels);

o reducing the ability of businesses to lease equipment from their own
subsidiaries to avoid paying the full sales tax upfront.

Structural Budget Issues
• The House One Budget does not include a balance sheet structured in
a manner that allows a reader to determine easily whether the budget
is structurally balanced. Several provisions in the budget may be
cause for concern.


o The budget appears to use $50 million from the Health Care Security
Trust Fund to pay for ongoing costs. By using a one-time revenue
source to pay for ongoing costs, the budget likely creates structural
balance problems.

o The budget does not make a $100 million deposit that would
ordinarily be made into the stabilization fund. While this option
would be available in future years and therefore may not cause
structural balance problems, if the Commonwealth wants to return to
the practice of making automatic deposits into the stabilization fund
in future years then it will have to find a way to fill this gap

o The budget uses 84 percent of the interest that the rainy-day fund
is expected to earn during FY 2008 to fund this year's budget; this
amounts to $75 million.

o The budget also uses a temporary source to begin funding retiree
health care obligations. It transfers the balance in the Health Care
Security Trust Fund (likely approximately $400 million) to the State
Retiree Benefits Trust Fund. While this is a use of one-time revenue
it is also a commitment to fund a future obligation that has never
before been funded. This transfer has no positive or negative effect
on the bottom line of this year's budget but it does set the
Commonwealth on a path to meeting a future obligation (which will
require increasing appropriations from the general fund in future
years).

Budget Transparency
• This budget makes significant progress on transparency and provides
information that makes it much easier for an ordinary reader to
understand the meaning of the funding recommendations made in the
budget document. The budget materials provided on-line include several
new features that make the budget a more accessible and informative
document, including the following:


o a "Budget Navigation Guide" that provides information about how to
understand the budget, where to find information about both spending
and revenue, and links to additional background information;

o tables that provide extensive information on current and prior
spending levels by line item so that the reader can see where spending
is increasing, where it is falling, and how current appropriations
compare to historic trends;

o a spreadsheet that includes all of the appropriations by line item
and can be easily downloaded;
o mission statements and organizational charts to explain the goals,
responsibilities, and structure of each state department (to find this
you have to click on "Department Information" when you get to the page
with the budget of a given department).

• While the progress on transparency is impressive for an
administration that has been in office for less than 60 days, there
are several areas where additional progress could still be made. In
addition to all of the new information provided in this year's budget,
ideally a transparent budget would include several other features,
such as the following:


o a clear and complete balance sheet that separately identifies
ongoing and temporary spending and ongoing and temporary revenue and
allows the reader to determine easily not only whether the budget is
balanced, but also whether it is structurally balanced;

o short descriptions of each program funded that includes a clear
statement of goals and objectives;
o information about caseload assumptions and other data that would
allow the reader to determine when spending changes are due to
caseload or cost changes rather than the result of decisions to expand
or cut a program or service.