It wasn’t so long ago that Massachusetts seemed to be swimming in cash.
Month after month, the state raked in tax revenues far ahead of predictions. By the end of the 2008 fiscal year, the state had collected more than $1 billion over its original estimate.
Then, suddenly, the bottom fell out.
Faced with a $1.4 billion budget gap, Gov. Deval Patrick announced last Wednesday more than $1 billion in cuts and spending controls, the elimination of 1,000 state jobs and the need to raid the state’s rainy day fund for another $200 million.
How did the state fall so far so fast?
The answer has to do in part with forces well outside the control of any state government, such as the turmoil rocking world markets. But even as Massachusetts was reaping greater than expected tax revenues, there were warning signs of trouble ahead.
In April, House Speaker Salvatore F. DiMasi unveiled what he described as an “austere” state budget plan. Lawmakers hiked cigarette and business taxes to bridge a spending gap. And state Treasurer Timothy Cahill urged lawmakers not to raid the state’s savings accounts too deeply.
Even Republican lawmakers, who’d first seemed skeptical about fears of a coming downturn, voted against the $28.2 billion budget, saying the state needed to curb spending even more.
In the end, the budget approved by lawmakers and signed by Patrick in early July proved not austere enough.
The biggest red flag of all might have been the budget’s reliance on volatile capital gains revenues — the taxes paid on profits from the sale of stocks, property or other assets.
During the 2008 fiscal year, the state collected $1.9 billion in capital gains taxes, but by the spring it was already clear that the level of collections couldn’t last, according to Michael Widmer, president of the business-backed Massachusetts Taxpayers Foundation.
Widmer also was critical of the decision to dip into state savings accounts last fiscal year.
“We were building in spending increases that weren’t sustainable,” he said. “The fact that we were heading into an economic decline was totally predictable.”
To be fair, the state hasn’t lost $1.4 billion — yet.
The number represents the difference between two estimates — the original estimate of revenues for the 2009 fiscal year, pegged at $21.4 billion, and a revised estimate released this week of $20.3 billion.
The $1.1 billion difference, coupled with another $300 million in unavoidable increases not included in the original budget, brings the estimated deficit to $1.4 billion.
Patrick blamed the dramatic reversal in the volatility of the financial markets, the tightening of the credit market, the drop in capital gains and an inevitable slowdown in business activity and consumer spending that translates into a drop in withholding and sales taxes.
The governor said the decline was so precipitous that the state needed to take action immediately, just four months into the new fiscal year.
“We’re making decision on the strength of evidence, not hunches, and the evidence and the impact is only beginning to get at us,” Patrick said.
He also defended the administration, saying he’d anticipated a possible downturn as early as March when he instituted a hiring freeze and ordered agencies to begin reining in spending.
State Sen. Steven Panagiotakos, D-Lowell, who heads the powerful Senate Ways and Means Committee, said lawmakers were also concerned about the possibility of a downturn and included a provision in the budget requiring mid-month revenue reports — a kind of early warning signal.
That signal went off in mid-September when the report showed a sharp decline.
“This situation is very fluid, but the one thing we do know is that the fluidity is taking us into dangerous waters,” he said.
Republican lawmakers said longer term fixes would help avoid a repeat of the troubles — like putting all state contracts online to let voters see how their money is spent — but also agreed more immediate action like Patrick’s plan is needed.
“This is a necessary correction for a budget that started out of balance and has growing increasingly unsustainable over the past few months,” said state Sen. Bruce Tarr, R-Gloucester.
With the state firmly in fiscal crisis control mode, lawmakers this week began lining up behind Patrick’s plan — and steeling the public for a long haul.
Senate President Therese Murray said there’s no way of knowing if another round of cuts may be needed before the end of the fiscal year on June 30.
“We don’t know if we will be back again,” she said.
Even Patrick couldn’t say for sure if the state may have to brace for more belt tightening. The Democrat was asked whether he had a “Plan B” if the new plan doesn’t go far enough.
“Of course. And the Plan B is to go deeper,” Patrick said. “The plan is if we have to, to take further cuts.”
(Associated Press)
