After all the rainy days, savings suffer

State had the reserves to weather the storm, but little is left and the forecast is cloudy

Patriot Ledger State House Bureau

State leaders have made some grim decisions during the latest economic downturn, cutting about $3 billion in four years from state-funded programs such as public education and health care for the poor.

But it would have been far worse if the state hadn’t socked away $2.3 billion over seven years during the 1990s.

“It was the difference between surviving and not surviving,” said Sen. Therese Murray, a Plymouth Democrat and the state’s top budget writer. “Many other states didn’t. We didn’t have to borrow, we didn’t have to go to heavy bonding, and we didn’t have to do the massive cutbacks like many other states did. We were very lucky we put that money away.”

Today, the rainy day account is all but dry again. Legislative budget writers want to spend $650 million of the state’s remaining $800 million in reserves in the fiscal year that begins July 1. That would leave about $150 million in reserves, a far cry from the $2 billion to $3 billion experts would like the state to have tucked away, at least when economic times are good.

The state also has some reserve accounts left over from federal sources, such as $444 million from the tobacco lawsuit settlement, money that is theoretically supposed to pay for health services.

“If we’re talking about the kind of big recession that occurs every 10 years or so, you need that amount to make your way through it,” said Cam Huff of the Massachusetts Taxpayers Foundation. “The question is, how do you get there?”

An unexpected increase in tax revenues means the state will have a little extra money for the fiscal year that begins July 1. But there’s little agreement about how to spend it.

In the same breath, Gov. Mitt Romney announced an extra $250 million in the Medicaid budget and called for a tax cut. Romney said projections show as much as $1 billion more available in this fiscal year and the next than he believed when he filed his budget in January.

Romney wants to cut the state income tax from 5.3 percent to 5 percent, noting that voters in 2000 called for the rollback of the income tax. That has become a campaign platform for this year’s Republican legislative candidates as well.

“It is time to carry out the will of the voters,’’ said Romney, citing the recent turnaround in the state’s economy. “Let’s get this under way. It helps the taxpayers, it follows their voice at the ballot box and it further stimulates our economy.”

House Speaker Thomas M. Finneran, however, wants to put more money back into a rainy day account. Finneran is calling for a constitutional amendment requiring the state to set aside 1 percent of all tax revenues in reserve, about $150 million at the current rate.

In the business world, companies are advised to keep at least six months of revenue in reserve in case of a sudden drop in revenue, said Northeastern University’s Barry Bluestone, a professor of political economy.

For the state, that would mean having $12 billion on hand – an unrealistically high goal, Bluestone said. He suggests the state’s reserves should be about $4 billion, or about two months’ worth of state revenues.

“When times are rosy, we should be building up a much larger rainy day fund,” Bluestone said.

“What you want to do is spread this out when revenue is flooding in ... so that when things really get tough there are more things to keep state and local programs going.”

That’s easier said than done, as elected officials often prefer to spend available money.

“Because states generally don’t do this, they actually contribute to the depths of recessions when they have to lay off people and cut back on spending,” Bluestone said.

Bluestone said he would not cut taxes now that the economy is picking up. He said he would put extra money in the reserve funds, but does not support a constitutional amendment requiring the state to do that.

One of Bluestone’s former students, Larry Makovich of Lexington, studied state rainy day funds for his doctoral dissertation. He said that even at its height of $2.3 billion, the state’s reserve fund was inadequate. And the Legislature compounded the problem by voting to raise taxes in 2002.

“Exactly what you don’t want to do in an economic downturn,” Makovich said.

On the other side of the debate are those who argue that excess money belong to the taxpayers and should be returned.

For that reason, the state has a cap on how big its reserve accounts can grow: 15 percent of the budget. On a $22.5 billion budget, the current cap is $3.5 billion.

For now, the state is a long way from reaching it.

Tom Benner may be reached via email by clicking here.

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State budget surplus

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A special report
Published June 12-17, 2004