Beacon Hill is bracing for a round of state budget cuts from Governor Charlie Baker. Again.
Just weeks after the Republican signed a $39 billion state budget into law, Democratic legislators say they expect him to use his executive authority — as he did this year — to chop programs they support, but he says the state can’t afford.
The fiscal tug of war comes amid relatively good economic times, raising a confounding question: Why does Massachusetts, which has been in an economic recovery for seven years, constantly careen from one budget gap to another, with officials announcing, again and again, that money coming in won’t cover expenses?
Conservatives insist spending is out of control. Liberals blame a series of tax cuts instituted around 2000. And Baker and the House of Representatives, which is controlled by Democrats, have effectively blocked any increase in taxes.
But several budget analysts and a Globe review of state data paint a more complicated picture, with three notable root causes of the enduring budget crisis: ballooning health care costs, weaker tax revenue increases than in every other economic recovery in the modern era, and policy makers’ addiction to fiscal gimmicks that allow them to avoid hard choices.
■ State spending on Medicaid, the health program for the poor and disabled, has skyrocketed — generally outpacing inflation, personal income, and tax revenue growth. The program eats up an increasingly large portion of the budget pie, constraining the cash available for everything else, from education to support for cities and towns. Medicaid now makes up more than a third of state spending, up from less than a fifth in 2000.
■ Tax revenue growth since the Great Recession has been slower than in every other economic recovery going back to the 1970s, crimping available money for expanding programs. Beacon Hill budget makers, who could count on 7 percent growth in tax revenue in the mid-’00s, now must make do with more modest annual boosts — just 2 percent for the most recent fiscal year.
■ And policy makers have, budget after budget, used quick fixes instead of making tough choices. They’ve diverted and drained billions meant for the state’s emergency savings account. They’ve put off until next year bills that were meant to be paid this year. They’ve used money meant for pensions and retiree health care to plug short-term budget holes. And they’ve repeatedly made unrealistically optimistic projections that allow them to balance budgets at the cost of burdening future lawmakers.
“Now, we’re running out of gimmicks,” said Eileen McAnneny, president of the business-backed Massachusetts Taxpayers Foundation.
In the fiscal year that ended last summer, policy makers used $1.2 billion in one-time revenues and savings to balance the budget, according to the state’s independent financial report. They used $621 million in tax revenue meant for the state’s emergency rainy day fund, pension fund, and retiree benefits fund. They put off payment of $170 million in Medicaid bills until the next year. They relied on hundreds of millions of dollars from one-time maneuvers, such as selling a state office building.
Policy makers also engaged in another frequent Beacon Hill gimmick: projecting unrealistically low costs for services such as housing homeless families, funding sheriffs, and lawyers who defend indigent defendants. (They had to supplement those areas with more money later in the year.)
In total, the various budget maneuvers are the equivalent of a family balancing its budget by draining the savings account, racking up credit card debt, diverting money meant for retirement, selling a car, and expecting there will be unrealistically low medical costs for a sick child in the year ahead.
Such strategies can get the state through a few years and allow policy makers to avoid cutting programs that residents care about. But the strategies are increasingly difficult to sustain and could mean that cuts avoided in the past are inevitable in the future when the economy takes a turn for the worse.
One budget-pinching trend that is out of policy makers’ hands is how much tax revenue increases. In the late 1970s and early ’80s, Massachusetts could count on an average of 11 percent annual revenue growth, outpacing even the high inflation of that era, according to the Massachusetts Taxpayers Foundation. In the ’90s, annual growth averaged 6.5 percent. And between fiscal 2004 and 2008, tax revenue grew, on average, 7 percent every year, the foundation found.
But Massachusetts, like many other states, is seeing slower growth now, which constrains how much new money is available to spend. Current Baker administration projections anticipate just under 4 percent growth this year, but that number could drop as new information comes in.
Economists are split on why this recovery — across the country — has been so anemic.
Perhaps the easiest problem to diagnose and the hardest one to solve is rising health care costs. Massachusetts — and the federal government — have tried to slow that growth. But health care costs have, year after year, outpaced inflation and tax revenue growth.
Spending on Medicaid, called MassHealth in Massachusetts, rose almost 15 percent from the fiscal year that ended in June 2014 to the one that ended last summer. But over the same period tax revenue grew just over 6 percent.
“The biggest difficulty the state faces in closing the circle on the state budget is health care costs,” said Jim Stergios, who directs the conservative-leaning Pioneer Institute.
Stergios points to the climb in the number of people enrolled in Medicaid as part of the reason for rapidly rising costs for the state. In the fiscal year that ended in 2001, there were 998,000 people enrolled in the program. Last fiscal year, officials estimate there were 1.85 million members.
Part of the expansion of Medicaid, for which the state receives federal reimbursement, has been intentional and has helped make Massachusetts the state with lowest percentage of uninsured residents. The 2006 Massachusetts health care law and the president’s 2010 health care overhaul both aimed to insure more people, including through expansions of Medicaid.
Some budget analysts say having more than a quarter of the state’s population enrolled in Medicaid is not sustainable, given that providing them health care costs more and more each year.
One underlying cause, said Jonathan Gruber, an MIT economist who helped craft the state and federal health care laws, is the cost of taking care of older people. Nationally, he said, the disabled and elderly are 30 percent of the Medicaid program population, but account for two-thirds of its spending.
Ultimately, the state’s decision to spend so much on health care for the poor and disabled is a moral choice, said Dr. Stuart Altman, chairman of the state’s independent Health Policy Commission, which monitors costs.
Altman said Massachusetts has made several decisions that are expensive: to cover the health care of the state’s “most vulnerable” residents and have a wider definition for who those people are than most other states; to cover a broader array of services for them; and to allow Medicaid recipients to go to any institution that will take them, including highly ranked facilities like Massachusetts General Hospital.
To tackle Medicaid costs, he said, would probably require lowering the already-below-market rates the state pays providers, limiting eligibility, reducing benefits, or narrowing access to doctors and facilities for almost 2 million poor and disabled adults and children.
Asked if the current trajectory for Medicaid spending is sustainable in Massachusetts, Altman was quick to answer.
“Sure, it’s sustainable — as a state, we can afford it,” he said, noting that taxes could be raised, money shifted from other programs, priorities rearranged. “It’s just a question of whether we want to or not.”