Massachusetts will soon face a budgetary reckoning because of a huge revenue shortfall caused by the pandemic-prompted economic slowdown. The conventional remedy to periodic budget crises caused by a soft economy — substantial spending cuts on state services like health care, state parks, and public higher education; income or sales tax increases; or a combination of the two — are unwise in this instance, and could even prolong the economic misery. Absent sufficient federal aid, the better solution is to borrow over several years to pave the way through the pandemic rough patch.
Like many states, Massachusetts has legal constraints against rolling a deficit from one fiscal year into the next. Policy makers can temporize to some degree, but ultimately a solution must be found.
The best way forward, obviously, would be an infusion of federal dollars: Unlike states, Washington can run deficits as big as it wants. The Democratically controlled House has passed legislation with almost $1 trillion to help state and local governments with their budgets. However, that legislation has stalled in the Republican-controlled Senate, which thus far shows little inclination to act. That leaves the Commonwealth, like many other states, with a vexing problem.
The developing revenue gap in the current budget (and that is expected in fiscal 2021) is substantial. In May, state tax revenues were down 13 percent from the same month last year and 15.6 percent below pre-COVID-19 projections. That means that with less than a month left in the current fiscal year (ending June 30), revenues are $2.253 billion below the level expected when policy makers crafted the $43.1 billion fiscal 2020 budget.
The final budget gap for this fiscal year will likely be higher — and a larger shortfall is expected in the next fiscal year, beginning July 1.
Against that, the state has some $3.5 billion available in its rainy-day fund. That, however, is unlikely to be enough to deal with the cumulative shortfall. Compounding the problem is the state’s effort to boost education funding, particularly for poor urban districts. The governor’s pre-coronavirus budget called for increasing education funding by $304 million next year, the first step in an effort to boost state education spending by some $1.5 billion by 2026.
Tough times offer an opportunity to scrutinize a budget for unaffordable frills or nonessential spending, but despite the age-old cost-cutting cliché, there are no large categories of waste, fraud, and abuse. Cutting the necessary amount, or even a significant fraction of it, would obviously have a large deleterious effect on vital state services and could lead to layoffs that would only exacerbate unemployment. Raising broad-based taxes in soft economic times, meanwhile, is always problematic.
That’s where borrowing comes in. If federal money isn’t forthcoming, the best way forward would be to take a page from the policy-making playbook in the budget crisis of 1989-1990. Faced with a stark, recession-driven revenue fall-off, state policy makers resorted to a variety of remedies. There were several tax increases and several rounds of budget cuts. But when all that proved inadequate, they authorized the issuance of $1.45 billion in bonds to help with the budget woes. At the time, the state budget was around $13.3 billion, so that represented significant borrowing.
To help resolve this revenue shortfall, bonding should also be on the table this year.
Borrowing a billion through bonding and paying it back over 10 years would cost somewhere in the neighborhood of $110 million for each of those years. That means for $330 million a year or so, the state could plug a gap of some $3 billion. A dedicated revenue stream to service that debt would obviously require far less of a tax increase than would be required to balance the budget in a single year.
Such a remedy obviously wouldn’t be wise if it merely delayed the need to fix a longer-term structural deficit. (The budgetary problems of three decades ago ultimately required further budget cuts before they were fully resolved.) But that’s not the case here: Our fiscal problems are caused by a once-in-a-century occurrence.
“You don’t normally do it, but this is the farthest thing from normal that there has been in our lifetimes,” says Michael Widmer, the former president of the Massachusetts Taxpayers Foundation. “It makes sense to think about dealing with the problem over a little longer term.”
It is prudent in other ways as well. In a recent letter to Beacon Hill policy makers, an array of economists and other academics noted that big budget cuts will harm essential state services like health care, education, local aid, transportation, social programs, and public safety, and hurt those populations most affected by COVID-19.
“We should work to limit the destruction from the pandemic as much as we can, including extensive borrowing," says Nobel Prize laureate economist Peter Diamond, one of the signatories to that letter.
Mind you, this is not a cure-all. Budgeting won’t be easy this year or next. Still, a wise use of borrowing through bonding could help Massachusetts make its way through this pandemic with the least possible harm.
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