Massachusetts could be facing a $1.5 billion shortfall in the coming fiscal year, forcing difficult choices on the new administration of Governor Charlie Baker and the Legislature.
The estimate comes from a leading Beacon Hill watchdog, and Baker’s budget chief agreed that it is in line with the administration’s own projections.
Kristen Lepore insisted Baker’s budget proposal will try to “minimize the impact,” but she declined to say if painful cuts are coming.
She instead said state spending is growing at almost twice the rate of tax revenue, which Lepore emphasized is “unsustainable.”
And she underscored that Baker’s proposed state budget, set to be filed March 4, will not raise taxes or fees, nor tap the state’s rainy day fund, meant for fiscal emergencies.
The president of the business-backed Massachusetts Taxpayers Foundation offered a warning to organizations that rely on state funding: “Brace yourselves for a new reality,” Eileen McAnneny said.
The expected hole in the budget is for the fiscal year that begins in July. It is driven by two sets of fiscal troubles, the Taxpayers Foundation found.
The first is significant increases in costs for items and programs considered nondiscretionary — such as Medicaid, the state-federal health program for poor and disabled people, and pensions — just to keep the same level of service next year.
The projected price tag is $1.4 billion. And those cost increases are poised to grow at a faster rate than the expected uptick in tax revenue.
In all, the Taxpayers Foundation estimated the state will have about $872 million in additional tax money available for its operating budget in the new fiscal year.
The second fiscal trouble, the foundation said, is the state’s heavy reliance on one-time sources of money — pots of cash that are tough or impossible to tap again — this fiscal year.
Those sources of money total about $1 billion and include tax settlements with corporations, a temporary diversion of tax revenue intended for the state’s rainy day fund, and casino licensing fees.
Massachusetts budgets often depend on unreliable revenue streams, even though some budget specialists frown on the practice. But a significant chunk of the one-time money was used in recent weeks by Baker and the Legislature to close a $768 million deficit in this year’s budget. Those fixes have a cascading effect on the next year’s budget.
The group’s projected $1.5 billion shortfall assumes funding for programs considered discretionary, from public safety to aid to cities and towns, stays the same. But to close the gap, it predicts there will be reductions in funding for everything from higher education to services for the needy.
“There will be no sacred cows,” said McAnneny, the Taxpayers Foundation president. “Everyone will have to come in and justify their existence in a way they probably haven’t had to before, simply because the problem is so sizable.”
The group says the gap could be smaller if the Baker administration is able to reduce the skyrocketing costs of Medicaid, a major driver of budget increases.
Whatever the administration of Baker, a Republican, decides to propose in its budget next week, the Democratic Legislature will have the final say. Each chamber will vote on its own budget plan and has the Democratic heft to override any vetoes from the governor.
The Foundation’s projection is anchored in the prevailing wisdom on Beacon Hill: There will be no tax or fee hikes this year. Baker opposes them and Speaker Robert A. DeLeo has said the budget plan that will come out of the House Committee on Ways and Means will contain no new taxes and no new fees.
Noah Berger, president of the liberal-leaning Massachusetts Budget and Policy Center, said the estimated gap is not that different from years past. He attributed the continued shortfalls to tax cuts put in place by voters and the Legislature in previous decades.
“We do continue to face long-term budget problems that we have had since cutting the income tax by $3 billion,” he said, “and there are no easy solutions.”
Berger added that if the upcoming fiscal year’s budget is balanced simply by cuts, “that could hurt a lot of people and the strength of our economy.”
He said cuts to transportation and education, in particular, could damage long-term economic prospects.
Baker took office on Jan. 8, succeeding Democrat Deval Patrick, and was instantly faced with the $768 million gap in the current budget. Through cuts and savings, Baker and the Legislature appear to have closed that gap and balanced the budget.
But Lepore, secretary of the Executive Office for Administration and Finance, said that a lot of work remains.
Despite relatively good economic times and tax revenue that is poised to grow almost 5 percent in the next fiscal year, she said the state nonetheless faces a shortfall.
“Spending growth has been exceeding revenue growth, and there has been a reliance on one-time sources. Those two things have collided,” said Lepore. “So we’ve reached a point where we really need to right-size the budget.”