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Watchdog says state may face $1 billion budget gap

State lawmakers’ next challenge may be plugging a budget gap that could reach $1 billion in fiscal year 2017.Globe Staff/File/Globe Staff

State officials are warning of tough spending decisions ahead, as a top Beacon Hill watchdog cautioned Tuesday that Massachusetts could face a $1 billion budget gap in the upcoming fiscal year.

Though the economy and tax revenue continue to grow at a steady clip, the state faces a twofold challenge: ballooning costs for health care and other needs that are colliding with years of one-time fiscal gimmicks, the business-backed Massachusetts Taxpayers Foundation said.

In a separate interview, Governor Charlie Baker’s budget chief cautioned that the state has “gotten to the point where we have to make really hard choices.” Kristen Lepore, administration and finance secretary, said Massachusetts must wean itself from one-time sources of money and align spending with recurring revenue brought in by taxes, fees, and other sources. She indicated that legislators and residents should gird themselves for belt-tightening across state government.


She declined to endorse the $1 billion figure, but said, “Mass. Taxpayers Foundation has a lot of credibility in this area.”

The projections are likely to mean that leaner times are coming in the fiscal year that begins in July, with many government agencies seeing small or no increases in their budgets. And given that Baker has pledged not to raise taxes or fees, it could mean there is no large pool of money available to substantially increase spending on big-ticket programs prized by some legislators, such as early education.

Lawmakers are already anticipating a hard balancing act between longer-term fiscal considerations and funding state services that range from aid to cities and towns to addiction prevention to law enforcement.

“It’s going to be a very tight year,” said Senator Karen E. Spilka, chairwoman of the Senate Committee on Ways and Means. “I think it will be tough for everybody.”

Although the state has not arrived at an official number yet, outside analysts predict Massachusetts will bring in just over $1 billion more in tax revenue next fiscal year than this one.


But much of that money is already spoken for by increases in mandatory costs, from paying interest on the state’s debt to local education aid.

Representative Brian S. Dempsey, chairman of the House Committee on Ways and Means, underscored another outlay that is large and getting larger next year, adding $200 million for public employee pension obligations.

Adding that money plus other mandatory costs, he said, “the billion gets spoken for fairly quickly.”

Health care spending, particularly on the state’s Medicaid program, which serves the poor and disabled, is expected to increase at a pace far exceeding inflation.

“MassHealth is obviously one of the biggest challenges that we continue to face and that continues to be a major pressure point for us,” Dempsey said.

The Taxpayers Foundation estimated that the state relied on $619 million this year in “one-time” funds, money that doesn’t come back year after year. In all, the foundation estimates a budget gap — the difference between estimated revenue and obligatory spending — at between $800 million and $1 billion.

To be sure, such warnings have become a frequent part of the yearly Beacon Hill ritual of figuring out how to spend about $40 billion of taxpayer money. And the reality does not always turn out to be so dire.

In recent years, lawmakers have been able to fill budget holes by using one-time cash from the federal government, by draining or diverting money from the state’s rainy day fund, by pushing off bills until the next year, and by selling state assets, like a local courthouse.


But many of those options are no longer available or are increasingly tenuous.

“It’s safe to say there’s a sizable gap for fiscal year 2017, and the problem is there are limited options to address it,” said Eileen McAnneny, president of the Massachusetts Taxpayers Foundation.

In particular, there is growing pressure for Massachusetts to beef up its rainy day fund, meant to be an emergency bulwark against extreme cuts to state services if the economy turns south. In the fiscal years that ended in June 2013, 2014, and 2015, the state withdrew or diverted an ever-increasing amount of money, totaling $2.2 billion, from the fund, according to a recent report from the foundation.

Analysts outside Massachusetts have taken notice. Three Wall Street credit rating agencies this year reaffirmed the state’s bond rating, second from the highest, a ranking that means the state can borrow money at a lower cost. Fear of losing the silver-plated rating can provoke swift action from Beacon Hill.

One of the rating agencies sent up a warning flare in late November. Standard & Poor’s Ratings Services changed its outlook for Massachusetts from stable to negative. That means the rating may be lowered over the next two years, which could make it more expensive for the state to borrow money — with millions more in debt payments every year.


S&P based the change on “a decline in financial reserves over the past several years despite a prolonged period of economic expansion and generally positive revenue trends.”

But, it said, the state’s outlook could be upgraded if Massachusetts reverses its trend of rainy day fund reductions.

David Hitchcock, senior director with Standard & Poor’s and a top analyst of Massachusetts finances, said several other states have seen a “softening” in revenue in the last six months.

“But I don’t think this is really a revenue problem for Massachusetts so much,” he said. “There seems to be some unexpected spending issues.”

Joshua Miller can be reached at joshua.miller@globe.com. Follow him on Twitter @jm_bos. Click here to subscribe to his weekday e-mail update on politics.