In an effort to boost the state’s emergency savings account ahead of what could be tumultuous economic times, Governor Charlie Baker on Wednesday will propose automatically placing money in the rainy day fund every year.
The effort comes as the state is under pressure from Wall Street credit rating agencies, which frown upon Massachusetts’ habit of raiding its savings.
To paper over state budget gaps, policy makers, including Baker, have repeatedly taken billions meant for the fund in recent years — during a relatively good economy — even though the account is meant to be a bulwark against extreme cuts to state services when tax revenue falters.
As a result, the fund has stagnated.
But Baker, a Republican who regards himself as a prudent protector of taxpayer dollars, will propose that a small chunk of annual state tax revenue be socked away in the savings account before spending on the rest of state government is funded.
The proposition will come as part of his yearly state budget to be unveiled Wednesday, according to two senior administration officials. The Democratic-controlled Legislature could embrace it, amend it, or nix it.
The rainy day fund is primarily meant to be filled through revenue from capital gains taxes — levies on investment income — that exceeds a certain monetary threshold. But in recent years, policy makers have diverted the cash from the state’s savings account to fill budget holes.
That’s led one key financial overseer to warn that a credit downgrade — which could increase borrowing costs and be an embarrassing political albatross — may be coming for Massachusetts.
In late 2015, Standard & Poor’s changed the outlook for the state’s bond rating to “negative” — an early warning that the state’s fiscal trajectory was amiss.
Two months ago, the agency said that the state’s decision to repeatedly suspend transfers to the rainy day fund is viewed negatively.
“Continued structural imbalance and reduction of reserves could contribute to a downgrade over the next few months to a year if we believe that financial flexibility is impaired — especially during a period of positive economic growth — and leaves the state less equipped to deal with the next economic downturn,” the Wall Street agency wrote in a Nov. 22 report.
To be sure, Massachusetts is still seen as being in fairly good fiscal shape and has the second-from-highest rating from all three big bond-rating agencies. But watchdogs have sounded alarms about rainy day fund gimmickry.
In the fiscal years between July 2012 and June 2016, the state’s operating budgets — those used to pay for everything from the State Police to pensions to health care for the poor — relied on more than $2.5 billion in transfers or diversions from the rainy day fund. That, budget watchdogs say, is a startling amount of emergency reserves to tap during an economic recovery. And it sets Massachusetts up for hard times when a recession comes.
In the summer of 2007, just months before the Great Recession began, the state’s rainy day fund had a little over $2.3 billion. Now, with economists warning a new economic downturn could be coming, the fund had less than $1.3 billion at the end of last year. Massachusetts’ budget is also much bigger than it was a decade ago. That means even the same amount of savings would offer less of a cushion.
So what, specifically, is the governor’s plan?
Currently, all capital gains tax revenue above a certain monetary threshold based on inflation is supposed to be put in the stabilization fund after the fiscal year concludes. But that hasn’t been happening.
So the governor’s plan, the officials said, would take half of any capital gains revenue expected to exceed the threshold and set aside that money for the savings account before the fiscal year begins.
That means, the officials said, there would actually be money put into the account every year. And that extra cash will help Massachusetts ride out an economic downturn, whenever it comes.
The state projects how much revenue it thinks will come in each year. The other aspect of Baker’s plan is, at the end of each fiscal year, to set aside half of any money that’s above the expected revenue number. So if the state has a $100 million surplus, $50 million would go to the stabilization fund — even if that extra money came from other sources, such as the sales tax.
The new push comes as Baker, who took office in January 2015, has been working to end the practice of balancing the budget with sources of money that don’t easily recur.
For example, in the fiscal year that ended in June 2015, the state balanced its budget on $559 million in tax revenue meant for the rainy day fund, $170 million in Medicaid payments it deferred to the next fiscal year, and $89 million from selling a state office building.
Such one-time sources of revenue are problematic because policy makers must scramble to find a new source of funding the next year just to maintain the same services. Baker has reduced the reliance on such maneuvers.
Baker is up for reelection in 2018. He hasn’t said whether he is running for a second term. But if he does, the no-new-taxes Republican is likely to run on keeping the state’s fiscal house in order.