The eye of the storm

From The Beacon, October 2009, Vol. XXXV, #9

The national and global downturn that we’ve been living through is being called the Great Recession, effectively describing the current economic crisis as our country’s worst since the Great Depression of the 1930s. While there have been some recent indicators that the economy has hit bottom, and may soon begin a long and arduous climb to recovery, it is far too early to believe that the worst is behind us.

The recession’s impact on state and local government has been extraordinary. Because the vast majority of government funding comes from taxes tied to our economy, all economic downturns hurt public-sector budgets and programs. This time, the hurt has reached record proportions. The collapse on Wall Street vaporized so much wealth that capital gains taxes have effectively disappeared. Near double-digit unemployment and huge job losses have gouged the income tax base. Frightened consumers have stopped spending, bringing sales tax collections to a standstill. Corporate tax payments have declined almost as much as the Big Three auto manufacturers.

According to the National Conference of State Legislatures, states have already closed a collective budget gap of more than $268 billion since the recession started in December 2007. Much of that deficit has been bridged at the expense of municipal governments all across the country. Here at home, local aid accounts were slashed by nearly $700 million in the fiscal 2010 budget, blanketing every Massachusetts city and town in red ink and forcing massive budget and service cuts.

We all have fresh memories of the dismal events of the past year, with tax revenues falling on a monthly basis and the news getting worse each day. After the state had revised revenue estimates three times and closed a $5 billion shortfall (by slashing the budget, increasing taxes, draining the state’s stabilization fund, and spending more than three-quarters of the one-time aid in the federal stimulus bill), cities and towns built their fiscal 2010 budgets on a much smaller (and weaker) foundation.

By comparison, the news has been relatively quiet since July. But no news is not always good news.

The budget problems for Massachusetts are not over. We appear to be in the eye of a fiscal storm. To get a consensus portrayal of our situation, a quick check with Wikipedia yields a description of the eye of a hurricane as “by far the calmest part of the storm, with no wind at the center and typically clear skies,” and notes that “a common mistake, especially in areas where hurricanes are uncommon, is for residents to wander outside to inspect the damage while the eye passes over, thinking the storm is over. They are then caught completely by surprise by the violent winds in the opposite eye wall. The National Weather Service strongly discourages leaving shelter while the eye passes over.”

The National Conference of State Legislatures has estimated that nationally, states are facing another $60 billion or more in budget shortfalls for fiscal 2011, a number that is sure to escalate. These gaps come from falling tax revenues, exhaustion of the federal stimulus money and other one-time revenue sources, and rising costs (e.g., energy and health).

Massachusetts is a prime case study. This year’s fiscal 2010 state budget is predicated on lower tax collections, but it is very likely that the benchmark was too optimistic and was set too high. For example, the prediction was that this year’s September tax collections would come in $90 million lower than last year’s. But during the first two weeks of September, tax revenues were $114 million lower than the same period a year ago, a loss that is $24 million more than was expected for the whole month.

Based on this news, the governor has publicly said that it is very likely that he will need to impose mid-year budget cuts on Executive Branch agencies. The state’s fiscal chief has ordered department heads to prepare a list of potential reductions.

Under state law, the secretary of Administrations and Finance will make a determination by Oct. 15 whether to adjust the revenue forecast downward, which would trigger a round of “9C” cuts on state agencies, with the governor in charge of reducing expenses to close any budget gap. The governor and the Legislature would need to pass a special act in order to cut  local aid, as was done in January of this year. There has been no such talk on Beacon Hill as of now, but the MMA is on guard, prepared to vigorously oppose such an effort. Further cuts to local aid would decimate municipal services and cripple the core programs that hold up our struggling economy.

If this indeed is the eye of the storm, now is the time for the state to take immediate action to give local leaders the tools to build stronger shelters to withstand the next wave of economic distress.

Cities and towns need relief from the Quinn Bill’s unfunded mandates. Localities need the authority to change health insurance plans outside of collective bargaining in order to save taxpayers money (power the state has, but refuses to share with cities and towns). Municipalities need relief from pension funding mandates (specifically, the 2030 deadline for full funding) that will force skyrocketing payments in the next year. Communities need the power to regionalize services as a management decision instead of needing union approval. The second half of the telecommunications tax reform package should pass. And we need the state to fund its commitments to cities and towns or else relieve localities of the mandates and requirements that have been imposed.

We’re in the eye of the storm, and the state would be wise to follow the advice of the National Weather Service: Don’t leave the shelter and wander about thinking the worst is over, as that’s just too dangerous.

We all can see that difficult and trying times are ahead. The crisis will last for two or three more years. Now, during this slight abatement in the storm’s intensity, we have a chance to build a better shelter for our communities and citizens. Local leaders are on the job, determined to protect their residents, but cities and towns need powerful tools, and they need them now, before the eye passes over and the torrent returns.