Top-down ‘deficit sharing’ weakens fiscal partnership

From The Beacon, December 2014​

On Nov. 19, outgoing Gov. Deval Patrick unveiled a plan to impose $65.8 million in immediate mid-year local aid cuts as a central part of his efforts to close a $329 million state budget deficit that was disclosed just two days after the statewide election.

The governor’s plans included legislation to slash fiscal 2015 unrestricted local aid by $25.5 million, and $40.3 million in mid-year reductions to key municipal and school accounts in the state budget, implemented using the governor’s unilateral “9C” budget-cutting powers. Together, these local aid cuts represent 23 percent of the $284.4 million in overall budget reductions sought by the administration.

Coming with virtually no warning, the governor’s cuts are bad news for cities and towns in every corner of the state, and are designed to shift the state’s fiscal problems onto communities in the middle of the fiscal year. This style of top-down deficit sharing is extremely disruptive, especially so late in the year, since communities have no options other than reducing services to their residents or draining all-too-thin reserves, weakening their overall fiscal condition.

The term “deficit sharing” is appropriate – of the 352 budgets in question (351 local and one state), only state government is running a deficit, and the governor’s plan to eliminate the 
Commonwealth deficit relies on shifting an oversized share of the burden onto cities and towns.

While the administration emphasized its decision to propose no reduction in fiscal 2015 Chapter 70 education payments, the plan does include the elimination of $29.6 million in funds that have been promised to reimburse communities for the cost of school transportation, special education programs, charter schools, and other key school accounts. At nearly $30 million, these mid-year 9C cuts are in effect now. Thus, the local aid reductions will certainly be harmful to schools, even if Chapter 70 remains untouched.

Every city, town and school district will be hit with one or more of these immediate 9C budget cuts. In most cases, the cuts will feel much deeper because the reductions are being implemented five months into the fiscal year. For example, with only seven months left in fiscal year 2015, a 10 percent cut in an account will translate into a 17 percent cut from now to the end of the year, and a 50 percent cut in a program will translate into an 85 percent reduction in remaining reimbursements due to cities and towns.

Further, the governor’s proposal to cut Unrestricted General Government Aid by $25.5 million would certainly hit both local schools and municipal services, because cities and towns use much of their local aid to fund local education budgets.

But the very good news is that before the ink was dry on the Patrick administration’s legislative submission to cut $25.5 million from unrestricted local aid, top lawmakers in the House and Senate, and Gov.-elect Charlie Baker, announced their strong opposition. Because UGGA funding cannot be reduced unless the Legislature passes a budget measure to do so, the $25.5 million cut is a non-starter at the State House.

Cities and towns can take heart in the immediate reaction of top state officials.

House Speaker Robert DeLeo said “understanding the vital role cities and towns play in providing services and jobs, I will not support a reduction of unrestricted local aid. Local aid is integral to helping municipalities accurately assess and plan their budgets so they can contribute to the overall growth of the Commonwealth’s economy.”

Gov.-elect Charlie Baker said, “I don’t think the Commonwealth should be cutting local aid halfway through the fiscal year. Cities and towns have built their budgets based on commitments that were made by the Commonwealth, and I think the Commonwealth should honor those commitments.”

Perhaps the largest task that legislative leaders and the new governor must confront during the transition to next year is identifying the full nature of the fiscal 2015 state budget shortfall. 

With the exception of a $70 million revenue loss caused by an automatic cut in the state income tax rate from 5.2 percent to 5.15 percent (which really should have been anticipated), the state deficit is mostly the result of administrative and budget management issues at the state level, largely from the announcement that non-tax revenues are running $175 million short. But there has been no public disclosure of what is in the $175 million and why the state is failing to collect the funds. Further, the Massachusetts Taxpayers Foundation is expressing concern that the deficit could be larger, due to a $100 million deficit at the state’s Group Insurance Commission, uncertain Medicaid expenditures, and questions over federal reimbursements, and other very large budget exposures.

Local leaders look forward to being deeply involved in the new Legislature’s and administration’s budget deliberations, both for fiscal 2015 and in the development of the fiscal 2016 state budget. Communities are seeking a stronger fiscal partnership, and this requires collaboration, communication and a shared stake in the outcomes.

Deficit sharing is not a sound or sustainable solution to the state’s budget woes. Indeed, the real solution is for the state and localities to work together as partners to provide the municipal and school services that are essential to building a strong economy, and to recognize that each level of government has a powerful role to play in creating a stronger future for Massachusetts.