Massachusetts Gov. Maura Healey and her budget team hit the reset button Monday, announcing a plan to cut $375 million from the current year's budget amid flagging tax collections, to downgrade the amount of tax revenue expected this budget year by $1 billion, and to build the next state spending plan on the assumption that even less tax revenue will come in next year.
By paring back spending over the next six months, tapping into investment earnings that are generally not used in budgeting, and planning for basically flat growth next year, Healey administration officials said they think they will be able to get through fiscal year 2024 without having to make additional cuts and can then build a balanced budget for fiscal year 2025.
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"We expect that while the economy's is growing, it'll be a bit slower. There are some positive signs -- the interest rates not increasing and the prospect of them coming down later this year, I think, bodes well for what we're seeing in terms of our growing out of this," Secretary of Administration and Finance Matthew Gorzkowicz said Monday. "So we see this pretty much as creating a glide path to FY26. We see this as sort of a 12-to-18-month condition where we have to do some belt-tightening. But overall, we think that ... we don't see this as being a recessionary environment and we believe the economy will continue to grow in [FY] 25."
Halfway through fiscal year 2024, the state has collected $769 million or 4.1% less tax revenue than the projections used to craft an annual budget featuring steep spending increases and a record bottom line of $56 billion. It's not that tax revenue has declined -- in fact, tax revenue has increased a hair compared to the same point one year ago, up $60 million or 0.3% -- but the limited revenue growth has not been enough to line revenue up with Beacon Hill's appetite for spending.
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To address what the governor said is a "budgetary shortfall totaling $1 billion" and to reset the foundation for future budgets, the Healey administration announced a multi-pronged plan Monday.
The plan includes $1 billion worth of "solves" to close the existing gap -- a net $375 million in spending cuts along with $625 million in newly-tapped non-tax revenues. The plan is meant to address the existing revenue shortfall of $769 million while also providing some breathing room for the second half of the budget year, when Gorzkowicz said he expects additional months of below-benchmark collections.
The governor's cut affect 66 different line items.
Among them is a gross $294 million reduction in MassHealth fee for service payments. An administration official said there are no eligibility changes, but MassHealth had room to trim because the ongoing redetermination effort has eliminated more people from MassHealth enrollment than expected by this point and because utilization of some key MassHealth services is below what was expected.
A big portion of the non-tax revenues being relied upon to close the budget gap are expected to come from increased investment earnings that the state typically does not budget against. Gorzkowicz said the current high interest rate environment helps the state generate more interest earnings on some of its investments.
"We don't always budget against those because interest earnings, particularly in this type of environment, are very volatile. And so we usually budget against a pretty, pretty nominal amount, a pretty conservative amount of that. And so we know that this fiscal year we'll see increased investment earnings, and so a big portion of the 625 [million dollars] will come from those earnings," the secretary said.
The remainder of the $625 million in non-tax revenue will come from higher-than-budgeted departmental revenues, Gorzkowicz said.
Gorzkowicz also decreased the fiscal year 2024 revenue estimate by $1 billion, from the $41.41 billion figure that he and key lawmakers agreed a year ago to build the fiscal 2024 budget on to $40.41 billion, including revenue from the state's new surtax on income above $1 million.
And Gorzkowicz also announced Monday that he, House Ways and Means Chairman Aaron Michlewitz and Senate Ways and Means Chairman Michael Rodrigues have agreed to base the fiscal year 2025 budget -- which Healey has to file with lawmakers by Jan. 24 -- on a consensus revenue forecast of $40.202 billion plus an additional $1.3 billion in surtax revenue.
