Baker’s dire deficit projection misses mark

A clarification has been added to this story.

THE BAKER ADMINISTRATION’S dire warnings last winter about a $768 million deficit for fiscal 2015 have turned out to be off the mark, so much so that the governor is now asking legislative approval to spend an end-of-the-year surplus.

Baker took office last January saying that the Patrick administration had left him with a $500 million deficit, which a short time later escalated to $768 million — $1 billion if previous cuts carried out by the Patrick administration were included. Baker proposed closing the gap through a combination of spending reductions and revenue-raising measures.

But a number of revenue forecasts included in that budget-balancing plan turned out to be off the mark. State tax revenues overall came in $391 million above the benchmark forecast, providing more money than expected. Capital gains tax revenues, which tend to be volatile, provided the biggest lift. Under state law, any capital gains tax revenues above $1 billion are required to go into the rainy day fund. The Baker administration sought and won legislative approval to divert that money from the rainy day fund and use it all for budget-balancing efforts. The administration expected the move to yield $331 million, but it ended up bringing in $621 million.

The revenue picture was mixed in other areas. Non-tax department revenues, basically fees charged for agency services, came in $116 million below estimates, according to administration officials. Court tax and non-tax judgments and settlements came in at $226 million, slightly below original projections for the year but far above what analysts were forecasting last December.

In the end, a combination of spending cuts and better-than-expected revenues left the Baker administration flush with cash at the end of the fiscal year on June 30. The administration is now asking the Legislature to approve a $547 million supplemental appropriations bill, mostly to pay off bills left over from fiscal 2015 but also to fund a few new initiatives, reduce debt, and bolster the rainy day fund.

The governor doesn’t call the $223 million for these initiatives a surplus, but that’s essentially what it is. He wants to tap fiscal 2015 funds to pay for several fiscal 2016 initiatives, including $5 million for homelessness prevention services; $28 million for opioid programs (including a counselor program he cut from the budget back in February); $140 million to pay off state debt; and $50 million for the rainy day fund.

The Baker administration hasn’t talked about how the state went from a huge deficit to a surplus in such a short time, but a spokesman provided a spreadsheet showing what happened. Before he left office, former governor Deval Patrick put the fiscal 2015 budget gap at $330 million. He cut spending by $250 million and proposed legislation to deal with the remaining $80 million gap, but the Legislature never took up his bill.

[Following the posting of this story, Baker administration officials took exception to the characterization of their actions and issued clarifying information on how the numbers changed.  (The changes are reflected below.) The officials said the deficit forecast they adopted early in the year was accurate at the time, noting that it was accepted by both branches of the Legislature. The deficit picture, they said, worsened and then brightened considerably as tax revenues poured in at an unexpectedly high rate in the final months of the fiscal year.]

Baker came in to office in January and said a $500 million budget deficit was being transferred to his administration. He later upped that number to $768 million. According to the administration spreadsheet, the total budget problem ended up being about $940 million. $1.1 billion.

The budget gap was closed using $254 million in revenue initiatives, $514 million in spending cuts and other savings measures, and $391 million from unexpected tax revenue growth. Combined, the revenue initiatives, spending cuts, and tax growth totaled $1.159 billion, about $219 million more than was needed to address the deficit.

Most of the gap was closed thanks to unexpectedly strong tax revenues. Of the total $1.1 billion gap, the administration says $720 million, or 63 percent, came from higher-than-expected tax revenues. The remainder of the gap was closed by cutting spending $235 million, grabbing $230 million in unused state and federal funds, collecting $18 million from a corporate tax amnesty program, and saving $168 million by bumping people off of Medicaid and shifting Medicaid bills into fiscal 2016. The combined initiatives left the state with a $231 million surplus, according to the spreadsheet.

“The Baker-Polito Administration made responsible budget decisions throughout the remaining six months of the fiscal year to close an inherited budget deficit,” said Brendan Moss, a spokesman for the executive office of administration and finance. “It was through fiscal management and increases in one-time capital gains revenues that allowed us to close the gap and invest in key priorities like opioid abuse prevention and homelessness.”

Alec Loftus, a former spokesman in the Patrick administration, said the Baker administration’s deficit numbers were bogus. “Now that the numbers are in, we know that the state never had to reckon with a huge deficit, but rather hundreds of millions in surplus revenues. This is no surprise. Massachusetts was left in great shape with 10 straight months of job growth, high reserves, and historic credit ratings due to the Patrick-Murray administration’s investments in education, innovation, and infrastructure,” he said.

Andrew Bagley, director of research at the Massachusetts Taxpayers Foundation, which forecast a budget gap similar in size to the one outlined by Baker, praises the governor for quickly moving to address what at the time appeared to be a serious budget deficit. But Bagley acknowledges the situation didn’t turn out nearly as bad as forecasted.

“In 20-20 hindsight, 2015 ended up doing better than we thought,” he said. As for the Baker administration, he said: “They were lucky and ended up with a surplus.”