Big question for lawmakers: When will downturn come?

STATE HOUSE NEWS SERVICE

DESPITE A STRONG ECONOMY, last year’s $1 billion budget surplus, and revenue collections that are outperforming expectations so far this year, the potential for an economic slowdown and future recession loomed as the budget-writing process for next fiscal year kicked off on Wednesday.

House Ways and Means Chairman Jeffrey Sanchez, who lost his reelection bid this year and will after December turn over his budget work to a successor chosen by Speaker Robert DeLeo, characterized the testimony as “very sobering.”

“At the end of the day, there’s a lot of good that’s happened in this past couple years and it’s been fortunate, but it’s fragile,” Sanchez, who was named Ways and Means chair in July 2017, said. “And in this upcoming session, the Legislature, the administration, and everybody are going to have a lot of hard work to do, especially with the demands of everything that we did in this past session. Everybody’s coming back, and the requests are going to be dramatic. We can feel it in the tail end of the session right now.”

The fiscal 2020 budget will be among the first major pieces of legislation developed in a new term where lawmakers will have to grapple with the unfinished business of this session, including efforts to shore up financially strapped community hospitals and to increase equity in education by boosting school funding.

Many lawmakers had hoped a proposed surtax on incomes over $1 million would give them more revenue to work with, but that effort was scuttled when the Supreme Judicial Court ruled the ballot question proposing the tax was unconstitutionally drafted.

Unlike the previous two years in which slow growth forced budget negotiators to mark down available revenues during their talks, the conference committee that crafted this year’s budget upgraded their projections to add spending beyond levels the House and Senate had approved.

“The past several budget cycles have taught us that we must be prepared for everything,” said Sen. Joan Lovely, who co-chaired Wednesday’s hearing from the Senate side. Lovely is the vice-chair of the Senate Ways and Means Committee, for which a new chair will also have to be chosen in the new year.

Revenue Commissioner Christopher Harding told the committee that the 8.5 percent growth last year from fiscal 2017 to fiscal 2018 was “exceptionally strong” and had been exceeded only three times in the preceding 30 years. He said that revenue growth was driven by a strong stock market performance, passage of the federal Tax Cuts and Jobs Act in 2017, and an overall strong economy in Massachusetts.

The growth in 2018 and the above-benchmark revenue collections so far this year “reflect one-time events such as tax reform that are exactly that — one-time events — and will not be repeated in the future,” Harding said.

Harding predicted an actual growth of 2 percent to 2.2 percent in fiscal 2020, with revenue collections ranging from $29.217 billion to $29.384 billion.

Other revenue projections were:

* From the Massachusetts Taxpayers Foundation, 3.6 percent growth in fiscal 2019 to $28.79 billion, followed by 2.4 percent growth to $29.47 billion in fiscal 2020.
* From the Beacon Hill Institute, 6.6 percent growth to $29.6 billion in fiscal 2019, with 2.4 percent growth to $30.3 billion in fiscal 2020.
* From Northeastern University professor Alan Clayton-Matthews, revenue collections of $29.57 billion in fiscal 2019 and $30.58 billion in fiscal 2020, for growth of 3.4 percent from 2019 to 2020

Harding told the committee the national economy is in the second-longest period of growth in its history, but said all expansions must end, and the question is “when the decline will start and how hard the fall will be.”

“Based on the analysis and inputs from our sources, we are not projecting a recession to begin during FY20,” Harding said. “We are however being realistic in our expectations for growth, and we will be monitoring both revenues and the economic environment carefully.”

Massachusetts Taxpayers Foundation President Eileen McAnneny, whose prepared testimony was titled “Are the Good Times Already Over?”, urged budget-writers to be cautious of “pre-recession warning signs” in labor markets, home sales, the auto industry, business investments and oil prices.

“The MTF suggests a cautious approach to this year’s budget,” she said. “While the time and severity of the next economic downturn is unknowable, by historic markers, we are on borrowed time. The state’s experience with past recessions clearly demonstrates how quickly and harshly fortunes can turn.”

McAnneny said preparing for the next recession, through steps including limiting spending growth and increasing the state’s stabilization fund balance, “is the only prudent policy.”

After a deposit from last year’s budget surplus, the stabilization fund balance is now over $2 billion. Administration and Finance Secretary Michael Heffernan said it is the highest balance in a decade.

Under questioning by Sen. Vinny deMacedo, the ranking minority member on Senate Ways and Means, Treasurer Deborah Goldberg said she thinks the state needs to “keep on marching up,” recommending a minimum balance of $4 billion in the so-called rainy day fund.

“It’s generally a percentage of your total budget so when we’re around forty [billion], we want to be at four [billion], and I would just recommend that we keep putting money into the rainy day fund and not veer from that,” she said. “In particular, now that we have begun to advance towards that, to back off from it would then again get the rating agencies concerned.”

Colin A. Young contributed to this report.