Rainy Day Savings

When Acting Gov. Paul Cellucci sent his budget proposal to the Legislature earlier this year, it represented a politician’s picture of paradise. The economic boom has lifted state revenues to the point where Cellucci could propose more spending on education, health care, child care, and crime fighting, while forecasting $30 million in savings from welfare because of a continuing drop in caseloads. In addition, the state has been socking away money in case the economic sunshine gives way to a tropical storm. The state’s “rainy day fund” now contains $800 million. On top of this, Cellucci proposed a multi-million-dollar cut in taxes. The state can afford, he said, a tax break for investors (cut the 12 percent tax on unearned income to 5 percent) and for ordinary people (drop the income tax from 5.95 percent to 5 percent), to the tune of a $1.7 billion annual tax refund by the time the breaks are fully phased in six years from now.

Talk about a Massachusetts Miracle!

Can times really be this good? More to the point, what would happen if another recession came along and government revenues started to fall? Eight hundred million dollars sounds like a lot of money to have in the bank, but would it be enough to keep a $19 billion budget from getting out of plumb?

The short answer is, $800 million would be a lot more helpful than the amount Massachusetts had in its Stabilization Fund before the last recession — a mere $112 million in 1988. That evaporated in the earliest days of the budget crisis that marked the end of the Dukakis administration.

The “Rainy-Day Fund” FY90 – FY98
FY90 0
FY91 $59 million
FY92 $230 million
FY93 $310 million
FY94 $383 million
FY95 $425 million
FY96 $543 million
FY97 $799 million
FY98 $856 million (estimated)

But if the last recession is any guide, $800 million is only a modest amount. The state budget deficit had topped $1 billion when William Weld became governor in 1991. Over the four-year downturn the shortfall would have been a billion dollars a year, without the combination of spending cuts, tax increases, and bond money that began to get the red ink out in 1992. So the current rainy day fund total would have been only a partial solution. (And unlike the federal government, the state can’t run a deficit in lean times.)

If it doesn’t get any better than this, that means it can only get worse.

Nobody expects a recession like that one again, though. “That was probably the worst Massachusetts ever will have,” says Michael Widmer, executive director of the Massachusetts Taxpayers Foundation. If the next recession were to last only two years and be half as severe, a good $400million to $500 million a year would get us through. “It depends entirely on the depth and duration of the recession,” says Widmer.

Widmer also points out that the state is in a better position now in another way: the administration and the Legislature “have acted very differently from the ’80s.” State spending in some years in the ’80s increased at double-digit rates, Widmer notes. Now spending has been rising at about 5 percent a year. The result is that the state is not in as deep when in comes to new programs.

“We will not make the same mistakes that were made during the 1980s,” states the governor’s budget message. “Our spending proposals are restrained, our tax and departmental revenue estimates are conservative, and our commitment to fiscal prudence has, quite simply, never been stronger.”

Meet the Author

Dave Denison

Founding Editor, CommonWealth magazine
The fiscally prudent Massachusetts Taxpayers Foundation is not all the way on board, however. In assessing the governor’s proposed budget, MTF warned against a “stampede of initiatives” and raised questions about all those tax cuts Cellucci wants. Reading between the lines, one could almost hear the worry: Could an over-commitment on tax cuts be the equivalent of the late ’80s spending binge?

The governor’s original phased-in plan (in March, Cellucci called for tax cuts to take effect even earlier) would have reduced state revenues by $245 million in 1999. But by 2002 the state would be receiving $1.5 billion less a year, according to MTF. That is not likely to pass muster with those in the Legislature who want to protect spending on education and health care and aid to local governments — and bolster the rainy day fund even more. And even MTF is nervous about what would happen if another recession blows in. The tax group is proposing that any major reduction in the state income tax be tied to the growth in the Massachusetts economy. Just in case.