Eyes turn to state's $726m reserve

Some covet funds for social services

By Rick Klein, Globe Staff, 9/4/2003

The state has quietly built up $726 million in its main reserve account, creating pressure from social service advocates and some lawmakers to restore money that was cut just weeks ago from rape crisis centers, mental health programs, and other social services.

The figure is more than twice the level that lawmakers estimated was in the state's rainy day fund when they crafted the $23 billion budget for fiscal 2004, which began July 1. The money comes from a surprise increase in tax collections, the closing of a corporate tax loophole, and initial payments from a federal aid package.

"At this point, it's clear that the state can restore some of the most damaging cuts that have been made," said Stephen E. Collins, executive director of the Massachusetts Human Services Coalition. "There are crying needs throughout health and human services. It's absolutely reprehensible that the state has been sitting on this much cash, when there are so many problems that could be solved with one-tenth of that money."

Lawmakers are trying to put together a modest bill that would address what they consider to be some of the most pressing holes in the budget, perhaps spending $15 million to $20 million. Governor Mitt Romney is calling for $11 million to stave off deep cuts to social services, mental health programs, and the Department of Youth Services.

Legislators have also shown interest in providing $2.5 million for rape crisis centers and domestic violence counseling, as well as other small public health programs.

But top House and Senate members and officials in the Romney administration want to cut off the spending spigot fairly quickly, after only a small number of programs see additional funding. They are worried that the state is likely to be in a budget hole again next year and should sock away as much money as possible to avoid even deeper cuts in the future. They also note that the economy could drop off again.

"This is not a big pot of money that we can just go splurge with," said Senate Ways and Means chairwoman Therese Murray, a Plymouth Democrat. "This isn't free money, and we cannot spend more and add to our structural imbalance."

Murray said the state needs to commit hundreds of millions of reserve dollars to solving long-term problems involving Medicaid costs, the unemployment insurance system, the free-care pool that provides health care to the uninsured, and the state's $11 billion School Building Assistance Program.

According to the Romney administration, the balance of the state's rainy day fund has spiked in recent months. It now includes $102.8 million from a surplus from last fiscal year; $110 million in back taxes paid by banks that set up real estate subsidiaries that state lawmakers say were formed to dodge taxes; $71 million from unclaimed policies from when private insurers went public; and $57.7 million sent to the state from the federal government as part of a fiscal recovery package.

The rainy day fund is separate from another $440 million the state has been promised as part of that federal aid package. Massachusetts also has about $475 million in the bank from the state's massive settlement with the big tobacco companies.

Yesterday brought another piece of good fiscal news: State tax collections in August were up $27 million over the same month last year, following a July where revenues rose $60 million compared with last year. So far in fiscal 2004, which began July 1, tax collections have exceeded budget-writers' expectations by $108 million -- a key barometer used by lawmakers when judging whether the state has cash to spend.

House Ways and Means chairman John H. Rogers cautioned that Wall Street would frown on spending all of the state's reserves, thereby threatening the state's bond rating. Rogers added that some of the funds in the state's reserve accounts are earmarked for specific purposes. For example, much of the federal money is intended for Medicaid, and the state is leveraging some of its tobacco settlement money to trigger federal matching dollars for health care needs.

Rogers said he recognizes that some needs must be addressed with rainy day funds, but said he is skeptical about spending much more on this year's budget, because next year's will also probably be tight. At least another month of tax data must be analyzed before a real trend can be identified, he said. "We have to keep the confetti in the closet for a while," said Rogers, a Norwood Democrat. "We have to spend money on pressing needs, but we have to be very careful about exacerbating the fiscal crisis."

In any event, the rainy day fund holds nowhere near the $2.3 billion it had as of July 2001. But the current total represents a healthy sum, especially as the economy shows signs of recovering, said Cam Huff, a senior research associate with the Massachusetts Taxpayers Foundation. That means the worst of the budget cuts are probably over, Huff said.

"We think it would be a huge mistake to say, `We have $1.5 billion to spend, let's spend it all,' because we're clearly not out of the woods," Huff said. "On the other hand, if we're talking about very painful additional cuts, we can't ignore the fact that there are a lot of reserves."

Some in the Legislature are arguing that the state should tap reserves now, as painful budget cuts begin to sink in around the state. State Representative J. James Marzilli Jr. predicted an outcry for more spending on services as children go back to schools that have fewer teachers and vastly reduced extracurricular activities.

"You create a reserve fund to address the unanticipated needs of the public," said Marzilli, an Arlington Democrat. "Now the cuts will be felt by broader populations, and there'll be a growing demand by the public that the Legislature come back into session and do its job and restore some of the terrible damage."

At the same time, the state's growing cushion could severely diminish attempts by some lawmakers to raise revenues by hiking taxes, floating bonds, or expanding legalized gambling. Marzilli, who supports a tax increase to deal with the fiscal crunch, said spending reserves is preferable to raising taxes.

Rick Klein can be reached at rklein@globe.com.