State budget stability elusive

Despite encouraging signs that the Massachusetts economy is on the mend, the state's fiscal problems are far from over, some legislative leaders and budget specialists say.

House Ways and Means Chairman John Rogers says the state is still at least two years away from a more solid financial footing. And one outside budget specialist is predicting a "permanent fiscal crisis," with more cuts to come and only limited opportunities for improving education, transportation, social services and other government programs in the near future.

"The general assumption in the State House is that if the economy recovers the fiscal crisis will disappear, and that's not the case," said Michael J. Widmer of the Massachusetts Taxpayers Foundation, a business-funded nonprofit group that monitors taxes and government spending. "It will be a rude awakening when they understand that even with an economic recovery, there will be limited opportunities for significant restoration of the cuts of the last several years."

With state tax revenue expected to be up more than 3 percent this year, a far cry from the gut-wrenching 10 percent plunge of two years ago, the mood among many lawmakers had brightened after three years of tight budgets and $3 billion in cuts.

But the new revenue isn't enough to keep up with fast-rising expenses. On average, the state can count on annual revenue growth of 4 to 5 percent, with each percentage point representing about $150 million. But the cost of Medicaid and other health care programs has increased by more than $2 billion, or 40 percent, since 2001.

Another problem is the state's heavy debt load. Governor Mitt Romney says it is the highest in the nation. The cost of the state's debt has increased by $400 million, or 25 percent, since 2001, and is likely to go up by at least $100 million a year for the foreseeable future, according to the Taxpayers Foundation.

In 2000, revenue was up 10.2 percent and up 9.2 percent in 2001. But nobody expects that kind of growth, which was driven by the surging stock market, to return anytime soon. In any case, it merely masked the state's fundamental budget dilemma.

"It would take a remarkable economic boom to repeat the 1990s. You look back at revenue growth in the '90s and you'll see years where it was 10 percent," said David Osborne, a consultant and coauthor of "The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis."

"All in all, it's very hard to see where we go back to real flush times," he said.

In an article he coauthored this month in CommonWealth magazine, Osborne said Massachusetts is one of many states facing a "permanent fiscal crisis."

It may be cold comfort to Beacon Hill budget writers, but Massachusetts is not alone. "All states are essentially in the same boat on this one," said Corina Eckl, fiscal program director at the National Conference of State Legislatures. "There is some stabilizing of their economies, but they're far from being out of the woods."

In the short term, both Rogers and Romney, who proposed his own budget plan last January, are using "one-time revenue," or money the state can't rely on every year, to close next year's budget gap, which Romney projects to be $1 billion and Rogers pegs at $1.5 billion. Rogers takes most of his $640 million from rainy-day reserves and a pot of money the federal government gave to states to help them through the fiscal crisis.

Romney, in contrast, relies on projected savings of about $190 million from his proposed Massachusetts Turnpike-Highway Department merger, $140 million from the federal relief fund and $150 million from refinancing the school-building assistance program.

Both Romney and the Democrats want to spend more money to refurbish decrepit schools around the state, but even those initiatives complicate the state's future budgets. Both parties want to add to the state's borrowing to clear the waiting list of projects. The Democrats also want to dedicate one penny of the state's 5-cent sales tax to back the bonds.

Romney on the other hand wants to borrow money for the school projects for a 40-year term, instead of the current 20 years, a step that he says would free up $150 million to help clear the backlog. But Rogers says Romney's proposal for school-building assistance would burden future generations by adding a total of $2.48 billion in interest payments.

As for the overall budget, a long-term solution is harder to come by. Eric Kriss, Romney's budget chief, said the governor's plan starts down that road by proposing changes such as the Turnpike-Highway Department merger, that will save the state money every year. That change, the administration says, will generate $20 million a year. Kriss also argued that Romney's proposals to alter construction rules and allow the state to use more private contractors will create more competition, diminish union power, and yield additional savings.

"We have proposed many, many changes that will get at the core cost structure of government," said Kriss.

Osborne, who worked with former vice president Al Gore on his "reinventing government" initiative, agreed that Massachusetts and other states could "make a ton" by eliminating what he called "bureaucratic" purchasing and hiring rules. But Widmer says Romney greatly overestimates the savings his proposals will produce. "We can't reform our way out of the structural deficit," Widmer said. "Reforms can help on the margins, but they are not the answer to our long-term fiscal dilemma."

So what is the answer? Many health and human services advocates and local officials would like Beacon Hill to raise income taxes. A report late last year by an economist at the University of Massachusetts-Amherst asserted that the state lost $5.5 billion in revenue by cutting personal income, capital gains, corporate and sales taxes between 1996 and 2002.

But other economists say that analysis ignores the stimulative effect of lower taxes. Thanks to the tax cuts, Massachusetts is now in a better position to compete with other states for businesses and workers, and a thriving economy fills the state's coffers. In any case, Romney has vowed to veto any broad-based tax increase, and legislative leaders have ruled out a tax hike this year.

Both Romney and the Legislature are looking into ways to save money on Medicaid, which is the single largest factor in the structural deficit. But the state has already enacted cost-saving measures over the past two years -- including cutting benefits and limiting enrollment -- and without a federal waiver it won't be able to go much further. The federal government reimburses Massachusetts for about half of its Medicaid costs.