State could face $1b deficit in '07

Aides to Governor-elect Deval Patrick said yesterday that the state is facing a deficit that could reach $1 billion next year, a looming budget gap that observers say could force Patrick to scale back his ambitious agenda, slash spending, or raise taxes.

Patrick's aides said a Romney administration budget blueprint, released this week, was based on overly optimistic revenue and spending data and aimed at making the state's finances appear healthier than they are as Romney leaves the State House next week for a probable presidential run.

The aides said that privately, Romney aides warned them last month that state finances were in much rougher shape.

The Globe yesterday received a copy of that budget presentation.

Patrick has been trying to tamp down expectations for his first year in office, but the prediction of a $1 billion deficit for the fiscal year that starts next July 1 has marked the first time his aides have offered a number that suggests just how dire the situation could be.

Patrick aides attributed the gap to the cost of pensions, Medicaid, and other state programs, which are growing faster than state tax revenues.

They spoke on condition of anonymity because Patrick is studying details of the projections.

A $1 billion gap, in a $26 billion budget, could force Patrick to make unpleasant choices, to cut spending, dip into the state's $2.1 billion "rainy day" fund, or raise taxes, which Patrick has repeatedly vowed not to do. The House's top budget writer said he is already warning members that there will be no room for new spending in next year's budget.

Patrick's aides yesterday declined to discuss what Patrick might consider doing to close the budget gap, but said he planned to keep his campaign pledge to add 1,000 new police officers in cities and towns across the state, at a cost of $85 million.

Patrick has also proposed expanding full-day kindergarten to more cities and towns at a cost of $34 million.

But budget specialists said the future looks grim.

"We have trouble ahead, the only question is how bad, how deep is the hole," said Michael Widmer , president of the Massachusetts Taxpayers Foundation, who has been advising the incoming administration.

Patrick, who will be inaugurated Thursday, pledged during the campaign to increase aid to local governments so they can cut property taxes, saying that was more fiscally responsible than rolling back the state income tax as voters approved in a 2000 referendum.

But Widmer said, "the fiscal picture suggests that it will be virtually impossible to provide any relief to the property taxpayer in the short term."

Others sounded similar notes of caution.

"A billion dollar gap, that's a very substantial problem," said Noah Berger , executive director of the Massachusetts Budget and Policy Center, which analyzes the impact of the state budget on the poor. "If in fact the gap is that big, there's no easy and painless way to close it."

David G. Tuerck , executive director of the Beacon Hill Institute, a economic think tank, said Patrick appears to be laying the groundwork to raise taxes.

"It doesn't seem likely to me that the new governor is going to be willing to cut a billion dollars of state spending," Tuerck said. "There is the 'rainy day' fund, but he'll be advised -- and I think correctly -- not to dig that deeply into the 'rainy day' fund, thus it seems we're left with one inference, which is taxes will have to go up."

Stephen P. Crosby , a budget official in the administration of former acting governor Jane Swift who is advising Patrick, said a working group Patrick assigned to analyze the budget has warned Patrick that he will need to consider all options, including raising taxes.

Crosby argued that Patrick's victory over Lieutenant Governor Kerry Healey , a proponent of tax cuts, suggests that "the times are different" and voters are more interested in preserving services than slashing taxes.

"The no-new-taxes thing doesn't have the traction it used to have," he said.

Patrick aides said Romney administration officials had been painting a grim picture of state finances in private meetings last month and this month. In the Nov. 27 presentation to Patrick's budget advisers, Romney aides projected a budget deficit for fiscal 2008, which begins in July, of between $400 million and $1.1 billion.

The deficit assumed that state tax revenues would grow by 3 percent.

That number was also contained in an official bond document the Romney administration sent to the US Securities and Exchange Commission on Nov. 10.

This week, however, Romney aides publicly released a budget blueprint that predicted revenues would increase by 4.8 percent, which would lessen any potential deficit. The blueprint also ignored some expenses, including funding some pension debt.

"It's a self-serving, political document," Crosby said.

"What they said to us a month ago," he added, "was honest and appropriate and off the record. What they've done is go back and tweaked all the assumptions so Romney can say he left a balanced budget."

The Romney spokesman, Eric Fehrnstrom, declined to comment on what Patrick's aides see as a discrepancy between the private briefings and the rosier public blueprint.

Earlier this week, Patrick said he would restore $383.6 million in emergency budget cuts Romney made last month. That money replenishes social service and other programs for the current fiscal year, which ends June 30. Romney aides said the decision to restore the cuts would also make it harder to balance next year's budget because $252 million of that amount could have been saved next year.

"The reason governor Romney made cuts to the state budget was because of the need to maintain fiscal discipline," Fehrnstrom said. "Just like every year, 2008 is going to be challenging.

"We have provided Deval Patrick with a planning document that contains recommendations on how to achieve budgetary balance. He is free to adopt these ideas or go in his direction."

Patrick spokeswoman Cyndi Roy said the new administration can restore cuts this year because revenue is coming in higher than was predicted. She called next year's financial circumstances "a different budget scenario."

Representative Robert A. DeLeo , chairman of the House Ways and Means Committee, said he is trying to lower expectations for next year.

"I haven't seen any appetite at all for taxes in terms of discussing it, very preliminarily, with members of the House," said DeLeo, a Winthrop Democrat. "In talking to members, I just say, there has been very little room or no room for any additional spending."

Andrea Estes can be reached at estes@globe.com, and Michael Levenson at mlevenson@globe.com.