Patrick prepares to cut budget as financial crisis unfolds

Governor Deval Patrick, facing the biggest fiscal challenge of his term, is confronting difficult decisions about which priorities he can pursue and which he may have to abandon as state leaders assess how severely the national financial crisis will slam Massachusetts.

While seeking publicly to steady a volatile financial situation, Patrick and his team have been scrambling behind the scenes to assess the damage to state tax revenues and credit availability and preparing various cutback scenarios in case the meltdown gets worse.

Other state officials, meanwhile, are hunkering down for major work at a time normally set aside for re-election campaigns. Travel plans among top leaders are being canceled, one notable casualty being a trade mission to Ireland that was to include Lieutenant Governor Timothy P. Murray.

Among the items up for discussion are whether to draw from the $1.8 billion remaining in the state's reserve account, and, if so, when to do it and how much. Emergency powers for the governor to cut further into the budget also are on the table, but so far the Legislature has balked.

"It's hard to say we're going to do A, B, C, or D until we figure out if we've hit bottom yet," Senate President Therese Murray said yesterday. "And I don't know if anyone knows the answer to that."

How the governor deals with the current fiscal challenge - and whether he can fulfill expensive campaign promises to lower property taxes, put more police on the streets, and reform education - is likely to define the middle phase of his four-year term.

"There are a number of challenges," Patrick said yesterday at a State House press conference announcing a Medicaid waiver deal with the federal government that will help pay for insurance coverage for Massachusetts residents. "This is one, and a big one that we can set aside. . . . But there remain some challenges."

The first major challenge is a large shortfall in tax revenues. Tax collections for September were estimated to be about $200 million less than originally forecast, according to three sources briefed on figures that will be finalized as early as today. While those figures indicate that revenue stabilized in the second half of the month after a rocky first two weeks, being in the hole so early in the year is worrisome.

"So far September is a disaster," Representative John Binienda, the House chairman of the Joint Committee on Revenue, said in an interview. "It's very scary what's going on out there."

Sales taxes and corporate excise taxes have been steadily declining, largely as a result of the slumping economy. Withholding taxes have also declined.

Patrick is meeting this week with members of a panel of economic advisers that he announced in January. The panel includes Cathy Minehan, the former president and chief executive of the Federal Reserve Bank of Boston; Gloria Larson, the president of Bentley College; and James Stock, chairman of the Department of Economics at Harvard University.

Patrick already instituted a number of spending controls starting in August - including preventing any increases in payroll costs and postponing any planned merit pay increases - and is expected to take further steps. In July, he asked agencies to develop cost-cutting plans, which the administration is currently reviewing.

"Nothing is more difficult for a governor," said former governor Michael Dukakis, who faced two economic crises. "Believe me, nobody's going to give you a medal for this kind of thing. It's gonna be painful. It's difficult."

There has been a shift in recent weeks from talk of expanding initiatives to merely limiting the pain. It means that the governor's hopes of putting more police officers on the streets, creating more jobs, and lowering property taxes may have to be tabled, or other areas of the budget will have to be drastically cut.

"He has no choice," said Michael Widmer, president of the Massachusetts Taxpayers Foundation. "He's been dealt his hand, and it's exactly opposite of what he wanted. It's a 180-degree difference. He's been talking about expanding programs. Now the question is how deep will the cuts be?"

Widmer, whose business-funded budget watchdog group has been warning of a $1.5 billion "structural deficit" in the budget and now thinks it will get worse, said the governor should consider $250 million in cuts within the next week or so - and also telegraph that it may be only the first of several rounds.

One area that may prove difficult for Patrick to fund is the Readiness Project, an ambitious initiative that includes increasing access to early childhood education, lengthening school days in some districts, and making community college free for all students."

"In better economic times there's an ability to expand programs and initiatives that are great investments for us in Massachusetts, like the readiness program," House Speaker Salvatore F. DiMasi said yesterday. "When the revenues are not coming in because of a crisis like this, we have to start looking at changing our views on many of these things. Sometimes you just have to provide the services you're providing today."

The state has a nice cushion with the $1.8 billion in a reserve account - one of the largest of any state in the country - but fiscal watchdogs warned against tapping that fund too early.

"It's clearly a precarious situation," said Noah Berger, executive director of the Massachusetts Budget and Policy Center. "What's going on in the national economy means everybody has to step back and recognize that plans for the future are likely to look very different a month from now than they do today. But we don't know what those changes will be."

Matt Viser can be reached at maviser@globe.com.