State's fiscal picture gets darker

Economists predict long period of poor revenues, tighter budgets

Robert A. DeLeo (left), House Ways and Means chairman, and Alan Clayton-Matthews, professor of public policy at the University of Massachusetts, spoke to the media after an economic summit at the State House yesterday. (Aram Boghosian for the Boston Globe)

Governor Deval Patrick and the Legislature should brace themselves for an extended period of declining or tepid tax revenues and smaller state budgets that will define the State House agenda for up to three years, a group of economists and public policy specialists warned lawmakers yesterday.

Legislators emerging from an hourlong meeting highlighted by the gloomy prognosis promised serious belt-tightening.

"We heard some very difficult news," said Representative Robert A. DeLeo, chairman of the House Committee on Ways and Means, who convened the forecasting session.

Beyond the immediate impact on state residents, rapid-fire economic developments spell difficult choices for Patrick as he gets ready to begin the second half of his four-year term. Patrick won election in 2006 on promises to lower property taxes, hire new police officers, and restructure the education system. Now those goals seem increasingly elusive.

"The economy is going to get worse, not better. . . . We don't know how bad it is going to get. " said Alan Clayton-Matthews, a professor of public policy at the University of Massachusetts at Boston.

House and Senate lawmakers are waiting to see what steps Patrick will offer next week to cut the budget. The governor has been meeting this week with Cabinet members, but so far he has not publicly discussed details.

But in an indication of how dire the state's circumstances are becoming, state lawmakers for the first time yesterday signaled that state financial aid to local communities may be at risk.

"Municipalities across Massachusetts should be concerned," House Speaker Salvatore F. DiMasi said yesterday. Although local aid cuts will be a "last resort," he said, "I think they should be prepared."

Local officials are already fretting over that possibility. In Boston, the City Council is planning to call today for a hearing on the city's financial state.

"Government has to find a way to make due with less or find a way to make more," said Stephen J. Murphy, chairman of the council's Ways and Means Committee, who predicted the city eventually will have to consider layoffs or a hiring freeze. "It all kind of flows downhill, and we're the bottom of the hill."

As dour lawmakers headed into their private briefing with economists, State Treasurer Timothy P. Cahill yesterday delayed, for the second time in a week, issuing $750 million in revenue bonds because of continued uncertainty in national credit markets.

Cahill had initially delayed issuing the bonds last week in hope that the federal bailout approved by Congress on Friday would unfreeze credit markets.

With the problems persisting, the state yesterday hired two New York-based banks, Goldman Sachs and Citigroup, to help it sell the $750 million in bonds, starting as early as today. Cahill said that he was afraid that if the state went out on its own and there were no takers for its bonds, it could hurt the state's image in the credit market.

"It takes a lot of the guesswork out, and this is not a good time to be guessing," Cahill said. "There is a cost to negotiating the deal, but there is a higher cost in getting killed going in and not knowing the interest rates."

The state has enough money on hand to carry it through several weeks, Cahill said, and there is another $1.8 billion in the state's rainy-day fund that could be tapped in an emergency. If the sale is completed today, the state will probably have enough available cash to last until December, Cahill said. Standard & Poor's Ratings Services said yesterday that it believed Massachusetts has enough cash to meet its needs through the end of the year.

"In the short term we can survive," said Michael Widmer, president of the Massachusetts Taxpayers Foundation. "But if this is an indication of the credit market, this is a huge deal."

State officials are developing new estimates on how far the revenues will fall, and by next week Patrick is expected to have a new estimate on budget cuts. The Department of Revenue reported last week that revenue for the first quarter of fiscal year 2009 had come in $223 million below expectations, not counting one-time payments. September was the worst of the three months, with revenues dropping $188 million.

"It's really, really hard to tell how long the state will be feeling the fiscal stress," Yolanda Kodrzycki, a senior economist and policy adviser at the Federal Reserve Bank in Boston, told reporters after the meeting with DeLeo.

Patrick has not offered any specifics on budget cuts, other than to say they will be in the "hundreds of millions" and will probably be announced next week. But many observers believe that will just be the beginning, including Widmer and others who say the state will need to cut $1 billion from its budget.

State officials over the last week have reacted to volatile developments and a barrage of negative economic news. Yesterday's meeting between lawmakers and economists was highly orchestrated. A small press pool was allowed in DeLeo's wood-paneled office for several minutes at the start of the meeting, a practice normally done when presidents meet with heads of state.

"We had to get a better grasp of what's going on in the Massachusetts economy," DeLeo told reporters after the hourlong meeting. "Every day we're talking about it. I just want to be better prepared for the future."

DiMasi and DeLeo said they plan to push the Massachusetts congressional delegation to seek a bailout for states, now that a $700 billion credit market bailout has been approved.

"They need to assist the states as well as assist the financial markets out there," DiMasi said.

John C. Drake of the Globe staff contributed to this report. Matt Viser can be reached at maviser@globe.com.