State facing budget woes as local aid payment due
State Treasurer Timothy P. Cahill said yesterday that the state must take dramatic steps - borrowing at a higher interest rate than usual and tapping the state's rainy day fund for $310 million - to make sure it has enough cash to make local aid payments due next week to cities and towns.
The extraordinary moves are a direct result of the troubled credit markets roiling Wall Street, and they portend more dire decisions looming for state lawmakers, Cahill said. The turmoil arises as state revenues are decreasing, making access to credit even more important.
"This is no longer a Wall Street issue, this is a Main Street issue," Cahill said. "I don't want to be constantly beating a dead horse. But it's a crisis. A full-blown crisis. We have to slow down or cut spending."
Cahill warned that some major-ticket items might have to be curtailed, including some of Governor Deval Patrick's priorities, such as expanding prekindergarten classes, repairing bridges, and increasing healthcare spending.
Administration officials did not dispute Cahill's assertion that the situation is serious but said they are still working on potential cuts in the $28.2 billion budget, which is not even three months old. The administration has not ruled out seeking legislative approval to reduce the $5.3 billion in education and other categories of local aid the state pays to cities and towns, as former governor Mitt Romney did in 2003.
"It's too soon to speculate how deep we're going to have to go," Patrick told reporters at the State House yesterday. "I think it is clear that we are going to have to do some trimming of the budget, and we have some plans for that."
Patrick would not rule out raising fees or instituting layoffs, saying there are various plans that administration officials are exploring, depending on how bad the financial situation gets.
"The numbers we have are preliminary. They are nonetheless concerning," he said.
The most immediate need is $1.3 billion in quarterly payments that are scheduled to go out to cities and towns next week. Municipalities use the money to fund everything from teachers to trash collections.
Cahill said it appears likely that cities and towns will get their local aid payments - preventing layoffs and cutbacks in municipal budgets - but he said he has had to jump through a complex set of financial hoops to make it work. Cahill and other state officials characterize the borrowing maneuvers as common ways to make payments before all of the tax revenue comes in. But the state usually is not this strapped this early and facing interest payments this high.
The state yesterday borrowed $51 million in a short-term loan from investors, at an interest rate of 6 percent for a practice that normally charges 2 percent interest. In order to make local aid payments, the state still needs to borrow up to $349 million in similar loans before next week. State officials fear a similarly high interest rate.
"This stuff is unheard of," Cahill said. "It's like going to the loan shark for money."
The state is also planning to use $310 million from the state's rainy day fund. The state had budgeted for such a drawdown but had expected to take the money out in December.
To continue paying bills, the state would try in early October to borrow $750 million, taken against future revenues, Cahill said.
"We support those efforts," said Leslie Kirwan, Patrick's secretary of administration and finance. "It's a challenging situation, predominantly the result of an unprecedented market, so this shouldn't be a surprise."
Senior state lawmakers have been scrutinizing the state's financial picture, and their concern was heightened last week when the administration said that tax collections for September are running $200 million less than September 2007.
Patrick, who can unilaterally impose cuts to about two-thirds of the state budget, has also asked the Legislature to grant him rare authority for expanded powers to cut in other areas. There are several looming milestones that will fill in the budget picture, including whether capital gains taxes will decrease precipitously and whether the state will get healthcare reimbursements it is seeking from the federal government.
"I don't think anybody can be sure about anything, given what's happening on Wall Street right now," Kirwan said. "We will work together through this, with the treasurer and the Legislature."
Matt Viser can be reached at maviser@globe.com. 