Extreme uncertainty clouds budget outlook

When Gov. Charlie Baker filed his fiscal 2021 budget recommendation on Jan. 22, prospects for enacting a state budget bill, and for finalizing amounts to be spent on municipal and school aid and other budget accounts, appeared to be on a normal course.

The House and Senate were expected to approve budget bills in April and May and send a final version to the governor around July 1, and state revenue assumptions would be largely based on a consensus revenue forecast adopted in late December.

By March, the COVID-19 pandemic had turned the world on its head, and the budget process for next year at the state and local levels is now characterized by extreme uncertainty about when budgets can be finalized and what levels of spending might be included.

There have been no announcements from the governor’s office or the Legislature as to when the fiscal 2021 budget will be taken up or how decisions will be made on funding levels. There has been some unofficial talk, however, about a House-Senate joint budget being taken up later in the budget process and about the state starting fiscal 2021 with interim budgets. A decision on the state process may be delayed for another several weeks until a clearer picture of the state’s fiscal condition emerges.

At the local level, municipal officials are revisiting almost every assumption about how to close fiscal 2020 and get started on fiscal 2021, while at the same time reinventing how local government is practiced and decisions get made.

The main reasons for the high level of budget uncertainty are the still-unfolding economic and revenue impacts resulting from actions taken to counter the pandemic, including business closures and social distancing rules. While plans are being drawn to restart economic and social activity, the timing and results are unknown.

Projecting revenues
At the consensus revenue hearing in December, the Massachusetts Taxpayers Foundation provided state finance officials with a “limited growth forecast” of 1.7% for fiscal 2021 after accounting for scheduled tax cuts. The governor’s budget (H. 2) used a growth rate of 2.8%, and preliminary municipal Cherry Sheets released in January were based on this estimate, which allowed for a $32 million increase in Unrestricted General Government Aid and a $304 million increase in Chapter 70 school aid to implement the first year of the Student Opportunity Act.

After Gov. Baker’s state of emergency declaration on March 10, the Taxpayers Foundation forecast that fiscal 2020 revenues would fall short of the benchmark by some $300 million to $500 million, and that fiscal 2021 revenues could drop by $2 billion or $3 billion.

At an April 14 virtual revenue hearing convened by the administration and finance secretary and the chairs of the House and Senate budget committees, the Taxpayers Foundation forecast that revenues could drop by $4.4 billion next year, or 14%. Foundation President Eileen McAnneny pointed out that this was not a worst-case scenario, and that their forecast would be revisited as circumstance warranted. By the end of April, there were informal estimates that the collapse in state tax collections next year could be steeper.

Federal support
A modest response to this grim news is a state stabilization fund balance of almost $3.5 billion, which is available to help close fiscal 2020 and mitigate cuts next year.

The most meaningful offset to state and local budget woes will be relief actions from the federal government. The CARES Act approved by Congress in late March provides about $2 trillion in federal stimulus and relief funds to counteract the impact of the pandemic, including $150 billion for a Coronavirus Relief Fund to help state and local governments with COVID-related costs. The Relief Fund includes about $2.7 billion for Massachusetts that can be used to help pay for eligible costs this year and in fiscal 2021. There is a separate much smaller education relief program.

There is interest building in Washington for another relief bill with substantial stabilization revenues for state and local government. Congress is slated to come back on May 4 to work on that legislation.

The amount of stabilization funding included the bill for Massachusetts, and the rules governing use of the funds, will help the governor and the Legislature prepare a budget schedule and provide a much clearer picture of funding options for next year.

Local budgets
Through this uncertainty, city and town officials must still work on budgets and be ready with a spending plan when the new fiscal year begins on July 1.

May is typically the big month for town meeting votes on local budgets, with action on city budgets to follow. It’s hard to envision much action, however, even with new options in the works in the Legislature, including remote participation in representative town meeting towns and quorum reduction in open town meeting towns.

While there could be a flurry of town meeting action in June, due to postponements, ongoing uncertainty could also mean that cities and towns use new rules to start the fiscal year with interim budgets authorized under a new law enacted last month.