Baker pitches plan to build state’s reserve fund

The governor's budget is under review by the House Ways and Means Committee

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BOSTON, Mass. (State House News Service) – The governor and his budget chief on Thursday morning pitched investors on their proposal to change the way the state stashes away money in its rainy day fund, an account that rating agencies give serous weight to when assessing the state’s creditworthiness.

On a conference call with investors and potential investors, Gov. Charlie Baker said the legislation he included with his fiscal year 2018 budget plan represents a “new, more practical approach to building our stabilization fund” and would put “the state in a better position to deal with any challenges that may come in the future.”

The state’s stabilization fund — or rainy day fund — is similar to an emergency savings account, a reserve maintained to bolster the state’s fiscal stability. The fund was created in 1986 as one in a series of financial reforms, but it was emptied out to balance the 1989 budget before being re-seeded, according to the Massachusetts Taxpayers Foundation.

Currently, capital gains revenues above a threshold amount agreed to during the consensus revenue process are directed to the stabilization fund.

In outside sections of his fiscal 2018 budget plan, Baker proposes a two-step process for making deposits to the stabilization fund.

“First, we will deposit for a stabilization fund deposit equal to 50 percent of projected capital gains revenue above the statutory threshold. This is a pre-budget transfer rather than waiting until the distribution of excess capital gains tax revenues at the end of the fiscal year,” Administration and Finance Secretary Kristen Lepore said during the investor call Thursday. “Second, at the end of the fiscal year we will mandate a deposit of 50 percent of all tax revenue above projection, regardless of the revenue source.”

Lepore said the proposal would guarantee a deposit of at least $51.1 million in fiscal 2018, though the administration expects the total deposit to be $98 million.

As of Jan. 31, the stabilization fund had a balance of $1.298 billion, according to the comptroller’s office, a balance that has seen increases throughout the past few years but still falls well below its high point of more than $2 billion before the 2008 recession. There have been no disbursements from the fund this fiscal year.

The Legislature in recent years has not been shy about spending reserves to plug budget holes, and the MTF report found lawmakers transferred or diverted a “staggering” $2.2 billion from the stabilization fund to pay operating expenses between the 2013 and 2015 fiscal years, years of economic growth.

The current process for depositing funds into the rainy day fund has two shortcomings, MTF said.

“First, capital gains revenues that have been far different from initial projections has caused budget problems,” MTF wrote in its assessment of Baker’s fiscal 2018 proposal. “Second, the deposit isn’t made until the end of the fiscal year and it has proven tempting for budget-makers to suspend the deposit from ever occurring if budget challenges arise.”

But the governor’s proposed new method, MTF said, “instills fiscal discipline, makes the practice more transparent and increases the likelihood that the deposits will be made.”

The two-step process would also free up $51.5 million for the operating budget in fiscal 2018, MTF said. Under the current system, $103 million would be held aside until the end of the fiscal year as expected capital gains revenue above the agreed-to threshold, though no amount would be deposited until the end of the fiscal year.

But under Baker’s proposed system, half of that — $51.5 million — would be deposited via a pre-budget transfer while the other half could be put into use on the operating side of the budget.

The Massachusetts Budget and Policy Center, the more liberal-minded state budget watchdog, said it is not clear whether Baker’s proposal would make the process of building up state reserves any better. The proposal reduces the amount of revenue technically required to be deposited to the fund, but might increase the likelihood that such deposits actually would be made, MassBudget said.

“The new rule normally would mean a reduction in the amount contributed to the Rainy Day Fund relative to the amount that would be contributed under the current rule. But in recent years the ‘required’ contribution — as defined under current rules — hasn’t actually been made,” MassBudget wrote in its analysis of Baker’s fiscal 2018 budget plan. “So, if the new rule were actually followed (in contrast to the current rule, which frequently has not been), it could result in progress in building up the Rainy Day Fund.”

The governor’s budget, and his stabilization fund proposal, is under review by the House Ways and Means Committee. A spokesman for the committee said Thursday the committee is “doing our due diligence to assess it’s (sic) impacts on state finances.”

A spokeswoman for the Senate Ways and Means Committee said that committee is also studying Baker’s proposal. Building up state reserves “has been a consistent Senate priority, and we will continue to explore ways to boost the Rainy Day Fund in the FY 2018 budget,” the spokeswoman said.

Baker administration finance officials are scheduled to testify next Thursday at the first public hearing on the governor’s $40.5 billion budget.

Copyright 2017 State House News Service

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