The state is borrowing $1 billion to make its local aid payments to cities and towns at the same time that monthly tax collections have dipped, triggering a warning from state treasurer Timothy Cahill that the Commonwealth could face a severe revenue shortfall in the coming months.
The state routinely borrows to pay its bills, but the amount is significantly higher than last year and Cahill said the borrowing should send a message to the Legislature and the governor that they should curb spending and consider making cuts.
"Borrowing is like paying for groceries with your credit card," he said. "It's not the best way, but if you're expecting a windfall, it's okay. The question is: Are we going to get a windfall?"
Cahill said he's worried that tax collections in October were so weak - down 2.8 percent over October of last year - they could portend a dramatic decline when most people file their income tax returns in April. If the country falls into recession, he said, the state could be in even deeper trouble.
"We're not trending in the right direction. My job is to send out the warning signals. There are storm clouds out there and we have to be very aware," said Cahill, who, along with Administration and Finance Secretary Leslie Kirwan, will send a joint letter to lawmakers today describing the borrowing plan and the state's cash flow situation for the year.
House Speaker Salvatore F. DiMasi, who was briefed on the cash flow report earlier this week, called the borrowing "yet another troubling sign for the Commonwealth's finances in the year ahead.
"One thing is clear from everything we are hearing - we must be conservative in our spending," he said. DiMasi said he has asked Kirwan and the Department of Revenue for more detailed information on the state's fiscal situation and future revenue trends.
Kirwan downplayed the significance of the short-term borrowing, calling it "not in and of itself alarming. It's standard operating procedure," she said, because revenue comes in at a different pace than state spending.
But she said the factors that led to the increased borrowing - like a shortfall in lottery revenues - could mean the state has to use reserves to balance the books at the end of the year. She would not predict how much may have to be taken from the state's rainy day fund.
This year's budget, she said, is based on a projection of 3 percent growth in tax revenues. Collections are up 4 percent for the year, she said. "Clearly, if state tax revenues were to go down over the rest of this year, we'll have even greater financial challenges to deal with."
She said the administration has proposed ways of increasing revenues - including closing corporate tax loopholes - but has been unable to win legislative support.
Michael Widmer, president of the Massachusetts Taxpayers Foundation, one of the state's leading fiscal watchdogs, yesterday predicted the state will have to use $300 million to $700 million in reserves to balance the budget at the end of the year because of increased health and pension costs and declining lottery revenues.
Next year, he said, the shortfall could skyrocket to $1.5 billion because of built-in, escalating expenses.
"All of this is predicated on a slow-growing economy," said Widmer. "But the danger of a national recession increases by the day, which would make this picture even worse. The situation is very serious today, but with a recession it would be dire."
According to Cahill, the state borrowed $200 million in October, $300 million in November, and will borrow another $500 million in December to cover its bills.
The state has never borrowed so much so early in the fiscal year, said Cahill. It is also the maximum amount the state can borrow for the short term by law and is the highest amount since the recession of fiscal 2003, he said. It will cost taxpayers $18 million in interest. Last year, the state borrowed $900 million.