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Patrick ponders big cuts as state revenue tumbles

By Casey Ross
Globe Staff / September 20, 2008
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Governor Deval Patrick's administration is considering widespread emergency cuts in the state budget after tax collections plummeted by $200 million in the first two weeks of September, fueling fears of a deeper financial crisis as the nation's economic outlook worsens.

The precipitous drop puts the state's revenue far below what state officials had budgeted for this point in the fiscal year that began July 1, according to a Department of Revenue report. Moreover, officials expect the budget situation to worsen as the turmoil in the nation's financial markets weakens the economy, resulting in lower tax revenues for the state.

"The current economy and its impact on the state are going to complicate what's already been a challenging budget problem," said Leslie Kirwan, Patrick's secretary of administration and finance, who has grappled with consecutive $1 billion budget deficits. "We will be watching this very closely for the rest of the month."

The state anticipated it would collect about $1.1 billion in the first two weeks of September. Instead, it generated only $889 million, an 18.4 percent drop from the same period last year. Overall, budget officials hoped to end the month $80 million ahead of September 2007 collections, a threshold that now seems unreachable given the shaky economy.

The Revenue Department report attributed the drop to weak collections from payroll taxes, which were down $73 million, and anemic revenues from corporate business taxes. Those collections dropped $84 million from a year ago. The state also generates revenues from sales taxes, income taxes, capital gains taxes from investments, and other sources.

Kirwan said the numbers in the Department of Revenue report caused the administration this week to ask managers to comb their books to ensure that salary accounts are being kept level and that merit raises have been suspended.

The report indicated that collections could rebound in the latter weeks of September because the majority of revenue is processed at the end of the month.

But Kirwan said she expects that emergency budget cuts will be necessary and that Patrick would implement them throughout the executive branch in October. She added that it is impossible to know the size and focus of the cuts until the budget picture becomes clearer.

"We're going to take a hard look at everything," she said.

If revenues continue to decline, she said, the governor would seek expanded powers to spread the cuts across state government, to accounts that pay for everything from the judiciary to services in cities and towns.

Under state law, Patrick must get approval from the state Legislature to make cuts to accounts outside the executive branch. That power has not been granted since 2003, when former governor Mitt Romney implemented sweeping mid-year reductions in the face of a spiraling deficit.

Michael Widmer, president of the Massachusetts Taxpayers Foundation, said the state must make immediate spending reductions. "The September numbers are very sobering," he said.

He noted the numbers in the revenue report do not reflect capital gains taxes, which are expected to decline given the turbulence in the stock market. "The big hit is yet to strike," he said.

Top lawmakers declined comment on the budget outlook last night. However, Senate President Therese Murray, a Plymouth Democrat, has called for an unusual meeting on Monday to examine the state's finances. Expected to attend are Kirwan, state Treasurer Timothy P. Cahill, and budget leaders in the House and Senate.

Unlike the federal government, the state cannot run a deficit and must finish the fiscal year with a balanced budget.

Seeing signs of an economic slowdown, Patrick has been planning for the possibility of budget cuts for several months and has asked managers in all executive agencies to identify services that could be trimmed. He has also implemented restrictions on hiring and has cut spending on salaries and benefits for employees.

Compounding this year's problem is how much the federal government will reimburse the state for healthcare programs. The state had planned to receive $3.5 billion for this fiscal year, but negotiations have dragged on past the June 30 deadline. If federal aid falls short, that could force more budget cuts.

The state also faces rising costs associated with its universal healthcare law, which has led to higher-than-expected enrollment in state-funded insurance programs. Patrick proposed a plan to raise an additional $130 million from employers and insurers to help fund the new law.

State officials are also grappling with the impact of the stock market turmoil on the state's pension fund, which is down nearly 8 percent so far this year. That's far better than US stocks, which are down about 14 percent so far, but the fund typically has higher returns because of its diversified investment strategy.

Cahill noted the pension fund is not overly reliant on stocks.

"We're long-term investors, and I have confidence that we are well positioned to rebound," he said. "But it won't be a pretty year."

Casey Ross can be reached at cross@globe.com. Kay Lazar of the Globe staff contributed to this report.

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