Massachusetts Municipal Association 2010 Conference

1. Massachusetts Municipal Association 2010 Conference January 22, 2010

2. Massachusetts Department of Revenue • FY10 Revenue Update • FY11 Revenue Forecast Department of Revenue

3. FY09 Revenue • The FY09 CRE of $21.402 billion was revised downwards 4 times beginning in October 2009 through May 2009, and actual revenues in FY09 came in at an estimated $18.259 billion • 12.5% drop from final FY08 revenues of $20.888 billion • $3.2 billion less than the original CRE for FY09 Department of Revenue

4. FY09 Revenue • 75% decline in capital gains tax revenues, from $2.1 billion in FY08 to approximately $500 million in FY09 • $148 million (1.6%) decline in withholding receipts • Sales tax declined $218 million or 5.3% to $3.9b • Within that category, MV sales tax fell 12.4% or $62m • Meals tax fell $3m or .5% • Other sales tax receipts fell 5.2% or $15 • Corporate and business tax collections fell $450m or 17.6% Department of Revenue

5. FY10 Revenues • Economy expected to begin slow recovery in FY10. • FY10 budget assumed 18.879 billion in revenues, including: • impact of sales tax rate increase • Lifting of sales tax exemption for sale of alcohol • Taxation of satellite TV subscriptions • FY10 Revenues now estimated to be $18.460 billion • Actual increase of 1.1% over FY09 – mostly reflecting the sales tax rate increase • “Baseline” decline of 3.5% - backing out tax law changes Department of Revenue

6. FY11 Revenues • FY11 estimate assumes that the national and state economies will continue a moderate recovery throughout the fiscal year. • FY11 consensus tax revenue estimate is $19.050 billion • Actual revenue growth of 3.2% over FY10 • 2.5% baseline growth – first baseline growth in since FY08 Department of Revenue

7. Economic Indicators - GDP • Real GDP growth turned positive in the third quarter of calendar 2009 and grew at an annualized rate of 2.8% • GDP is expected to remain positive in the fourth quarter and through calendar year 2010. • Real GDP growth for the full fiscal year 2010 is projected to be 0.4% compared to growth of 2.2% in FY08 and -2.2% in FY09. • In fiscal year 2011, real GDP growth is projected to range from 2.4% to 2.7%; Department of Revenue

8. Other Economic Indicators • Employment • FY10 – Decline by 1.8% to 3.2% • FY11 – Change by -0.6% to 0.5% • Personal income (excluding capital gains) • FY10 – Grow by -1.9% to -0.1% • FY11 – Grow by 2.6% to 3.5% • Wages and salaries • FY10 – Decline by 1.7% to 5.1% • FY11 – Growth from 1.1% to 3.4% Department of Revenue

9. Other Economic Indicators • Retail sales • FY10 – Decline by -0.4% to -1.9% • FY11 – Grow by 3.5% to 4.4% • Corporate profits at the national level (there are no forecasts for state corporate profits) • FY10 – Increase by 3.8% to 22.6% • FY11 – Grow by 2.9% to 6.4% • Capital Gains revenues • FY10 – Increase by $160 million over FY09 • FY11 – Increase by $97 million over FY10 Department of Revenue

10. Municipal Revenue State Totals Department of Revenue

11. State Total Motor Vehicle Excise Department of Revenue

12. Department of Revenue

13. Department of Revenue

14. Department of Revenue

15. New Local Option Meals ExciseRevenues for October (smallest to largest) Department of Revenue

16. Department of Revenue

17. Department of Revenue

18. FY10 Budget Update MMA ConferenceJanuary 22, 2010

19. Agenda • Budget Update – LeeAnn Pasquini, Budget Director • FY09 Close Out • FY10 Update • FY11 Planning and H.2 Department of Revenue

20. FY2009 Close OutThe Challenge Faced • FY09 saw 4 major revenue revisions which totaled $3.14 billion or a 12.5% decline in tax revenue from FY08. • On top of declining revenue, spending exposures needed to be addressed through supplemental funding and transfers. Department of Revenue

21. FY2009 Close OutThe Solutions • Solutions in Fiscal Year 2009 totaled $3.9 billion • Budget Cuts Totaled Approximately = $1.3 billion • Approximately $1 billion came from 9C reductions and voluntary contributions from non-Executive Branch agencies • Use of State Stabilization Funds = $1.4 billion • Use of Federal Stimulus Funds = $1.3 billion • This includes approximately $900M in enhanced federal Medicaid matching funds (FMAP) and $400M in federal fiscal stabilization funding (for education) Department of Revenue

22. FY2009 Close OutFiscal Management • Through strict fiscal management including FTE caps and detailed review of all BGTS and Allotment requests the year closed with enough funding to: • Meet our statutory carry forward for cash flow; • Transfer $10 million to the Life Sciences Fund; • Use of surplus to help address the FY10 revenue revision. • Our closing FY09 balance in the stabilization fund is $841 million. Department of Revenue

23. FY09 Close OutStabilization Fund Balances Department of Revenue

24. FY2010 Update • In early October, DOR announced a $212 million shortfall in tax revenues for the first quarter of FY10.; Following consultation with the state Department of Revenue and his Economic Advisory Council, Governor Patrick reduced revenue projections for the entire fiscal year by $600 million. • Consistent with prior recessions, growth in the main drivers of state tax revenues – employment, wages, taxable sales, and corporate profits– is expected to lag the economic recovery. This is because even as the economy grows, businesses remain cautious and do not resume hiring until they are certain that the economic expansion is sustainable. And until hiring picks up, wages (and the taxes paid through withholding on wages) will not grow and consumers will not increase their spending on taxable goods. • While the stock market has staged a strong recovery over the past six months, capital gains realizations are still projected to decline in tax year 2009, which will be reflected in FY10 capital gains taxes. • According to an October 2009 report from the Center for Budget Policy and Priorities, revenues have fallen short of projections and resulted in mid-year budget deficits in 26 states, totaling $16 billion or 4% of these budgets. Department of Revenue

25. FY2010 UpdateFY10 Challenge and Solutions To Date In the fall of 2009, A&F completed a detailed review of all fiscal year 2010 spending and revenue assumptions. Throughout the first half of the fiscal year there were several changes that have had an impact on the bottom line of the budget. Department of Revenue

26. FY2010 UpdateContinuation of Fiscal Management Processes • FTE caps continue to be used • FY10 additions carefully reviewed in an effort to evaluate their impacts on FY11 and in most cases denied. • Contractor hires will continue to be evaluated as to continue to meet our legal obligations around the use of contractors versus FTEs. • Budgetary Transfers Carefully Reviewed • Allotment Schedule – Bi-monthly allotments employed Department of Revenue

27. FY11 H.2 Development • Increases in revenues over this year expected to be modest • Although economy recovering, tax revenues lag. • FY10 budget relies on nearly $1.9 billion of one-time resources • Continuing spending pressures Department of Revenue

28. Department of Revenue

29. FY11 H.2 Released • January 27, 2010 • Online budget – www.mass.gov/governor/budget • Issues in Brief • Companion Legislation • FY10 Supplemental Funding Department of Revenue