Record State Savings Balance Creeping Closer to Legal Limit
Source: State House News Service
Author: Colin A. Young
Beacon Hill seems to have more money than it knows what to do with these days, and lawmakers could soon have even fewer options at their disposal.
Surging state revenues have in recent years fueled sizeable surpluses and allowed the Baker administration and Legislature to pump the state’s Stabilization Fund up to new heights. But similar to the way that fiscal year 2022 revenues were capped by Chapter 62F, leading to taxpayer rebates totaling nearly $3 billion, the Stabilization Fund’s balance is getting closer than it has in at least 20 years to a cap of its own — one that would trigger another lesser-known tax rebate mechanism in state law.
As of the end of fiscal year 2022 on June 30, Massachusetts had stashed away in the Stabilization Fund about 75 percent of what it is legally allowed to, according to the year-end financial report released last week by the state comptroller.
Massachusetts injected $2.311 billion into its Stabilization Fund during fiscal year 2022, bringing the rainy day fund’s balance to a historic high of about $6.938 billion, according to the comptroller. And the fiscal year 2023 budget that Gov. Charlie Baker signed in August would put the Stabilization Fund on track to reach yet another record high of roughly $8.4 billion by next summer, his administration has said.
The law that lays out the parameters of the Stabilization Fund stipulates that “[i]f the amount remaining in the fund at the close of a fiscal year exceeds 15 per cent of the budgeted revenues and other financial resources pertaining to the budgeted funds, as confirmed by the comptroller in the audited statutory basis financial report for the immediately preceding fiscal year, the amounts so in excess shall be transferred to the Tax Reduction Fund.”
For fiscal year 2022, the Stabilization Fund cap was $9,312,616,000 as calculated by Comptroller William McNamara’s office in the Statutory Basis Financial Report published last Friday. And the balance of the Stabilization Fund when fiscal 2022 ended was $6,937,864,000 — or 74.5 percent of the allowable balance.
While there is still room for more savings, the fund’s balance is closer to the limit than it has been at any point over the last 20 years and the balance has been increasing at a much faster rate than the cap.
The last time that the Stabilization Fund ended a fiscal year with a balance less than it had one year prior was fiscal year 2014, when the balance was equal to about 23.5 percent of the statutory cap. Since then, the fund’s balance has grown more than 455 percent — from about $1.248 billion to roughly $6.938 billion. Over the same period, the cap — which is based on tax revenues, federal grants and reimbursements, and more — has increased 75 percent, from $5.320 billion to $9.312 billion.
Starting in fiscal 2015, the Stabilization Fund began to grow, slowly at first. Its balance increased just 0.32 percent that year, then 3.12 percent in fiscal 2016 and 0.71 percent in fiscal 2017. Each fiscal year since, the fund’s balance has grown by a greater percentage than has its upper limit imposed by the cap.
Fiscal year 2018’s nearly 54 percent increase in the balance far outpaced the 6.44 percent increase in the cap. The 71 percent growth in the Stabilization Fund balance in fiscal 2019 (compared to 6.44 percent growth in the cap) brought the fund to about 50 percent of its legally-allowable maximum. Fiscal 2020 was more reserved — 2 percent growth in the cap and 2.24 percent growth in the fund’s balance.
But even as state revenues have skyrocketed in the last two years, the Stabilization Fund’s balance has still grown faster than its ceiling. Fiscal 2021 saw a 20 percent increase in the cap — the largest one-year increase since the cap was raised in the early 2000s from 10 percent to 15 percent of budgeted revenues — and 32 percent growth in the fund’s balance. And fiscal year 2022 generated a 9 percent increase in the cap but a nearly 50 percent increase in the Stabilization Fund’s balance.
If or when the statutory 15 percent cap is reached, any additional money that would normally be bound for the Stabilization Fund — like excess capital gains revenue — goes instead into the Tax Reduction Fund, which sends money back to taxpayers through a one-time increase in the personal exemption.
Since its creation in 1986 as a companion to the Stabilization Fund, taxpayers have received three tax cuts through the Tax Reduction Fund, according to News Service reporting. The cuts came through one-time increases in personal exemptions on 1996, 1997 and 1998 tax returns.
The first tax cut was worth $150 million, the second came in at $91.8 million, and the third and most recent cut was worth $208.8 million, the News Service reported in 2001, citing a deputy state comptroller.
Massachusetts was limited to holding a maximum of $543 million in the Stabilization Fund in fiscal year 1996, but tax revenues helped to propel it well beyond that figure, triggering the automatic tax cut. Gov. William Weld, who was locked into a hot U.S. Senate race against John Kerry at the time, announced in June 1996 that there would be a roughly $150 million tax cut coming when people filed their taxes the following year. That cut meant $105 for a single filer or $135 for married couples, the News Service reported at the time.
“I would much rather see some harried parents enjoy a night out than see government engorge itself on the public’s tax dollars,” Weld said when he announced the tax cut.
Current lawmakers, who were blindsided by the governor’s late July Chapter 62F revelation, may have avoided a possible Stabilization Fund cap issue when they made what McNamara last week called one of the “more unusual transfers” as they closed the books on fiscal year 2022. Instead of being transferred into the Stabilization Fund as would normally be the case, the final close-out budget passed by the Legislature and signed by Gov. Charlie Baker directed the state’s year-end $4.8 billion surplus to instead be deposited into a Transitional Escrow Fund to be reappropriated in fiscal year 2023.
Secretary of Administration and Finance Michael Heffernan said the escrow account “acts almost as a stabilization fund on top of the Stabilization Fund.”
Massachusetts is far from the only state where a similar story is playing out.
Together, states had a record $136.5 billion in savings by the end of fiscal 2022, the National Association of State Budget Officers said. An October report from the Pew Charitable Trusts found that state savings accounts hold enough money in reserve to run government operations for a median of 42.5 days, a new high and up from a median of 28.9 days in fiscal 2019, just before the pandemic-fueled recession.
At least three states — Connecticut, Iowa and Oklahoma — were projected to have already maxed out their rainy day funds once the final accounting on fiscal year 2022 was completed, Pew said. In those cases, money that otherwise would have flowed into savings will be diverted to other purposes, as would be the case if Massachusetts were to hit its Stabilization Fund ceiling.
And while the COVID-19 years have proved to be a boon for state savings accounts despite initial forecasts for steep losses, Pew said that it expects that states will soon have to slow down on stashing money away.
“Budget surpluses and related gains in states’ rainy day funds during fiscal years 2021 and 2022 are not expected to continue to the same degree in fiscal 2023. Higher-than-forecasted tax revenue growth, historic federal aid, and record financial reserves have buttressed states’ fiscal positions over the past two budget years,” Pew said in its October report. “However, policymakers now face an inflection point as they reckon with several looming challenges, including weakening economic growth amid tightening monetary policy and historically high inflation, and a tapering of federal aid.”