Massachusetts lawmakers, uncertain of coronavirus’ economic toll, brace for tough decisions on education, taxes for fiscal 2021 budget

Nearly seven months ago, Gov. Charlie Baker sat on a table in a Boston high school auditorium signing a bill that legislative leaders proclaimed would close the opportunity gap in Massachusetts classrooms. Karen Spilka said it was the Legislature’s greatest responsibility.

Whether the state will start meeting its responsibility in fiscal 2021 remains unclear. In what should be the first year phasing in the Student Opportunity Act, the landmark $1.5 billion education law remains in limbo as state officials contemplate holding aid flat for the year while schools cut their staff amid significant revenue shortfalls in the wake of the coronavirus pandemic.

Charlie Baker signs education bill — Gov. Charlie Baker signed an education funding bill at The English High School in Boston on Nov. 26, 2019. (Shira Schoenberg / The Republican)

For the first time in recent history, state legislators are approaching July 1 without any budget proposals filed for the new fiscal year. Lawmakers don’t know whether a federal stimulus bill is on the horizon and could help with education funding increases, as the federal government did during the Great Recession. Nor do they know how soon or how much the federal government will reimburse the billions of state spending in its COVID-19 response and how much of a tax revenue shortfall the state faces — one projection puts the gap at $6 billion — as the state is waiting on tax payments now due on July 15, the extended tax deadline.

State budget writers don’t have the luxury of taking a wait-and-see approach. Unlike the federal government, Massachusetts legally cannot enter the new fiscal year running a deficit. While state leaders often rely on interim budgets to cover their expenses in July as they settle last-minute negotiations, longer delays on drafting full-year budgets mean municipalities wait longer for answers on funding for schools, local road and bridge repairs and other key services that rely on state aid.

In the short term, state officials plan to keep education funding flat. The Massachusetts Department of Revenue published a bulletin on Monday stating funding for Chapter 70 and local aid will remain level for July and August. State officials still have to draft the roadmap for the rest of the fiscal year.

The state has a $3.5 billion rainy day fund, but state officials and economists caution against relying on it. Depleting the stabilization fund quickly may send the wrong message to credit rating agencies; Standard & Poor’s dropped Massachusetts’ rating from AA+ to AA three years ago, warning the state’s rainy day fund was too low. Another reason to save stabilization funds is because lawmakers won’t know whether they need to dip into it next year.

“That is money that can be tapped, but that’s like using all the water In the bucket for the fire,” said Greg Sullivan, research director at the Pioneer Institute, a Boston-based think tank. “When that’s gone, you really have nowhere to turn.”

“If we do not get that block grant from the feds, we are going to have to make some brutal decisions of layoffs, terminating programs, cutting local aid across the board,” Sullivan added. “There will be devastation in our budget.”

In the worst-case scenario, that devastation could translate to deferred education investments. Gov. Charlie Baker’s budget proposal in January included a $303 million increase toward Chapter 70 school aid, a 6% increase that would bring the total pool to $5.38 billion. Now lawmakers are considering holding Chapter 70 funding harmless, or leaving it flat, if they do not receive enough relief from the federal government. Such a move would run contrary to the provisions of the Student Opportunity Act.

“The conversation now is we need to protect education funding, and the plan is to insulate and hold harmless Chapter 70 funding,” said Sen. Adam Hinds, a Pittsfield Democrat who serves on the Senate Ways and Means Committee. “How we get there is a different matter.”

The missing pieces

Massachusetts elected officials are waiting to answer several unanswered questions that will help the state’s financial picture come into a clearer focus.

An official from the Executive Office of Administration and Finance official said the Baker administration is coordinating with the Legislature on spending plans for the next year, but declined to elaborate on the timeline for passing a fiscal 2021 budget or what areas could face cuts.

Asked about whether the state would fully fund the Student Opportunity Act’s first year, Gov. Charlie Baker said legislators and his administration must resolve some more immediate funding issues before they can determine how much money they have to spend on “big picture” priorities such as the education funding law, echoing concerns from economists.

Baker’s top priority is passing a $1 billion supplemental budget, saying all the funding covers personal protective equipment, incentive pay and services reimbursable by the federal government because of the coronavirus pandemic.

The sooner legislators pass his supplemental budget, the sooner he can submit a formal request to the Federal Emergency Management Agency and learn how much the state will get back to cover its spending gaps, Baker said during a recent news conference.

“Those funds are available until they’re gone. That doesn’t mean you don’t get reimbursed at some point down the road, but if you’re not one of the people who gets in line relatively early with all your incurred expenses that are currently federally reimbursable, it may be a while before you get the money,” he said. “It’s very important to us with all these moving parts between us and the feds and local communities that a lot of stuff get buttoned up and done.”

“There are so many moving pieces associated with our fiscal position that it’s very hard to answer really big questions,” he also said, “and I know that’s a bit of a dodge, and I apologize.”

The House advanced the supplemental budget on Monday and plans to take it up on Wednesday, according to the State House News Service.

Rep. Aaron Michlewitz and Sen. Michael Rodrigues, the Legislature’s budget chiefs, said in a joint statement the supplemental budget will help get COVID-19 expenses reimbursed by the federal government and free up money for state and local resources.

“The priorities included within this supplemental budget — funding for personal protective equipment, emergency child care, health care supports for community health centers and behavioral health services, housing and homelessness supports, and food security— reflect the advocacy of the members of both chambers to urgently address the challenges facing our Commonwealth during this difficult time,” said Michlewitz, a Boston Democrat, and Roderigues, a Westport Democrat, in the statement.

Lawmakers are also waiting on what money comes in on July 15, this year’s Tax Day.

The state Department of Revenue has collected $2.25 billion less than it expected to in tax revenues, in large part due to revenue collections falling short in April. The preliminary revenue collections for April alone fell short $2.1 billion of the state’s benchmark and was 54% less than what the state collected in April 2019.

DOR attributed the lower collections total in part to the tax deadline extensions and in part to the non-essential business closures that shut down restaurants and shops. Those delayed penalty waivers for late filing and corporate excise tax payments and certain sales and meals tax payments until June 20, in addition to the well as the income tax payment and filing deadline until July 15.

“We don’t really know what the actual tax revenue for the month of April, which is the biggest month on the calendar in the fiscal year is going to look like until people actually pay their taxes in July,” Baker said at a recent news conference.

In May, the state collected $1.7 billion in tax revenues, 15% less than the state expected and 13% less than the state collected in May 2019.

And it’s not just sales and income tax revenues. Andrew Bagley, vice president of policy and research at the Massachusetts Taxpayers Foundation, said the state has to take stock of lost gas tax revenues, lottery fees and casino revenue.

“What does that mean for MassDOT if you’re down in gas tax revenues, if registry fees are down? People aren’t getting their cars inspected,” he said.

MTF projected before the pandemic hit that the state faced a revenue shortfall of up to $800 million this fiscal year. Even then, the Beacon Hill watchdog group suggested putting off the phase-in of the Student Opportunity Act or hold off spending in other parts of the budget.

Since the pandemic began, those predictions have only grown darker. MTF now projects the state is up to $6 billion short and that the economy could take years to recover — casting doubt on predictions of a V-shaped recovery.

“A complete and accurate picture of the state’s budgetary challenges may elude us for some time,” a May 28 report states. “Ongoing adjustments will be necessary as we follow the trajectory of the virus, the timing of a vaccine, the ability of the economy to regain traction and consumers to regain confidence through inevitable fits and starts, and the willingness of Congress and the administration to keep state and local governments functioning.”

The state’s financial picture remains murky as the new fiscal year approaches.

“We’re in the same position as the House, Senate and the administration. We have nowhere near enough information to decide how much in the FY2021 budget for us to start making any recommendations,” he said. Like Sullivan of Pioneer Institute, Bagley cautioned against relying too much on the rainy day fund at this point. “How big a problem does 2020 create for 2021. If you have to dip into the rainy day fund for 2020, that’s not good,” he added.

Perhaps the biggest unknown is the one lawmakers and state officials can control the least.

The U.S. House of Representatives passed a $3 trillion coronavirus bill that would deliver almost $1 trillion for state and local governments in April, but the prospect of the legislation landing on the president’s desk and being ratified has dwindled.

During the Great Recession, Massachusetts received more than $16 billion in federal aid through the American Recovery and Reinvestment Act. More than half of the money was used to fill spending gaps in the state budget and for some municipalities, Commonwealth Magazine reported in 2012. One-quarter of the money went to special education, student aid, school employee health insurance and other education spending. The rest went to safety net programs, “shovel-ready” construction, road repairs, wind turbines and other programs and initiatives.

The economic decline from COVID-19 has been sharper, yet debates over whether to assist states and municipalities has fallen along partisan lines. Senate Majority Leader Mitch McConnell, a Kentucky Republican, made headlines in April suggesting states should file for bankruptcy rather than rely on a federal bailout. Since then, McConnell has suggested the U.S. Senate won’t revisit a COVID-19 relief bill until late July, weeks into the new fiscal year in Massachusetts.

State legislators have held several meetings with the Massachusetts congressional delegation, urging them to bring federal relief money to Massachusetts. Rep. Carlos Gonzalez, a Springfield Democrat who leads the Black and Latino Legislative Caucus, said members raised concerns about the state budget, as well as policies to address racial inequities, in meetings with U.S. Rep. Richard Neal and U.S. Sen. Elizabeth Warren, both Democrats.

“I think the federal response has been too late,” Gonzalez said. “We hoped that they would address our state budgets a lot quicker and really be able to help move the economy by help moving our state’s economy.”

Education in the age of coronavirus

The Student Opportunity Act was the culmination of years of advocacy for education reform. A 2015 Foundation Budget Review Commission report found that a formula under a 1993 education law ended up underfunding school districts by $1 billion to $2 billion a year.

Five years later, Baker sat at a table in the English High School’s gym and signed an education reform that overhauled the state’s Chapter 70 formula to better account for pockets of poverty in school districts, English language learners, special education and rising employee health care costs.

School districts expected to see funding increases from the state, especially school districts with higher concentrations of poor students who say they weren’t receiving as much money as their suburban, more affluent counterparts.

Since the pandemic, school districts in Chicopee, Worcester, Brookline and other communities have announced plans to reduce their staff. Chicopee Schools sent 100 layoff notices to its employees.

Under the Student Opportunity Act, the state is supposed to increase funding over seven years until it provides $1.5 billion more in funding annually. School districts with higher numbers of poor students are supposed to receive the most money, followed by those with large ELL populations.

But the state’s ability to start increasing its Chapter 70 funding is unclear.

“It’s hard to comment on something like how the big pieces of the budget are going to play out until we know something like that,” Baker said at a recent news conference.

Sen. Sonia Chang-Diaz, whose education bill laid the framework for the Student Opportunity Act, said she wants to see as much of an increase as possible to start phasing in education reform.

“It will depend on what the federal gov’t does or doesn’t do in the coming weeks, but ... we cannot just sort of wait for the fed gov’t to ride in like a white knight here,” the Boston Democrat said. “That’s not a strategy.”

In the meantime, lawmakers are revisiting new taxes they previously proposed. Baker again proposed in his budget accelerating sales tax payments, which would bring a one-time revenue increase. House members sought to eliminate a tax break for rental agencies that buy new car fleets, among other taxes and fees, to fund transportation improvements.

Others have discussed taxing businesses that have seen a windfall during the pandemic. A report by The Center for State Policy Analysis at Tufts University suggested a one-time surtax on corporate profits resulting from COVID-19, ranging from grocery stores to e-commerce platforms, food delivery services and other electronic services.

“If you’re a corporation that’s experiencing a drastic spike in profits that is likely caused by the pandemic — Zoom, for example — that’s an entity that should be giving something,” said Chang-Diaz, a Boston Democrat.

Proponents of a windfall tax say it’s not meant to be punitive, but rather a way for thriving businesses to contribute to the economy as other businesses struggle to recoup their losses.

Sen. Jo Comerford, a Northampton Democrat, suggests taxing multinational companies’ offshore earnings, often known as the global intangible low-taxed income. A GILTI tax, she said, could help plug some budget holes and prevent cuts to education, local aid and environmentally focused infrastructure projects.

“It just feels like in order to get out of this pandemic and the associated economic crisis, public investment is needed,” she said.

Hinds said he doesn’t know what the worst-case scenario looks like for the Student Opportunity Act, except that the education reform law has to play a role in the state’s budget discussions to follow through on correcting funding levels for low-income areas.

“There’s an important conversation to be had for identifying ways that we protect education. On the governor’s side, there’s accelerating the sales tax,” Hinds said. “The relevant piece we were talking about is the need for additional sources of revenue before this, and now the urgency is accelerated.”

Related Content: