Beacon Hill's budget-balancing act just got trickier: An expert explains

Yahoo

01-06-2025

As Massachusetts lawmakers wade into negotiations to iron out a fiscal 2026 budget agreement, budget season in Washington, D.C. creates a massively uncertain economic landscape.
Analyzing that data, understanding proposals and putting recommendations out for a path ahead is the focus of Doug Howgate and his team at the Massachusetts Taxpayers Foundation.
As president of the business-backed public policy research organization, Howgate provides key input that helps guide the state's fiscal and economic future.
The group recently released its annual House and Senate budget analyses, along with other reports pertaining to the changing federal outlook and its potential impact on resources and spending in Massachusetts.
'So many of these challenging things are going to be made in connection to resource decisions,' Howgate said in an interview at his downtown Boston office. 'How do we make sure that those conversations are coordinated across the branches of government in a way that makes sense for how we determine how to use our scarce resources?'
In a recent conversation with State House News Service, Howgate talked about what's ahead for House-Senate budget negotiations and how lawmakers might adjust to the shifting fiscal realities of the Trump administration.
This interview has been edited and condensed for clarity and length.
Q: Have you been surprised by anything in particular this budget season?
A: I don't think anything within the governor's budget, House budget or Senate budget has been overly surprising. I think what's been surprising is the context in which those budgets are being developed.
We knew from the election in November that there were going to be changes, but with any of those things, it's hard to assess exactly what's going to happen.
I think the uncertainty related to federal policy, related to things like Medicaid or taxes, that was probably something we knew we were going to have to be tracking.
Especially in April, with things like the initial tariff announcements, there began to be more of a feeling that things economically may be more volatile or uncertain than we expected.
Q: You believe the best budget approach for the Legislature is to follow its usual budget timeline, then reassess before sending a final product to the governor. Why?
A: It didn't make sense to make adjustments in April, and then to make another adjustment in May, and then to reassess in June.
When you think about the factors in play, one of those big factors is state revenue collections. We know now what April collections are, and especially in terms of what they mean for the budget and for surtax revenue, for capital gains revenue — it gives you more of a sense of some of those moving parts at the state level. A lot of the uncertainty continues to be federal policy related to things like Medicaid, or other places where federal spending directly impacts state spending.
We still don't know everything, but I believe firmly that we're in a better position to assess risks and potential outcomes now than we were two months ago.
It's really that balance of putting in place a strong fiscal plan on the governor's desk, but also not trying to react to every change in the moment and increasing some of the chaos if you make several adjustments throughout that process.
Q: How do fluctuations and uncertainties in the stock market and capital gains revenue play a role here, and how can lawmakers best respond?
A: What the economy looks like at one point in time, and then what it looks like 12 months from now — they look like two different things. The benefit of the uncertainty with the Trump administration is we're probably more attuned to that reality now than we normally are.
We do have in place mechanisms to try to mitigate some [revenue source volatility]. At the same time, if the economy goes haywire, that will have a huge and direct impact on the state budget. April revenues were quite strong in Massachusetts.
So much of that activity — surtax collections, capital gains — is reflective of where the stock market was over the last 12 months, not where it's going. We need to disentangle that.
Another important thing for budget makers to note is that a sustained economic downturn is the biggest fiscal risk the state budget faces in any given year.
Given that we've probably seen greater uncertainty now than we've seen in the last several years, we need to make sure we're putting in place a spending plan that creates options for the state to respond to an economic downturn, not just the implications of various federal policy changes.
A: Over the past decade or so, adjusting revenues based on new information became something that was not uncommon.
Before the pandemic, you had a couple of years where revenues really disappointed compared to initial projections, so in June, it was required that the overall revenue threshold was reduced.
During the pandemic, we saw the House, Senate and administration work pretty well together to adjust both their revenue baselines to make sure they were accommodating for this huge unknown.
And then you had the flip side in FY22 and even FY23, where we had this unexpected surge in tax collections and it became apparent that the revenue numbers built were just not operative anymore.
We have a bit of muscle memory there, using analysis from the administration and groups like ours to make thoughtful adjustments.
You also have seen, in the past, exercises where the governor's veto authority comes more into play, and I'm sure that's something that the Healey-Driscoll administration will be monitoring.
My guess is that the focus will be to coordinate action in June to make sure that all three branches are working together to craft a budget with a sensible revenue forecast.
A: Generally, from a fiscal and a resource standpoint, they take a pretty similar approach.
You're talking about two budgets that both spend about $500 to $570 [million] less than the governor's budget proposal and that didn't adopt a number of the revenue-raising proposals that the governor put forward.
Obviously there are differences. One thing that jumps out is you've got two different approaches on the governor's transportation finance proposal. The House largely adheres to what the governor proposed. The Senate differs in things like multi-year support for the MBTA.
It moves more money into other areas of the transportation sector. What will be interesting when we see these two things reconciled is, because of this overarching context of needing to reassess revenue assumptions based on what's happened since January, you could see them start from that standpoint of, 'Okay, what do we think we have to work with for resources?' And then, 'How do our different spending proposals plug into that new reality?'
Q: There are concerns about the about the 6% spending bump over the FY25 annual budget, especially in an uncertain context. Is that worth concern?
A: Getting overarching spending growth in line with long-term revenue growth has got to be a high priority for everyone.
That's something that really, starting with the pandemic, we've had some challenges with — increasing demands on the system, significant revenue growth for a time period, and building in cost pressures that are hard to steer the ship on from one day to the next.
Managing long-term spending obligations is going to be challenging. These are programs that impact millions of Massachusetts residents.
One of the things we see in this budget are proposals to look at the personal care attendant program within MassHealth to say, how do we make some longer-term reforms in the program that are going to bend the cost curve there going forward? I think we need to be honest with ourselves, that making a change from day-to-day is not always easy, is not always appropriate.
But how do we make sure, as we're putting together the fiscal 2026 budget, we're also doing it with a view towards managing costs in 2027 and beyond? That's even more important, I think, when we look at all the federal uncertainty.
Q: The House budget puts a pause on decisions surrounding vocational school admissions policies. The Board of Education already approved a path forward. What could this say about the Legislature's role in shaping that conversation?
A: I think the Board of Elementary and Secondary Education certainly has a role in setting regs, though the effectiveness of those regs is only going to be as successful as their ability to also build consensus within the Legislature and the rest of the administration.
Any one of those entities can really undo work or press pause on moving forward. I think it speaks to two things.
One, we do need to take a new look at how we make sure that our process for equitably ensuring access to vocational schools works in the current world. And [two], we need to do it in a way where the administration and the Legislature, and all the stakeholders, feel like they've had an opportunity to make their voices heard.
We just need to make sure, at the end of that process, that the ability of students in Massachusetts who can use that vocational opportunity to achieve economic opportunity and build a career that is right for them, not get lost in the shuffle.
A process that has that consensus across the board — the Legislature is probably going to have to be a part of it, no matter what.
Q: What are your thoughts on the Senate's move to lower prescription drug costs in its budget?
A: The Senate's been remarkably consistent in terms of advancing pretty aggressive proposals [related to] drug cost limitation and things like that.
We had major compromise drug cost legislation signed into law at the end of [2024]. What's happening with the implementation of that bill? Are we moving forward with this stuff that is in law, that we had broad consensus on, and making sure we're doing that as impactful a way as possible?
That should take priority over starting new reforms before the initial reforms have gone into effect.
We are [also] seeing a number of health care and drug and life sciences issues coming into play at the same time, whether it's in terms of ongoing strains on the health care system, cost pressures for premium payers, cost pressures for the state — at the same time, financial pressures on providers and uncertainty with federal Medicaid, and the critical role that the health care sector and the life sciences sector play for Massachusetts residents and a broader economy.
One larger concern I would have is, how do we make sure we're not adding too much to that unknown policy mix that we have to adapt to and react to?
Q: You've referenced proposed cuts to Medicaid multiple times. What's on your mind there?
A: This is one of the reasons why we felt like it was so important to not make premature adjustments to the spending framework back in April and May.
While we don't know exactly where the federal budget is going to go, we've got more clarity in at least where the [U.S.] House wants to go. Those proposals would significantly negatively impact the state's Medicaid population and the Medicaid program in the budget.
That said, they are not as immediate or as significant as some of the proposals we originally saw. To me, this is a bit of a commercial for, 'We want to be proactive and we want to be decisive, but we also want to make sure we have as much information as we can have before we make a decision.'
The Medicaid proposals, as they're formulated right now, won't have an FY26 impact on the state budget or the state program. A lot of the big adjustments we see are in FY27 through FY29, which doesn't mean they're not very important -- they are, but that timeline really matters.
As we think about the proposals in there, whether it's work requirements or other things like that, it's important to also differentiate between what's going to reduce the amount of federal resources available to the state budget associated with spending requirements, and what is likely to reduce enrollment in the state's Medicaid program, which will have a big knock-on effect on the health care sector and things like our health safety net.
The budget impact in the near term is less clear cut than, say, just a reduction in the federal Medicaid reimbursement. That's why knowing what they're actually proposing and the timeline is so critically important.
Q: Has there ever been a situation, in your memory, where the state has had to accommodate a similarly massive gap?
A: Over the last 15 years, the thing that probably gives us the best kind of experience for this is actually sustained economic downturns during the Great Recession, where we saw billions of [dollars of] loss in state tax revenue, and at that time, a lot of discussion and action on Medicaid service reductions and things like that.
That's where we've seen a lot of the debates on Medicaid policy that maybe policymakers could draw upon.
To me, there's a more important lesson there, which is what is included in the bill working its way through Congress right now is important, but what is equally and potentially even more important for the Medicaid program, let alone for the state budget, is: are we prepared to withstand a potential economic downturn as well?
Because that can force decisions within a program like Medicaid just as fast or faster than Medicaid policy proposals being discussed in D.C.
Q: What do you view as the potential fiscal and economic costs of Trump administration research funding and immigration policies in Massachusetts?
A: You can't quantify to the dollar what the impact of a specific kind of policy direction is, necessarily.
When we talk about the impacts of the Trump administration, one of the things we talk about is the impact of what we would call 'process uncertainty' — of not actually knowing what the policy is, how it's going to change, what you need to react to.
That creates paralysis in the system, makes people reluctant to act, impacts decisions from higher ed institutions about admittance or about how they're going to spend their money. It certainly impacts state or nonprofit or private sector actors, as well. Irrespective of where those policies land, the uncertainty that it comes with has a huge cost. At the same time, you think about the work that we [and others] have done about Massachusetts competitiveness, our challenges sustaining a growing labor force.
One of the biggest ways we've been able to address that in recent years has been through immigration. Any time you're talking about policies that are going to dampen immigration going forward, that has a profound impact on Massachusetts's ability to grow its economy and its labor force.
Read the original article on MassLive.