Wednesday, December 5, 2018

FY20 Joint Ways and Means Hearing on Revenue

About to come to you live from the Joint Ways and Means hearing on revenue, starting the process of agreeing as to how much money the state will have to budget for FY20.

Updating as we go
Rep. Sanchez gavels in, noting it's the last time he'll do this
"this exciting session...that we have by statute to decide what revenues are going to be"
there is representation from the Senate (Sen. Joan Lovely) and the Governor's office (the Secretary of Administration and Finance Michael Heffernan)
represents the kickoff of the 2020 budget
despite the $1B surplus of the previous year, "we always have to remain thoughtful as we plan for the future"
"have been able to act in a unified bipartisan choices to make hard choices"
notes that rainy day fund is above $2B, that tax revenues are above forecasts
"everywhere I look, the cranes keep going up...and not only here in Boston, but throughout the Commonwealth"

Sen. Lovely "a vital first step in the budget process"
"critical that we forecast accurately"
"must be good stewards"
"our collections grew well beyond benchmarks"
revenue this year grew $423M beyond expectations
"we must be prepared for anything...our economy has remained consistently strong"

Secretary Heffernan
"keen appreciation for the process"
looking forward to testimony today
"look forward to our continued collaboration" with Legislature
and parting words for Sanchez
"but we are just five months into the fiscal year and we must always be mindful that circumstances can change"

Christopher Harding, Commissioner of Department of Revenue
Chief Economist
General Counsel
Have distributed copies of briefing book which will also be available on their website
"exceptionally strong revenue growth in FY18"
greatest single year growth since FY11, had been exceeded only 3 times in preceding 30 years
why? preceded by two years of disappointing revenue growth
(and note that they're still getting FY18 tax filings)
S&P index rose; "jump in estimated payments...partly due to strong stock market performance" and jump in capital gains
federal tax code: impact on state revenue
"corporate tax revenue tend to be volatile"
SALT  payments from personal side encouraged (federal side)
strong Massachusetts economy throughout
"less indicative of trends than episodic factors"
financial markets much more uncertain this year than previously
"given these conditions, the more volatile sources of income cannot be depended upon"
nearly full employment, so further growth in employment may slow
slower growth nationally would at some point slow growth in Massachusetts
among longest periods of economic growth in history (will reach that in July)
"not projecting a recession to begin during fiscal year twenty" but coming
potential upside on benchmarks for next year
"should be treated with caution"
"believe some of the fiscal surplus was borrowed" from next year
"we believe that our prior FY19 benchmark remains appropriate"
based on FY19...
2% to 2.9% over FY19 forecast
range up to 3.5%; midpoint would be 3.2%
assumptions of note: tax rate down to 5%
on marijuana sales: "use with caution for budgeting purposes"
fading impact of federal tax changes, international markets, concerns about international trade
state employment rate "is impressively low" and projecting growth of less than one percent to just over
possibility of growing gains in tax revenue exists, but when those will come in "is impossible to predict"
"unclear whether state revenues will continue to be strong through the year end"

and questions
Sanchez: past two years have been completely different (from one another)
"what we can learn from that projecting from the future?"
A: significant taxes came in at the end of the year
"in some cases to prepay based on uncertainty"
"strong economy indicators, strong job growth" as we exited '18
Sanchez: assuming we hit tax rollback figures, what will be impact?
A; first rollback to 5.01% by $84M in FY19 and $175M in FY20
"and you can read that on page seven, Mr. Chairman"
(to question) sales tax exceeded expectations

Lovely: gaming tax revenue?
A: we have not looked at that, falls under the Treasurer
"have not received any proposes for changes"
to question: exceeded estate tax benchmarks "significantly"
"most volatility is estate side"
very strong revenue from marijuana sales, will continue to track that

Chang-Diaz: actual numbers versus baseline numbers
"actual is raw dollar increase"
"baseline adjusts for an administrative or legislative changes throughout the year" to do a comparison that is more accurate
Chang-Diaz: so it gives us more of an idea of what is happening in the economy rather than policy changes
Chang-Diaz: expected increase in income tax rates: why not yielding an increase in revenue?
A: "there's a model and complexity"
"not a one for one...needs to be adjusted for volatility"

Rep. Walsh: rise in GDP but expectation that employment will rise more than that
A: GDP looks at all sectors, labor side looks at just jobs

Q on online revenue
A: online registration from day one
approximately 370 registered; additional after decision
"in tens of millions right now...a nice steady growth right now"
tracking very closely who has and has not registered
"have sent them friendly reminders" of those who have not registered
do have enforceement measures

Rep. Cutler: rainy day fund
A: hard to predict when things will turn and how long they'll turn and thus how much the fund needs to be

Next up Treasurer Deb Goldberg
Goldberg wishes both Sanchez and Kulik well
Sanchez "Madame Treasurer, I'm not in a casket!"
Goldberg notes that she met Sanchez when he first ran and knocked on her door
"most of you have consistenly heard me speak of the need to replenish the rainy day fund"
here to thank you for doing so
note tax change: impact on tax exempt organizations
do not have a significant number of bonds maturing in near time
income rates had begun to increase
"navigated the markets effectively this year"
"have seen wide investor interest...and robust demand from traditional retail investors"
realistic about the challenges faced
"manage our unfunded pension obligations...on track to be funded by 2040"
"we will not turn our backs on [retirees]"
unclaimed property reversions; on track to meet total reversion estimate of $131M
"consistently returning more and more money to its rightful owners"
Lottery aid: fourth straight year topped $5B mark; $997M in net profit
Gaming landscape has shifted: lottery has adapted
increased investment in retail partners
"most efficient lottery in the United States"
pitch for online lottery
"understand that there will not be progress without partnership"
notes concerns about corner stores but not how one would deal with them
and offers to help with sports betting

And questions:
Sanchez: how to better communicate our fiscal strength and responsibility to rating agencies?
Goldberg: did a road show in NY to rating agencies when she was first elected
will recommend another one
"many states offload debt onto their counties and other state agencies we have; we do not do that, and we don't seem to get credit for that"
"they were very focused on the rainy day fund"
recommend going back down to New York and seeing them again
Sanchez: feel funding of unfunded pension liability is realistic?
Goldberg: will make recommendations again in January in response to new projections
"in good shape to whatever may come in the next couple of years"
past few years "we had major overperformance"
Sanchez: how do you come up with those projections? should we make an adjustments?
Goldberg: we use actuarial estimations, "it's a complicated data-driven process"
look at funding schedule every year

Kulik: online lottery; mentioned 11 states with online lottery presence
are there any that are a peer state (NH, Kulik says, in size and revenue, not comparable)
Goldberg: we are losing potential customers to NH
Michigan; as their sales have grown,their retailors sales have grown
which means they're creating gamblers?
Goldberg: can set up stops on their mobile phones for themselves so they only can spend so much
"patterns that you can begin to see"

Sen. deMacedo: what would you like to see happen on rainy day fund?
Goldberg: rainy day fund is important but not all they look at
was recommending a minimum of $4B
"I would recommend that we keep putting money in the rainy day fund"
"when we don't adhere to fiscal policy, it costs the state opportunity and money"
"I can't begin to tell you how many communities need new schools, and that isn't because smartboards would be nice. They need new buildings."
if we don't have good bonding, we can't borrow for it
"I think of the pipes underground" water quality is a health issue

Chang-Diaz: where the sales of lottery are happening?
Goldberg: due to commissions, we know where the sales happen, but not where the people are
"there's always the conversation of communities where it appears people would have a lot more money"

Lovely: on gaming revenue: any idea on projections?
Goldberg: we would not know anything about gaming revenues, and that is not within our department
Gaming Commission would know that; "that's not our you want to move it there?'
(DoR had said Lovely should ask Treasurer)
lottery in casinos; hearing some concerns about siting
"not looking at one on one of the casino versus the lottery...we're being assaulted by multiple resources"
"if you don't innovate, you don't grow and you potentially die"
and that's it for the Treasurer

Federal Reserve Bank economist Dr. Zhao (?)
New England Public Policy center
overview of labor markets: continue to post solid job gains through October of 2018
8.8% increase over previous year (non-farm labor) for Massachusetts
by sector: construction sector posted largest year over year rate of growth (5.1% increase in the state)
outpaced nation in professional and business services, information, and other job services
measurement of unemployment (usage rate? maybe?) which takes in those underemployed as well
7.1% as a state (7.8% nationally)
labor force rate has grown continuously since 2016
only state in the region with labor force participation over that prior to the recession
last time it was this high was 2003
seniors 65 and older are part of what is driving it
tighter labor market, thus a stronger wage increase than the U.S.: 3% over prior October
2.4% increase across the U.S.
housing market: increase 6.8% nationally, 5.3% increased in Massachusetts
passed pre-recession levels
are slowing somewhat; attributed to rising interest rate
fuel and utilities increased by 4.6% over year before
top exporters reported year over year drop in Massachusetts
outlook: 2.1% over the next six months
job growth strong on average; unemployment low; house sales slowing
"economy to grow at a positive but slower rate in the near term"

Rep. Fiola: what are we exporting to China?
A: recent change? depreciation of U.S. dollars

Next is Mass Taxpayers Foundation
2.4% increase is what they are projecting
"does not include marijuana sales" or one time revenue
nor does it assume a tax rate drop
decline in capital gains is what they're projecting based on
slower employment growth projected
demographic headwinds leading to a slower growth in jobs
aging and decling workforce due to one of the lowest birthrates in the country
declining population between 16 and 64
negative impacts of opioid epidemic
initial signs of strain: pending home sales dropping, sagging auto sales, business investment (stock buyback rather than new investment), oil prices down,
tensions with China, concerns over Brexit, concern over economic downtown
increase in tax revenue of 3.6% is what they are projecting for FY20
don't recommend any revision to current fiscal year projection
"we are on borrowed time" regarding a fiscal downturn
"we certainly would like to see a higher balance in the stabilization fund"
"certainly is less than rating agencies would recommend" due to volitality of revenue sources, which would recommend 10% of state annual budget
states' ability to withstand a moderate or severe recession recently rated

to questions:
Sanchez: business confidence is down from a year ago
MTF: consistent with a lot of what we're saying
exercise is to look 18 months out; "so much easier to add a supplemental budget over the course of the year than have to take money away
Sanchez: insight "revising elements of the Grand Bargain"?
MTF: would require additional money; small businesses operate on smaller margins, and that bears watching
Rep. Malia: opioid epidemic?
MTF: economy is losing out on wages of folks who would otherwise be in the economy
companies because of absenteeism or presenteeism "has a considerable cost"

William Burke, Beacon Hill Institute
increase of 2.4% increase in tax revenue projected for FY20
current labor market in the United States is strong
250,000 jobs increased in October nationally
slowing growth over the next two years
"expected growth to slowdown in 2020" due to trade policy, other factors
"the Massachusetts outlook remains strong"
"expect growth to moderate from the current robust pace"

next testimony (I don't know who this is)
includes reductions in personal income tax rate
3.4% growth of revenue expected
"economic growth is expected to slow"
federal tax policy change: question of excess revenue in FY18 comes at expense of fiscal year '19
used estimates of FY18 without change
refunds were $446M less; payments on returns were $554M less
"seems to indicate that people indeed did move" filing from FY19 to FY18
fsical year income for businesses: consistent with corporations timing their fiscal liablity to get the lower tax rate
"there is a downside for the fiscal '19 estimate" (they were paying ahead)

Michael Goodman's testimony (UMass Dartmouth)
leads the Public Policy Center
testimony reflecting on context of time
capital gains realized in FY19; reporting well above benchmarks
"while this is very encouraging, there are a number of reasons why I think we are not going to be able to sustain this pace of growth"
aging and slow-growing population concern in keeping up with workforce; have been meeting ways in various ways
defer retirement, underused employees
domestic migration (usually unusual for us) "it may be this time is different"
crossborder commuting (NH, RI)
federal immigration laws and enforcement practices are particularly unhelpful
"our most important competitive advantages are the talents and innovative capacity of our people--our human capital"
"limited additional capacity to support growth at the current pace"
"sizable and troubling gap between the performance of the Greater Boston region and the rest of the state remains"
and even as Boston booms there is "increasing congestion on our roadways, a growing reliance on our already struggling public transit systems, and...a serious housing affordability problem"
regarding trade: "it turns out trade wars are not easy to win"
notes that new schools, which he agrees with the Treasurer we need, will need steel rebar, which now will cost 40-50% more than it would have without the trade war
thus increase cost for the Commonwealth
"growing consensus that there is a reversal of economic fortune in the offing"
running a nearly $1T annual budget deficit at the national level; lacking capacity for action if needed, let alone infrastructure investment
rainy day fund below FY07 levels
"a number of good reasons to be optimisitc about the Commonwealth's near-term economic and fiscal prospects"

Sanchez: labor force participation?
Goodman: they have stayed on and not retired
Sanchez: ethnic and racial groups: who is participating?
Goodman: that is being tracked; some recognition among employers that they need to work in the people they have
transportation and education needs
Lovely: older population staying in: want to work or have to?
Goodman: yes
Lovely: student debt; do we know what that looks like?
Goodman: does place a burden on the next generation
do millenials like roommates and not like cars or are they unable to afford them?
more the latter
"it is a significant burden and it is changing behavior"
Rep. Fiola: workforce training; really keep our eye on that
Goodman: long been a significant social problem; now an economic imperative, because we "literally cannot afford to leave anyone behind"


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