Macroeconomics

9C cuts in Massachusetts Budget FY2009: an example of Budget “Alchemy”?



The Fiscal Years 2002, 2003, 2007 and 2009 in Massachusetts represent examples of budgetary arrangements. In 2009 under the 9C cuts, the State adjusted its budget from a projected spending of U$18.986.971.941 to an adjusted spending of U$18,192,567,756. The 794.815.185 dollars in cuts represented a correction of structural deficit rather than just a  reflexion of cyclical deficit. This essay takes a brief look at the Commonwealth finances in order to assess whether the 9C cuts of 2009 were techniques for just giving a false appearance -in Petersen words Alchemy- or were substantial and real adjustments. It starts by mentioning what is considered by Petersen as Alchemy. Then we present the nature of the main 9C cuts of 2009 along with a brief analysis of the major cuts. Finally, the essay concludes that only 4% of the cuts might be defined as Alchemy. We take the data from the  9C Account Listing at http://www.mass.gov/bb/gaa/fy2009/prnt_09/app_09/p9csummary.htm. All the calculations are ours.  

Before we define “Alchemy”, it is important to point out that Cyclical Deficits occur during the fiscal year when expected revenues fail to materialize (Petersen, 2003). Which is the case, for example, of localities such as Lowell which budget relies more than 50% on state aid. However, structural budget deficits occur when the entire existing revenues system can not generate enough revenues to meet spending commitments in the long-run. For instance the current crisis of skyrocketed health care costs. The shortage is usually due either to the revenue structure or to an economic downturn. “Generally, the idea is that given existing and planned spending commitments, the existing revenue system (including already enacted charges) under the assumed conditions will not generate sufficient revenues to meet spending commitments” (Petersen, 2003. Pag 569). That seems to be the case of Massachusetts State Budget, which required structural measures in the Fall of 2009. 
Thus, John Petersen identifies six forms of Budget “adjustments” that are intended to balance budgets but fail to solve real structural problems. For him, public finances may be made-up of the following tricks: 1. “Rosy scenario” which consists in an overestimation of revenues. 2. The sale of an state public asset to fund ordinary spending. 3. Inter-fund manipulation and internal borrowing. 4. Acceleration of revenues and delays in spending. 5. Capitalization of current costs and borrowing to cover them, and 6. Anticipation of future savings. To unveil these tricks from the budget requires a closer assessment to the 459 existing accounts for 2009. In this essay, we just aggregated the main explanations for the cuts as a proxy for identifying to what extend the so-called “Alchemy” was applied to the State Budget. Thus, as the table #1 shows, only 4% which is roughly U$32,743,514,00 of the cuts might be understood as Inter-Fund manipulation or internal borrowing. An additional 1% assigned to a reduction of “payments to providers” might be also interpreted as delays in spending.  
Table #1. 
Main cuts’ explanations. C9 FY 2009.
Amount
Percentage
Reduces spending that is not affordable given the current revenue estimate.
$474,124,695.00
61%
Eliminates and reduce earmark spending.
$45,259,868.00
6%
Reduces appropriation to projected spending levels.
$74,421,388.00
10%
Reduces earmark spending and other spending that is not affordable given the current revenue estimate.
$75,556,137.00
10%
Reduces payments to providers to an amount that can be supported by the current revenue estimate.
$6,361,019.00
1%
Reduces payroll and administrative expenses.
$62,710,846.00
8%
Inter agencies transfers
$32,763,514.00
4%
The previous table helps us to understand the nature of the cuts. From there we can infer that the most large amounts of cuts were given under the explanations of “reducing spending that is not affordable given the revenue estimate”, which was roughly 61% or U$ 474,124,695.00, and “Reduce earmark spending that is not affordable”. With an exception of the Primary Care Workforce Program, the 2009 State Budget Adjustment seems not to use funds from sales of public assets. Also an 8% was deducted from reducing payroll and administrative expenses. Nonetheless, as we mentioned above, in order to determine whether or not the budget was truly adjusted we have to look at the accounts. The following table shows the top eleven cuts in 2009 and the description of the account. Those eleven accounts represent a 59% of the 2009 cuts. None of them appears to belong to any of the categories that Petersen defined. 
Table #2. 
Description. Selected accounts 9C FY 2009 cuts.
FY 2009 GAA
FY 2009 9c Cuts
MassHealth Managed Care
3,121,385,000
-95,340,714
MassHealth Senior Care
2,158,355,058
-56,822,857
MassHealth Fee-for-Service Payments
1,535,816,000
-64,156,429
Lottery Revenue Distribution to Cities and Towns
935,028,283
-91,114,887
Group Insurance Premium and Plan Costs
830,933,764
-31,700,000
University of Massachusetts
492,251,998
-27,422,075
Additional Assistance to Cities and Towns
379,767,936
-36,885,113
Mental Health Services Including Adult, Homeless and Emergency Supports
322,068,305
-29,672,421
Circuit Breaker – Reimbursement for Special Education Residential Schools
230,043,700
-14,562,017
Workforce Training Programs
21,000,000
-9,000,000
Community First Initiative
20,000,000
-13,500,000
Conclusion: 
By looking at the State Budget Cuts of 2009 this essay tried to identify whether the adjustments were substantial or not. We find evidence to deny that hypothesis because only 4% of the cuts may be identify as “Alchemy” in Petersen words. There is not strong indication of a manipulated use of the accounts. However what the tables does show is the severe reduction on social benefits and programs. Education and Health Care were the first target of the state Budget in 2009. Evidently, the social and political cost of that measures is going to have consequences on poverty levels.      

Categories: Macroeconomics

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