True story: Just after winning the 1990 gubernatorial election, William F. Weld and several aides were bustling through the Lexington, Kentucky airport on their way to a crash course in running a government. And no wonder. Back home, the Massachusetts budget had been wrecked by a brutal combination of overzealous public spending and an underperforming economy. Weld was not exactly a national figure at the time, yet perhaps because his predecessor brought attention to Massachusetts in his run for President, Weld was recognized by at least one bystander in the Lexington airport. As a Weld aide tells it, the knowing traveler spotted the red-headed Republican and identified him as “the poor bastard who just inherited the Massachusetts Miracle from Mike Dukakis.”
Which raises the question: How would that wry commentator react if he were to size up Weld’s former understudy, Governor Paul Cellucci, today?
Cellucci looks out on a state transformed. From a billion-dollar deficit to a billion-dollar surplus, from fretting over budget cuts to figuring out which programs will get extra funds, Massachusetts in 1999 is a mirror image of 1990. So then, does that make Paul Cellucci the lucky bastard who just inherited the Massachusetts Miracle from Bill Weld?
An ambitious agenda
In the electric hours after his election in November, Cellucci signaled he and his administration would be on the move as Massachusetts turns the corner on the next century. His victory speech outlined an activist agenda: Health care, one of the most expensive services government can provide, would be expanded again; education reform would be augmented by a bevy of supportive programs. And in the weeks after the election, even though he’d been at or near the seat of power for eight years, Cellucci assembled a transition team to develop a new agenda that would bring “a bold vision and new energy to the executive branch.” The implication was clear: He had things to do, and, if you looked at the balance sheet of the government he now leads, money to spend doing it. So much money, in fact, he planned to continue pushing for a major cut in the state income tax.
But the biggest challenge facing Cellucci and the Legislature may not be, as it turns out, creating major public policy reforms or tax cuts. Ironically, it may be the sheer maintenance of the state’s finances, now seemingly so supercharged, that could preoccupy the body politic–for in the next few years they are expected to change dramatically. How the fiscal facts of life change will determine just what kind of agenda Cellucci can pursue.
Weld took office in the worst of times, when there was nowhere to go but up. He had a government so racked by pain that any kind of surgery was beneficial; his favorability soared with the blood pressure of the state he resuscitated. Cellucci, on the other hand, begins with government in robust health–it literally cannot get better. And that’s a potential problem.
Within a year or so, a collision of events, on both the spending and revenue sides, may produce another train wreck in the state budget–one that has perfectly rational, respectable observers saying Massachusetts may again see the kind of financial hardship and budget madness that visited in the late ’80s and early ’90s. Not that he would have time to appreciate the irony, but Cellucci, instead of writing his legacy in popular programs and spending bills, may be forced to administer the very same bitter medicine he thought was long behind him.
“The finances are a bigger issue than the public realizes,” says Peter Nessen, who as Weld’s first Administration and Finance Secretary waded hip deep in the 1991 budget cuts. “In the next four years, the governor is going to have to address this type of problem, and it’s going to be real again, as it was in ’90 and ’91.”
Adds another former official who was involved in the early Weld budget cuts: “It’s going to be a lot like 1991–only it’s not going to be 1991, so no one’s going to buy it . . . . When you say, ‘You can’t do this, this, and this, because we don’t have the money,’ they’ll say, ‘What do you mean we don’t have the money?’ The big problem the next governor faces is, nobody–nobody–is going to believe we don’t have any money in the bank.”
The return of the budget busters
Frankly, it is a little hard to imagine. State government is swimming in money. Over the first half of fiscal 1999, state tax collections were an eye-popping 10 percent above the previous year, putting the government on track to record another budget surplus of as much as $500 million. That’s even better than the impressive numbers of the last few years. But most experts say such red-hot growth will not continue.
The danger is that state spending shows no sign of cooling down. Already, the ominously labeled “budget busters” are eating through cash at an alarming rate. Health care inflation is spiking sharply upward, with pharmacy costs alone jumping 20 percent. And since the state buys more than $4.5 billion a year in medical services through its Medicaid and employee health plans, every one-point hiccup in health care costs could give the budget a $45 million gas bubble. At a health care inflation rate of 10 percent, the state would have to cough up almost half a billion dollars.
A decade ago five state programs were singled out as “budget busters.” In the Cellucci administration view there are eight: Medicaid, state employee health insurance, employee pensions, state aid for public schools, higher education, welfare, public transportation, and debt service. Combined they account for 70 percent of annual state spending, so negative trends in any one–such as a recession that throws more people back onto welfare, or a stock market dip that lowers returns for the pension fund–could have severe consequences on the overall budget.
Even without expecting such dire developments, the administration has raised its own red flag, forecasting the budget busters as a group to grow 5.6 percent next year–about twice the rate of inflation. Because of their sheer size, and the fixed nature of these spending obligations, the budget busters are expenses the state cannot easily control.
Getting deeper in debt
The “capital budget” is a dry, lifeless label for what’s essentially the bones, brains, and blood systems of the Commonwealth: roads and bridges, school roofs and chemistry labs, drinking water pumps and sewage drains, affordable apartments and efficient courtrooms. Of late, concern is developing about the ambitious number of new capital projects and physical repairs that are pushing the state deeper into debt, and driving up the mortgage payments, if you will, that state government is obligated to pay. Repayments on the loans the state has taken out in recent years to finance those projects will begin to jump next year and threaten to overwhelm the budget at a time when many believe state revenues will begin to taper off.
When it comes to the state’s total debt picture, looks can be deceiving. Different kinds of long-term obligations are categorized and repaid differently, so that the total amount is not neatly organized in a single column in the state’s financial ledger. For example, the capital cost of expanding the Massachusetts Bay Transportation Authority (MBTA) or of building new schools is not considered a “general obligation” debt of the state, and so is not counted in its main debt account–even though the state in fact pays nearly all those bills. Not only does this make it difficult to give a simple accounting of the state’s indebtedness, it allows Cellucci to point to lower figures to show debt costs are under control, as he did in rebuffing Scott Harshbarger during the recent gubernatorial campaign.
But regardless of the measurement used, the numbers show an alarming upward trend. Cellucci would prefer to focus on the jump of 9.2 percent in debt costs next year (by some measures it was higher than that last year). In addition, payments outside that account are going up. The state’s reimbursement to communities for new schools is going up 17 percent, or $40 million, next fiscal year.
And this doesn’t include new capital spending the government is committed to undertake over the next few years. The MBTA, for instance, is planning a five-year, $1.5 billion capital expansion, much of which will be repaid by the state, but will not be counted as general state debt.
To exert some order over the vast number of “priorities” the Legislature authorizes, the Weld administration developed a device to manage the amount of new debt the state assumes each year. It’s called the “bond cap,” and it’s currently set at $1 billion a year. The cap is also in place to appease Wall Street credit agencies, who view debt management as a badge of a government’s soundness. But the $1 billion a year doesn’t begin to accommodate the infrastructure needs of the political economy.
The Legislature continues to order up a full complement of new projects. Just last summer, lawmakers authorized $1 billion in borrowing for new courthouses and affordable housing projects, and mammoth issuances for water pollution control and transportation projects wait in the wings. These “authorizations” don’t necessarily commit the government to that actual spending. But the fact that they’ve been approved by the Legislature means there is a political constituency for these projects that can be expected to pressure the administration to carry through and incur those debts.
The bond cap also does not truthfully represent how much debt the state incurs each year because the administration has repeatedly turned to other borrowing devices–especially to deal with the staggering costs of Boston’s Central Artery project, but also for other projects that can’t fit within the bond cap.
“It’s clear,” says Geoffrey Beckwith, a former state representative and now head of the Massachusetts Municipal Association, “the capital side is a black hole. And black holes have a tendency to suck things in and you can’t get them out.”
“You’re maxing out your credit cards is what you’re doing,” frets David Soule, executive director of the Metropolitan Area Planning Council.
Debt and related payments now total about 10 percent of the state’s $19.9 billion budget this year. Not an outrageous amount, and certainly less than the big spending days of the mid ’80s. But as a percentage of overall spending, debt payments have been climbing over the last few years, an ironic reversal given that one of Weld and Cellucci’s signature achievements in the earlier part of the decade was to tame the debt problem.
“The issue is not the 10 percent, per se,” explains Michael Widmer of the Massachusetts Taxpayers Foundation, which recently issued a report warning of the state’s growing debt problem. “It’s the direction it’s going in, and it’s starting to accelerate again.”
“The capital side is daunting at best,” Widmer adds. “The need to maintain financial discipline, and the long list of capital investments the state has to make–that’s a huge tension and the two are in direct conflict.”
Mixed messages?
What has many insiders worried is that the state’s spending obligations–if left unchecked–are projected to keep spiking upward just when many believe the economy will turn downward. Not a recession-like fall, mind you. Just a cooling off to normal economic growth–from, say, 7 and 8 percent revenue growth to 4 and 5 percent.
Cellucci’s key budget officials have been trying diligently to get the word out that spending must be kept under control in case the economy falters. But fiscal pessimism is a problematic strategy for the new governor: He also wants to push an income tax cut that would remove $1 billion in revenue from the tax base.
This creates an interesting dynamic in the Legislature. On the one hand, the Democratic leadership will be happy to accept the idea that harder times loom ahead and thus ignore Cellucci’s tax cut proposals. Cellucci will be left to argue that the only way to control spending is to take $1 billion off the table. The state has already begun to steel itself for a recession, banking an incredible $1.2 billion into a “rainy day” fund, he will point out.
“We have squirreled away a lot of money in case things go south,” notes Fred Laskey, who served as interim Administration and Finance Secretary into Cellucci’s new term. “Our goal is to manage conservatively and dampen expectations and do the prudent things that need to be done.”
But will the Democratic leadership believe the state has a big enough umbrella? With the Central Artery project entering a key construction phase where cost overruns are a risk, with the MBTA expansion seemingly unchecked, with pressure to add new pots of money to education reform when the funding formula comes up for reauthorization next year, the state faces an intimidating mountain of bills.
And as more money is locked up for programs and obligations such as these, less is left for the raft of regular public services whose fortunes rise and fall on the discretion of the annual budget debate. Many of these programs have done shockingly well over the last few years of generosity; others still haven’t fully recovered from the budget blood-letting of the beginning of this decade.
In either case, no agency will ever admit it now has enough money, or volunteer to surrender some when the crunch hits. “If these facts be known,” says Lowell Richards, the former Assistant Secretary of Administration and Finance, “the ability to make other programmatic expansions is very, very small.”
“The two biggest public policy challenges we face, access to improved education and access to health care, are weighty and expensive,” says state Rep. Jay Kaufman, a Democrat from Lexington. Like many others, Kaufman is frustrated by what he sees–a growing gap between the rich and everyone else, and from his view in the State House, “needs which are virtually limitless.” But as a member of a recent special state commission that examined Massachusetts tax policy, Kaufman has also come to appreciate the growing severity of the state’s finances, and the limits on the coming agenda.
“I regard the situation as a crisis waiting to happen,” he adds, “and would welcome some company.”
Education reform, the sequel
This conflict will play itself out in the single greatest priority before Cellucci and the Legislature: deciding how much money to keep pumping into public schools. The 1993 Education Reform Act called for seven years of steady increases in education spending, largely to urban and rural poor communities that have few resources to improve their own schools. The funding plan expires in the middle of the year 2000.
The next round of debate will feature a series of pitched battles over specific facets of education reform, maybe none so pitched as the role money has in improving learning among schoolchildren. The funding formula has directed more than $4 billion in additional state aid for local schools so far, but despite its popularity and apparent success in equalizing spending among districts, the law is under attack from poor, rich, and otherwise.
Advocates for the poorer communities say the law doesn’t provide enough basic aid to guarantee low-income kids receive “an equal opportunity to an adequate education.” Richer communities say they’ve had to comply with the law’s costly mandates without much help from the state, jeopardizing their quality. And in the middle are middle-class communities who say they’ve been particularly squeezed because they are neither poor nor rich. Many receive only the minimum state aid–currently $100 per student–yet have experienced tremendous growth in their school-age population for which they are not compensated.
Some communities complain of larger class sizes, fewer teaching resources, and neglected facilities. Though the poorer communities have the courts behind them, the suburban towns will be a political force in the coming debate. Regardless of how they frame the issue, and on whose behalf they are advocating, the bottom line is these communities want the state to spend more money.
The battle will tear at legislators such as Kaufman who, as a liberal, doesn’t want to see affluent schools in Lexington gain at the expense of a poorer city like Lawrence. On the other hand, “We can’t continue to starve the schools in the wealthiest communities,” Kaufman says, recognizing that his comment might not evoke sympathy. “The only way to avoid fracturing among communities is for the state to assume a larger share of the burden of public education.” But doubling the minimum per-pupil aid, to $200 as many are advocating, would cost the state another $100 million each year.
“I think it would be smart to assuage the suburbanites . . . and eliminate some of the most violent confrontation,” declares Paul Reville, one of the key architects of the education reform law who now serves as chairman of a state commission overseeing its implementation. “You’d hate to see a coalition get together and knock out the formula altogether.”
The Cellucci administration, meanwhile, seems prepared to fight over money. While the governor has advocated for some costly side programs, he is not likely to support an across-the-board increase in general aid. Not only is it expensive, but the benefits are in question–at least in some quarters of the administration.
Results of the first new statewide achievement tests given to 4th, 8th, and 10th graders revealed a predictable split between students in poor urban schools and in wealthier suburbs. While it’s incontrovertible that the districts that already had money showed the best, those results were hardly spectacular. And the schools that got the most money from the state have yet to show sufficient progress.
The Cellucci administration is expected to use the test results to argue that the next phase of education reform should not be about dollars, but about so-called quality issues, such as testing teachers. “I think the notion of continuing to throw money at the problem is going to be reassessed,” says Laskey.
Transportation spending: the money pit
To prove his fiscal bona fides, candidate Paul Cellucci liked to say that he’s “been there and made the tough choices.”
Cellucci’s challenge is as large as the massive Central Artery project that is burying an expressway under Boston, and it is as tender as the toddler in state-supported day care. The downtown highway project may seem an altogether different animal than the cheery confines of a pre-school, but in some roundabout way, the choice Cellucci makes for one will affect the other. What decisions the governor makes on capital spending will directly affect what choices he has left on discretionary programs such as day care.
For the Central Artery, the administration has concocted a fanciful scheme to fund near-term construction by borrowing against long-term future revenues. This is a little like paying your household bills with a credit card because your paycheck won’t be coming for a few months. The interest costs alone on this interim borrowing will total more than $700 million over the next decade.
There is not an easy explanation for why the government is doing this. Suffice to say, that in a time of record budget bounty, the state doesn’t have quite enough money for the Central Artery. The reasons are several. The overarching one involves the shift of political power in the country toward the South and Southwest–the Republican South and Southwest. Some in Congress are tired of seeing Massachusetts, with its all-Democratic delegation, suck up so much federal highway money.
In the federal transportation bill passed last year, Congress righted the balance, so to speak, by deeply reducing highway funds for the Central Artery–well below what state officials had insisted was the minimum necessary to keep the project going. To add insult to injury, Congress has since enacted further limits on highway aid, the end result being that Massachusetts has even less than the small amount it anticipated, and officials are now trying to calculate the size of the hole blown into their Central Artery financing scheme. The Massachusetts Taxpayers Foundation, for example, estimates that federal aid over the remaining life of the project could be $400 million below what the state expects to receive.
Other explanations are just as political. In order to appease Massachusetts legislators from the central and western parts of the state who feel more or less the same toward Boston as those southern Republicans, the administration accepted a limit on the amount of toll revenues from the Turnpike that could go toward Artery construction. It has also resisted tapping into other funding sources, such as dedicating a larger percentage of gas tax revenues to the project. Interestingly, Cellucci appears committed to an elimination of motor vehicle registry fees, a $50 million annual sum that critics say would greatly ease the strain on the Artery project funding. Such a decision, they contend, reflects on Cellucci’s political priorities.
One other avenue open to Cellucci is also politically dangerous. Again, in order to prove to legislators outside metropolitan Boston that the Central Artery isn’t sucking up all their local money, the administration has committed to using a generous amount of state funds for road and bridge repairs elsewhere in the state. Lately though, as the pressure has tightened on the Central Artery, the amount of that spending has slowed, causing concern among local officials.
If Congress again sticks it to Massachusetts the next time it rewrites a highway bill, or if the Artery goes even mildly over budget during the peak construction years coming up, then Cellucci has left himself with few options to make up a sudden shortfall. He’s sworn off a tax increase. And he can’t easily dip into state highway funds intended for other road projects. “That will have a major political kickback,” says the Taxpayers Foundation’s Widmer, who believes Cellucci would “pay a political price” for such a move.
Competition for resources
The point is not necessarily to criticize Cellucci for the decisions he’s made; but rather to sketch out the daunting choices he faces deeper into his term. He has a lot to keep his eye on without adding new expensive agenda items. And yet there seems to be no give in the political establishment’s appetite for more worthy projects.
Cellucci has tried to be creative in finding solutions to the shortage of capital funds. One plan he’s expected to expand on is a novel financing scheme that would allow a private company to renovate and maintain the northern section of Route 3, in exchange for long-term lease payments from the state. “I think the Route 3 case is the canary in the coal mine,” says James Peyser, executive director of the market-oriented Pioneer Institute for Public Policy Research. “It’s a combination of being more innovative about financing such projects, and being more selective in choosing which projects to finance.”
Regardless of the mechanisms the state employs, the mere act of continuing to undertake more and more capital projects also invites other costs down the road. If you spend a lot building commuter rail extensions in Southeastern, Northeastern and North Central Massachusetts, for example, you have to spend a lot to run trains up and down those tracks. So much so that the MBTA’s projected costs have even Cellucci officials worried. In the year 2000, public transit spending is expected to increase an eye-popping 21 percent.
So in addition to contributing to mounting debt costs, capital projects also further swell the operating expenses side of the state budget–a state budget that’s already been pretty generous to its “other” programs. The judges and the jailers have done pretty well; so have, to some degree, health care aides and day care providers. Across Massachusetts, subsidized day care operations received 54 million new dollars–a 21 percent increase–this fiscal year.
The bountiful budget surpluses have fed ever-higher state budgets, with the last three years each averaging around $1 billion in additional spending. Republican challenger Joe Malone was right: Under Weld and Cellucci spending has grown handsomely. But Cellucci was also right in that the state was living within its means because of generous tax revenues. By fiscal year’s end the 1999 budget will surely surpass $20 billion; five years ago it was around $16 billion.
“The coming budget year looks pretty good,” says Doug Baird of the Associated Day Care Services of Greater Boston. But he worries about a clash between capital spending obligations and discretionary programs. He and others in his industry have been lobbying for even more funds to raise the dismal salaries of their employees, whom they are losing in droves to better-paying industries. Without additional state help, Baird worries that children will inevitably suffer from marginal care delivered by unqualified workers.
David Soule of the Metropolitan Area Planning Council says it is a matter of priorities. “The real choices that are going to be in front of people are: Do you want the intersection fixed? The pothole filled? The roof of the school fixed? The bad guys in jail?” he says. “That’s the way you have to frame these issues.”
Cellucci’s legacy
Cellucci has a few aces up his sleeve should he get dealt a plug hand.
His former opponent Scott Harshbarger did him a huge favor when he agreed in his waning days as Attorney General to a tobacco litigation settlement that will swell state coffers $263 million to $323 million a year, for years. The anti-smoking lobby is already having fits over the political claims to this money. But this being Beacon Hill, it should not be shocking that Cellucci is proposing to use some of the funds to finance a portion of his tax cut and to underwrite expansion in other health programs.
Then there is that stabilization (or “rainy day”) fund. It’s a funny kind of comfort $1.2 billion buys. It’s nice to have, but it’s hard to know when to use it. There’s more than enough money to cover lost revenues during a moderate downturn, which is why the Cellucci administration seems occasionally sanguine about the fiscal future.
Others say the state will be under a perverse pressure not to use the money when it needs it most. “It’s like an insurance policy you can’t draw on,” says Geoffrey Beckwith of the municipal association. “Wall Street says you can’t use it, because if you use it, you’re not financially stable.”
The money cushion can also lull the body politic into thinking the fundamentals of the state are sound, even if the economy is more fluid and dependent on world events like the Asian and Latin American crises, and the budget is growing at an outsized rate.
Cellucci’s predecessor used the budget crisis at the beginning of the decade to bring fundamental change to government operations in a way that also saved money. Nothing forces the imagination like desperation. But in Cellucci’s inaugural address early this year, there was nary a mention of reforming government. He talked about cutting taxes, but without linking it to wholesale scaling back of government services.
New millenniums are inspirational events, so it’s natural Cellucci may be inspired to concoct an agenda that has personal legacy written all over it. But the man who’s been co-governor and acting governor for eight years should know by now what his new agenda for the next term will be: managing the old one.
Andrew Caffrey, formerly a political analyst for WBUR-FM in Boston, is a reporter for the Wall Street Journal‘s New England edition.