The Scorecard shows that the Massachusetts Fund, measured at 7.2 percent of the total FY 2008 budget, ranked 13th in the nation before this recession hit the state. History shows that that is not enough to protect the Commonwealth against future recessions. Based on the data, the Chamber proposes that all annual capital gains revenues beyond the first $300 million will be allocated to the Rainy Day Fund until this key reserve account has met a specified target level. This proposal provides a larger, more robust stream of funds in growth years to capitalize the Fund, while protecting the state budget from severe capital gains drops during economic downturns.
The severity of the current economic recession has acutely demonstrated Massachusetts’ need for a well-equipped Rainy Day Fund. Before the 2001-2002 recession, the Rainy Day Fund stood at nearly 8 percent of the total state budget. Despite substantial draw-downs over the next two years, Massachusetts had to impose a significant tax increase and large spending cuts to balance the state budget. Before the current recession, the Rainy Day Fund stood at just over 8 percent of the total state budget. Despite that strong position, the Commonwealth has endured painful budget cuts and the prospect of tax increases as the economic downturn has worsened.
“The lesson is clear,” said Paul Guzzi, president and CEO of the Greater Boston Chamber of Commerce. “The Massachusetts Rainy Day Fund has not been strong enough. In each of the last two recessions, a larger Fund would have substantially reduced the need for deep service cuts and tax increases.”
The Chamber proposal would:
- Dedicate capital gains revenues to the Rainy Day Fund by capping the amount of capital gains revenue that is directed to the budget at $300 million per year. This general fund allocation could be phased in, starting at $500 million in the first year and decreasing to $300 million over a four year period.
- Deposit all additional capital gains revenue into the Rainy Day Fund each year until a target of 15% of budgeted revenues is reached.
- Once the fund has reached its 15 percent target, additional capital gains revenues would revert back to the general fund.
In addition to producing a Rainy Day Fund that hits the 15% target within a few years, the Chamber proposal would reduce the Commonwealth’s operating dependence on the unpredictable capital gains revenue stream. The more stable state budget that results, coupled with a larger Fund, will make Massachusetts’ fiscal position stronger than ever.
The Chamber’s Competitiveness Scorecard, published throughout the year, highlights cost and competitiveness issues facing the Massachusetts economy. Each scorecard measures Massachusetts’ competitiveness on a key issue compared to all 50 states, and introduces a policy proposal designed to enhance the state’s competitive position. Future editions of the Scorecard will focus on business cost, workforce development, and innovation issues.