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House and Senate Democrats moved Monday to redirect more than half a billion dollars headed for the state's long-term savings account and instead use it to close a budget gap and fund some additional spending.
Lawmakers surfaced and quickly approved their final plan (H 5132) for closing the state's financial books on fiscal year 2024, sending it to Gov. Maura Healey's desk minutes before Beacon Hill budget-writers formally kicked off the process of planning for fiscal year 2026.
The newly approved "closeout" budget has a $701.2 million bottom line, with a projected net cost to the state of $133.6 million after federal reimbursements, according to a House Ways and Means Committee official.
The proposed appropriations address accounts underfunded in the annual budget and fill a fiscal 2024 budget gap that materialized in part due to non-income surtax revenue collections that didn't hit projections, leaving a shortfall of about $233 million.
Legislative Democrats moved Monday to bridge the shortfall and fund some spending by using more than half a billion dollars that would have otherwise flowed into a state savings account.
Each year, capital gains tax revenues above a certain level are split up with 90 percent deposited into the state's "rainy day" stabilization fund, 5 percent used to fund pensions, and 5 percent used for other post-retirement benefits.
The new spending bill would dramatically change that formula on a one-time basis. It would steer 85 percent of excess capital gains -- about $502 million -- to the general fund, and direct only 5 percent or $29.5 million to the stabilization fund, according to the House Ways and Means official. Pensions and other post-retirement benefits would each receive the same 5 percent as the traditional formula.
That's a shift from the approach the House and Senate first sought to take. The original House bill directed 47 percent of excess capital gains revenue to the General Fund and 43 percent to the stabilization fund. The original Senate bill sought to use 15 percent of excess capital gains revenue for the General Fund, and would have steered higher shares toward pensions and other post-retirement benefits.
Healey proposed navigating the gap by using surtax collections that surpassed projections to backfill education- and transportation-related spending in fiscal 2024, freeing up originally appropriated dollars to plug the hole.
But Healey also agreed to use capital gains tax collections as a similar type of backstop in the current cycle. The fiscal year 2025 budget she signed in July allows the state to divert up to $375 million in excess capital gains tax revenue from the rainy-day pipeline and instead use it to balance the books for the cycle that runs from July 1, 2024 to June 30, 2025.
After previously drawing scrutiny from ratings agencies for dipping into the rainy day fund, Beacon Hill in recent years has worked to build up a sizable nest egg and resisted calls to spend its more than $8 billion balance.
A House Ways and Means committee official said the funding shuffle will also allow about $162 million to be swept into the Student Opportunity Act reserve fund, which helps pay for increases in K-12 state aid outlined in a 2019 law, bringing its balance to about $460 million.
Spending in the bill would flow to a range of areas, including $7.3 million for the Residential Assistance for Families in Transition program, $8.7 million for the state's universal school meals program, and $2.5 million to cover start-up costs for online Lottery games.
The vast majority of the spending, about $565 million, would go to MassHealth. Senate Democrats previously estimated that line item would carry a $0 net cost to the state after federal reimbursements.
Healey will get 10 days to review the bill. Lawmakers were once again weeks late on completing the closeout budget, at least according to deadlines written into statute. The state comptroller by law is supposed to file a key financial report by Oct. 31, but cannot do so until the governor signs into law a closeout budget.
Lawmakers have made a habit in recent years of blowing past that date and delaying the comptroller's work as a result. Michlewitz and Rodrigues have completed a closeout budget before Oct. 31 only once in their six cycles as Ways and Means Committee chairs.
[Alison Kuznitz and Sam Drysdale contributed reporting.]
