Public Policy Updates: April Economic Roundtable on FY21

Recognizing how radically circumstances have shifted since the joint revenue hearing back in early December, the chairs of the Joint Committee on Ways and Means, Senator Michael Rodrigues and Representative Aaron Michlewitz, together with Secretary of Administration and Finance Michael Heffernan, hosted an economic roundtable on April 14 to update the projected revenue for the fourth quarter of FY20 and the budget year of FY21. While Sen. Rodrigues, Rep. Michlewitz, and Secretary Heffernan were all at the State House, all testimony was taken remotely. 

In opening the hearing, Sen.Rodrigues said it is always”our top goal each and every year” to create a fiscally responsible budget that cares for the most vulnerable. He said that this would be the “first of critical conversations” about managing during the pandemic. 
Rep. Michlewitz said the usual timing of the House budget for mid-April was no longer feasble. He said that never before have we purposefully slowed down the economy. He noted the many that are facing hardships across the state, but said that public health component of this crisis must be dealt with first, that “opening economy before that would be foolish.” He said, as bad as economic impact, is “it pales in comparison” with the health issue. 
Secretary Heffernan thanked the administrations partners ine Legislature, noted the strong economic growth of prior years, and hoped that it meant we’d have a strong recovery.

The Roundtable first heard an update from Treasurer Deborah Goldberg, who opened by noting the $3.48B in the state’s rainy day fund “thank goodness.” She said that on April 1, Standard and Poors announced a change to all outlooks across the country to negative, further noting that the pre-pandemic credit of an issuer with largely determine their ability to recover. The Treasurer’s department has worked on systems of credit and lines of liquity. Pension management is of course of concern during such times, and the Treasurer explained that the pension system had shifted to manage changes in all markets so as to cushion it from volatility. 
Rep. Michlewitz asked the Treasurer if other states are tapping their rainy day funds; she said while it had not happened as yet, some are getting very close to it.

Eileen McAnneny, President of the Mass Taxpayers Association, testified next. Mass Taxpayers projects that tax revenues will fall by $4.4B for FY21 or 14.1% from the January benchmarks; they believe non-tax revenue will drop as well. They project a $1.2B drop in withholding due to unemployment, as they predict the state will lose 570,000 jobs, raising unemployment to 17.8%, reducing annualized wages by $29B or 12%. They predict Massachusetts will recover 210,000 jobs during FY21, with unemployment to 7% by fourth quarter, but will not return to FY20 levels until FY22. McAnneny said it is important to note there can be no full economic recovery until consumers feel comfortable in crowded settings again. A U shaped recovery could start in July, but if the virus reemerges, it could be a V shaped recovery of early fall or later.
McAnneny also suggested that it is possible that Massachusetts will lag rest of country on recovery, as there are disparities in regional risks. Several states are more vulnerable to economic shocks, of them all coastal. Risk factors include: exposure to the virus (as measured by cases and international travel); demographics; global interconnectedness; tourism; finance; and commodities. Massachusetts measures high in all of those, thus could experience steeper decline than country as a whole. 

Testimony from the Beacon Hill Institute President David Tuerck opened by noting “we’re in the middle of a lot of guesswork.” They have surveyed the literature and pandemics need aggressive fiscal policy at the federal level to be successfully handled economically. Beacon Hill Institute’s prediction for calendar 2020 is that state GDP would down by 7.2% with a rise to 14.7% unemployment and a tax revenue decline by 20%. They predict that both the country and the globe believe nation and world will face a “deep recession…that is on a depression level.” They expect that there could be a U or even an L shaped recovery, with a second wave meaning a W shaped recovery. There is a great deal of uncertainty for next fiscal year, and they advised great caution, as much will be unclear until summer. 

Massachusetts Budget and Policy Center President Marie-Frances Rivera said, “Government exists for this very moment.” This public health crisis creates a stark focus on how interconnected we are, pushing our public systems to the public test. She said MassBudget based their testimony on how prior recessions have impacted tax revenues from Department of Revenue tax revenue and consensus revenue numbers. There were two recessions in the past two decades, and in the year following the recessions, revenue fell between 14-16% in the following year and”didn’t reach pre-recession levels for another five years.” She noted, though, that numbers and estimates have changed dramatically over the past week; for example, the latest numbers are showing we are already as of April 4 approaching initial claims that had been projected for July. “Let’s plan for the worst and hope for the best.” MassBudget proposed three revenue sources: closing tax loopholes, tapping the rainy day fund, and advocating for further federal aid. “It’s really dire…now is not the time to switch into austerity mode.” 

Professor Michael Goodman, Executive Director of the Public Policy Center at the UMass Dartmouth, said that one way of thinking about this is we’ve put the economy in a “state of suspended animation…in a medically induced coma.” This is an “economic catastrophe that’s very slow moving,” dramatically larger than recession in 2008, the largest global impact since Great Depression. There is a growing consensus until we have an effective treatment or vaccine, it will be difficult to expect that this virus will just recede; opening up economy will require a number of public health development, including testing of both virus and antibodies. Goodman said that timing and development “remains an open question and a wild card for all forecasts you’ll hear today.” Goodman said he joined the other panelists in their congratulations of the state on the rainy day fund; he said it would be a temporary, but very important buffer, ‘though not sufficient, even as its level had been prudent. He said there is “no question that federal resources are going to be required if we’re going to ride this out in a way that minimizes pain and suffering.”  He said it was most important that we prioritize the health of the public and that human needs must come first.

Alan Clayton Matthews, a professor at Northeastern University, ran a revenue model to estimate impacts on revenue for the state in FY20 and FY21 based on assuming 20% of workforce will be unemployed, furloughed, on leave, or dropped out, and that output and incomes will fall by 15% by June/July. He further forecast that it will come back by the end of 2021, though, of course, he added, the virus, mitigation measures, will impact that. He said, “it’s a fairly optimistic projection.” On capital gains, he felt there would be a 31% drop in FY20, with then a 5.5% increase in FY21. His projection is that stocks will largely come back. With that, total revenue then would be down $6B than what was projected, but he felt that skewed negative, so he thought that $5B is more on order. The projection then yields $670M in capital gains, about the same in FY21 relative to what was expected.

Evan Horowitz, of Tufts Tisch College, projects that total tax revenue will be $500-700M below benchmarks for FY20, $2B below consensus revenue for FY21; that depends heavily on the timing of the recovery. He said we “just don’t have a handle on what revenue will look like in FY21.” He said, “it may make sense to draw from the state stabilization fund” if federal support is insufficient, “which it might.” He said it will be important to look for areas where spending can’t happen or genuinely doesn’t need to happen in the budget, but with care, lest the impact be exacerbated. He recommended conservative revenue estimate for the budget, and that the state then build a plan for midyear review and adjustment, considering “when might we know more and when might we be in a better condition?”


Dan White, Moody’s Analytics, who says he doesn’t have any slides as he figures that at this point “you’ve been PowerPointed to death.” He said sometimes economy loses gas during recovery, some parts may not come back as quickly, and it looks more like a W, with an initial downturn, recovery, then downturn, then additional stimulus to kick it back up. He then was projecting about a 20% decline in GDP with peak unemployment (US) of 13-14%. The average state is going to see 17% of the economy go away during this year; 23% under severe scenario; he is projecting Massachusetts is in 15-17% range. The state doesn’t have as volatile a tax code; a more progressive code in other states injects a larger amount of volatility into tax revenue. With mostly health care and education in Massachusetts for economy, we are much more solid when we go into downturns like this.

Closing the meeting, Senator Rodrigues said they will be working very closely together as they navigate through this fiscal crisis, saying, “God bless; stay safe.”