Capital gains windfall triggers $290M rainy day fund deposit

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BOSTON — Capital gains tax collections have been pouring into state coffers at such a high volume that it has triggered a $290 million deposit into the state's rainy day fund, and a second large automatic deposit appears likely.

In a letter to Comptroller Thomas Shack on Thursday, Revenue Commissioner Christopher Harding said third quarter capital gains income of $673 million had pushed such receipts up to $1.49 billion over three quarters, exceeding a $1.169 billion threshold. State finance law requires that capital gains receipts over that threshold be automatically transferred to the stabilization fund, and Harding told Shack his letter certifies that required transfer.

Capital gains taxes are assessed on investment gains and analysts have tied some portion of the spike in taxes to impacts of the new federal tax law. The Massachusetts Taxpayers Foundation this week cautioned that a surge in sales of capital assets is temporary and can't be counted on for ongoing revenue.

The deposit will push the state's rainy day fund balance above $1.6 billion, which Baker administration officials said represents an increase of about $500 million since the governor took office in 2015.

"This significant deposit into the Stabilization Fund is exciting news for the Commonwealth and taxpayers, and represents an increase of nearly 45 percent in reserves since the Baker-Polito Administration took office," Administration and Finance Secretary Michael Heffernan said in a statement. "The administration's goal for the past three years has been to restore structural balance in our state budget so when the Commonwealth makes a meaningful deposit into the Stabilization Fund, it will remain there until needed for true emergency purposes."

Just over a year ago, in June 2017, S&P Global Ratings lowered its rating for Massachusetts bonds to AA from AA+ and admonished the state for its approach to savings.

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"The downgrade reflects what we view as the commonwealth's failure to follow through on rebuilding its reserves as stipulated through its own fiscal policies aimed at mitigating the state's propensity for revenue volatility," S&P Global Ratings credit analyst John Sugden said at the time.

The state collected $229 million in capital gains in the first quarter and $589 million in capital gains during the second quarter. The month of June is considered the fourth quarter under an arrangement in which quarters are not evenly spread over three months, as usual, due to uneven capital gains flows that are tied to tax filing deadlines.

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Because the threshold has already been hit, capital gains receipts in June will also go to the rainy day fund.

The total over-threshold capital gains figure is $322 million, but $16 million will automatically flow to the State Retiree Benefits Trust Fund and an additional

$16 million will move through the stabilization fund and into the state's Pension Liability Fund, according to Harding's letter.

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Administration officials also say the state's reliance on nonrecurring revenue sources has been reduced from

$1.2 billion per year to less than $100 million.

The news of the big rainy day fund deposit comes as Democratic legislative leaders grapple with details of a more than $41 billion budget for fiscal 2019. The budget is due by Sunday, but lawmakers Thursday adjourned for the week, ensuring that the annual budget will be late this year.

Gov. Charlie Baker on Thursday afternoon signed a $5 billion interim budget to prevent any disruption in state services while negotiations continue on an annual budget.

Legislative leaders acknowledged Thursday that marking up their fiscal 2019 revenue estimate, given strong fiscal 2018 collections, is under consideration.


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