As prepared for delivery:
Chairman Rodrigues, Chairman Michlewitz and Members of the Committee, thank you for the opportunity to testify before you today regarding the Governor’s proposed budget for FY20.
I would like to start by thanking each of you for your commitment in supporting the Alcoholic Beverage Control Commission [ABCC].
Last year, the Legislature and the Governor in recognition of the ABCC’s important work and its need for additional resources, increased the line-item [0610-0050] for the first time in over a decade [from $2.44 million to $3.69 million].
As you are aware, the ABCC plays an important role in the economic vitality of every community and our state as a whole. We support small business growth, protect consumers, and promote public safety. The ABCC also generates direct revenue to the General Fund – an anticipated $5.1 million in FY19, and provides additional revenues by assisting other departments and agencies without charging back for any of its services. For example, we collect, on average, $12.44 million in back payments and penalties due to the Department of Unemployment Assistance, the Department of Industrial Accidents, the Massachusetts Lottery, and the Department of Revenue.
The number of licenses and permits processed by the ABCC increased dramatically over the last ten years, from about 19,000 to 32,000, a 66% increase. Until this past fiscal year, the Legislature’s allocation for our operating budget had essentially remained flat. Massachusetts was 45th in the nation in terms of inspector-investigators per licensee and the independent Alcohol Task Force concluded that the ABCC was “woefully underfunded.”
However, with your support, this fiscal year we have begun to address the deficiencies that this agency had previously operated under.
First, I am pleased to report that by bringing all 3 ABCC Commissioners [vs. just 1] up to full-time, we have successfully eliminated licensing backlogs.
Second, we have just hired 5 new inspector-investigators, which will allow us to process license applications faster and enhance public safety, through even more effective enforcement strategies.
Additionally, we will be able to focus on further streamlining our licensing processes, working with the Administration and the Executive Office for Technology Safety and Security [EOTSS], ensuring that all state alcohol related license applications are now online.
I am extremely proud of everyone who works at the ABCC. Under demanding circumstances they have produced superlative service to all our constituents. Now they will be able to provide an even better constituent experience.
The Governor has proposed a further increase to the ABCC’s administrative line-item from $3.69 million in FY19 to $4.48 million for FY20, to ensure that the ABCC does not lose any of the momentum it has just attained. Essentially, this small increase will offset the charge backs assessed by EOTTS in the expansion of the e-Licensing project. Otherwise, we would again be confronted with losing the staffing levels we have just gained.
Continuing your investment in the ABCC will enable our team to meet the demands of a rapidly changing industry, promote local and statewide economic development, and improve health and safety outcomes.
Lottery and Local Aid
Turning to the state Lottery, we are pleased to have been able to continue to provide significant unrestricted local aid to all 351 cities and towns in the Commonwealth.
For the fourth straight year, we topped the $5 billion mark in gross revenues with $5.29 billion in sales, providing $997 million in net profit. For FY19, we project $966 million in net profit and in FY20 about $967 million.
As you know, the landscape of the gaming industry has shifted dramatically in Massachusetts and across the country. To the extent possible given our current statutory constraints, our team at the Lottery has adapted to the changing marketplace.
We have also increased investments in our retail partners. Thanks to the $40 million technology upgrade made possible through a $65 million bond approved by the Legislature, this past calendar year we completed the roll out of 7,500 new digital Lottery terminals at retail locations across the state.
These terminals provide a modern, user-friendly system, with touch-screen technology, full color customer displays, direct communication from Lottery staff to their agents and customers, and better reliability for our brick and mortar stores.
This commitment to our retail partners contributed to their record $303 million in earned commissions and bonuses this past fiscal year.
As the most efficient lottery in the country, we expend less than 2 percent of revenues on administrative costs [$100.3 million in FY18], translating to a consistently strong return to our local communities.
We are proud of the Lottery’s accomplishments. It is high-performing and well-positioned in an increasingly competitive environment. Yet even as we continue to deliver strong numbers, growth has not kept up with inflation, and the need for resources at the local level.
To continue to perform at our best, we need adequate resources and the flexibility to meet the demands of a changing marketplace. For FY20, the Governor proposed funding the Lottery’s operating account at $86.5 million. A modest increase to $87.7 million will better equip the Lottery to continue modernization efforts. These funds will allow us to develop a strong digital marketing team and enhanced IT capabilities.
But, we must look to the future. Consumers’ purchasing habits and methods of engagement and entertainment continue to change. To succeed, we need to change with the times. Technology has transformed every aspect of our lives.
Although I am confident that our Lottery can continue to maximize its performance and be an important source of unrestricted local aid – I believe that as partners together, we should take the next steps to ensure the ongoing success of this critical asset.
And, what is that next step? Allowing the Lottery to go online. We need to provide the Lottery with the tools and resources necessary to win new customers, utilize digital marketing, and provide frictionless transactions through cashless purchasing options.
Our competitors are already there.
A growing number of states have implemented an iLottery. In fact, of the 44 states with their own lotteries, one-quarter  now offer games online. Our neighbor to the north, New Hampshire, started selling online last September and in just twelve weeks, their lottery posted over $1.3 million [$1,359,581] in net gaming revenue from online sales alone. We know more states will soon be following.
We face competition here at home as well.
Online gaming is not new to our state. The Legislature has authorized Daily Fantasy Sports to operate over the internet and on mobile applications. And, since 2002, Massachusetts consumers have been able to legally place wagers on horse racing online or over the phone [see MGL c. 128A § 5C]. With the introduction of smartphones, consumers have also been able to place these wagers on mobile applications. One Massachusetts racing licensee reported over $90 million in wagers placed through these means in 2016 alone.
I understand full-well that progress will not be realized without partnership. As a former retailer myself, I want to make sure we protect our retailers -particularly our convenience store operators and gas stations/quik-marts. Done correctly, an online Lottery will help them too – directing new customers through their doors.
If we want to uphold our commitment to supplying reliable local aid to our cities and towns, we must respond proactively to these challenges.
Bond Rating/Pension Fund/Stabilization Fund
As Chair of the Board that manages our almost $70 billion pension fund, I am pleased to report that we continue to outperform our peers.
After a universally challenging fourth quarter in 2018, our strategy of de-risking our portfolio significantly mitigated losses. We ended the year with a 2.3% loss net of fees. By way of comparison, the S&P was down 4.4% and a 60/40 mix of global stocks and bonds was down 5.6%.
Despite volatility, our strong performance in up markets [such as FY17 and calendar year 2017] and our strong outperformance in down markets [such as calendar year 2018 and FY16] gives us confidence that our investment program is performing as intended.
Our returns in the first quarter of 2019 give us further reassurance. While we do not have Q1 fund performance available yet, we are likely to have gained back our entire loss – and more.
We take our obligations seriously. We will continue to refine our investment strategy to deliver on our promise to the more than 300,000 state and local employees, public school teachers, retirees and beneficiaries.
I know that the Governor and the Legislature share my commitment to addressing our pension liability. The Governor’s budget proposes over $2.8 billion in pension funding. This investment keeps us on pace to achieve full funding by 2037 – almost three years before the statutory requirement.
I would also like to thank the Governor and the Legislature for taking steps to facilitate additional deposits to the state’s Rainy Day Fund. The commitment to deposit surplus revenue into the state’s stabilization account, together with statutorily required deposits of excess capital gains, has brought the balance of the Rainy Day Fund above the $2 billion mark for the first time since FY08. Given the uncertainties in our world-wide economies, this is excellent progress.
The Governor’s budget builds upon this, anticipating a commitment of $296.7 million to the Commonwealth Stabilization Fund in FY20 [$224.5 million in required deposits; $28.5 million from sales tax modernization; $21.5 million from gaming revenues; and $44.6 million from other sources].
I realize that these investments will require tough decisions from this Committee. But, you know as I do, that these investments are critical in maintaining the state’s strong bond rating – a rating achieved in large part due to this Committee’s fiscal discipline.
As you craft your FY20 budget, I welcome the opportunity to collaborate with you to reaffirm our priorities.
I would also like to give you a quick update on our innovative retirement savings plan for non-profits. Last year at this time, we had just launched the Massachusetts CORE Plan – a first-in-the-nation, statewide multiple employer 401(k) retirement plan, available to Massachusetts nonprofit organizations with twenty or fewer employees.
The Massachusetts nonprofit sector ranks as the sixth largest in the nation. It represents nearly 17 percent of the Massachusetts statewide economy and employs over 520,000 people. Sixty-five percent of these employees are women, who are typically receiving lower pay and have less capacity to save for their senior years.
Since the program’s launch just over one year ago, 44 employers have adopted the Plan. On top of providing the opportunity to save in a tax-advantaged way, CORE is unique because it allows participating employers to contribute alongside employees – and they are [75%].
Many more organizations have expressed an interest in enrolling. But, unfortunately, we are statutorily restricted from serving nonprofits with more than 20 employees. On more than one occasion, we have had to turn away organizations due to their size.
My hope is that we can collaborate with this Committee and others, to ensure that all employees who serve in this sector, have the ability to successfully save for their futures.
Before I conclude, I would like to thank you for your ongoing support of the Office of Economic Empowerment.
Financial literacy has been a priority to me, and my office, from the very beginning. We have created programs for every age group, at every stage of life, with significant results.
The Economic Empowerment Trust Fund that you authorized in 2015 has helped us to reach thousands of Massachusetts residents, providing them with the financial skills they need to achieve economic security and stability.
For example, we have expanded our Credit for Life Fairs, in partnership with the Division of Banks, providing students with experiential learning and real-life budgeting skills. When we announce our newest round of grantees in the next week, we will have issued grants to 82 different schools and served over 43,000 high school students in four years.
Operation Money Wise, our financial education program for veterans and their families, has now served over 2,100 members of our military community. We just announced the new grant round last week for 2019, which will bring this program to even more veteran communities across the state.
College savings and avoidance of college debt have also been a high priority and are key components of economic success for individuals and our state’s economy as a whole. As you may recall, starting in September 2016 we began our seeded college savings account [CSA] pilots, in order to develop best practices before launching a comprehensive statewide program. Our kindergarten pilot ran in Worcester and Monson and our middle school pilot in Haverhill, Lowell, Pittsfield, Springfield, and Worcester too. Our programs combine college savings accounts with a financial education curriculum for the children and their families.
The success of these two pilot programs have provided the experience, data and analysis necessary to go statewide – which is exactly what we plan to do!
I am excited to announce the Massachusetts BabySteps Savings Plan. Starting in January 2020, all babies born to or adopted by Massachusetts residents will receive a $50 deposit to open a 529 account through the Massachusetts Educational Financing Authority [MEFA]. And, thanks to our partners at the Department of Public Health [DPH], parents will have the ability to begin the process by merely checking a box on the state birth certificate form.
This program will empower families everywhere in Massachusetts to plan and save for their child’s future. It is designed to help build the skilled workforce that we know our businesses need, and can be used not only for college, but for vocational and technical training too. A win-win for everyone.
The Governor proposed an increase in funding for the Office of Economic Empowerment [0610-0010] to $604,351 in order to support the launch of the BabySteps Savings Plan. We support the increase and further respectfully request an earmark of $70,000 to support the one-time cost of updating the DPH birth certificate form.
As part of our mission to make resources and services more accessible, our Veterans’ Bonus Division has launched an online application for the Massachusetts Global War on Terrorism [GWOT] Welcome Home Bonus. Servicemembers and veterans can now apply online to streamline the application process and expedite bonus payments. It was the first change to the application process in over 100 years.
Welcome Home wartime bonuses are awarded to servicemembers who lived in Massachusetts for at least six months immediately prior to entering the military and served on or after September 11, 2001. Qualified applicants can receive bonuses for their active service and deployments in support of the Global War on Terrorism. In 2018, we awarded $1.2 million in bonuses.
Our team has increased outreach significantly, leading to an almost 27% bump in applications [from 1,249 in FY17 to 1,583 in FY18]. Now that the application is available online, we expect the number of applications to jump again. In fact, even prior to the official announcement and publication, we had already begun receiving online submissions. In the first 3 days since the application went live, our workload has nearly doubled.
The administrative cap in the Veterans’ Bonus line-item [0610-2000] has not been increased since FY12. In order to ensure we have the capacity to meet increasing need, we respectfully request a modest increase to the administrative cap from $205,000 to $300,000.
As always, I am grateful to you for considering our requests. So much of our collaboration with you generates additional revenues for the state and, we hope you agree, merits your continued support.
I fully understand your challenges and appreciate your efforts to produce a responsible state budget. Thank you for the opportunity to testify here today.
Please consider my office a partner and a resource as you move forward with the budget drafting process.
Now, my colleagues and I are happy to answer any questions.