Responsible compromise stops doomsday clock

The Maryland General Assembly completed its work on the budget with 45 days remaining before “doomsday budget” cuts go into effect.   The legislature passed the (pre-negotiated) administration package without amendment. We’ll be reporting the details in the coming days … in the mean time, you can check out the legislature’s staff analysis here, and the administration’s testimony on the package (which provides a good, factual background and description), here.

On the last day of the regular legislative session, the Maryland legislature fell down on the job, giving the state’s governmental leaders black eyes.

In the special session, they did much to redeem themselves.

1.  They acted in a timely manner, so as not to require local governments, public schools, nonprofit service providers, scholarship recipients, businesses and many other affected parties to put contingency plans into effect.
2. They compromised. The administration package was not anyone’s first choice. It has been criticized from the left, the right and the center. But it is a practical plan that avoids disastrous cuts. The “doomsday budget” would have harmed families and communities today and Maryland’s prosperity in coming years.
3. They acted responsibly. The revenue plan is moderate and progressive. It affects individual tax filers with 6-figure incomes and households with incomes over $150,000. It increases taxes on these high earners by less than 1/3 of one percent. You can find Citizens for Tax Justice’s blog item here and the Institute on Taxation and Economic Policy’s analysis here.

The compromise plan relies on a shift of part of teacher retirement costs to local budgets, but it’s gradual – phased in over four years, and there are offsets in the form of local revenue and restorations of some state aid payments for police and public health.

In addition, the legislature’s action improves the state’s bottom line, reducing the chance of disruptive mid-year cuts this year, and reducing the revenue shortfall the governor and legislature will face next year.Responsible compromise. It’s a great American value. Maybe Annapolis can be an example for Washington.

Governor releases details of special session agreement

Governor O'Malley, Senate President Miller, and Speaker Busch held a press conference this morning (video) outlining the agreement they have come to for the special session starting May 14th.

For the most part, the new Budget Reconciliation and Financing Act (BRFA) and revenue bill will follow the template created by the conference committee at the end of the regular session.  Other highlights from the press conference included:

• The session should take three days.
• The special session agreement will include an additional $109 million in cuts.  The majority of the new cuts, $80 million, are actually due to revised estimates of Medicaid costs..  However, there is no explanation yet on where the other $29 million will come from.
• The revenue package will include a tax increase on single filers making more than $100,000 and joint filers making more than $150,000 (the top 16 percent of filers, according to the Governor).  The House and Senate leaders confirmed they are in agreement on this point.
• Sharing education pension costs with counties is part of the deal, phased in over four years.
• Transportation funding is a continuing problem, but will not be addressed this year.  Nor will the "net taxable income" issue (NTI).  NTI is an element of the education funding formula of particular importance to Baltimore City and Prince George's County. The governor said that he plans to do something about NTI in his budget next year.
• The overall FY2013 budget will grow 2.6 percent, but general fund spending will decline $380 million.
• The fund balance at the end of FY 2013 is projected to be $204 million, an improvement over the $155 million balance projected in the conference agreement. This will help protect the state against the possibility of mid-year cuts, and put the state in a better position to balance the next budget.

The governor also said he would send a letter to the speaker and senate president to begin convening a working group on gaming shortly, in anticipation of calling a second special session later this summer.

Senate Budget and Taxation Plan Phases in Pension Shift

In addition to budget cuts and revenue increases, Governor O’Malley’s budget plan included a $239 million shift of teacher pension costs from the state budget to local governments.

The Senate Budget and taxation Committee recommends a more moderate, phased-in approach.

Under the Committee’s plan:

• The shift will phase-in over four years (fiscal years 2013 through 2016). The Governor’s plan implemented the shift all at once.
• The shift will only affect the payments for the retirement benefits earned by active employees (technically called “normal costs”). The state would still pay 100 percent of the accumulated unfunded retirement liability from previous years. The Governor’s plan called on the local governments to share the cost of unfunded liabilities as well as normal costs.
• Only school employees’ retirement payments are included in the shift. The Governor’s plan would also have shifted a share of library and community college employees’ pension costs.

The Committee’s plan is more reasonable and, while it will still have a significant impact on local budgets, it’s more gradual and sustainable than the Governor’s proposal.

It makes sense for the state and the local governments to share teacher retirement costs. Education finance experts have long recognized that 100 percent state funding of teacher retirement is one of the biggest “dis-equalizing” elements in our school finance system: state funding of teacher retirement costs tends to benefit wealthier school systems more than needier ones. The more affluent school systems can afford higher teacher salaries and lower student-teacher ratios, and full state funding of retirement costs exacerbates the resulting disparities.

However, this is a bad time to thrust this new cost onto local budgets all at once. While state revenues have begun to recover (slowly and unevenly) from their post-recession lows, local revenues are still dropping. That’s because of local governments’ reliance on property taxes, which take longer that income and sales taxes to respond to changes in the economy.

A sudden shift of almost a quarter billion dollars in costs to local budgets this year would have just shifted bad budget choices to local government leaders. Marylanders would have been hit by even more damaging cuts on locally-funded services.

Ultimately, Maryland needs to restore the wealth adjusted per-pupil inflation increases to local school aid that were enacted in a decade ago. The “Thornton” increases have started to reduce gaps in student achievement. Maryland will need to resume its investment in students to assure that we make further progress instead of losing the gains we have made.

Passing off teacher pensions to local governments passes the buck but doesn’t solve anything

Maryland Senate President Thomas V. “Mike” Miller, Jr. advocates turning responsibility for funding teacher retirement costs over to local governments. The Benefit Sustainability Commission, chaired by former state House Speaker Caspar Taylor recommended transferring 50% of the cost of teachers’ pensions and social security to local Boards of Education – a $233 million cost shift. While this action would help the state’s financial situation “on paper,” in reality, it just throws the same problem to our counties and school systems.

The state has paid the cost of teacher retirement since the beginning of a pension system for teachers in the 1920’s. The amount now totals about $1 billion.

There are some sound policy reasons to consider local governments sharing in teacher retirement costs. The current 100% state funding for teacher pension benefits may help the state’s most affluent school systems afford the highest teacher salaries, to the detriment of less wealthy systems.

However, now is not the time to put additional burdens on local governments. School costs generally make up 40% to 60% of the expenses of Maryland counties. And local revenues are now in as serious trouble as the state government’s. 

Local governments rely heavily on property taxes. In a downturn, the property tax base takes longer before it declines than do the income and sales taxes – the mainstays of state revenues. As a result, the counties and Baltimore City governments are just now feeling the brunt of the revenue shortfall.

Merely shifting more cost from the state to the local level of government does nothing to relieve the problem. Already, the state has required local governments to pay for 90% of the cost of assessing property values for tax purposes and a share of the cost of educating children in state residential placements. Local governments are currently cutting services in public schools, community colleges, police and fire departments, recreation programs, trash removal, and their other services.

Making local officials add teacher retirement costs to their expenses will just shift the onus of solving the shortfall from state officials to local ones. The citizens pay taxes and depend on services from both state and local levels of government. Local governments will need to raise their taxes, cut more from school budgets, or cut more from other local services like police, road repair, and parks.

The Taylor Commission recommends phasing in the shift over Maryland ranks low among states in the share of public school dollars paid by the state. Maryland pays 42% of the overall cost of schools. The average state pays 48%. If Maryland decides to require local governments to share teacher retirement costs, then the state ought to increase its share of the direct costs of public schools. Maryland should not just offload its obligations onto its local governments, and worsen their financial problems.