Little Red Riding Hood and the 3 Big Bad Wolves

In our earlier post, we showed that Maryland is facing its easiest budget season in years. Of course, the state is not exactly awash in cash. We pointed out that good planning and management of the state's finances combined with an economic recovery (albeit a weak one) and some good luck have combined so that the state's projected revenues are sufficient to cover projected expenses through June 30, 2014 - the budget year that the current legislature will act on.

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The situation reminds me of Little Red Riding Hood carrying her basket to grandmother's house. It should be easy. There will probably be no problem at all.

However, there are some risks. In particular, there are three Big Bad Wolves lurking who could endanger the budget before the legislature delivers the basket in April.

1. The first wolf is called Cliff. Fiscal Cliff. It's true that Congress acted early in the year to avert the worst effects of large automatic tax increases on everyone. However, Congress deferred decisions related to automatic spending cuts and the federal debt limit. Deadlocks on these issues, or unsound resolutions of them, could result in serious losses of federal revenue for Maryland and maybe some negative shocks to the state economy, which would also affect the budget.
2. The second wolf is the hungry Transportation Trust Fund. Maryland needs more funding for roads, transit and other transportation improvements. The dedicated transportation fund is running low - mostly because it's major source - the gas tax - has not been adjusted in 20 years. However, quite a few legislators are understandably skittish about raising gas taxes. The concern is that in seeking a way to feed the transportation wolf without touching the gas tax, the legislature will divert general funds still under stress and still needed for education, healthcare,  public safety, environmental protection, and other important priorities.
3. The third wolf is a familiar one: the state's "structural deficit." Even though the budget is just about balanced through the next 18 months, the state is still taking in less that it's paying out over the course of the year. It can balance its budget for the year by using cash from revenue surpluses from previous years. The size of the structural deficit is around $400 million - just one fifth the size it was at the height of the recession. However, Maryland needs to continue to chip away at the remaining structural imbalance. The legislature's Spending Affordability Committee recommended making at least $200 million of progress towards eliminating the structural deficit in fiscal year 2014. The concern is that to find budget cuts to meet this goal, the state might do critical damage to education, healthcare, and the social safety net for vulnerable Marylanders who are still not "out of the woods" as the economy continues its slow, fitful recovery.

Over the next few days, we will look in a bit more detail at each of these big bad wolves, and suggest ways that Little Red should avoid them.