The last big bad budget wolf - the structural deficit

Maryland's legislature is just about set to begin its consideration of the state budget for the upcoming fiscal year. And, it could be much less exciting that in years. In previous blog posts, we pointed out that after solving six large, consecutive budget shortfalls, projections for the upcoming budget were in balance.

When Governor O'Malley unveiled his proposed budget on January 16, there were no big surprises. The budget is balanced without any large tax increases or extraordinary budget cuts (though there are many budget cuts of the "routine" variety).

The budget season though, still has some suspense. It's like the story of Little Red Riding Hood. It should be an easy task to deliver a basket of goodies through the woods to Grandmother's house.  However, there are big bad wolves lurking in the woods, and they could cause trouble for Little Red.

In the case of Maryland's budget, there are three big bad wolves we are worried about. In a previous post, we discussed big bad wolf number one: the still-unresolved federal fiscal cliff. If Congress deadlocks on a settlement of the federal government's finances - or if the resolution involves precipitous spending cuts - the fiscal and economic impacts could devastate Maryland's revenues and budget.

We also discussed the state's impending funding shortage in dedicated funding for transportation. If the legislature wants to provide funds for future road and transit projects, but does not want to raise taxes on gasoline (the primary traditional source of transportation funds), it may turn to the sales tax or another traditional general state revenue. This could "crowd out" funding for local schools, colleges, health programs, and other priorities in the state budget.That was the second big bad wolf.



Sources:DLS, DBM and MBTPI calculations

That brings us to the final wolf: the "structural deficit." A structural deficit is the situation when the amount of revenue during the year does not cover the ongoing expenditures during the year. The state can have both a positive year end balance and a structural deficit if it is using accumulated balances from previous years to get through the current year. That situation meets the constitutional requirement to balance the budget, but it is not sustainable into the future.

In developing this budget, the governor faced a structural deficit in the neighborhood of  $400 million. The governor's proposed budget reduces this to less that $200 million through a combination of budget cuts and by shifting state transfer tax revenues to the general fund for a period of five years. (These transfer tax revenues were dedicated to the purchase of open space and recreational land and facilities).

Some of the larger cuts include:
-$73 million in state savings from additional federal Medicaid funding through the Affordable Care Act.
-$63 million from placing a ceiling of 2.5 percent on rate increases for health and human services providers.
-$32 million in cost savings in the employee health insurance program.


These reductions should be enough to manage the structural deficit. $200 million is well within the ability of the state to make normal year-to-year budgetary adjustment. Simply put, a structural deficit in this range is essentially the same as a structurally-balanced budget.

The budget cuts incorporated by the governor in the proposed budget will require detained examination as the legislature and legislative staff  conduct their analysis and hearings on each agency's budget. Some of the cuts may have severe effects on vulnerable Maryland or might have unintended effects that will increase future costs. If some mistakes of this type have slipped through, the governor should be prepared to restore funding in a supplemental budget.

With the effects of an economic recovery (even a weak, uneven one), sound financial management, and a bit of luck, Maryland may have avoided for now the big bad wolf of the structural deficit.