The Sequesters are Coming

Maryland should keep its budget intact, and use rainy day reserves for temporary shortfalls.

Tomorrow is D-Day for sequestration unless Congress acts to prevent it in the coming hours.

Sequestration—that scary moment when automatic, across-the-board federal budget cuts begin. Every state will be affected, but Maryland may be worse off than many.  

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While the effect of these cuts on Maryland will be very substantial, they will not all be immediate. Maryland’s state and local budgets will be affected in three ways:

1.  There will be a loss of direct federal funding for state and local programs. Some of the larger programs, like Supplemental Nutrition Assistance (“Food Stamps”) and Medicaid are excluded from the cuts. But lots of other programs in education, health care, job training, public safety, and many other areas will be cut. According to White House estimates, Maryland schools will lose over $24 million in federal funds. 800 kids in Maryland will lose Head Start program seats. Funding for child vaccinations will drop by $140,000, reaching 2,050 fewer children. Senior meal programs would lose $877,000. The Department of Legislative Services estimated the total at $117 million for the state over two fiscal years, with additional cuts hitting local governments.
2. Cuts to federal jobs and purchases will suck income out of the state’s economy. The White House estimates that civilians working for the Defense Department in Maryland will lose $354 million as they are furloughed one day per week. Other cuts to military operations will exceed $100 million. Cuts would hit other federal agencies located in Maryland: the National Institutes of Health, Social Security Administration, the National Institute of Standards and Technology, National Archives, Census Bureau, and many others. Employees of these agencies—and of Maryland businesses that sell supplies and services to them—could  all lose income.
3. These impacts will affect the state’s overall economy. As federal employees, vendors, and contractors lose income, they will have less money to spend on groceries, entertainment, furniture, and everything else. The cuts will have a “de-multiplier” effect on Maryland’s economy, reducing job and income growth in all sectors. That will cut Maryland’s yield from income and sales taxes, which combined make up the largest source of state revenue.

The net effect could be the loss of hundreds of millions of dollars, just when Maryland’s budget is finally approaching stability.

What should the state do? To repeat a popular phrase, “Keep Calm and Carry On.”

Our national leaders have fallen into a bad habit of brinkmanship. Since each side feels its leverage increases as a crisis gets closer, they wait until a deadline (or past a deadline) before they negotiate seriously. These cuts are serious and should not be acceptable. But their effect won’t be fully apparent right away. With some pressure from ordinary people and businesses, it is likely that Congress can eventually reach some sort of deal, and before the next scheduled crisis on March 27, when the current federal appropriations run out.There will be yet another scheduled crisis set for May 18, when the federal debt limit expires again.  All of these events will occur before the new state fiscal year begins July 1st. We can hope that the national financial and economic pictures are clearer by then.

Maryland has ways to address shortfalls. The Governor's proposed budget prudently leaves cash balances of more than $1.1 billion in Rainy Day Fund and general fund reserves. Part of these can be used to address federal impacts. 

The Governor and the Board of Public works have the ability to reduce appropriations when the legislature is not in session. 

Finally, the next session of the legislature will meet when the state is half-way through this budget. Since Annapolis has shown the ability to take responsible actions on financial matters, any adjustments that require changes in law can be made then.

However, Maryland should not respond to federal budget cuts with state budget cuts. Eliminating more services, more jobs, and more economic activity would make a bad situation worse.

What is critical now is for Maryland’s government, business, and nonprofit leaders and regular citizens to help convince Congress to solve the nation’s financial problems in a calm way and without wrecking the economy or harming vulnerable families.