Sequester Update

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Three months into sequestration, effects have started surfacing from the first round of remarkable and random federal cuts to discretionary outlays. According to a poll this week by ABC New/Washington Post, the sequester now directly affects the lives of almost forty percent of Americans to some degree, and half of those affected claim substantial personal injury from this $85 billion slash in spending.  How this expenditure reduction will specifically affect Maryland’s residents remains uncertain, but a report released Wednesday by the Economic Policy Institute (EPI) that analyzes the net change to states’ federal grants sheds some light on possible consequences for the state’s budget.

According to the issue brief, while sequestration reduced total federal grants to states by $5.1 billion overall in 2013, Maryland fared better than average, receiving a $44 million increase in its federal aid (which represents a 0.5 percent increase relative to the 2012 funding level). The report provides state residents some reason for optimism, but this analysis does not suggest that Maryland as a whole has dodged the fiscal bullet. While the net effect on federal aid to the state may show an increase, some support for programs such as housing assistance, Meals on Wheels, and Head Start has waned. The state has also seen a $3.4 million decrease in federal support to administer unemployment insurance, according to a study by Pew. Many nonprofits in the state face grant reductions, with some shedding staff as a result; others yet to be hurt by the sequester see their own cuts looming next year. Additionally, a full seven percent of Maryland’s workforce is employed by the federal government, and many major agencies have issued furlough orders.  The economic effects of these lost wages will inevitably ripple through the economy.

Results for other states were mixed. Virginia likewise saw its grants grow (up $271 million, or 2.7 percent from last year), while others in the region like the District of Columbia, Pennsylvania, and Delaware suffered millions of dollars in federal revenue losses. EPI attributes the difference in states' outcomes to the mechanics of the sequester— it only reduces spending on discretionary programs, so states with increases in beneficiaries under mandatory spending formulas saw grants expand amidst this great spending contraction. Overall, 25 states experienced reductions in federal grant funding that will decrease their ability to provide public goods such as infrastructure, education, and social services for elderly and low-income residents.

Sequestration and its effects are far from over, as Evan Soltas of Bloomberg News points out in his blog post this week, reminding Americans that another $92 billion in cuts await us in 2014, and a portion of the spending reductions from this year have yet to go into effect.  

Immediate budget problem evaporating – serious challenges remain

Maryland’s budget deficit for fiscal 2014 is nearly gone. The legislature’s fiscal staff recently briefed the Spending Affordability Committee and presented new estimates. These incorporated revised estimates of state debt service requirements and casino revenues.

Source: Dep't of Legislative Services

The result is a projected shortfall of only $27 million. In the context of a total budget of $35 billion, that is essentially balanced.

Does that mean the Governor and legislature don’t have any budget work? Hardly. There are three big, big challenges.     

1.  The fiscal cliff. As we have shown, an impasse on the FEDERAL budget would have severe effects on Maryland’s economy and budget. The White House and Congress must achieve a responsible compromise that avoids precipitous cuts and middle-class tax increases, but that significantly reduces the federal deficit over time. Legislative staff recommended that the upcoming Maryland budget should leave a positive fund balance of $200 million as a buffer.
2. The structural deficit. Even though Maryland has virtually balanced its budget for the upcoming year, the state’s finances are not yet sustainable for the long haul. The projected budget for the upcoming year – fiscal 2014 - could be balanced without much effort because there’s a ¾-billion-dollar surplus to start the year. If we finance the budget by spending down that surplus, then revenues will continue to fall short of expenses after the balance is gone, and the state will be looking at budget shortfalls again in a year or two. So the Governor should propose ongoing revenue increases or spending reductions to bring the budget into long-term balance. One idea for raising revenues is an increase in the tax on cigarettes proposed by the Maryland Citizens’ Health Initiative. This would help balance the structural budget and reduce future health expenses by discouraging smoking.
3. The Transportation Trust Fund. Like most states, Maryland has a special, dedicated fund to pay for roads and other transportation projects: the transportation trust Fund. The gas tax, the transportation fund’s major revenue source has not increased since 1992. And the gas tax does not adjust to account for inflation or for fuel process. The fund is now running out, and without new revenues there will not be enough money for any new construction of roads or mass transit. Maybe not enough to cover operation and maintenance of what we have now. The 2013 legislature will need to consider increasing the gas tax for the first time in 20 years.

MD faces $600 million FY 2014 "structural" deficit, more if feds push US off "fiscal cliff"

As the Governor develops the budget for fiscal year 2014, Maryland is closer to a balanced budget picture at this point in the process than in any of in the last five years. Threats to the economy from the federal budget impasse could make things much worse, though.

The Department of Legislative Services (DLS) briefed the Spending Affordability Committee on Wednesday, forecasting Maryland's economy and issues facing the state in fiscal year (FY) 2014 (DLS's briefing handout).

MBTPI graph from Dep't of Legislative Services data

The highlights include:

Maryland's Economic Outlook

• Labor Market - 12 month payroll employment growth accelerated from June 2011 through February or March of this year. Data from the Current Employment Survey suggests employment grew much slower in the months following, but the trend was still positive. Look for our blog later today about the latest employment figures released this morning (hint: they're good news).
• Housing Market - Existing home sales have been up for the last five months, compared to 12 months prior. Prices for existing homes have been rising since February. Part of the explanation for improvement in the housing market may be that the inventory of homes on the market is down 25 percent compared to 2011.
• Consumer Market - So far this year new vehicle sales are up 10.8 percent while used car sales are essentially flat, compared to 2011. Vehicle prices are also up. Personal income growth has flattened over the first two quarters of 2012, to just under 4 percent.
• Economic Forecast - The Board of Revenue Estimates forecasts that from the current FY 2013 to FY 2015 rising employment (between 0.9 and 1.8 percent growth), personal income (between 3.3 and 6.1 percent growth), and wage and salary income (between 3.4 and 4.2 percent) will reflect the improving state economy.

The improving economy means that DLS projects state revenue growth in FY 2014 of 2.7 percent, to $15.3 billion.

DLS also presented a baseline current services budget (in other words, what the budget would look like if current programs were continued, including expected changes in caseloads, etc.).

One important change this year is that DLS has decided to report information about expenditures from the general funds and some of the state's special funds together. This is an important change, because legislators have increasingly relied on the creation of special funds to help meet revenue shortfalls, masking increases in general funds expenditures. As the inset table shows, including special funds increases the FY 2013 budget by $1.7 billion and the baseline FY 2014 budget by $1.3 billion. This also impacts how we interpret the budget's growth rate. General funds are projected to grow 8.2 percent in FY 2014. However, including the special funds with the general funds drops the annual growth rate of expenditures significantly, to just 4.8 percent.

All of this means that Maryland is likely to face a structural deficit in the FY 2014 budget of more than $600 million. While smaller than in previous years, this is still significant and will require careful work by the executive and legislative branches.

Finally, none of these numbers may mean much if the United States Congress fails to solve their own fiscal problems, specifically sequestration (mandatory across-the-board cuts to discretionary federal spending) and the expiration of various tax cuts and other revenue measures. If Congress fails to act, Maryland could lose $117.6 million in direct federal aid during federal fiscal 2013. Furthermore, Maryland stands to lose up to 60,000 jobs in calendar year 2014 and a further $635 million in lost revenue due to smaller state income and sales tax collections.

Letter to the State Superintendent - Kids learn better if they are not hungry

The Maryland Budget and Tax Policy Institute is one of 24 organizations to sign this letter asking the state Department of Education to embark on a multi-year commitment to provide free breakfast funding for all the schools that qualify.  Also see our "Monday Message" on school breakfast from the 2012 legislative session. The $1.8 million we are requesting for the upcoming budget amounts to 5/1000 of one percent of the state budget.

General Assembly moves fast on day one of special session

Yesterday, the Senate Budget and Tax Committee held its hearing on the Budget Reconciliation and Financing Act or BRFA (SB 1301) and the State and Local Revenue and Financing Act (SB 1302). Fiscal notes are available for both bills, as is our testimony in support of the revenue bill. The committee gave a favorable report to SB 1301 and 1302, setting the stage for passage by the Senate.  After rejecting all amendments and an affirmative vote at second reading yesterday, the Senate is poised to pass the bills upon third reading today.

This year, the House of Delegates must wait for the Senate to send it the BRFA and revenue bill before it can act (the chambers alternate taking the lead on the budget; next year the opposite will be true). However, in order to save time and taxpayer money, the House held hearings yesterday on identical House bills. The House Appropriations Committee held a hearing on the BRFA (HB 1801), followed by a hearing on the revenue bill (HB 1802) in the Ways and Means Committee. 

The combination of the compressed three-day schedule for the special session and the legislative rules laid out in Maryland's constitution require some contortions regarding legislative dates.  The constitution requires three readings on three separate days for all bills.  A holdover from the early days of Maryland, reading each bill three times ensured that illiterate legislators had a chance to digest the import of each bill before they voted.

In the modern, more literate General Assembly, bills are rarely read aloud three times. In most cases the legislature interprets other actions as having fulfilled the three readings requirement.  However, the three day rule still applies.

The Senate got around this problem yesterday by adopting a rules exception allowing two readings on the same day.  The House took a more interesting approach as it waits for the Senate bills. Last night the House recessed but did not adjourn, meaning that the legislative date inside the House chamber is still Monday, May 14th.  Once the Senate passes SB 1301 and 1302 (in a Tuesday, May 15th session) and sends them across the hall, the bills will move backwards in (legislative) time as the House moves through their first reading, then adjourns Monday's session. Later on Tuesday the Speaker will then open Tuesday's session and the chamber will proceed with the second reading.  Third reading and passage of the two bills in the House is expected sometime on Wednesday.

The Week Ahead

The General Assembly returns to Annapolis today in a special session to pass budget and revenue legislation eliminating the need for the doomsday budget. On Wednesday the governor outlined what state leaders expect to accomplish over the next three days, but regardless it is going to be a stressful week.

Monday, May 14th

• Senate Budget and Taxation Committee will hold hearings on the Budget Reconciliation and Financing Act (BRFA), the State and Local Revenue and Financing Act, and Qualified Zone Academy Bonds (a federal tax credit program to help local jurisdictions borrow for education spending, excluding new construction). MBTPI has prepared testimony in support of the revenue bill in both chambers. 11am in 3 West, Senate Office Building, Annapolis. 
• House Appropriations Committee will hold a hearing on the BRFA. Testimony is due by 11am today. 1pm in room 120, House Office Building.
• House Ways and Means Committee will hold a hearing on the State and Local Revenue and Financing Act. Testimony is due by noon today. 2pm in room 130, House Office Building.
• We expect the Senate will have its second reading of the BRFA and revenue bills late Monday.

Tuesday, May 15th

• We expect the Senate to vote on the BRFA and revenue bills Tuesday morning.
• We expect the House to begin its consideration of the BRFA and revenue bills late Tuesday.

Wednesday, May 16th

• If all goes according to plan, the legislature will wrap up the special session sometime on Wednesday.
• MBTPI co-hosts our annual Legislative Wrap-Up with Maryland Nonprofits, the Maryland CASH Campaign, Advocates for Children and Youth, Job Opportunities Task Force, and the Maryland Consumer Rights Coalition. This free event will focus on what came out of the 2012 regular session, what is happening with the special session, and our budget briefing.  Lea Gilmore from the Moving Maryland Forward Network will speak, as will representatives from each of the sponsoring organizations. Leading legislators will stop by as available. Lunch is included. You must register for this free event, and the deadline to register is today (Monday) at 4 pm. 10am to 2pm, Senate Office Building, Annapolis.
• To register, download a registration form. Complete your information at the top of the form, write "Legislative Wrap-Up" for 'course name', and May 16 for 'course date', and ignore all payment related fields. Fax the completed form to Maryland Nonprofits at 410-235-2190.
• If you are a Maryland Nonprofits member you can register online.  Scroll down to "Legislative Wrap-Up" and click on Register . 

Friday, May 18th

• Friday is Bike to Work Day.  In an effort to encourage more bicycling, communities across the country sponsor events, pit stops, and support teams for the day.  If you live in the Baltimore region you can find out more here.  If in the DC region, look here. 
• Bureau of Labor Statistics releases state employment figures for April 2012.  Maryland's unemployment rate ticked up slightly in March, to 6.6 percent.  The rate rose because the labor force grew faster than employment (MD added more than 2,000 jobs in March). 

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.

The Week Ahead

Happy Martin Luther King, Jr. Day!  Today we are reminded of Dr. King’s quest for social and economic justice.  Jobs, income, and housing were the main focus of the last few years of his life, and that struggle continues today.  At a time when Maryland is experiencing high unemployment, tremendous wage and income disparities, and high housing costs, we as advocates must follow in Dr. King’s footsteps and press our leaders in Annapolis to enact a budget and pass other legislation that strengthens low and moderate income Maryland families.

Monday, January 16^th

• Unions, civil rights organizations, Lieutenant Governor Brown, and members of Congress and the state legislature will rally tonight to honor Dr. King and call for jobs, justice, and equality. From 6pm to 8pm on Lawyers Mall, Annapolis.

Tuesday, January 17^th

• The House Appropriations Committee receives a briefing from the Developmental Disabilities Administration (DDA) at 1pm.  This should be particularly interesting because of the fight last year to increase the tax on alcohol sales to fund DDA services, coupled with the revelation in November that DDA returned $25 million in unspent funds to the general fund.
• The House Health and Government Operations Committee meets to discuss the public health perspective on health care reform, among other topics.  The briefing is scheduled for 1pm in room 240 of the House Office Building, Annapolis.  The Senate Education, Health and Environmental Affairs Committee will receive a similar briefing at the same time.
• The Senate Budget and Taxation Committee meets for a briefing on property tax assessment, tax subsides, and other topics.    The briefing is scheduled for 1pm.

Wednesday, January 18^th

• The day we’ve all been waiting for, when Governor O’Malley introduces his budget for Fiscal Year 2013.
• The House Appropriations subcommittees hold briefings from 1-3pm, including on the Bay Restoration Fund.
• Good Jobs First publishes the third in their series of papers on state tax subsidies.  This latest report will look at enforcement mechanisms states use when projects fail to meet their goals, for example when not enough jobs are created.  I blogged about their second paper when it came out a month ago.

Thursday, January 19^th

• The House Ways and Means Committee receives a tax briefing from the Comptroller’s office at 11am in room 130 of the House Office Building, Annapolis.

• The Maryland Health Care Commission meets at 1pm in room 100 of their offices at 4160 Patterson Avenue, Baltimore.

Friday, January 20^th

• The House Appropriations and Ways and Means Committees hold a joint briefing on maintenance of effort (MOE) and K-12 education.  MOE promises to be a significant issue this year.  The briefing is scheduled for 1pm in the Joint Hearing Room.

Coming up

Look for MBTPI’s Instant Analysis later in the week, our first look at the governor’s budget.  Next Monday the Department of Legislative Services gives its Fiscal Briefing to a joint meeting of the House Appropriations Committee and the Senate Budget and Taxation Committee.  The schedule for other budget hearings can be found on the General Assembly’s website, and of course highlights will be provided every Monday right here on Maryland’s Money Matters.

At start of session, Governor signals a balanced approach to balancing the budget

Governor O’Malley signaled his intention to adopt a balanced approach to balancing the budget this morning at the annual Annapolis Summit hosted by the Marc Steiner Show and the Baltimore Business Journal.  In addition to supporting raising the gas tax and flush tax, he indicated his support for raising the sales tax by one percentage point as his preferred solution to the structural deficit in the state’s operating budget. His comments are a good indication of what his budget will include, but we still have to wait until next Wednesday for the complete package.

After years of job-killing cuts, the Governor’s sales tax proposal is a good way to begin a conversation about rebalancing the budget.  The legislature can improve on it. A sales tax increase will have a disproportionately negative effect on lower income families. This is because low-income and working families need to spend a larger share of their incomes on taxable goods compared with more affluent households. Increases in gas taxes and the “flush tax” to help Bay water quality will also hit low-income and working families the hardest. These increases should be paired with increased refundable tax credits for low and moderate income earners.

Unfortunately, increasing the sales tax will not be sufficient to protect the vital services that Marylanders depend on and that this state needs to prosper into the future.  The legislature and the governor need to also look at developing other new revenues sources, including closing loopholes for multi-state corporations, reinstating the millionaire’s tax, and modernizing the sales tax to include services.

Happy session! 

Spending Affordability Committee recommends a path to structural balance

Last week, the Maryland General Assembly’s Spending Affordability Committee issued its final report.  The committee’s major function is to issue a recommendation for how much the budget for the coming year should be allowed to increase. The recommendation is not binding – either on the governor or the legislature.

However, the legislature generally uses the spending affordability recommendation as a policy target. If the governor’s proposed budget exceeds the recommendation, the legislature will usually cut it back.

This year, the committee’s major recommendation is that the 2013 budget should “reduce the estimated structural deficit for that year by at least 50%.”

The “structural deficit” is a measure of the state’s fiscal sustainability.  Every year the state is required to balance its budget. During the recession and its aftermath, it has  done so by depending on temporary measures to stay in the black, such as drawing down funds that have built up in the state’s accounts. This can get us through a rough year or two or four, but it means we always have a new budget problem the next year.

The committee estimates the structural deficit at $1.1 billion, so the recommendation requires $550 million in ongoing budget balancing actions –revenue increases or more budget cuts. By cutting the structural deficit in half, the committee aims to restore the state’s financial health without abrupt disruptions to education, health care, and other state-funded functions.The recommendation is sensible and responsible and the governor should seek to meet it.

However, in doing so, the Governor should use a balanced approach. Maryland has already cut $2 billion from annual spending for education, health care, transportation, public safety, and other important services since 2007.

Source: Spending Affordability Committee, October 2011

Further cuts are going to throw more Marylanders out of work; damage the services we need now from our state counties and schools; and withdraw the investments we need to secure Maryland’s prosperous future. It’s time to turn to some reasonable and fair revenue options.

Unemployment falls, but still twice the rate in 2007

Maryland’s unemployment rate continued to fall in November, according to data released today by the Bureau of Labor Statistics.  After rising to 7.4 percent in September, the state unemployment rate fell to 7.2 percent in October and 6.9 percent in November.

While this is good news, the state’s jobs crisis is far from over.  There are still 134,000 fewer Marylanders working today than when employment peaked in February 2008.

As the governor prepares his budget and the legislature readies for the 2012 session, it is imperative that they craft a budget that focuses on creating jobs for Marylanders through increases in targeted spending funded by new revenue streams.  The Capital Debt Affordability Committee had the right idea yesterday, when they recommended issuing an additional $150 million in state bonds to fund needed infrastructure investments now rather than later, creating construction jobs and taking advantage of low borrowing rates.  Maryland can’t afford more job-killing budget cuts.