Spending Affordability Committee Recommends Modest Budget Increase, Deficit Reduction

Yesterday, Maryland state lawmakers responsible for advising the Governor and General Assembly on spending levels for the state budget recommended that next year’s spending increase no more than 4 percent, from $37 billion to $38.5 billion. This relatively small budget increase is necessary to support inevitable growth in state spending to meet the needs of residents who, like the state itself, are still recovering from the Great Recession.

Revenue Down in Short Term, Projected Up in Long Term

The Spending Affordability Committee’s decision comes amid decreased revenue projections for the current fiscal year, but increased expectations for fiscal year 2015. The December Board of Revenue Estimates forecast that revenues for the current fiscal year will be $101.1 million less than expected, largely due to an economy that is still growing recovering from the Great Recession and hampered further by federal budget sequestration that kicked in at the beginning of 2013 and resulted in less revenue coming into Maryland, as well as the federal budget shutdown in October and general environment of uncertainty regarding federal spending. However, the December revenue estimates expect the state’s economy to grow and expect that revenue for FY 2015 will be $143.7 million more than initially forecast in September. This includes expectations for improved income and sales tax revenue that will result from the opening of the Amazon distribution center in Baltimore. The recent federal budget deal should reinforce these expectations by removing uncertainty and relieving sequestration cuts.

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Source: Maryland Board of Revenue Estimates

Modest but Necessary Budget Growth

Warren Deschenaux, director of the office of policy analysis in the Department of Legislative Services characterized the projected FY 2015 $361 million structural deficit as “a small hole, certainly compared to what we have seen in the past." As such, while taking action to reduce the state’s budget deficit is imperative, state lawmakers would be wise to do so in a way that does not drastically affect the ability of state programs to meet residents’ needs, and allow the budget to grow during crises as needed. In general, state spending on programs can be expected to increase from year to year as the population grows and particularly in times such as these when needs remain high. During times of normal economic growth, these increases in spending are more than covered by economic growth that leads to rising wages and revenue for the state. This is typically the case for Maryland. However, the 2008 recession caused Maryland lawmakers to reduce spending to respond to the 2008 recession and subsequent slow recovery (some of which was offset by new federal funds in the Recovery Act).

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Source: December 2013 Spending Affordability Committee Report; 90 Day Reports for the 2011, 2012, and 2013 Legislative Sessions

Usually, the Spending Affordability Committee recommends a percentage growth goal for the governor’s budget. However, between FY 2011 and 2013, the committee instead proposed targets to reduce the structural deficit. (The Spending Affordability Committee’s recommendation for 2010 was 0 percent budget growth.) This year, the Spending Affordability Committee returned to form and recommended an increase of no more than 4 percent. This responds to the need to allow spending to rise to meet the needs of state programs while also reducing the structural budget deficit by $125 million. This recommendation is also in line with the expected growth of the Maryland economy during this time. Revenue grew by 4.4 percent between FY 2012 and 2013. Currently, the Department of Legislative Services forecasts FY 2014 revenue to be 2.4 percent more than FY 2013. Not increasing state spending at all, as initially proposed by some lawmakers during yesterday’s Spending Affordability decision meeting, would amount to a cut in support for state programs.

Investment Income Growth Outpacing Earnings

Notably, while the economy is still struggling to recover from the Great Recession, some forms of income have grown faster than others. According to the Board of Revenue Estimates, capital gains income grew by 50 percent in 2012 and by 20 percent in 2013, outpacing the growth of income from wages.

Debt Increase Limited

In November, we discussed the Spending Affordability Committee briefing on Maryland’s Capital Budget, in which the Department of Legislative Services advised lawmakers not to increase Maryland’s borrowing authority by $75 million per year for the next five years, as requested by the O’Malley administration and approved by the Capital Debt Affordability Commission, out of concerns about the increasing costs of debt servicing for the state budget. The committee decided to recommend increasing borrowing authority by $75 million for only one year, out of concerns for the need to fund Maryland’s plans to clean up the Chesapeake Bay without diverting money from other transportation projects or unrelated parts of the state budget. It will be up to the next governor and legislature to decide whether to pursue additional debt authorization or to fund Bay cleanup through some other means.

Though the Spending Affordability Committee’s recommendations are not binding, the Governor and the General Assembly usually take action in line with its advice. Governor O’Malley will release his budget no later than January 15th.  

Spending Affordability Committee Meeting Addresses Spending on Mass Transit, Pensions, and the Reasons for Decreased Revenue Projections

Yesterday we discussed the November meeting of the Spending Affordability Committee and highlighted its concerns about increased borrowing costs crowding out the ability to pay for new initiatives and savings that Maryland is seeing from implementing the Affordable Care Act. Today we will conclude our coverage of the November meeting by highlighting its findings regarding transportation spending and pension reform and look ahead to the committee’s final meeting before the start of the 2014 legislative session.

Department of Transportation Budget

The Department of Legislative Services noted that the transportation budget ended the 2013 fiscal year with more money than planned, both due to less spending and more revenue than expected. Spending on mass transit, including the Red and Purple lines, will increase in the coming years and peak in 2018, though total spending on roads and highways remains higher than spending on mass transit during this time.

Capital Spending on Transportation by Category, 2014-2019

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Note: “Other” comprises the Secretary’s Office, the Maryland Port Administration, the Motor Vehicle Administration, and the Maryland Aviation Administration. “Mass Transit” includes the grant to the Washington Metropolitan Area Transit Authority.

Data source: Maryland Department of Transportation, 2014 draft Consolidated Transportation Program; Image source: Spending Affordability Committee Briefing, November 2013, p. 14.

A recent panel of transportation experts convened by the Greater Baltimore Committee praised the recent passage of the Transportation Infrastructure Investment Act which increased transportation funding via a gas tax increase and other revenue-raising measures such as bus fares and vehicle registration fees. According to Maryland Reporter, the panel rightly agreed that “expanding public transportation was key to a prosperous and sustainable future for Maryland.”

Pension Reform and Local Taxes

DLS analysts showed that while unfunded liabilities have leveled off rather than continuing to grow after the state government shifted some of the costs of teacher pension contributions to country governments, “[l]imited revenue at the local level resulted in seven county governments raising at least one major local tax in fiscal 2014 in order to balance local budgets.”

Under the Spending Affordability process, which is established by Maryland law, the committee makes recommendations aimed at limiting the growth of the state budget for the upcoming year, though its recommendations are not binding. This month’s briefing focused on Maryland’s Capital Budget, which is composed of construction projects and other long-lasting assets. Last month, the Spending Affordability committee warned that the state is likely to face an $87.6 million budget deficit after initially expecting a surplus. DLS Policy analysis Director Warren Deschenaux said the new forecast of lower revenue can be blamed on “our colleagues down Route 50,” referring to the disagreements among federal lawmakers regarding the budget that have lead to policies and other actions that have hurt Maryland’s economy, such as sequestration and the recent Government shutdown.  The Spending Affordability Committee will meet again on December 18 to make its final budget recommendations to Maryland lawmakers before the upcoming 2014 legislative session. 

November Spending Affordability Briefing: Increasing Debt Service Costs, Savings from Affordable Care Act

At its November briefing of the Spending Affordability Committee, the Department of Legislative Services urged state lawmakers to maintain current levels of debt, citing increased debt service costs in the coming years. DLS also noted that Maryland will both save money and provide more residents with health coverage due to its implementation of the Affordable Care Act (ACA).

Legislature Urged to Keep Debt at Current Levels

At the briefing, DLS analysts warned of increasing costs of debt service, the money required to pay the interest and principle on bonds that Maryland has issued. DLS forecasts that these costs will crowd out Maryland’s ability to spend money on other projects in the coming years.

The analysis and recommendation are in part a response to Governor O’Malley’s request, backed by the Capital Debt Affordability Commission, to increase debt authorizations by $75 million annually between 2015 and 2019 for the purpose of funding Maryland’s Watershed Improvement Plan.

According to the DLS, doing so will increase debt servicing costs by $43 million during this period. However, this is the result of not only increased borrowing but also a decrease in revenue from state property taxes. Property taxes, which are used to fund debt servicing, have been down as a result of the housing collapse and Great Recession, which caused housing prices in Maryland to decline for 55 months in a row. Prices have started to increase since February 2012, but because property tax revenues lag real estate market trends, DLS expects that property tax revenues will stabilize and start to increase slightly beginning in 2016.

In the meantime, debt service costs are expected to increase by 6.1 percent annually while property tax revenues are projected to increase by half a percent annually. As a result, DLS projects that beginning in 2014, an increasing amount of General Fund Revenues will be needed to pay for debt service each year.

In addition, there are more requests for funding from the capital budget than there are dollars: more than $1 billion in requests compared to just $320.4 million in unallocated funding.

DLS therefore argued that maintaining debt at current levels rather than increasing borrowing is “the remaining lever to provide relief from this ongoing fiscal squeeze” available to lawmakers.

Affordable Care Act Saving Maryland Millions

The other key theme of the November meeting of the Spending Affordability Committee was that DLS projects that Maryland will see “significant general fund savings” as a result of its implementation of the Affordable Care Act. What is most noteworthy is not just that the state will save money, but that it will do so while also providing health coverage to more residents. DLS finds that Medicaid enrollment will increase at a greater rate both because Medicaid eligibility has been expanded and because increased publicity from the Maryland Health Benefit Exchange marketing campaign is leading residents that were previously eligible but not enrolled to sign up.

General Fund Savings Attributed to the Affordable Care Act in the Medicaid Forecast

Fiscal 2014-2019

($ in Millions)

Source: Department of Legislative Services Spending Affordability Briefing, November 14, 2013.

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These savings are largely the result of increased federal funding to implement the ACA. Maryland’s Primary Adult Care Program will end on January 1, 2014 as the single adults currently in this program will be eligible for the expanded Medicaid program which is mostly funded by the federal government. Combined with other sources of increased federal funding for health care programs, these savings are more than enough to offset costs that Maryland will bear to implement the ACA.

Check back tomorrow for the rest of our briefing summary.