Choices and Challenges: Maryland's Budget Outlook & Governor's Upcoming FY 2015 Budget - Part III

By David McNear

Previously, we have provided a general overview of the state budget process as well as a more detailed discussion of the sources of the deficiencies that state lawmakers must address in the current session. We will conclude with an overview of Maryland’s capital budget as well as provide more detail on the operating budget

Capital Budget Overview

 Maryland's Capital Budget funds the state's Capital Improvement Plan.  In FY 2014, GO Bonds made up $1.1 billion, or 71% of the total $1.5 billion Capital Budget.  Capital projects for Agriculture, Environment and Natural Resources accounted for $486 million, or 31%, with Education/School Construction at $348 million, or 22%, and Higher Education projects at $352 million, or 23%. 

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The Capital Debt Affordability Committee recommended $1.16 billion in GO Bonds for the upcoming Capital Budget.  Due to prior authorizations, including the public school construction set-aside, only $320.4 million is projected as "unspoken for" by DLS, or about 28% of recommended GO Bonds. 

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Operating Budget Detail

General Fund Revenue is expected to grow from $14.6 billion in fiscal 2013, to $15.2 million in FY 2014 and just over $16 billion in FY 2015.

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Maryland's expanded gaming program has increased receipts for the Education Trust Fund (ETF) and provided General Fund budget relief. The BRE projects $344 million in gaming revenue for the ETF in FY 2014 and $417 million in FY 2015.

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General Fund spending growth in Local Aid is relatively flat, due to changes in local portion of teacher retirement costs and low inflationary data used in K-12 funding formulas.  Entitlement spending is expected to increase, mostly due to increased Medicaid spending. 

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The $6.6 billion in FY 2014 General Fund Spending on State Agencies in FY 2014 is projected to increase to $6.9 billion in FY 2015 budget.  Fiscal 2014 state agency spending includes DLS-projected deficiencies. 

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There is $6.3 billion in General Fund State Aid to Local Governments for both the FY 2014 and the FY 2015 budgets, with 91% going to Education and Libraries. 

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In addition, there is $2.9 billion in General Fund FY 2014 & FY 2015 Entitlement Spending, with $2.5 billion for Medicaid.  Again, Fiscal 2014 entitlement spending includes DLS-projected deficiencies. 

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In the previous three posts, we’ve provided a lot of detail on the context that state lawmakers face as they work to craft Maryland’s budget. Check back here for more on specific issues that affect all Marylanders as we move through the legislative session. Later this week, we will provide an instant analysis of Governor O’Malley’s budget, which he must submit by Wednesday, January 15.

Choices and Challenges: Maryland's Budget Outlook & Governor's Upcoming FY 2015 Budget - Part II

By David McNear

Previously, we provided an overview of the Maryland budget process and the economic conditions that will impact the options available to state lawmakers as they work to craft the FY 2015 budget.

Today, we will delve deeper into the constraints that state lawmakers face in developing the budget for the coming fiscal year. To begin, legislators enter the session facing the need to make up for deficiencies that result from less-than-expected revenue collected during the previous fiscal year. We will discuss options for how state legislators can make up for these deficiencies.

State Budget Outlook

At end of 2013 session, the state’s structural budget deficit - the gap between ongoing spending and ongoing revenue - was projected at about $172 million, down from about $1.2 billion a few years ago, and the FY 2014 General Fund cash balance was projected at $294 million. One-time sources of money, like the Federal stimulus package, and state budget and tax action decreased the structural budget gap and eased pressure on the General Fund.  As Federal budget and tax decisions dragged on the state economy, the growth in state revenue collections was slower than expected.   In current budget, reduced revenue collections, lowered revenue estimates and projected deficiencies led to a projected FY 2014 General Fund gap of $189.5 million. 

• $294 million estimated closing General Fund balance at end of 2013 session;
• $56 million less than expected in closing FY 2013 General Fund balance;
• $264 million in DLS estimated deficiencies for FY 2014; 
• $62 million in reduced fiscal 2014 revenues in September BRE forecast; 
• $102 million additional revenue FY 2014 write-down in December BRE forecast; led to
• $189.5 million current DLS estimate for FY 2014 General Fund shortfall.

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The Department of Legislative Services projected that FY 2014 deficiencies total $264 million in General Funds, including $124 million for Medicaid, $41 million for the Developmental Disabilities Administration, $22 million for Office of Public Defender, and $19 million each for Foster Care and K-12 Education. 

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Despite increased FY 2015 revenue estimates in December, when the BRE boosted its revenue forecast by $144 million from the September estimate to $16 billion, fiscal 2015 also sees a projected General Fund budget gap.  DLS anticipates FY 2015 General Fund spending of about $16.5 billion, which is projected to outpace available money by $339.4 million.  With the estimated $189.5 million budget gap in the current budget, combined current General Fund budget shortfall is estimated at $528.9 million. 

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Addressing Deficiencies

The Governor's proposed FY 2015 budget plan will need to be balanced for both fiscal 2014 and 2015. For the current FY 2014 budget, the Governor's upcoming budget does not have to include money for all or part of the $264 million in projected General Fund deficiencies, which could be funded in later Supplemental Budgets. The Board of Revenue Estimates updates their FY 2014 and FY 2015 revenue forecast in March, before Supplemental Budgets have to be introduced and balanced -- and before the legislature has to pass the final budget.  In addition to more available funds through boosted revenue estimates in March, the legislature could also raise revenues.  Money could also be transferred to the General Fund from Reserves or Special Funds, like Bay Restoration Fund or the Transportation Trust Fund, which ended FY 2013 with a fund balance of $218 million, or $118 million more than expected.  Increased capital debt, in form of General Obligation (GO) Bonds, has often been used to replace transferred Special Funds and provide General Fund fiscal relief.   

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In addition, General Fund spending in the Capital Budget (PAYGO) could also be replaced by GO Bonds. Whether state lawmakers decide to replace PAYGO, or to make up for Special Funds transferred into the General Fund, the increased allocation of GO Bonds leaves limited flexibility in funding the Capital Budget increases debt service costs.  In previous budgets, state property tax collections were sufficient to help pay for debt service costs, without the need for a General Fund contribution.  Beginning with the current FY 2014 budget, an $83 million General Fund contribution is needed for debt service costs; and $233 million is forecast in General Fund debt service spending for FY 2015.  As the fixed costs of pension and debt service grow to a larger portion of the General Fund budget, spending for other needs and priorities is squeezed.

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We will conclude our preview of the budget with an overview of the state’s capital budget and more detail about the operating budget. 

Choices and Challenges: Maryland's Budget Outlook & Governor's Upcoming FY 2015 Budget -Part 1

In the coming days, we will be providing an overview of Maryland's budget and budgeting process in advance of the release of Governor O'Malley's FY 2015 budget, which is expected on January 15.

Today we will start with a general overview of the budget process in Maryland and the economic factors that will set the parameters within which state lawmakers will craft the budget.

Maryland's Budgeting Process

•  The budget must be balanced - both the Governor's budget, which must be introduced by January 15, as well as well as the final budget that the General Assembly passes in April 
• The Governor's Budget will include an Operating Budget, which funds Local Aid, State Agencies and Entitlements, like Medicaid, and a Capital Budget, which funded $1.5 billion in capital projects such as school construction in the current FY 2014.
• The Governor may also introduce additional Supplemental Budgets later in legislative session.  These supplemental budgets must also be balanced.  The Governor can fund deficiencies in Supplemental Budget. 
• To balance spending and revenue, the Governor's proposed budget uses December revenue estimates; and the legislature's final budget uses March estimates.
• The General Assembly can not add money to the Governor's recommended spending; but legislature can raise revenues, cut spending and move money around to balance budget.

Maryland Economic Performance and Forecast

The state ended 2013 with an annual unemployment rate of 6.8% and slowing wage and income growth.  Strong stock market performance and recovering real estate market led to surging capital gains growth and offset sluggish wage and income growth.

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General Fund revenue growth tends to track state wage and income growth.  Indeed, a drop in wage and income growth in 2013 results in sluggish General Fund revenue growth for the current fiscal 2014, and the September and December BRE revenue write-downs.  Economic forecasts for 2014 and 2015 show improving wage and income growth, and estimated revenue growth for future years mirrors the economic trends.

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Maryland's reliance on federal spending and employment buoyed state economy during worst of recession.  Recent federal tax and budget actions, including sequestration and shutdown, and continuing uncertainty have dragged on the state economy.

• The October 2013 government shutdown Maryland an estimated $5 million per day.
• There are roughly 120,000 federal employees in Maryland, or 5% of the state workforce.

While the recent Congressional budget deal is encouraging, it is a minor victory.  The federal budget is still funded at inadequate levels; spending levels for non-defense discretionary expenditures are historically low and are forecast to drop to lowest level on record (1963) as share of GDP.  The deal extended some sequestration cuts, mainly in Medicare provider payments, for 2 years to 2023. And the debt ceiling debate is again looming.  Maryland has created a $100 million fund to offset federal action. Out of this fund, Maryland has thus far distributed $9 million to Head Start, substance abuse prevention/treatment and seniors in September, all before the October government shutdown. The prolonged shutdown likely cost a substantial portion of fund balance. Thus, while federal action has recently been more promising, there is still much work to be done, and recent history suggests that Maryland must be prepared for disruptions and decreased revenue that result from federal actions.

Updated Estimates Reveal $529 Million Budget Gap

• The Board of Revenue Estimates (BRE) forecasts state revenue collections for current and upcoming budgets three times each year in March, September, and December.   Due to slow economic growth, the BRE dropped current year fiscal 2014 revenue estimates by $62 million in September and another $102 million in December.  Last month, the BRE also increased FY 2015 revenue estimates by $144 million to just over $16 billion.
• In December, the legislature's Spending Affordability Committee made final recommendations on limiting spending growth in FY 2015 budget to 4%.  As part of process, the Department of Legislative Services (DLS) also released projected changes in current budget and baseline for upcoming budget. The DLS FY 2015 baseline is $39.4 billion in total spending, and $16.5 billion in General Fund spending.
• The combined FY 2014 and FY 2015 projected General Fund budget gap is $528.9 million: $189.5 million in current fiscal 2014 budget and $339.4 million in upcoming fiscal 2015 budget.

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Check back here for more information about the budget and state lawmakers begin their work.

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.