Revenue Board Slightly Reduces Estimates

The Board of Revenue Estimates has revised the official estimate of state revenues downward by $115 million. The $115 consists of $77 million in the current year (1/2 of 1 percent) and $38 million in the upcoming fiscal year 2014 (1/4 of 1 percent). The decrease comes mostly from sales tax proceeds, with smaller reductions attributed to corporation and individual income tax. Even with this revision, revenues would grow 4.9 percent this year and 2.4 percent next year.

Comptroller Peter Franchot, the chair of the Board of Revenue Estimates, attributed the reduction to:

• Reduced consumer expenditures related to the 2 percent increase in federal payroll taxes that took effect January 1 (a part of the “fiscal cliff” provisions that was allowed to take effect).
• The economic ‘de-multiplier’ (my phrase, not Comptroller Franchot's) effects of anticipated federal budget cuts on Maryland’s economy.

This estimate revision arrives just as the legislature is completing its hearings on agency budgets and beginning to make its budget decisions.

In constructing the proposed budget, Governor O’Malley allowed for a cushion of over $1 billion.  He did this precisely because the resolution of the federal government’s budget was uncertain and that federal actions could affect state revenues and programs.

The legislature should not over-react to this modest reduction in revenue growth. The state budget remains balanced through June 2014 with a comfortable margin. Inflicting state budget cuts on top of federal cuts will not help our economy.

The federal fiscal cliff may still huff and puff and blow Maryland's budget down

In our recent posts, we showed that Maryland's billion-dollar-plus budget shortfalls have been eliminated due to  a combination of good financial management, the national economic recovery (tepid though it is) and some good luck.

The first wolf is called Cliff. Fiscal Cliff. 

Image: wpclipart.com

It's true that Congress acted early in the year to avert the worst effects of large automatic tax increases on everyone. The deal passed by Congress on New Year's Day permanently continued the income tax rate cuts for most taxpayers. It extended for five years expansions of the earned income and child credits that help mostly working and low-income households. Social security payroll taxes have increased 2 percent for virtually all workers. Emergency unemployment benefits are extended for one more year.

However, Congress deferred decisions related to automatic spending cuts and the federal debt limit. Congress has actually arranged for three "scheduled crises" to hit while Maryland's legislature is in session and working on the budget.  

1. On March 1, unless Congress does something automatic, across-the-board but cuts to federal defense and domestic programs will take effect.The cuts would be 8.6 percent of domestic programs and 9.6% of defense programs.

The Department of Legislative Services estimates that these cuts would reduce direct Federal grants to Maryland's state government by about $117 million.  

A more serious problem would be the effect on Maryland's economy (and the resulting effect on state government revenues). The Pew Center on the States estimates that federal employment and procurement make up 20 percent of Maryland’s economy: defense 10 percent and non-defense 10 percent. For Maryland DC and Virginia combined, federal nondefense jobs make up 4 percent of the region's workforce.
  
2. Congress also has to deal with the federal debt ceiling. In 2010, after an earlier budget stand-off, Congress raised the limit on federal debt to a little under $16.4 trillion. late last year, we hit that amount.The Treasury can juggle things to keep paying off existing debt and the government's expenses for a  few weeks. By late February or early March, though, those options will run out. Failure to set a new debt limit by then would result in the government defaulting on the debt and/or failing to make other payments. Most observers believe that this would cause a national and international economic crisis, while doing irreparable harm to America's credit.

3. By March  27, Congress also has to extend the government's existing appropriations.The government is being funded by a "continuing resolution" that ends on this date. If Congress does not enact Appropriations Bill (unlikely at this point) or authorize a new continuing resolution, most government operations would shut down.

If the federal government deadlocks on any of these issues, or resolves them in ways that hurt states' budgets and economies, it will cause a problem for Maryland's budget. There could be serious losses of federal revenue for Maryland and maybe some negative shocks to the state economy, which would also throw the budget out of balance. This could put the state right back in the position of needing to resolve a large budget shortfall.

So, we are not out of the woods yet.

More moderately good news

On Thursday, two of the last pieces of the 2014 budget puzzle fell into place.

The state Board of Revenue Estimates published the December revenue estimates. This is the number that the Governor will base his balanced plan on. The estimate adds $161 million to the previous estimates, from September. The bulk of the increase is in the corporation income tax. The full report is here.

Also the legislative spending affordability made its final recommendation to the Governor. The new revenue estimates would fully cover the cost of the state’s “current services” budget through June 2014. However, the budget is not sustainable into the future. It depends on spending down the fund balance accrued through past revenue gains.

The Spending Affordability Committee recommended that the Governor resolve $200 million of the structural imbalance in his proposed budget. The remaining structural deficit of $183 million is judged to be “within normal budget management tolerances.” The full report is here.

Of course the wild card in the state’s budget remains the federal “fiscal cliff.” If Congress does not reach an agreement on the federal budget, then automatic tax increases and program cuts will take effect. If they do (and if they are allowed to remain in effect for more than a few weeks), then Maryland will lose considerable direct federal aid. More seriously, the federal actions would trigger a new economic downturn, which would reduce state revenues and send Maryland back into a new budget crisis.

The Week Ahead (Late Night Edition)

MBTPI staff are in New Orleans for much of this week at the annual Economic Analysis and Research Network (EARN) conference. This week's edition of the Week Ahead is very late because our travel was significantly delayed due to this mornings fog (and because the wifi at the airport didn't work). But we'll be back in Baltimore in time to cohost our conference call on the fiscal cliff (see Thursday, below).

Tuesday, December 11th

• Legislative Policy Committee holds their last meeting of the interim. 4pm in the Appropriations Committee Room (121), House Office Building, Annapolis.
• Capital Budget Subcommittee and the Public Safety and Administration Subcommittee (both of the House Appropriations Committee) go on a site visit to the Maryland State Archives and warehouses. 10am to 1pm, 350 Rowe Boulevard, Annapolis.
• House Ways and Means Committee holds briefings in preparation for the upcoming session. 10am to 5pm in room 130, House Office Building, Annapolis.
• Senate Finance Committee discusses energy issues and the Division of Labor and Industry and related laws and functions. 1pm in 3 East, Senate Office Building, Annapolis.
• Advisory Council for Alternative Response meets. 1pm in room 1044, Department of Human Resources, 311 West Saratoga Street, Baltimore.
• State Commission on Criminal Sentencing Policy continues to review and evaluate Maryland's sentencing guidelines and policies. 5-6:15pm in room 100, House Office Building, Annapolis.
• Maryland Community Health Resources Commission meets to discuss Health Enterprise Zone applicants. 2pm in room 230, House Office Building, Annapolis.

Wednesday, December 12th

• House Health and Government Operations Committee receives an update on Maryland's Health Benefit Exchange and state benchmark plan; an update by CareFirst; a briefing on Excelsior College's nursing program; and an update from the Department of Health and Mental Hygiene on generic drug reimbursement. 1pm in room 240, House Office Building, Annapolis, MD
• Special Joint Committee on Pensions meets. 2pm in room 120, House Office Building, Annapolis.
• Task Force on the Establishment of a Statewide Spay/Neuter Fund  meets. 1pm in room 250, House Office Building, Annapolis.

Thursday, December 13th

• Joint Committee on the Management of Public Funds is briefed on small business financing opportunities in Maryland and state banks. 1pm in the William Amoss Hearing Room, 4th Floor, Senate Office Building, Annapolis.
• Spending Affordability Committee meets. 4pm in room 120, House Office Building, Annapolis.
• House Emergency Medical Services System Work Group receives an update by the Maryland State Police Aviation Command and a Department of Legislative Services presentation on the Maryland Emergency Medical System Operations Fund. 1:30pm in room 318, House Office Building, Annapolis.
• Task Force to Study Maryland Insurance of Last-Resort Programs continues discussion comparing the four insurers of last resort programs. 1pm in room 231, House Office Building, Annapolis.
• Maryland Advisory Commission on Manufacturing Competitiveness holds a board meeting. 10am to noon at Frito Lay, 800 Hickory Drive, Aberdeen.
• Council for the Procurement of Health, Educational and Social Services meets. 2pm in room 240, House Office Building, Annapolis.
• MBTPI and Maryland Nonprofits host an informational conference call on the federal fiscal cliff at noon. Call 1-866-740-1260 and use passcode 7636737. 

Friday, December 14th

• Board of Social Work Examiners meets. 11am in room 109, Metro Building, 4201 Patterson Avenue, Baltimore.

PLEASE ACT NOW - THE FISCAL CLIFF IS DANGEROUS!

This is a repost of a blog by Henry Bogdan, Managing Director of Public Policy and Public Affairs for Maryland Nonprofits and our own Neil Bergsman. At the end there is more information about our fiscal cliff conference call next Thursday.

The "fiscal" or as we're calling it, the "human cliff" poses a real threat for our nonprofits and our clients. It is not just a matter of protecting the deduction for charitable contributions.

The “fiscal cliff” refers to a series of tax increases and budget cuts that take effect around the first of the year, unless Congress acts to avoid them. Maryland Nonprofits is asking you to contact your member of Congress and urge them to REACH A RESPONSIBLE COMPROMISE AGREEMENT:

• INCLUDING A BALANCED PACKAGE OF TAX RATE INCREASES ON HIGH EARNERS AND MODERATE SPENDING REDUCTIONS
• AVOIDING CUTS TO PROGRAMS THAT WOULD THREATEN THE MOST VULNERABLE AMERICANS
• PRESERVING AN EFFECTIVE INCENTIVE FOR CHARITABLE CONTRIBUTIONS
  

The fiscal cliff will trigger automatic federal budget cuts of $109 billion each year, half to defense and half to “discretionary domestic spending.” Across the board this would be an 8.2% cut to hundreds of programs that relate to nonprofits’ missions in the discretionary domestic category: from nutrition, to substance abuse treatment, to job training, and the arts.  That automatic budget-cutting process is called “sequestration.” The sequestration cuts are estimated to mean a loss of over $117 million in Maryland’s state budget alone for the next year.  
At about the same time, tax reductions for people at all income levels adopted over the last 11 years would expire all at once with major impacts on the economy. Together with sequestration these are referred to as the “fiscal cliff”.
If nothing is agreed upon in Washington, there is a strong chance of renewed recession in addition to major spending cuts.  The State Department of Legislative Services recently estimated a potential combined negative impact on Maryland’s fiscal 2014 personal income and sales tax revenues (which make up about 80% of the state’s general funds) ranging from $337 to $635 million.  Together with the sequestration cuts listed above, this could reach over 5% of the state’s total general fund budget.
Much more likely is a gradual or phased package of negotiated tax changes combined with new revenue and significant new cuts in future spending.  For domestic programs, this will be in addition to cuts over the next ten years already adopted in the Budget Control Act of 2011. Failure to raise major new federal revenue, as the President is proposing by eliminating most of the Bush-era tax cuts for the wealthiest 2% of taxpayers, will magnify the size of additional spending cuts required. Domestic program funding through the states, Medicaid, Head Start, Title 1 Education, Women and Children’s Health, for example, are all at risk. Further, any cuts absorbed by states will likely mean reductions in additional areas as they try to re-adjust priorities at their level.   
WHAT CAN YOU DO?
 
Cuts are coming – even without the “cliff” the Budget Control Act has already put reduced spending caps on discretionary domestic spending, and rapidly growing costs of veterans’ benefits will compete with everything else in that category.  Nonprofits must be advocates for raising federal revenue – as much and as fairly as possible. 

1. Support the President’s tax proposal – it is the best chance to protect the most services for people and communities we serve!
2. Oppose ‘flat dollar caps’ on tax deductions – these are being proposed as an alternative to the President’s plan for tax rate actions and a modest limit on the percentage value of deductions for top earners.  Caps won’t raise as much revenue, so many more cuts must occur, and will have major negative consequences for charitable giving and many state tax systems that benefit from federal deductibility.  More information... 
   

HOW CAN YOU DO THIS?

1. Craft a message (you can use this sample format and vary the details for your audience) that: 
1. describes the people (children, families, communities, etc.) that your nonprofit serves or advocates for, and the importance of their needs; 
2. summarizes how cuts in the government-supported services they use and need will impact them and the community; and 
3. supports the President’s tax and revenue plan to help protect those services. 
2. Communicate this message (by phone, letter, email, meetings) to your member(s) of Congress (use http://mdelect.net/ to find your representatives and their contact information). 
3. Communicate to the public through social media, letters to editor, other local media, etc., to raise the profile of the issue. Communicate the same message to your state legislators and state officials (and local officials if they are involved in the services or funding). They will decide whether or how to make up for federal cuts, and how to cut or re-allocate their own resources. 
4. Reach out through your networks, coalitions, or state associations of providers or advocates, to reach more of the state’s delegation in congress (and more of the media and the public). 
5. Keep up with developments and keep your message current and fresh – follow the Maryland Budget and Tax Policy Institute’s updates at www.marylandpolicy.org 
6. Involve your board, staff, volunteers, supporters and clients in the steps above. 
7. AND Join us for a “fiscal cliff” information conference call at noon on Thursday, Dec. 13 at 1-866-740-1260, passcode 7636737.

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.

Reflections on the election

Now that the glow from all that late night election-return television watching has faded, we thought we'd share some thoughts about the impact of the election on Maryland going forward.

The most important issue facing Maryland in the next three months is the looming fiscal cliff (or slope, as some have called it). Either the lame duck or the newly elected Congress will have to decide what, if anything, to do about expiring federal tax cuts and the mandatory spending cuts (known as sequestration) set for January. While both measures might help reduce the federal deficit in the short-term, the long-term effects would be devastating in human terms, and would likely push the country back into recession. The Washington Post has collected a number of graphics together to help explain the fiscal cliff at the national level.

In Maryland, the effects of falling off the fiscal cliff would be multiple. The state would see an immediate reduction in federal aid of $117.6 million (see pages 22-24) due to sequestration in fiscal year 2013. The state would also lose up to 53,500 jobs and $268 million in personal income and sales taxes, the largest local revenue sources for the state. This loss of revenue and increased demand for services by the newly unemployed would put significant pressure on the state's budget. The effect in later years would be even more severe.

Not to mention the cuts in federal aid to county and local governments.

Gambling expansion passed, and would raise some additional funds for the state. However, the increase in revenue for FY 2013 would be a bare $58 million, with not more than $200 million per year by 2017.Plus - the Department of Legislative Services' budget projections assumed that the referendum would pass. So the money is not "extra." it's already accounted for in the projections.


It seems unlikely that Congress will address the fiscal cliff before America falls off it. More likely is that the newly elected Congress takes up the issue after the fact early next year. It's unclear what the solution to the current gridlock might be, however. Voters mostly maintained the status quo last night. Democrats still control the White House and the Senate, while Republicans retained control of the House of Representatives. The hyper-partisan polarization that created the fiscal cliff will probably not abate.

Complicating matters for Maryland, the governor will likely have to present his budget to the General Assembly before the matter is resolved. The governor may reserve some amount in the budget to serve as a contingency for the fiscal cliff or it's resolution. or he may submit a budget in January based on the most reasonable assumptions, and leave it to the legislature to make adjustments as the budget bill works through the legislative process. If there is no answer when the legislature take final action on the budget in late march or early April (and that would be bad), then the Governor may propose adjustments to the budget for approval by the Board of Public Work after the budget is enacted.

In short, the national election - whatever else it accomplished - has done little to reduce Maryland's level of budget uncertainty.