Halfway Through Budget Hearings: Recommended Cuts Total $101 Million So Far

With the General Assembly’s budget committees about halfway through their hearings, the biggest challenge facing lawmakers is how to continue investing in services that Marylanders rely on every day.

As the committees debate and amend the budget proposal, they are guided, in part, by the Department of Legislative Services’ (DLS) in-depth budget analysis. Last month DLS cautioned that the governor’s budget—while balanced—does not leave enough of a cushion at the end of the year to account for unexpected expenses during the year. Subsequently, as the committees work through each agency’s budget, DLS offers a menu of recommended cuts for each agency. While the legislature cannot add new money to the governor’s budget proposal, they can cut spending in some areas and transfer those funds to other priorities elsewhere in the budget. 

DLS is recommending several good solutions, including:

• Replacing $30 million allocated for debt service reduction with proceeds from anticipated sales of bond premiums.  
• Reducing various personnel and administrative costs in state agencies by $27.2 million, mostly through eliminating vacant positions or through technical adjustments, like turnover rates and cost-of-living adjustments. 
• Cutting $17.6 million from the Department of Agriculture, since this amount was already paid for by the Chesapeake and Atlantic Coastal Bays 2010 Trust Fund.

Unfortunately, not all of DLS’s recommendations were so good. In fact, some of the agency’s recommended reductions would cut money from important state programs and services, including: 

• $14.4 million cut to economic development efforts, which includes $8.9 million for the Maryland Economic Development Assistance Authority and Fund (MEDAAF), $2 million for a biotechnology tax credit, $1 million for a cyber-security tax credit, and $2.5 million in tourism development grants. 
• Cuts to investments that support Maryland's working families, which include a $3.6 million for job training through Employment Advancement Right Now (EARN), $2 million for child care assistance, $500,000 grant for the Maryland Food Bank, and a $100,000 grant for Roberta's House. 
• $3 million cut to foster care
• $799,000 cut to agricultural land preservation through the Tobacco Transition Program
• $125,000 cut to the Department of Aging's Maryland Access Point

Lawmakers should think twice before cutting any of these programs, and should instead focus their efforts on other parts of the budget.

Next month the Board of Revenue Estimates (BRE) will release updated forecasts of state revenue for Fiscal Years 2014 and 2015.  Any increases from the December forecast will provide additional flexibility and funding as the General Assembly moves towards passing their final budget plan in April. 

As the budget committees continue their work, check back here for updates.

MD revenue projections down $61.9 million

Yesterday, the Board of Revenue Estimates released its latest figures for Fiscal Year 2014. The Board now projects General Fund and Budget Restoration Fund revenues of $15.4 billion. While this is less than the previous projection, revenues are still expected to rise 3 percent from FY 2013.

Looking closer, the revisions are quite different depending the source of the income. The personal income tax estimate has been revised upward by $114 million, but corporate income taxes are now projected to be $67 million lower. Sales and use tax, state lottery receipts, and a variety of other revenue sources are also projected to perform below previously anticipated levels.

The reason for these downward revisions continues to be the stubbornly lackluster economic recovery, and the fiscal uncertainty emanating from Congress. That's why Maryland must continue to take the initiative by raising the funds necessary to keep investing in what makes our state great (education, health care, innovation, a strong safety net), regardless of what happens at the federal level.

The Week Ahead (Superbowl Champions Edition)

Last week we blogged about the Working Matters press conference kicking off the fight for paid sick leave in Maryland and why MBTPI supports it. Neil Bergsman appeared in a story about the need to potentially raise property taxes.

Monday, February 4th

• House Appropriations Committee subcommittees hold budget hearings:
• Health and Human Resources Subcommittee meets to discuss the Department of Human Resources budget. 3pm in room 150, House Office Building, Annapolis.
• Public Safety and Administration Subcommittee meets to discuss the budgets for the Judiciary, Secretary of State, and the Board of Public Works. 3pm in room 120, House Office Building.
• Education, Business, and Administration Subcommittee of the Senate Budget and Tax Committee holds budget hearings on the Maryland School for the Deaf, the Inter-agency Committee on School Construction, the Department of Business and Economic Development, the Maryland Economic Development Corporation (MEDCO), and the Comptroller of Maryland. 1pm in room 3 West, Senate Office Building, Annapolis.
• Task Force to Study the Laws and Policies relating to Representation of Indigent Criminal Defendants by the Office of the Public Defender meets
  to receive an update on subcommittee progress and a review of the citation process effective January 1, 2013. 2pm in room 100, House Office Building.

Tuesday, February 5th

• Senate Budget and Taxation Committee holds budget hearings on the Maryland Department of Transportation and the Governor's Office for Children and Inter-agency Fund. 1pm in room 3 West, Senate Office Building.
• Capital Budget Subcommittee of the Senate Budget and Taxation Committee holds (surprise!) capital budget hearings on the Department of Veterans Affairs, the Military Department, and Department of Planning. 4pm in room 3 West, Senate Office Building.
  

Wednesday, February 6th

• Board of Public Works meets. 10am in the Governor's Reception Room on the Second Floor of the Maryland State House.
• House Appropriations Committee subcommittees hold budget hearings:
• Capital Budget Subcommittee meets to discuss the Department of Veterans Affairs, the Military Department, and Department of Planning. 4pm in room 120, House Office Building.
• Education and Economic Development Subcommittee meets to discuss the University System of Maryland and Coppin State University. 1pm in room 145, House Office Building.
• Health and Human Resources Subcommittee meets to discuss the Alcohol and Drug Abuse Administration and Mental Hygiene Administration. 1pm in room 150, House Office Building.
• Transportation and the Environment Subcommittee meets to discuss the Department of Planning and the Maryland Department of Transportation. 1pm in room 120, House Office Building.

Thursday, February 7th

• House Appropriations Committee subcommittees hold budget hearings:
• Education and Economic Development Subcommittee meets to discuss aid to community colleges and Baltimore City Community College. 1pm in room 145, House Office Building.
• Health and Human Resources Subcommittee holds a hearing on the Developmental Disabilities Administration. 1pm in room 150, House Office Building.
• Public Safety and Administration Subcommittee discusses the Department of Public Safety and Correctional Services, the Office of the State Prosecutor, the Office of Administrative Hearings, Boards, Commissions and Offices, and the Military Department. 1pm in room 120, House Office Building.
• Senate Budget and Taxation Committee subcommittees hold budget hearings:
• Education, Business, and Administration Subcommittee discusses the University System of Maryland and Coppin State University. 1pm in room 3 West, Senate Office Building.
• Senate Health and Human Services Subcommittee holds hearings on the Alcohol and Drug Abuse Administration and Mental Hygiene Administration. 1pm in room Amoss, Senate Office Building.
• Public Safety, Transportation, and Environment Subcommittee meets to discuss the Department of Planning, the Maryland Energy Administration, the Public Service Commission, and the Office of People's Counsel. 1pm in room Schweinhaut, Senate Office Building.

Friday, February 8th

• House Appropriations Committee holds budget hearings on the Governor"s Office for Children and the Inter-agency Fund, and public debt. 1pm in room 120, House Office Building.
• Senate Budget and Taxation Committee subcommittees hold budget hearings:
• Senate Education, Business, and Administration Subcommittee discusses aid to community colleges, Baltimore City Community College, and the State Lottery and Gaming Control Agency. 1pm in room 3 West, Senate Office building.
• Senate Health and Human Services Subcommittee discusses Boards, Commissions and Offices, and the Military Department.1pm in room Amoss, Senate Office Building.
• Senate Public Safety, Transportation, and Environment Subcommittee holds a hearing on the Maryland Department of Transportation. 1pm in room Schweinhaut, Senate Office Building.

The Week Ahead

Last week we blogged about this year's fiscal briefing and Maryland's structural deficit. In the last two weeks Neil Bergsman was interviewed about the proposed budget and transportation funding.

Monday, January 28th

• Education and Economic Development Subcommittee of the House Appropriations Committee and the Education, Business, and Administration Subcommittee of the Senate Budget and Taxation Committee hold a joint policy briefing on higher education. 1pm in room 3 West, Senate Office Building, Annapolis.
• Public Safety, Transportation, and Environment Subcommittee of the Senate Budget and Taxation Committee receive a briefing on the implications of the FY 2014 budget on the Chesapeake Bay. 2pm in Schweinhaut, Senate Office Building, Annapolis.
• Maryland CASH Campaign and the Maryland Consumer Rights Coalition host their third annual Consumer Caucus Reception. RSVP to Robin McKinney at robin@mdcash.org, or call 443-692-9422. 6-8pm at The Maryland Inn, 16 Church Circle, Annapolis. 

Tuesday, January 29th

• Senate Budget and Taxation Committee holds hearings on the Maryland Emergency Medical System Operations Fund, State Retirement Agency, and Maryland Supplemental Retirement Plans. 1pm in room 3 West, Senate Office Building, Annapolis.
• Capital Budget Subcommittee of the Senate Budget and Taxation Committee is briefed on the capital budget. 4pm in room 3 West, Senate Office Building, Annapolis.
  

Wednesday, January 30th

• House Appropriations Committee subcommittees hold a variety of hearings:
• Education and Economic Development Subcommittee meets to discuss higher education. 2pm in room 120, House Office Building, Annapolis.
• Health and Human Resources Subcommittee is briefed on the budget for the Department of Human Resources and also by the Office of Legislative Audits. 2pm in room 150, House Office Building, Annapolis.
• Public Safety and Administration Subcommittee is briefed on the Office of the Attorney General. 2pm in room 145, House Office Building, Annapolis.
• Senate Budget and Taxation Committee holds a hearing at 3pm on Senate Bill (SB) 34, which would reduce the corporate income tax from 8.25 percent to 6 percent. MBTPI will submit testimony on this bill, which we will post on our website Wednesday under Advocacy>2013 Session.
• Bureau of Labor Statistics releases metropolitan-level employment figures.

Thursday, January 31st

• House Appropriations Committee subcommittees hold a variety of hearings:
• Education and Economic Development Subcommittee holds briefings on the Maryland School for the Deaf, the Interagency Committee on School Construction, the Department of Business and Economic Development, and the Maryland Economic Development Corporation (MEDCO). 1pm in room 145, House Office Building, Annapolis.
• House Health and Human Resources Subcommittee holds briefings on  Public Health Administration and the Office of Health Care Quality. 1pm in room 150, House Office Building, Annapolis.
• House Public Safety and Administration Subcommittee holds briefings on the State Retirement Agency, Maryland Supplemental Retirement Plans, the Comptroller of Maryland, and the Department of Public Safety and Correctional Services (DPSCS). 1pm in room 120, House Office Building, Annapolis.
• Senate Health and Human Services Subcommittee holds briefings on social services and the Secretary of State. 1pm in Amoss, Senate Office Building, Annapolis.
• Working Matters coalition holds a rally to announce the official filing of the Earned Sick and Safe Time Act, a bill to allow workers to earn a limited number of annual paid sick days from their employer. MBTPI has signed on in support of the Act because everyone gets sick and everyone deserves the opportunity to recover without risking their economic security. See our blog Tuesday for more information. RSVP to Melissa Broome at melissa@jotf.org, or (410) 236-6079. 11am in the East Wing Conference Room, Senate Office Building, Annapolis, MD.

Friday, February 1st

• House Appropriations Committee holds hearings on the Maryland Emergency Medical System Operations Fund and Maryland Department of Transportation. 1pm in room 120, House Office Building, Annapolis.
• Senate Budget and Taxation Committee subcommittees hold several hearings:
• Education, Business, and Administration Subcommittee discusses higher education. 1pm in room 3 West, Senate Office Building, Annapolis.
• Health and Human Services Subcommittee holds hearings on Public Health Administration and the Office of Health Care Quality. 1pm in Amoss, Senate Office Building, Annapolis.
• Public Safety, Transportation, and Environment Subcommittee is briefed on the Judiciary and DPSCS. 1pm in Schweinhaut, Senate Office Building, Annapolis.
• Bureau of Labor Statistics releases national employment figures for January. The U.S. unemployment rate was 7.8 percent in December as employment and labor force participation both rose.

The last big bad budget wolf - the structural deficit

Maryland's legislature is just about set to begin its consideration of the state budget for the upcoming fiscal year. And, it could be much less exciting that in years. In previous blog posts, we pointed out that after solving six large, consecutive budget shortfalls, projections for the upcoming budget were in balance.

When Governor O'Malley unveiled his proposed budget on January 16, there were no big surprises. The budget is balanced without any large tax increases or extraordinary budget cuts (though there are many budget cuts of the "routine" variety).

The budget season though, still has some suspense. It's like the story of Little Red Riding Hood. It should be an easy task to deliver a basket of goodies through the woods to Grandmother's house.  However, there are big bad wolves lurking in the woods, and they could cause trouble for Little Red.

In the case of Maryland's budget, there are three big bad wolves we are worried about. In a previous post, we discussed big bad wolf number one: the still-unresolved federal fiscal cliff. If Congress deadlocks on a settlement of the federal government's finances - or if the resolution involves precipitous spending cuts - the fiscal and economic impacts could devastate Maryland's revenues and budget.

We also discussed the state's impending funding shortage in dedicated funding for transportation. If the legislature wants to provide funds for future road and transit projects, but does not want to raise taxes on gasoline (the primary traditional source of transportation funds), it may turn to the sales tax or another traditional general state revenue. This could "crowd out" funding for local schools, colleges, health programs, and other priorities in the state budget.That was the second big bad wolf.



Sources:DLS, DBM and MBTPI calculations

That brings us to the final wolf: the "structural deficit." A structural deficit is the situation when the amount of revenue during the year does not cover the ongoing expenditures during the year. The state can have both a positive year end balance and a structural deficit if it is using accumulated balances from previous years to get through the current year. That situation meets the constitutional requirement to balance the budget, but it is not sustainable into the future.

In developing this budget, the governor faced a structural deficit in the neighborhood of  $400 million. The governor's proposed budget reduces this to less that $200 million through a combination of budget cuts and by shifting state transfer tax revenues to the general fund for a period of five years. (These transfer tax revenues were dedicated to the purchase of open space and recreational land and facilities).

Some of the larger cuts include:
-$73 million in state savings from additional federal Medicaid funding through the Affordable Care Act.
-$63 million from placing a ceiling of 2.5 percent on rate increases for health and human services providers.
-$32 million in cost savings in the employee health insurance program.


These reductions should be enough to manage the structural deficit. $200 million is well within the ability of the state to make normal year-to-year budgetary adjustment. Simply put, a structural deficit in this range is essentially the same as a structurally-balanced budget.

The budget cuts incorporated by the governor in the proposed budget will require detained examination as the legislature and legislative staff  conduct their analysis and hearings on each agency's budget. Some of the cuts may have severe effects on vulnerable Maryland or might have unintended effects that will increase future costs. If some mistakes of this type have slipped through, the governor should be prepared to restore funding in a supplemental budget.

With the effects of an economic recovery (even a weak, uneven one), sound financial management, and a bit of luck, Maryland may have avoided for now the big bad wolf of the structural deficit.

The Week Ahead

Last week Neil continued his series on the threats to Maryland's budget with blog posts on the federal fiscal cliff and the state transportation budget. Look for the final installation of this series on Wednesday. We also blogged highlights from the governor's budget.

Today we are releasing our annual Instant Analysis of the Proposed Budget (pdf). This four page brief provides an overview of the dimensions and features of Governor O'Malley's proposed fiscal year 2014 budget, as well as basic information about the largest components of the budget and a summary of next steps.  The first item on the agenda is today's fiscal briefing (see below).

Monday, January 21st

• House Appropriations and Senate Budget and Taxation committees come together for the annual fiscal briefing. 3pm in the Joint Hearing Room, Department of Legislative Services (DLS), Annapolis.

Tuesday, January 22nd

• Capital Budget Subcommittee of the House Appropriations Committee goes on a site visit to the Baltimore Pre-release Unit facility. 11am at 926 Greenmount Avenue, Baltimore.
• House Ways and Means Committee receives a fiscal briefing from DLS at 11am.
• House Health and Government Operations Committee holds several briefings, including one on the Johns Hopkins Community Health Partnership Program, starting at 1pm.
• Senate Budget and Taxation and Finance committees holds several joint briefings on health care related topics, including the implementation of the Affordable Care Act. 1pm in 3 West, Senate Office Building.
• Senate Education, Health and Environmental Affairs Committee holds a briefing on the Marcellus Shale, with testimony from state agencies, industry, and environmentalists, starting at 1:20pm.

Wednesday, January 23rd

• Board of Public Works meets. 10am in the Governor's Reception Room, State House, Annapolis.
• House Economic Matters Committee holds a briefing on various economic development programs at 10:30am or immediately following session.
• House Environmental Matters Committee is updated on implementation of the Sustainable Growth and Agricultural Preservation Act of 2012 at 11am.
• House Ways and Means Committee holds hearings on several bills related to the income tax, starting at 11am.
• Senate Education, Health and Environmental Affairs Committee is updated on implementation of the Sustainable Growth and Agricultural Preservation Act of 2012 at 1pm.
• Senate Finance Committee holds several hearings, including a fiscal briefing from DLS at 1:45pm.
• Senate Judicial Proceedings Committee holds several hearings, including a briefing by the Department of Juvenile Services, starting at 1pm.
• Maryland Alliance for the Poor (MAP) - a coalition that includes MBTPI - briefs House Appropriations Committee on poverty in Maryland at 1:30pm.
• MAP briefs the Senate Budget and Taxation Committee at 3:30pm.

Thursday, January 24th

• House Environmental Matters Committee holds briefings on housing issues, including foreclosures and senior housing, starting at 11am.
• House Ways and Means Committee receives a briefing on tax issues from the Comptroller's office at 11am.
• Education and Economic Development Subcommittee of the House Appropriations Committee holds hearings on the Maryland Stadium Authority, Maryland Public Broadcasting Commission, and College Savings Plans of Maryland. 1pm in room 145, House Office Building, Annapolis.
• Health and Human Resources Subcommittee of the House Appropriations Committee holds a hearing on the Department of Health and Mental Hygiene. 1pm in room 150, House Office Building, Annapolis.
• Transportation and the Environment Subcommittee of the House Appropriations Committee holds a hearing on the Chesapeake Bay. 1pm in room 120, House Office Building, Annapolis.
• Health and Human Services Subcommittee of the Senate Budget and Taxation Committee holds a hearing on the Department of Human Resources. 1pm in Amoss, Senate Office Building, Annapolis.
• Public Safety, Transportation, and Environment Subcommittee of the Senate Budget and Taxation Committee holds a hearing on the Department of Juvenile Services. 1pm in Schweinhaut, Senate Office Building, Annapolis.

Friday, January 25th

• House Appropriations Committee holds briefings on the Department of Juvenile Services and the capital budget. 1pm in room 120, House Office Building, Annapolis.
• Education, Business, and Administration Subcommittee of the Senate Budget and Taxation Committee holds briefings on the Maryland Stadium Authority, the Maryland Public Broadcasting Commission, and the College Savings Plans of Maryland. 1pm in 3 West, Senate Office Building, Annapolis.
• Senate Health and Human Services Subcommittee holds a briefing on the Department of Health and Mental Hygiene. 1pm in Amoss, Senate Office Building, Annapolis.
• Senate Public Safety, Transportation, and Environment Subcommittee holds a hearing on the Chesapeake Bay. 1pm in Schweinhaut, Senate Office Building, Annapolis.

Little Red Riding Hood and the 3 Big Bad Wolves

In our earlier post, we showed that Maryland is facing its easiest budget season in years. Of course, the state is not exactly awash in cash. We pointed out that good planning and management of the state's finances combined with an economic recovery (albeit a weak one) and some good luck have combined so that the state's projected revenues are sufficient to cover projected expenses through June 30, 2014 - the budget year that the current legislature will act on.

Image: wpclipart.com

The situation reminds me of Little Red Riding Hood carrying her basket to grandmother's house. It should be easy. There will probably be no problem at all.

However, there are some risks. In particular, there are three Big Bad Wolves lurking who could endanger the budget before the legislature delivers the basket in April.

1. The first wolf is called Cliff. Fiscal Cliff. It's true that Congress acted early in the year to avert the worst effects of large automatic tax increases on everyone. However, Congress deferred decisions related to automatic spending cuts and the federal debt limit. Deadlocks on these issues, or unsound resolutions of them, could result in serious losses of federal revenue for Maryland and maybe some negative shocks to the state economy, which would also affect the budget.
2. The second wolf is the hungry Transportation Trust Fund. Maryland needs more funding for roads, transit and other transportation improvements. The dedicated transportation fund is running low - mostly because it's major source - the gas tax - has not been adjusted in 20 years. However, quite a few legislators are understandably skittish about raising gas taxes. The concern is that in seeking a way to feed the transportation wolf without touching the gas tax, the legislature will divert general funds still under stress and still needed for education, healthcare,  public safety, environmental protection, and other important priorities.
3. The third wolf is a familiar one: the state's "structural deficit." Even though the budget is just about balanced through the next 18 months, the state is still taking in less that it's paying out over the course of the year. It can balance its budget for the year by using cash from revenue surpluses from previous years. The size of the structural deficit is around $400 million - just one fifth the size it was at the height of the recession. However, Maryland needs to continue to chip away at the remaining structural imbalance. The legislature's Spending Affordability Committee recommended making at least $200 million of progress towards eliminating the structural deficit in fiscal year 2014. The concern is that to find budget cuts to meet this goal, the state might do critical damage to education, healthcare, and the social safety net for vulnerable Marylanders who are still not "out of the woods" as the economy continues its slow, fitful recovery.

Over the next few days, we will look in a bit more detail at each of these big bad wolves, and suggest ways that Little Red should avoid them.

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.