Close-out - revenues slightly under estimate. Maryland ends year with $1.2 billion in the bank.

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 Comptroller Peter Franchot today released the results of the state’s close-out of fiscal year 2013. Fiscal year 2013 began July 1, 2012 and ended June 30, 2013.

The state ended the fiscal year with $510 million in the general fund and $700 million in the “Rainy Day” reserve fund, for a combined balance of $1.2 billion.

General fund revenues fell $62.4 million short of official estimates, growing 4.5 percent over fiscal year 2012. General fund revenues for fiscal year 2013 totaled $14.9 billion.

Favorable variances in expenditures and transfers offset $15.4 million of this loss, so general funds overall finished $46.9 million below the previous estimate.

The Bureau of Revenue Estimates cited poor growth in wages as a cause of the reduction. However, most of the shortfall in revenue was actually in the corporation income tax. Individual income taxes actually finished very slightly above the estimate. Losses in withholding were offset by gains in final payments (or refunds) of 2012 taxes.

The Board of Revenue Estimates will meet on September 17 to release revised revenue estimates for fiscal year 2014 and the preliminary estimate for 2015. The $62.4 million shortfall in fiscal 2013 is less that one half of one percent of general fund revenues. By itself, it does not materially affect the state’s financial picture.

 

Reserves are adequate enough so that mid-year adjustments are unlikely to be needed in the current fiscal year 2014. If the Board of Revenue Estimates determines that federal budget cuts and the state’s overall prospects for income growth will seriously harm future revenue collections, it could make it more difficult for the state to meet current service commitments in fiscal 2015.

A Glossary of Surpluses and Deficits
+$1.2 billion	FY 2013 total balance	The state’s total available reserves as of June 30, 2013, including $511 million in general funds and $700 million in the “Rainy Day” reserve fund
+$511 million	FY 2013 general fund balance	The amount in the state general fund on June 30, 2013
+$247 million	2013 unassigned funds balance	The amount that would be left in the general fund on June 30, 2014 if there were no changes to the FY 2014 enacted budget
-$46.9 million	FY 2013 general fund actual below estimate	The amount by which the fiscal year 2013 ending general fund balance was below the previous official estimate. The $62.4 million shortfall in revenue was partially offset by $14 million in below-estimated expenditures and $1.4 million in transfers in excess of the previous estimate
-$62.4 million	FY 2013 revenue shortfall	The amount by which actual revenues for fiscal year 2013 fell short of the official estimate

Happy New Year - A Look Back at Fiscal 2013

At midnight Sunday, June 30, Maryland will conclude fiscal year 2013 and start 2014.

The old fiscal year, 2013, was the budget that was rescued from a legislative train wreck in the 2012 legislative session.

Maryland was formulating that budget in fall and winter of 2011. The state faced a looming, billion-dollar shortfall. Expenditure levels had already been cut $1.6 billion below the cost of “current services” as they existed before the Great Recession. The $4 billion in assistance from the federal Recovery Act was drying up.

After a “steady diet of cuts” for the previous four years, Governor O’Malley proposed a “balanced approach” to balancing the budget. It included revenues from a modest income tax increase, a multi-year shift of teacher pension cost from state to local budgets, and significant restraints on expenditures - Especially in Medicaid and state agency operations.

The legislature agreed to a budget plan very similar to the governors. They agreed to and amended the governor’s pension reform legislation, that transferred teacher pension costs to local governments more gradually.  On the final day of the session, Senators and Delegates were rushing to agree on a compromise revenue package. They did reach an agreement of a $300 million income tax package that raised tax rates slightly on the 20 percent of households with the highest incomes.

But, the bills to transfer the pension costs, raise tax rates, and transfer some $150 million in special funds did not come to a vote before the end of the 90-day session. Instead, a $500 million package of cuts, known colloquially as the “Doomsday Budget,” was slated to go into effect. Education programs would have taken the brunt of these cuts, but other functions from health care to business development would also have been slashed.

Here is where Maryland showed more maturity than our national government. Maryland’s political leaders did not allow the Doomsday Budget to stand. They met in special session before the new fiscal year began, and they took the tough votes to approve revenue plans and the other legislation needed to balance the budget.

The fiscal year we are completing was based on a balanced approach to balancing the budget. 

Even though the regular legislative session ended in a deadlock, leaders came together to implement a responsible compromise. Maryland has been able to maintain our funding for education, health care, and other investments in our people, families and communities better than states that have relied exclusively on budget cutting. 

In addition, the compromise budget approved in the 2012 special session set the stage for much less dramatic budget deliberations in the 2013 legislative session. Maryland’s finances remain challenging, but the gap between revenues and the cost of current services is considerably narrower.

Next week, we’ll review the status of the new fiscal year 2014 budget just starting. 

In a few weeks (likely early September), Comptroller Franchot will report on the fiscal year close-out, and we’ll get our first chance to assess Maryland’s financial posture going into fiscal 2015.

So, have a happy fiscal New Year. And however you choose to celebrate, please do it safely.

Revenue exceeds estimates

Today Maryland Comptroller Peter Franchot announced that revenues for state fiscal year 2012 - which ended June 30 - exceeded the official estimates by $230 million.


This is moderately good news for several reasons:

1. It demonstrates that the economic recovery - weak as it is - is beginning to improve household and corporate income.
2. It reduces the state's revenue shortfall for the upcoming year. 

The Comptroller issued a statement that emphasizes that the economy remains precarious and the recovery is adding jobs and revenue much more slowly than we would like. He is right. Still, the good revenue news suggests a glimmer of light at the end of the tunnel.

There are still two big risks to the economy (and therefore to Maryland's budget). Congress might enact abrupt federal budget cuts, which could send the national economy into a new recession. Or the European economy could deteriorate to the extent that the US economy suffers.

On the plus side, Maryland's state budget is balanced through June 2013. $672 million remains in the state's "Rainy Day" reserve fund. The three bond rating agencies have again upheld Maryland's exceptional Triple-A credit rating.

The budget will remain difficult, but as a result of the state's balanced approach to managing the budget and some level of economic recovery, there is hope for the future.

We will publish MBTPI's complete analysis of the fiscal year close-out shortly.

Maryland bucking the trend

Nationally, many states are pursuing a strategy of public disinvestment in order for conservative politicians to demonstrate their opposition to taxes. Some states, like Michigan, New Jersey, Indiana, and Tennessee, are enacting rash and irresponsible tax cuts.    Other states are attempting to go much farther

Some state legislators are proposing to eliminate whole taxes, cutting state revenues by 30 or 40 or 50 percent. Georgia, Kansas and Oklahoma have considered proposals to abolish their state income taxes. North Dakota voters defeated a proposal to eliminate their property taxes only after voters rejected it in referendum.

Governing Magazine’s Penelope Lemov recently interviewed the (progressive) Center on Budget and Policy Priorities’ Nick Johnson and the (conservative) Tax Foundation’s Joe Henchman about this trend. (Disclosure: the Center on Budget and Policy priorities is a major national coalition partner with the Maryland Budget and Tax Policy Institute).

Johnson and Henchman both pointed out that the cuts needed to offset such large revenue reductions can be very harmful to a state.

Henchman: “Depending on what you cut, you will have an economic effect. If you cut education, that might make your state less competitive. There are trade-offs.”

Johnson: “A state could end up with much higher sales taxes and excise taxes, much higher local taxes and larger class sizes, fewer teachers, libraries and cops on the street, and less availability of health care. It's magical economic thinking -- this idea that there's a free lunch to be had.”

So, there’s broad agreement that our taxes do pay for something valuable.

In contrast to the national tax-cut fever, Maryland’s legislature used a balanced approach to balancing the budget this year, including fair and moderate tax increases. It preserved funding for the functions important to our state’s economy and quality of life. Our elected representatives did the obvious and responsible thing.  Yet in doing so, they were bucking the national trend.

 At the same time, we have further evidence to disprove one of the common bogeyman of the anti-tax brigade.  Jeffrey Thompson at UMASS’ Political Economy Research Institute has compiled a very thorough, balanced and readable survey of the research on the economic effects of state taxes on high income taxpayers. The result? “Modest tax increases on high-income households are unlikely to make substantial changes in their work effort or entrepreneurship or make them more likely to leave the state.” There may be more tax-sheltering behavior, particularly among the top 1/10 of 1 percent.

Professor Thompson concludes “The benefits of sustaining appropriate levels of funding on K-12 and public higher education, public safety, and transportation should be weighed against these consequences – as opposed to unsubstantiated fears that the rich will flee a state en masse or shut down their businesses.”

In Maryland, our leaders made these responsible choices. We need to maintain our support for education and our other shared public assets so we have a strong future with growing prosperity that’s broadly shared.

Responsible compromise stops doomsday clock

The Maryland General Assembly completed its work on the budget with 45 days remaining before “doomsday budget” cuts go into effect.   The legislature passed the (pre-negotiated) administration package without amendment. We’ll be reporting the details in the coming days … in the mean time, you can check out the legislature’s staff analysis here, and the administration’s testimony on the package (which provides a good, factual background and description), here.

On the last day of the regular legislative session, the Maryland legislature fell down on the job, giving the state’s governmental leaders black eyes.

In the special session, they did much to redeem themselves.

1.  They acted in a timely manner, so as not to require local governments, public schools, nonprofit service providers, scholarship recipients, businesses and many other affected parties to put contingency plans into effect.
2. They compromised. The administration package was not anyone’s first choice. It has been criticized from the left, the right and the center. But it is a practical plan that avoids disastrous cuts. The “doomsday budget” would have harmed families and communities today and Maryland’s prosperity in coming years.
3. They acted responsibly. The revenue plan is moderate and progressive. It affects individual tax filers with 6-figure incomes and households with incomes over $150,000. It increases taxes on these high earners by less than 1/3 of one percent. You can find Citizens for Tax Justice’s blog item here and the Institute on Taxation and Economic Policy’s analysis here.

The compromise plan relies on a shift of part of teacher retirement costs to local budgets, but it’s gradual – phased in over four years, and there are offsets in the form of local revenue and restorations of some state aid payments for police and public health.

In addition, the legislature’s action improves the state’s bottom line, reducing the chance of disruptive mid-year cuts this year, and reducing the revenue shortfall the governor and legislature will face next year.Responsible compromise. It’s a great American value. Maybe Annapolis can be an example for Washington.