Happy New Year 2014!

On Monday, July 1 Maryland began its fiscal year 2014. Last week, we reviewed the fiscal year 2013 budget that we rang out with the old year at midnight on June 30. The new budget totals $36.7 billion. That’s 3% higher than last year. After adjusting for inflation and population growth, the budget grows only 0.5 percent . On an inflation-adjusted, per person basis, this budget is below the budget in place three years ago in fiscal 2011.

Most of the money is stated for education, healthcare, transportation and public safety. These four slices make up over three-quarters of the total. Most of the budget growth over the current year will be in health and education programs.

The budget is balanced, with a surplus if over $1 billion projected to be available at the end of the year, one year from today (counting both general fund balances and the state’s “Rainy Day Fund”).

The Sequesters are Coming

Maryland should keep its budget intact, and use rainy day reserves for temporary shortfalls.

Tomorrow is D-Day for sequestration unless Congress acts to prevent it in the coming hours.

Sequestration—that scary moment when automatic, across-the-board federal budget cuts begin. Every state will be affected, but Maryland may be worse off than many.  

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While the effect of these cuts on Maryland will be very substantial, they will not all be immediate. Maryland’s state and local budgets will be affected in three ways:

1.  There will be a loss of direct federal funding for state and local programs. Some of the larger programs, like Supplemental Nutrition Assistance (“Food Stamps”) and Medicaid are excluded from the cuts. But lots of other programs in education, health care, job training, public safety, and many other areas will be cut. According to White House estimates, Maryland schools will lose over $24 million in federal funds. 800 kids in Maryland will lose Head Start program seats. Funding for child vaccinations will drop by $140,000, reaching 2,050 fewer children. Senior meal programs would lose $877,000. The Department of Legislative Services estimated the total at $117 million for the state over two fiscal years, with additional cuts hitting local governments.
2. Cuts to federal jobs and purchases will suck income out of the state’s economy. The White House estimates that civilians working for the Defense Department in Maryland will lose $354 million as they are furloughed one day per week. Other cuts to military operations will exceed $100 million. Cuts would hit other federal agencies located in Maryland: the National Institutes of Health, Social Security Administration, the National Institute of Standards and Technology, National Archives, Census Bureau, and many others. Employees of these agencies—and of Maryland businesses that sell supplies and services to them—could  all lose income.
3. These impacts will affect the state’s overall economy. As federal employees, vendors, and contractors lose income, they will have less money to spend on groceries, entertainment, furniture, and everything else. The cuts will have a “de-multiplier” effect on Maryland’s economy, reducing job and income growth in all sectors. That will cut Maryland’s yield from income and sales taxes, which combined make up the largest source of state revenue.

The net effect could be the loss of hundreds of millions of dollars, just when Maryland’s budget is finally approaching stability.

What should the state do? To repeat a popular phrase, “Keep Calm and Carry On.”

Our national leaders have fallen into a bad habit of brinkmanship. Since each side feels its leverage increases as a crisis gets closer, they wait until a deadline (or past a deadline) before they negotiate seriously. These cuts are serious and should not be acceptable. But their effect won’t be fully apparent right away. With some pressure from ordinary people and businesses, it is likely that Congress can eventually reach some sort of deal, and before the next scheduled crisis on March 27, when the current federal appropriations run out.There will be yet another scheduled crisis set for May 18, when the federal debt limit expires again.  All of these events will occur before the new state fiscal year begins July 1st. We can hope that the national financial and economic pictures are clearer by then.

Maryland has ways to address shortfalls. The Governor's proposed budget prudently leaves cash balances of more than $1.1 billion in Rainy Day Fund and general fund reserves. Part of these can be used to address federal impacts. 

The Governor and the Board of Public works have the ability to reduce appropriations when the legislature is not in session. 

Finally, the next session of the legislature will meet when the state is half-way through this budget. Since Annapolis has shown the ability to take responsible actions on financial matters, any adjustments that require changes in law can be made then.

However, Maryland should not respond to federal budget cuts with state budget cuts. Eliminating more services, more jobs, and more economic activity would make a bad situation worse.

What is critical now is for Maryland’s government, business, and nonprofit leaders and regular citizens to help convince Congress to solve the nation’s financial problems in a calm way and without wrecking the economy or harming vulnerable families.

O'Malley's budget released

Governor O'Malley released his budget today. Highlights include:

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• The budget totals $37.3 billion, a 4.3% increase.
• The significant increases are in:
• Health ($406 million - mainly federal funds for Medicaid),
• Transportation ($269 million,  but this could change markedly as the legislature considers a transportation finance package),
• K-12 Education ($183 million, all in increased aid to public school systems),
• Universities and colleges ($144 million, of which $90 million is state funding and $54 million is from the institution's own revenue sources).
• $450 million of the increase is in the appropriation  to the State Reserve Fund. The Governor is proposing increasing the "Rainy Day" account in the reserve fund from 5% (where it has remained throughout the recession and its aftermath) to 6%. This is to provide a cushion against possible federal budget cuts.
• The proposed budget does not provide any new revenue for the state's transportation fund. The legislature is expected to consider a separate transportation funding initiative this session.
• At the Governor's budget briefing, state budget Secretary Eloise Foster summarized $325 million in cuts from current services "baseline" funding levels. The cuts are concentrated in Medicaid (with some related to additional federal funding in the Affordable Care Act), and a 2.5% limit in rate increases for health and human service providers, and deferring some payments to a reserve fund for local government income tax revenues.

The General Assembly will now take up the governor's budget. Our knowledgeable readers will remember that the legislature is only allowed to cut the budget in most cases.

Stay tuned for MBTPI's more detailed analysis of the proposed FY 2014 budget in the coming weeks.

Happy (Fiscal) New Year!

July 1 starts a new fiscal year for Maryland state government. And Maryland’s finances are in pretty fair shape. Not perfect, but pretty fair.

The state begins the new fiscal year with about $320 million in its general fund (Maryland's checking account). There’s also over $700 million in the Rainy Day Fund (our savings account).

The state’s budget is balanced for the year. The estimated revenues plus the beginning fund balance more than cover the budgeted expenditures. 

These expenditures pay for local schools, college education, healthcare, the men and women who keep our communities safe. They help our communities now and strengthen Maryland’s economy for the future. To see some of the ways the state budget helps us and our neighbors, check out this blog entry at Moving Maryland Forward Network.

Although the legislature deadlocked at the end of the regular session, they returned for a special session and enacted a responsible balanced budget 45 days before the end of the fiscal year. There are many states that routinely start the fiscal year without an enacted budget in place. And then there’s Congress….

All three national credit rating agencies continue to give Maryland their top “Triple-A” ratings. These evaluations reflect the state’s economy and the characteristics of the bonds, along with Maryland’s sound financial management practices.

There are certainly challenges ahead. Next year, Maryland will face another revenue shortfall, along with a need to provide funding for transportation infrastructure. We have ongoing unmet needs in education, healthcare, services for children, job training, and other areas. So there’s more work to do.

We can meet these challenges. Governor O’Malley and the legislature have shown they can reach a responsible compromise that keeps the state’s finances on track and protects our investments in education, infrastructure and the rest. 

I promise to resume my usual gloom and doom budget talk soon enough. But for now: it’s New Years. It’s a time to recognize some of the really good things about our state budget. It's time to be hopeful about the future. Happy New Year, Maryland!