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.

Spending Affordability Committee recommends a path to structural balance

Last week, the Maryland General Assembly’s Spending Affordability Committee issued its final report.  The committee’s major function is to issue a recommendation for how much the budget for the coming year should be allowed to increase. The recommendation is not binding – either on the governor or the legislature.

However, the legislature generally uses the spending affordability recommendation as a policy target. If the governor’s proposed budget exceeds the recommendation, the legislature will usually cut it back.

This year, the committee’s major recommendation is that the 2013 budget should “reduce the estimated structural deficit for that year by at least 50%.”

The “structural deficit” is a measure of the state’s fiscal sustainability.  Every year the state is required to balance its budget. During the recession and its aftermath, it has  done so by depending on temporary measures to stay in the black, such as drawing down funds that have built up in the state’s accounts. This can get us through a rough year or two or four, but it means we always have a new budget problem the next year.

The committee estimates the structural deficit at $1.1 billion, so the recommendation requires $550 million in ongoing budget balancing actions –revenue increases or more budget cuts. By cutting the structural deficit in half, the committee aims to restore the state’s financial health without abrupt disruptions to education, health care, and other state-funded functions.The recommendation is sensible and responsible and the governor should seek to meet it.

However, in doing so, the Governor should use a balanced approach. Maryland has already cut $2 billion from annual spending for education, health care, transportation, public safety, and other important services since 2007.

Source: Spending Affordability Committee, October 2011

Further cuts are going to throw more Marylanders out of work; damage the services we need now from our state counties and schools; and withdraw the investments we need to secure Maryland’s prosperous future. It’s time to turn to some reasonable and fair revenue options.

A Field Guide to Maryland Surpluses and Deficits

Following Comptroller Franchot's recent announcement of the state's fiscal year close-out, there are lots of numbers flying around purporting to be a surplus or a deficit. There's a billion-dollar surplus, a billion-dollar deficit, and several numbers in between.

Which one is right?

Well ... all of them.

Each of these figures can be called a “surplus” or “shortfall.” One of the reasons discussions about the state’s budget become confusing and frustrating is that different people use different measures of the “surplus” or “shortfall” or “deficit,” often depending on the message they want to convey.

$990 million – this is the amount of the general fund balance on June 30, 2011, the end of the previous fiscal year. It is like the state’s checking account balance on that day. It reflects a point in time in the past, and so it is a certain number.

$314 million – this is the amount the 2011 general fund revenues exceeded the estimate in the final budget. The actual collections were $13,537 million. The latest official estimate was $13,223 million. It also measures past revenues and is not subject to change.

$344 million – this is the total amount by which the state’s general fund balance exceeded the amount previously budgeted on June 30, 2011. In addition to the $314 million revenue surplus, it includes $24 million in final expenditures below the budgeted amounts and $6 million in additional transfers from other funds to the general fund.

$400 million – this is the amount that would be the general fund balance on June 30, 2012 if nothing else changes. This gives us a picture of the state’s projected fiscal path. In particular, it shows that the state plans to spend down part of its account balance during the current year. However, this figure will change several times over the upcoming months as we get new revenue estimates and new information on expenditures.

$1 billion - this is the estimated shortfall for the 2013 fiscal year, the budget the governor must present to the legislature next January. This number will also change over the upcoming months. Since it’s based on many assumptions about future finances and policy decisions you may see this shortfall estimated as anywhere from $700 million to $1.1 billion.

Maryland’s revenue surplus is good news. See our complete report here. But, the surplus does not come close to solving Maryland’s long-run revenue shortfall. It is only a thin cushion.

Looking into the future, revenues are not adequate to meet the current  service levels for education, health care, public safety and the needs of a still-fragile state economy. Many risks are in play, from the state of the national economy to the ill effects of federal budget actions.

 Maryland needs to be ready to respond with a balanced approach that includes sensible revenue measures.

Virginia and Maryland: Similar challenges, different messages

Is Virginia awash in money while Maryland is awash in red ink??

No.

The two states’ financial situations are remarkably similar. Both states had significant balances as they closed their fiscal years last June 30. Both states have balanced budgets in place through June 30, 2012.

However, both states used an array of temporary measures to achieve that balance. Their ongoing revenues do not cover the needs for public schools, colleges and universities, health programs, public safety operations, and the other services state governments provide.

As a result, both governors will face new revenue shortfalls when they write their proposed budgets next winter.

Virginia’s governor Bob McDonnell stated: “…We have ended the 2011 Fiscal Year with a surplus of over half a billion dollars. This is the second year in a row that we have posted a budget surplus.” He was bragging about the Commonwealth’s   unanticipated revenue plus unspent appropriations at a single point in time in the past.

Maryland has not yet announced its fiscal year-end surplus. However the state anticipated a $647 million balance when it approved this year’s budget in April. Since then, Maryland’s Comptroller has announced that revenues for the year were running $300 million over the previous official estimate. So the fiscal year-end balance is going to be about $950 million in surplus. In addition, Virginia has depleted most of its “Rainy Day” reserve fund, while Maryland’s still holds 5% of annual revenues.

Two days after McDonnell’s announcement, Maryland’s Governor Martin O’Malley told a convention of county officials, “While we do anticipate revenues to exceed what had been originally been forecast for FY12 and FY13, our projected budget fall for 2013 is approximately $1 billion.”

O’Malley is worried about the state’s financial stability into the future. (The improved revenue attainment might reduce Maryland’s shortfall, but there are also unanticipated costs in programs like Medical assistance and prison operations. So the best guess for Maryland’s shortfall remains around $1 billion.) This slideshow summarizes Maryland’s budget position.

Although Governor McDonnell isn’t talking about it, Virginia faces an analogous problem. Through fiscal 2013, the Old Dominion’s revenues are projected to fall $500 million short of funding even current operations.

This report from Virginia’s Commonwealth Institute documents the revenue shortfall looming in Richmond.

And current funding levels reflect four years of constant budget-cutting. In both states, services from schools, to roads, to medical coverage are already inadequate.

Both states have money in the bank today, but face serious shortfalls in the future. Maryland’s projected shortfall is larger, but so is its current surplus. The overall sizes of the two states’ budgets are roughly comparable: $15 billion in Virginia and $13 billion in Maryland.

Maryland Governor O’Malley has signaled that he will propose a “balanced approach” that includes spending cuts and revenue measures. That’s the proper course. If we continue to balance the budget with cuts alone, we’ll sacrifice the investments we have made in a skilled workforce, a great transportation system, and a high quality of life. Those are the things that give Maryland its competitive edge, and will sustain our ability to compete successfully in the future.