Fiscal Briefing: Structural deficit down, budget provides some "fiscal responsability"

The legislative staff's annual Fiscal Briefing usually contrasts with the Governor's press conference on the budget.

The Governor emphasizes broad themes themes and trumpets a few initiatives. It's more of a sales pitch than an information session.

The legislative staff provides analysis and criticism. It usually identifies weaknesses in the Governor's budget proposal. Often, it provides the basis for the legislature's strategy in amending the Governor's budget.

Dep't of Legislative Services

This year's legislative fiscal briefing was unusually positive about the Governor's budget proposal. You can find the 80-page briefing document here. Among the features that legislative staffers seemed to like:

• The budget"nearly resolves" Maryland's longstanding "structural deficit," cutting it from over $1.7 billion five years ago to only $155 million. (The "structural deficit" is the amount by which ongoing revenues received during the year fall short of ongoing expenditures).
• The budget leaves a cash balance of over $1.2 billion - including the $236 million year-end balance in the general fund plus the $921-year-end balance on the "Rainy Day Fund." The legislature's chief policy analyst Warren Deschenaux said that this large balance is "desirable" given uncertainties about federal funding as Congress continues to wrangle over the federal budget.
• The budget includes several modest initiatives, such as $25 million for school security improvements and $1.8 million for school breakfasts. We'll examine some of these in future blog posts.
• The budget "fully funds" existing formulas for a range of local and nonprofit functions, like schools, police departments, community college, and arts organizations. (In most cases, though, the legislature has adjusted these formulas since the onset of the Great recession, so "full funding" now may be less than it would have been back in 2007.)
•  The budget includes $94 million to reconcile past-year charges against federal grants of other special funds in which turned out to be overestimates. Deschenaux commented that he has "never seen so much fiscal responsibility in one lump."

All this  is made possible by renewed revenue growth (though its still rather slow growth by historic standards), a pause in the increase in state funds for Medicaid (thanks to stabilizing caseloads and federal funds from the Affordable Care Act), and some budgetary maneuvering.

There are still some "gimmicky" moves proposed in this budget. The budget uses nearly $90 million in state transfer tax revenue to support the budget. This funding would ordinarily be dedicated to acquiring open space and environmental land. The governor proposes to issue bonds to fund the open space acquisition for the next five years. Also, payments to a couple of reserve funds totaling $100 million would be deferred or not made at all. One related to local government income tax would be eliminated. Another one, related to the Inter-County Connector road project, would be delayed until 2020. These actions would account for most of the year-end general fund balance.

There are some cuts in this budget, and well be looking at them as the legislature begins holding budget hearings in the coming days and weeks.

Overall, however, legislative staff gave the Governor a positive review on his budget proposal. We are sure that the legislature will find ways to improve the budget. This year, it may be more like fine tuning than like a complete make-over.

What happened to Maryland's budget deficit?

For the first time in six years, Maryland enters a legislative session without an immediate budget crisis. The latest projections show that Maryland's revenues will be sufficient to cover "baseline" expenditures, through the next fiscal year: that is until June 30, 2014.

Over the past several years at this point in the budget cycle, Maryland faced projected shortfalls in the one to two billion dollar range. The shortfalls were resolved each year through a combination of budget cuts, transfers from special funds to the general funds, and revenue increases (including taxes, fees, and expanded gambling).

So why is this year different?

Part of the difference is the continuing economic recovery. The recovery is weak and sporadic. Maryland has not yet recovered all of the jobs its lost in the recession. Nevertheless, the recovery has been sufficient to halt the annual decline of state revenues and also to generate some modest growth.

Another part of what makes this year different is good luck. For example, the dynamics of the national credit market have helped the state receive "premium" payments from investors when it sells bonds, and this reduces the growth in payments for annual debt service.

Let's give credit where credit is due: the improved outlook for Maryland's general fund is also due to good planning and management on the part of state officials. In 2010 the legislature set a goal of resolving the state's structural deficit over three years (the "structural deficit" is the ongoing gap between revenues received and expenditures incurred, excluding one-time and temporary effects).

The Governor signed on to the legislature's plan. The state made some difficult decisions to hold back expenditure growth and raise revenues, including raising taxes on upper-income households, alcohol, and cigarettes. And it worked.

In a week, the Governor will submit his proposed budget for the legislature's consideration. We expect it to have some significant cuts and some modest initiatives, but nothing too dramatic.

A word of warning though: there are three threats that could mess up Maryland's finances before the legislative session concludes in April.

• Congress' next actions to reduce the federal deficit.
• Maryland's response to the need to fund its transportation program.
• The remaining "structural deficit."

We'll discuss each of these threats in upcoming blogs.

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.