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

wpclipart.com

 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

Conference committee resolves budget differences

A conference committee of delegates and senators has resolved the differences between the two houses’ versions of the budget, just four days prior to the legislative session’s scheduled conclusion.

Even though the two plans were not very different, the legislature allowed the constitutional target date of April 1 to slip by before concluding the budget process. Legislative leaders may have been awaiting the resolution of other legislation (such as the firearm safety act) and a supplemental budget proposal from the governor before finalizing their budget action.

The final budget left intact 98.8 percent of the funding proposed by Governor O’Malley in January.

Key Conference Committee decisions

• One of the major differences between the House and Senate budget plans related to pension contributions and fund balances. The 2011 pension reform law called for the state to make an extra contribution of $300 million to the teachers’ and employees’ pension funds next year.  The Senate cut this to $200 million, and added the savings to the general fund balance, so it could be available if needed to absorb the effects of federal cutbacks.
  

The conference committee accepted the cut to the extra pension contribution, but placed it in the “Dedicated Purpose Account” of the state reserve fund. This way, it could be used by the governor (subject to review by legislative committees) without the need for action by the whole legislature. By using this mechanism, the governor could replace funding for critical services without either waiting for the 2014 legislative session or calling a special session.

Any unused amount would be forwarded to the pension fund after the end of this calendar year.

Counting this addition to the contingent fund  the final amount of balances ($1.16 billion) is close to the amount recommended by the Senate.

• The conference committee accepted most of the items in Governor O’Malley’s proposed supplemental budget, with these exceptions:

The conference committee rejected $432,000 in general funds to cover part of emergency management and National Guard expenditures for the derecho and Hurricane Sandy. The conference committee suggested that the agencies be allocated the funds from the state’s Catastrophic Event Fund. That fund has $1 million available.

The conference committee directed that $300,000 included by the governor for the Towson University men’s baseball team should instead be used as matching funds for an intercollegiate athletics donation incentive program. The program would provide matching funds for Division I schools in the University of Maryland System to support sports to maintain compliance with Title IX requirements.

Next steps

Update: The House and Senate have both approved the conference committee report and passed the budget bill in final form. The budget bill becomes law immediately upon passage by the legislature and does not require the Governor’s signature.

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.

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.