The Week Ahead

Last week we blogged about this year's fiscal briefing and Maryland's structural deficit. In the last two weeks Neil Bergsman was interviewed about the proposed budget and transportation funding.

Monday, January 28th

• Education and Economic Development Subcommittee of the House Appropriations Committee and the Education, Business, and Administration Subcommittee of the Senate Budget and Taxation Committee hold a joint policy briefing on higher education. 1pm in room 3 West, Senate Office Building, Annapolis.
• Public Safety, Transportation, and Environment Subcommittee of the Senate Budget and Taxation Committee receive a briefing on the implications of the FY 2014 budget on the Chesapeake Bay. 2pm in Schweinhaut, Senate Office Building, Annapolis.
• Maryland CASH Campaign and the Maryland Consumer Rights Coalition host their third annual Consumer Caucus Reception. RSVP to Robin McKinney at robin@mdcash.org, or call 443-692-9422. 6-8pm at The Maryland Inn, 16 Church Circle, Annapolis. 

Tuesday, January 29th

• Senate Budget and Taxation Committee holds hearings on the Maryland Emergency Medical System Operations Fund, State Retirement Agency, and Maryland Supplemental Retirement Plans. 1pm in room 3 West, Senate Office Building, Annapolis.
• Capital Budget Subcommittee of the Senate Budget and Taxation Committee is briefed on the capital budget. 4pm in room 3 West, Senate Office Building, Annapolis.
  

Wednesday, January 30th

• House Appropriations Committee subcommittees hold a variety of hearings:
• Education and Economic Development Subcommittee meets to discuss higher education. 2pm in room 120, House Office Building, Annapolis.
• Health and Human Resources Subcommittee is briefed on the budget for the Department of Human Resources and also by the Office of Legislative Audits. 2pm in room 150, House Office Building, Annapolis.
• Public Safety and Administration Subcommittee is briefed on the Office of the Attorney General. 2pm in room 145, House Office Building, Annapolis.
• Senate Budget and Taxation Committee holds a hearing at 3pm on Senate Bill (SB) 34, which would reduce the corporate income tax from 8.25 percent to 6 percent. MBTPI will submit testimony on this bill, which we will post on our website Wednesday under Advocacy>2013 Session.
• Bureau of Labor Statistics releases metropolitan-level employment figures.

Thursday, January 31st

• House Appropriations Committee subcommittees hold a variety of hearings:
• Education and Economic Development Subcommittee holds briefings on the Maryland School for the Deaf, the Interagency Committee on School Construction, the Department of Business and Economic Development, and the Maryland Economic Development Corporation (MEDCO). 1pm in room 145, House Office Building, Annapolis.
• House Health and Human Resources Subcommittee holds briefings on  Public Health Administration and the Office of Health Care Quality. 1pm in room 150, House Office Building, Annapolis.
• House Public Safety and Administration Subcommittee holds briefings on the State Retirement Agency, Maryland Supplemental Retirement Plans, the Comptroller of Maryland, and the Department of Public Safety and Correctional Services (DPSCS). 1pm in room 120, House Office Building, Annapolis.
• Senate Health and Human Services Subcommittee holds briefings on social services and the Secretary of State. 1pm in Amoss, Senate Office Building, Annapolis.
• Working Matters coalition holds a rally to announce the official filing of the Earned Sick and Safe Time Act, a bill to allow workers to earn a limited number of annual paid sick days from their employer. MBTPI has signed on in support of the Act because everyone gets sick and everyone deserves the opportunity to recover without risking their economic security. See our blog Tuesday for more information. RSVP to Melissa Broome at melissa@jotf.org, or (410) 236-6079. 11am in the East Wing Conference Room, Senate Office Building, Annapolis, MD.

Friday, February 1st

• House Appropriations Committee holds hearings on the Maryland Emergency Medical System Operations Fund and Maryland Department of Transportation. 1pm in room 120, House Office Building, Annapolis.
• Senate Budget and Taxation Committee subcommittees hold several hearings:
• Education, Business, and Administration Subcommittee discusses higher education. 1pm in room 3 West, Senate Office Building, Annapolis.
• Health and Human Services Subcommittee holds hearings on Public Health Administration and the Office of Health Care Quality. 1pm in Amoss, Senate Office Building, Annapolis.
• Public Safety, Transportation, and Environment Subcommittee is briefed on the Judiciary and DPSCS. 1pm in Schweinhaut, Senate Office Building, Annapolis.
• Bureau of Labor Statistics releases national employment figures for January. The U.S. unemployment rate was 7.8 percent in December as employment and labor force participation both rose.

The last big bad budget wolf - the structural deficit

Maryland's legislature is just about set to begin its consideration of the state budget for the upcoming fiscal year. And, it could be much less exciting that in years. In previous blog posts, we pointed out that after solving six large, consecutive budget shortfalls, projections for the upcoming budget were in balance.

When Governor O'Malley unveiled his proposed budget on January 16, there were no big surprises. The budget is balanced without any large tax increases or extraordinary budget cuts (though there are many budget cuts of the "routine" variety).

The budget season though, still has some suspense. It's like the story of Little Red Riding Hood. It should be an easy task to deliver a basket of goodies through the woods to Grandmother's house.  However, there are big bad wolves lurking in the woods, and they could cause trouble for Little Red.

In the case of Maryland's budget, there are three big bad wolves we are worried about. In a previous post, we discussed big bad wolf number one: the still-unresolved federal fiscal cliff. If Congress deadlocks on a settlement of the federal government's finances - or if the resolution involves precipitous spending cuts - the fiscal and economic impacts could devastate Maryland's revenues and budget.

We also discussed the state's impending funding shortage in dedicated funding for transportation. If the legislature wants to provide funds for future road and transit projects, but does not want to raise taxes on gasoline (the primary traditional source of transportation funds), it may turn to the sales tax or another traditional general state revenue. This could "crowd out" funding for local schools, colleges, health programs, and other priorities in the state budget.That was the second big bad wolf.



Sources:DLS, DBM and MBTPI calculations

That brings us to the final wolf: the "structural deficit." A structural deficit is the situation when the amount of revenue during the year does not cover the ongoing expenditures during the year. The state can have both a positive year end balance and a structural deficit if it is using accumulated balances from previous years to get through the current year. That situation meets the constitutional requirement to balance the budget, but it is not sustainable into the future.

In developing this budget, the governor faced a structural deficit in the neighborhood of  $400 million. The governor's proposed budget reduces this to less that $200 million through a combination of budget cuts and by shifting state transfer tax revenues to the general fund for a period of five years. (These transfer tax revenues were dedicated to the purchase of open space and recreational land and facilities).

Some of the larger cuts include:
-$73 million in state savings from additional federal Medicaid funding through the Affordable Care Act.
-$63 million from placing a ceiling of 2.5 percent on rate increases for health and human services providers.
-$32 million in cost savings in the employee health insurance program.


These reductions should be enough to manage the structural deficit. $200 million is well within the ability of the state to make normal year-to-year budgetary adjustment. Simply put, a structural deficit in this range is essentially the same as a structurally-balanced budget.

The budget cuts incorporated by the governor in the proposed budget will require detained examination as the legislature and legislative staff  conduct their analysis and hearings on each agency's budget. Some of the cuts may have severe effects on vulnerable Maryland or might have unintended effects that will increase future costs. If some mistakes of this type have slipped through, the governor should be prepared to restore funding in a supplemental budget.

With the effects of an economic recovery (even a weak, uneven one), sound financial management, and a bit of luck, Maryland may have avoided for now the big bad wolf of the structural deficit.

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.

The Week Ahead

Last week Neil continued his series on the threats to Maryland's budget with blog posts on the federal fiscal cliff and the state transportation budget. Look for the final installation of this series on Wednesday. We also blogged highlights from the governor's budget.

Today we are releasing our annual Instant Analysis of the Proposed Budget (pdf). This four page brief provides an overview of the dimensions and features of Governor O'Malley's proposed fiscal year 2014 budget, as well as basic information about the largest components of the budget and a summary of next steps.  The first item on the agenda is today's fiscal briefing (see below).

Monday, January 21st

• House Appropriations and Senate Budget and Taxation committees come together for the annual fiscal briefing. 3pm in the Joint Hearing Room, Department of Legislative Services (DLS), Annapolis.

Tuesday, January 22nd

• Capital Budget Subcommittee of the House Appropriations Committee goes on a site visit to the Baltimore Pre-release Unit facility. 11am at 926 Greenmount Avenue, Baltimore.
• House Ways and Means Committee receives a fiscal briefing from DLS at 11am.
• House Health and Government Operations Committee holds several briefings, including one on the Johns Hopkins Community Health Partnership Program, starting at 1pm.
• Senate Budget and Taxation and Finance committees holds several joint briefings on health care related topics, including the implementation of the Affordable Care Act. 1pm in 3 West, Senate Office Building.
• Senate Education, Health and Environmental Affairs Committee holds a briefing on the Marcellus Shale, with testimony from state agencies, industry, and environmentalists, starting at 1:20pm.

Wednesday, January 23rd

• Board of Public Works meets. 10am in the Governor's Reception Room, State House, Annapolis.
• House Economic Matters Committee holds a briefing on various economic development programs at 10:30am or immediately following session.
• House Environmental Matters Committee is updated on implementation of the Sustainable Growth and Agricultural Preservation Act of 2012 at 11am.
• House Ways and Means Committee holds hearings on several bills related to the income tax, starting at 11am.
• Senate Education, Health and Environmental Affairs Committee is updated on implementation of the Sustainable Growth and Agricultural Preservation Act of 2012 at 1pm.
• Senate Finance Committee holds several hearings, including a fiscal briefing from DLS at 1:45pm.
• Senate Judicial Proceedings Committee holds several hearings, including a briefing by the Department of Juvenile Services, starting at 1pm.
• Maryland Alliance for the Poor (MAP) - a coalition that includes MBTPI - briefs House Appropriations Committee on poverty in Maryland at 1:30pm.
• MAP briefs the Senate Budget and Taxation Committee at 3:30pm.

Thursday, January 24th

• House Environmental Matters Committee holds briefings on housing issues, including foreclosures and senior housing, starting at 11am.
• House Ways and Means Committee receives a briefing on tax issues from the Comptroller's office at 11am.
• Education and Economic Development Subcommittee of the House Appropriations Committee holds hearings on the Maryland Stadium Authority, Maryland Public Broadcasting Commission, and College Savings Plans of Maryland. 1pm in room 145, House Office Building, Annapolis.
• Health and Human Resources Subcommittee of the House Appropriations Committee holds a hearing on the Department of Health and Mental Hygiene. 1pm in room 150, House Office Building, Annapolis.
• Transportation and the Environment Subcommittee of the House Appropriations Committee holds a hearing on the Chesapeake Bay. 1pm in room 120, House Office Building, Annapolis.
• Health and Human Services Subcommittee of the Senate Budget and Taxation Committee holds a hearing on the Department of Human Resources. 1pm in Amoss, Senate Office Building, Annapolis.
• Public Safety, Transportation, and Environment Subcommittee of the Senate Budget and Taxation Committee holds a hearing on the Department of Juvenile Services. 1pm in Schweinhaut, Senate Office Building, Annapolis.

Friday, January 25th

• House Appropriations Committee holds briefings on the Department of Juvenile Services and the capital budget. 1pm in room 120, House Office Building, Annapolis.
• Education, Business, and Administration Subcommittee of the Senate Budget and Taxation Committee holds briefings on the Maryland Stadium Authority, the Maryland Public Broadcasting Commission, and the College Savings Plans of Maryland. 1pm in 3 West, Senate Office Building, Annapolis.
• Senate Health and Human Services Subcommittee holds a briefing on the Department of Health and Mental Hygiene. 1pm in Amoss, Senate Office Building, Annapolis.
• Senate Public Safety, Transportation, and Environment Subcommittee holds a hearing on the Chesapeake Bay. 1pm in Schweinhaut, Senate Office Building, Annapolis.

The Big Bad Wolf of Transportation

In our previous blog posts on the budget situation, we used the story of Little Red Riding Hood to illustrate the budget situation. Because Maryland has managed its finances responsibly through the Great Recession and its aftermath, and because the nation and the state are experiencing an economic recovery (albeit a slow, fitful, and uneven recovery), this year’s budget situation is much less challenging than the previous five or six budgets.

It’s like Little Red Riding Hood delivering her basket of goodies to Grandmother’s house. It ought to be an easy, straightforward task. However, there are Big Bad Wolves in the woods, and if Little Red happens to encounter one of them, the trip will suddenly become dangerous.

On January 16, Governor O’Malley delivered his budget and it was indeed less difficult and complicated than previous budgets. There is a comfortable ending balance, an increase in the State Reserve Fund, no large, highly visible cuts, and no significant tax increases.



Image: wpclipart.com

However, we cautioned about three “Big Bad Wolves” lurking in the woods. The first wolf was the federal fiscal cliff.

Today, we meet the second Big Bad Wolf: Transportation Finance.



Maryland has a system for funding transportation that relies on dedicated revenue. The revenue sources include transportation-related revenues like gas taxes and vehicle titling and registration fees, as well as a share of the corporation income tax. The gas tax is the largest of these sources. It has not increased since it was set at 23-1/2 cents per gallon in 1992. William Donald Schaefer was the governor.

Since the tax is a flat number of cents per gallon, the amount or revenue does not adjust for inflation. The price of gas in 1992 was $1.09 per gallon.

Soon, the revenue will be insufficient to cover any new highway or transit projects at all. It will only cover operating costs and routine maintenance.

Increasing the gas tax would be the most straightforward way to finance the state’s transportation needs. However, legislative leaders are wary of supporting a gas tax increase. It is perceived as being wildly unpopular with voters.

So … here is where the Big Bad Wolf of Transportation comes in. One way to increase transportation funds without raising gas taxes would be to use general fund revenue sources to finance transportation. And this could endanger adequate funding for education, healthcare, public safety functions, and the other important services that rely on those sources. Governor O’Malley keeps talking about a sales tax increase to solve the transportation problem. Virginia Governor Robert MacDonald has proposed a transportation finance package in that state that involves both increasing the sales tax and diverting a share of existing sales tax revenues for transportation needs.

• To avoid being attacked by this Big Bad Wolf, Maryland should fund its transportation needs with a gradual, phased-in gas tax increase.
• To reduce the economic effect as well as the "regressive" effect on low-income Maryland workers, the gas tax increase should be accompanied by a small increase in Maryland’s Earned Income Tax Credit.
• Finally, the revenue should be used to a balanced transportation program, including significant transit, pedestrian and bicycle improvements.

O'Malley's budget released

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

Image: wpclipart.com

• 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.

The federal fiscal cliff may still huff and puff and blow Maryland's budget down

In our recent posts, we showed that Maryland's billion-dollar-plus budget shortfalls have been eliminated due to  a combination of good financial management, the national economic recovery (tepid though it is) and some good luck.

The first wolf is called Cliff. Fiscal Cliff. 

Image: wpclipart.com

It's true that Congress acted early in the year to avert the worst effects of large automatic tax increases on everyone. The deal passed by Congress on New Year's Day permanently continued the income tax rate cuts for most taxpayers. It extended for five years expansions of the earned income and child credits that help mostly working and low-income households. Social security payroll taxes have increased 2 percent for virtually all workers. Emergency unemployment benefits are extended for one more year.

However, Congress deferred decisions related to automatic spending cuts and the federal debt limit. Congress has actually arranged for three "scheduled crises" to hit while Maryland's legislature is in session and working on the budget.  

1. On March 1, unless Congress does something automatic, across-the-board but cuts to federal defense and domestic programs will take effect.The cuts would be 8.6 percent of domestic programs and 9.6% of defense programs.

The Department of Legislative Services estimates that these cuts would reduce direct Federal grants to Maryland's state government by about $117 million.  

A more serious problem would be the effect on Maryland's economy (and the resulting effect on state government revenues). The Pew Center on the States estimates that federal employment and procurement make up 20 percent of Maryland’s economy: defense 10 percent and non-defense 10 percent. For Maryland DC and Virginia combined, federal nondefense jobs make up 4 percent of the region's workforce.
  
2. Congress also has to deal with the federal debt ceiling. In 2010, after an earlier budget stand-off, Congress raised the limit on federal debt to a little under $16.4 trillion. late last year, we hit that amount.The Treasury can juggle things to keep paying off existing debt and the government's expenses for a  few weeks. By late February or early March, though, those options will run out. Failure to set a new debt limit by then would result in the government defaulting on the debt and/or failing to make other payments. Most observers believe that this would cause a national and international economic crisis, while doing irreparable harm to America's credit.

3. By March  27, Congress also has to extend the government's existing appropriations.The government is being funded by a "continuing resolution" that ends on this date. If Congress does not enact Appropriations Bill (unlikely at this point) or authorize a new continuing resolution, most government operations would shut down.

If the federal government deadlocks on any of these issues, or resolves them in ways that hurt states' budgets and economies, it will cause a problem for Maryland's budget. There could be serious losses of federal revenue for Maryland and maybe some negative shocks to the state economy, which would also throw the budget out of balance. This could put the state right back in the position of needing to resolve a large budget shortfall.

So, we are not out of the woods yet.