Don Fry Commentary: Getting beyond MD’s clever budget-balancing tactics

State lawmakers call them “smoke and mirrors.”

The state’s top fiscal analyst calls them “mandate-modifying palliatives of a one-time nature.”

They’re the budget-balancing tactics that lawmakers in Annapolis deploy in order to address the seemingly chronic series of so-called “structural” deficits our state government has been facing for more than a decade.

As Maryland pulls out of the recession, however, some in Annapolis are calling attention to the increasing cost of a favorite state budget-balancing tactic – borrowing.

Maryland’s projected deficits of $394 million in the current fiscal year and $210 million in FY 2015 represent a significant narrowing from the massive deficits of more than $1 billion lawmakers faced in the three years between 2009 and 2011 as the Great recession wreaked havoc on Maryland’s economy. Our state government has been facing consecutive annual budget deficits since 2002.

The Maryland General Assembly is mandated by the state’s constitution to enact a balanced budget where projected revenues match projected spending. And in each of the past 13 years, lawmakers have enacted a balanced budget even though in every one of those years actual operational revenue fell short of the state’s operational spending.

Here’s how borrowing figures into deficit reduction. First lawmakers cut spending and shift appropriated operating funding between agencies. Then they close remaining budget gaps by transferring cash to the General Fund from a wide variety of special funds set up for other dedicated purposes ranging from wetland preservation to transportation.

Lawmakers authorize bond borrowing over a number of years to repay the “borrowed” special funds. So, in any given recent fiscal year, it has been routine for the General Fund to receive budget-balancing transfers from special funds while paying debt service on bonds issued to repay borrowed special funds from previous years.

For example, the FY 2015 budget being considered by the General Assembly proposes to transfer $69 million to the General Fund from a special fund of transfer tax revenues earmarked for land preservation, to be repaid by issuing bonds in future years. Meanwhile, $83 million would be paid from the General Fund to help meet the state’s debt service for previously-issued repayment bonds, according to the Department of Legislative Services’ January 2014 fiscal briefing.

During the last five years, the state has issued more than $1 billion in bonds to, in effect, fund operating budget gaps, according to state data.

This process has become the accepted routine in Annapolis. But some, including Warren Deschenaux, the General Assembly’s top fiscal analyst – are warning of budget consequences in coming years. Deschenaux’s report to lawmakers on January 20 forecasts that annual debt service payments required from the General Fund will increase to $499 million in FY 2018 and $531 million in FY 2019.

The practice of borrowing from special funds for operating revenue and bonding its replacement in the future “does take a pinch out of what we can use our bond money for,” Deschenaux told members Senate Budget and Taxation Committee and the House Appropriations Committee on January 20. “There is a significant opportunity cost, as well as the financial interest cost of bonding,” he said.

Another issue that is emerging from the state’s use of long-term bonds to fund short-term operations is a growing gap between required debt service and revenue from the state property tax that is intended to support that debt.  That gap is forecast to grow from $210 million in FY 2015 to $548 million in FY 2015, necessitating the escalated General Fund payments for debt service.

Whatever you think of the process state lawmakers have deployed to close budget gaps in recent years, the state’s structural deficit has been reduced to the point where Maryland’s budget is in better fiscal shape.

But those in Annapolis must recognize that there is much to be done to move our state to sustainable fiscal stability without use of “smoke and mirrors.”

Stability of any government or organization requires that it “should be able to meet its mission without resorting to gimmicks, timing of payments, freezes, cost-shifting and the like,” says Robert R. Neall, the citizen member of the General Assembly’s Spending Affordability Committee and a former county executive of Anne Arundel County and former state senator.

Business leaders at the Greater Baltimore Committee contend that the state’s top priority should be to reform its tax structure to better position Maryland to be competitive and to achieve government revenue growth without damaging the business climate.

At the GBC, a private-sector commission of experts is working to produce revenue-neutral recommendations for a tax structure that better matches the economy of the future.

Lawmakers have managed to finesse Maryland through the Great Depression.  But Maryland’s fiscal future will rely on the degree to which they can position our state to aggressively compete for economic growth.

Donald C. Fry is president and CEO of the Greater Baltimore Committee. He is a regular contributor to Center Maryland.

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