By Donald C. Fry
The upcoming round of budget cuts Gov. Martin O’Malley announced on July 10 provides more evidence that Maryland’s fiscal condition continues to erode.
To offset revenue shortfalls, the governor will ask the state’s Board of Public Works next week to approve the first of $700 million in budget cuts for the fiscal year that began July 1, a mere 17 days ago.
As O’Malley and elected leaders in Annapolis properly point out, Maryland is not alone in dealing with the recession’s tenacious fiscal challenges. Maryland is the 13th state to announce projected revenue shortfalls after adopting their budgets this year.
To remind Marylanders that it could be worse, state lawmakers often point to California, which faces a $26 billion deficit.
They’re right. It could be much worse, according to national government management experts who view Maryland as doing fiscally better that most states. For instance, the Pew Center for the States — a Washington, D.C.-based think tank that analyzes states’ policies — gives Maryland a grade of “B” for overall performance. Pew ranks Maryland ahead of 37 other states for management practices.
Nevertheless, leaders in Annapolis must guard against being lulled into any kind of complacency based on an assumption that once the current recession ends, everything will be fiscally OK again. A number of serious challenges remain to be addressed if Maryland is to emerge from the recession in a position to thrive in the post-recession economy.
As a reality check, here are four key fiscal questions that our state’s elected leaders must consider.
First, what will be the implications of Maryland’s increasing reliance on federal funding? Not counting any stimulus funding, the amount of federal funding included in Maryland’s overall annual spending has increased to more than 26 percent, according to the Department of Legislative Services.
Conversely, less than half of current state spending comes from the General Fund, which is fueled by revenues from the state’s major taxes, lottery proceeds, and other sources and has traditionally funded Maryland government operations.
The rest of state expenditures come from state special funds, such as the Transportation Trust Fund, federal funds or bond revenue.
Second, how will Maryland fill the budget hole when federal stimulus funds and other one-time funding are no longer available? Approximately $2.5 billion in stimulus funds and $1.8 billion in state fund transfers are included in the FY 2009 and FY 2010 Maryland budgets, much of it for operating expenses.
That’s a lot of one-time funding to adjust for, particularly for a General Assembly that is historically averse to aggressively cutting spending.
For example, the budget that emerged from the General Assembly’s 2009 session included $840 million in actual cuts. Less than 30 days into the new budget year, the governor is proposing almost as much in reductions based on input from his cabinet.
In FY 2012, after a second round of stimulus funding will have dried up, the state could face a structural deficit requiring either another round of high-magnitude budget cuts or, in the worst-case scenario, a proposal for more tax increases.
The post-recession economy
This raises a third question: Can Maryland expect to return to the kind of spending increases that have occurred since 2000?
Between fiscal years 2000 and 2008 — a period that spanned Republican and Democratic administrations — overall state spending increased by an average 7.9 percent per year, according to state fiscal reports.
It’s pretty clear that many state leaders presume that Maryland’s post-recession economy will return to pre-recession levels. Some of that optimism is based on anticipated revenue boosts from economic activity related to Base Realignment and Closure (BRAC) activity and from the implementation of slot machine gambling in Maryland.
However, the pace at which Maryland government will feel the positive effects of BRAC revenue remains uncertain, and the full revenue effect of slots will not likely be realized until FY 2013.
While we all hope for an economic rebound to pre-recession levels, it’s probably not prudent to base Maryland’s fiscal plans on that assumption.
What are our priorities?
Which brings us to the fourth and ultimate question for state leaders: What, specifically, are state government’s strategic priorities?
Maryland government needs to take its acknowledged management prowess to the next level. It must begin to focus not just on short-term processes, but on specific, measurable, long-term strategic outcomes. This will require serious priority-setting.
Any kind of sustainable, long-term fiscal strategy must assign a high priority to strengthening our state’s business climate.
Lawmakers in Maryland — and in the nation, for that matter — must find a way to think, plan and act on a much higher strategic level than governments are historically accustomed to achieving.
A core element of a new commitment to strategy must be to leverage the state’s limited financial resources through programs and initiatives that create tangible, measurable economic growth.
Achieving this kind of strategic consensus is extremely difficult, particularly in today’s climate of fragmented political constituencies and agendas.
But one thing is certain: When the recession’s economic carnage recedes and Maryland’s leaders begin to sort through the fiscal remains of one of the most difficult economic downturns in 80 years, they’re going to need a solid strategic game plan — not just good intentions, short-term tactics and optimistic projections.