Maryland’s structural deficit … it’s back

By Donald C. Fry

Last January lawmakers and media observers trumpeted the fact that, for the first time in almost a decade, a Maryland legislative session began without having to address a major structural deficit, thanks to fiscal measures our state’s elected leaders had taken in the last several years.

But now, two months away from the beginning of the 2014 legislative session, the deficit is back. That’s the gist of an October 16 briefing from the state’s Department of Legislative Services to the General Assembly’s Spending Affordability Committee.

Baseline spending in FY 2015 is projected to exceed revenues and transfers to the state’s general operating fund by more than $465 million, legislative analysts estimate.

And this despite projections that state revenue for FY 2015 will constitute a more than 6 percent increase over revenues collected in the fiscal year that ended last July (FY 2013) – a 3 percent revenue increase forecast for the current fiscal year and a 3.5 percent revenue increase forecast for FY 2015.

State spending is projected to outstrip this magnitude of revenue growth. The legislature’s fiscal experts project a more than 9 percent increase in state spending from the general fund by FY 2015.

It’s worth noting that these are working figures offered to the Spending Affordability Committee to help it set spending limits for the next session’s budget deliberations.

Projections tend to be “gloom and doom” in nature at this point in the budgeting process, but often improve by end of the session due to budget decisions by lawmakers, improving revenue projections or a combination of both.

However, the projections in this briefing appear to ratify a call for fiscal caution expressed recently by the state’s Board of Revenue Estimates.

Maryland still faces notable challenges including generally slower employment growth and wage growth than the nation as a whole, according to General Assembly’s fiscal experts.

It’s important to recognize that, despite projections that our state government revenue is growing, albeit slowly, the recession is not fully over yet and we still need to tighten our budget.

Bad times inherently dictate budget constraints. It’s easy to be conservative or prudent when times are tough. But history suggests that it may be even more important to budget conservatively when times are good, or getting good and the demand and temptation to escalate government spending begins.

Nevertheless, all of this underscores the nature of the challenges that exist regarding the state’s current framework for managing its fiscal affairs.

It is those challenges that prompted the Greater Baltimore Committee to form a task force of private-sector experts to study both sides of Maryland’s fiscal framework – our state’s tax structure for generating revenue and its process for establishing spending priorities.

The study was among recommendations for improving our state’s competitiveness made by business leaders in the recent GBC report “A Compact for Competitiveness.”

Goals of the GBC task force include identifying revenue-neutral ways to restructure Maryland’s taxes so that they enable the state to attain fiscal sustainability and to better compete as a location for robust economic growth, business innovation and job creation.

The task force will examine how tax revenue is raised and how well the state matches its spending to strategic priorities.

Needless to say, Maryland’s revenue system and budgeting processes are complicated. They represent the accumulation of tactical policy decisions made over decades that have, frankly, pushed our state’s affordability limits.

For example, budgeted operating expenditures from state funds have increased 58.6 percent over the last 10 years. During that same time period, the personal income of Marylanders increased 40.9 percent – almost a third less than the rate of the state’s spending increase, according to data from the Department of Legislative Services.

Any effort at state fiscal reform faces daunting political and practical challenges highlighted in the recent spending affordability briefing and in other state fiscal reports. Major built-in fiscal challenges include the following:

  • The state has, over the years, set itself up as a funding source and central distributor of operating funding to local governments. Aid to local governments currently accounts for more than 25 percent of the state’s total operating expenditures, according to the spending affordability briefing.
  • When it comes to operating budget categories, three of them – health and mental hygiene, K-12 education, and higher education – consume 62.4 percent of the FY 2013 budget, according to state data.
  • The next three biggest operating categories – transportation, human resources, and general government administration – consume another 23 percent. This leaves a combined 14.6 percent for 10 other government operating categories including public safety, agriculture, judiciary, housing, community development, licensing, regulation, juvenile services, business development and the legislature.

Meanwhile, Maryland’s government faces another looming fiscal challenge – funding state pension and retiree health care obligations.

These are just a few reasons why it’s important – for both the fiscal health of the state and its citizens who contribute to funding government and who are directly impacted by spending decisions – to ensure that our state government’s mechanisms for generating revenue are sustainable, competitive, compatible with current economic trends, and well-matched to an effective strategic spending strategy.

Budgeting is the most important job our lawmakers have in Annapolis. Technically, it’s the only constitutionally-mandated job the General Assembly is convened to perform.

The Spending Affordability Committee is charged with ensuring that the state’s rate of spending growth does not exceed the rate of growth of the state’s economy.

The committee’s mission, however, is mostly limited to mathematically determining how much in annual spending and debt increases the state can tolerate – not how it should spend revenue.

Given the nature of today’s fiscal challenges and increasing costs of government, it’s imperative that lawmakers ensure that our budgeting process is more about strategic planning and less about conducting an annual tactical exercise in number crunching.

The legislature is constitutionally mandated to pass a balanced budget at each legislative session but that doesn’t necessarily correspond to a budget that is “sustainable” in future years.

When it comes to the issue of how revenue is raised and how it is spent to operate Maryland’s government, it’s time for our leaders to shift their focus more toward the big picture and away from the status quo.

Donald C. Fry is president and CEO of the Greater Baltimore Committee. He is a regular contributor to Center Maryland. This commentary appeared on the November 11 Center Maryland blog.

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