Comptroller Peter Franchot attacked the special session called by Governor Martin O'Malley and his administration's proposals for balancing the budget in a letter to Senate President Mike Miller and House Speaker Mike Busch.
The strangest part of the letter is when Franchot says that there is no urgency on the question because the budget is balanced and can wait until the regular session. One might think the bond markets would like the State to get its fiscal house in order sooner rather than later.
My guess is that the relationship between the comptroller and the governor has turned from cold to icy. One wonders if it is too early to contemplate a primary challenge by Franchot against O'Malley. I don't think Democrats will necessarily appreciate Franchot working to undercut the governor so early in his term even if they agree with him on some of the issues.
Dear Friends,
As the Maryland General Assembly prepares to convene in a special legislative
session to discuss the Governor's slots and tax package, I wanted to share with
you a letter I sent today to the President of the Senate and the Speaker of the
House. I hope you will take a minute to read through it and share your thoughts
with me on this extraordinary time in our State's history.
Peter Franchot
Comptroller
October 23, 2007
Honorable Thomas V. “Mike” Miller, Jr.
President, Senate of Maryland
State House
Annapolis, Maryland 21401
Honorable Michael E. Busch
Speaker, Maryland House of Delegates
State House
Annapolis, Maryland 21401
Dear President Miller and Speaker Busch:
As you know, Governor O’Malley has signed an Executive Order convening the
Maryland General Assembly to consider his proposed remedies for the State of
Maryland's $1.7 billion structural budget deficit. The Governor's proposal
includes, but is not limited to, an increase in the State's sales tax, cigarette
tax and corporate income tax rates, an extension of the sales tax levy to
service transactions that are currently exempt, a fundamental realignment of our
State's personal income tax structure, and a plan to legalize slot machines in
Maryland.
Having served two decades in the General Assembly, including several years
as Chairman of a House budget subcommittee, I have been through similar fiscal
challenges and appreciate the Governor's desire to address our State's looming
budget shortfall in an aggressive manner. As Maryland's chief fiscal officer,
however, I must question the timing and necessity of this approach. Mindful of
the reservations each of you has expressed about a special session, I must
underscore the profound – and perhaps unintended – consequences of this
undertaking on Maryland’s economy, business climate and quality of life, and to
caution against acting in haste.
THE TIMING
The special session that will convene on October 29 will take place against
a backdrop of exceptional economic instability. The collapse of the subprime
mortgage industry has effectively ended the most sustained housing boom of this
generation. The recent, dramatic spike in foreclosures has created a national
surge in housing inventory just as stricter lending standards have compressed
the pool of potential buyers. These well-documented national trends have also
been experienced in Maryland. For example,
• The foreclosure rate has increased by 57 percent in Maryland from the
first quarter of 2006 through the second quarter of 2007, compared to 41 percent
nationally;
• The foreclosure rate for subprime Adjustable Rate Mortgages (ARMs) has
increased 200 percent in Maryland, compared to 115 percent nationally;
• The median price of existing homes sold in Maryland declined by 0.6% in
August, compared to August 2006. This was the second decline in just four
months, coming not long after 54 consecutive months of double-digit growth;
• Existing home sales in August dropped by 25 percent compared to August
2006, and were 44 percent lower than 2004 and 2005 levels;
• Today, Maryland’s housing inventory is at the highest levels of this
decade, and has increased threefold in just three years.
The collapse of the housing market, in turn, has inspired a ripple effect
throughout the entire U.S. economy. Just last week, Federal Reserve Chairman
Ben Bernanke warned that the troubles in the housing market could be a
“significant drag” on the economy.
The Dow Jones Industrial Average and other U.S. financial markets are in the
midst of a period of high volatility. Consumer confidence has plunged, as
evidenced locally by the sluggish growth in state sales tax receipts that led to
last month's $130 million writedown of FY 2008 revenues. The dollar has dropped
to an all-time low against the Euro, compounding concerns of higher oil prices
and inflation. The Labor Department reported last week that applications for
unemployment benefits are far exceeding expectations, raising concerns that the
housing collapse will finally destabilize the nation's job market. As a result
of these and other, similar developments, many national economists have elevated
the odds that we will enter a period of recession.
It is in a spirit of concern over the general direction of our economy that
I have recommended a more cautious and deliberative approach to addressing
Maryland's structural budget deficit. In recent weeks, I have suggested that
our December presentation of revenue estimates would offer a much clearer sense
of Maryland's long-term economic outlook, as well as the dependability of the
funding streams that the Governor is counting on in his package. The
availability of this crucial data, coupled with traditional economic indicators
that are duly reported by the media, argues in favor of taking up the Governor's
proposal during the regular 90-day session. The politics of the day might argue
in favor of a more dramatic gesture. From a budgetary and fiscal standpoint,
however, the current state of affairs makes this special session – and its
purpose – a high-risk proposition.
THE NECESSITY
In recent weeks, the media has reported warnings from senior O'Malley
Administration officials that, without a special session, the State's structural
budget deficit will mushroom. Please allow me to take this opportunity to set
the record straight. There is no relationship whatsoever between the timing of
the next General Assembly session and the magnitude of Maryland's structural
budget deficit. As you know, the structural deficit is loosely defined as the
negative balance between the sum of the State's ongoing spending obligations and
its ongoing revenues. Unless we are required to revise State revenue estimates
downward, or unless the State makes any unfunded spending commitments between
now and January (which is highly unlikely), the structural budget deficit will
remain at $1.7 billion.
At the risk of restating the obvious, it is also worth noting that through
June 30, 2008, the State of Maryland has a balanced budget. That, too, is
irrespective of the timing or outcome of the next General Assembly session. It
has been suggested, by key lawmakers from both parties, that it would be more
appropriate to take up the Governor's package during the regular legislative
session, where it can be considered within the context of his FY 2009 budget
proposal. Aside from affirming the basic logic of considering new revenues,
spending commitments and budget cuts at the same time, I will further
substantiate this approach by restating that there are no permanent costs
associated with proceeding in that manner.
THE CONSEQUENCES
The Governor's revenue package includes the most dramatic reform of
Maryland's tax structure in well over a generation and, in slot machines, a
proven catalyst for a broad range of social and economic ills. It would
directly affect all Maryland residents, workers and tourists, as well as every
small business and corporation that has chosen to invest in our state. Mindful
of its enormous ramifications, I must note that Governor O'Malley's plan was
constructed in private, introduced gradually by press release, and the details
have yet to be made available. This makes review and evaluation of the plan
next to impossible, and further risks actions being taken that may have
unintended consequences.
For example, according to press releases that have been made available by
the Governor’s office, the plan includes a proposal to extend the sales tax levy
to property management services. Although the details on this particular
provision are unclear, concerns about its impact on the State’s affordable
housing stock have already been raised. In meeting with citizens and business
leaders throughout Maryland, I have heard numerous complaints that the costs of
this tax will simply be "passed through" to renters, many of whom are families
with low and moderate incomes who cannot afford further strain on their fixed
budgets. My intent is not to render a personal opinion on this specific piece
of the plan, or any others. Rather, it is to underscore the importance of
sharing this plan with the public in open, inclusive and unscripted public
forums. I am afraid that the current timetable allows virtually no opportunity
for such stakeholder input, which could ultimately diminish
public confidence in the process and result in a product that negatively impacts
the Maryland economy and the taxpayers we represent.
In my view, the volatility of the U.S. and Maryland economies, the absence
of an immediate fiscal “crisis” and the lack of detail about the plan could all
combine to create a perfect storm of unintended consequences. Rather than act
in haste, the fiscally prudent and practically wise thing to do would be to move
cautiously and deliberatively throughout this process.
Should you have any questions, or if I can be of assistance to either of
you, please do not hesitate to call. Thank you in advance for your
consideration of these points.
Sincerely,
Peter Franchot
Comptroller
