Thursday, July 03, 2008

State and County Budgets Create Perfect Storm for MoCo

The Gazette and Free State Politics have both covered the state’s continuing budget problems. Now the Gazette informs us that Montgomery County is facing at least a $240 million deficit next year even after closing a $297 million deficit this year. These twin typhoons are coming together to pound the county once again.

First, let’s look at the state budget. Back in April, we noted that despite tax hikes and spending cuts in the 2007 special session and the 2008 general session, the state had not completely closed its long-term deficit. At that time, the state’s Department of Legislative Services (DLS) projected a $243 million deficit in FY 2010 and a $596 million deficit in FY 2011. Thereafter, deficit amounts depended on the passage of the slots referendum. DLS said:

Based on the assumption that the constitutional amendment to implement video lottery terminals is approved by voters in the fall of 2008, the projected cash and structural shortfall narrows significantly by fiscal 2013. It is estimated that revenue from video lottery terminals will add nearly $500 million in revenue in fiscal 2012, increasing to an estimated $660 million in fiscal 2013. If the constitutional amendment is not successful, the structural deficit is projected to remain at the roughly -$600 million level.
Since then, the Comptroller’s office released estimates of state revenues through May. The Comptroller wrote:

General fund revenues for the month of May totaled $961.0 million, an increase of 15.1% over May 2007. For the fiscal year to date, general fund collections are $11.312 billion, growth of 5.1%. After a steep decline in April (adjusted for the rate increase), the sales tax showed some growth in May. Year-to-date, revenues are slightly under expectations, with underperformance in the individual income tax, sales tax and tobacco tax offset by strong performance from most other revenue sources.
We reproduce the summary data below.

A 5.1% increase in general fund revenues is not a disastrous performance, but the Comptroller states that it is “slightly under expectations.” That is the key. A very large chunk of state spending is driven by formulas, including education, special education, community colleges, Medicaid, library subsidies, land conservation, community services to seniors and aid to counties, municipalities and local health departments plus more. That says nothing of benefit payments to state employees. If these formulas call for a spending rate growth that exceeds the growth in revenues, there will be a gap that must be resolved by the Governor and legislature. Right now it appears that the state’s deficit may very well exceed the $243 million originally projected for next year.

And now we look at Montgomery County’s budget. This blog blanket-covered the County Council’s agonizing, but ultimately successful effort to close its $297 million deficit in May. Now they face at least a $240 million deficit next year. But that could change depending on the state of the county’s economy.

Back in May, I wrote the following on the county’s budget:

As for the future, the most volatile components of the county’s revenues are the two tied to real estate sales: the real property transfer tax and the recordation tax. According to the county’s Department of Finance, residential real estate sales volume averaged over $500 million per month from 2006 through the first eight months of 2007. Since then, residential real estate sales volume has averaged between $200 and $300 million per month. It is this collapse in residential real estate transactions that has caused many of the county’s current budget problems. All policymakers – both inside the government and inside the unions – should watch this figure in the Finance Department’s monthly economic updates. If it rises back up to $400 million per month or more, the county’s real property transfer and recordation taxes will begin to recover. If it falls further, tougher times are ahead.
Since then, the county’s Department of Finance reported residential real estate volumes of $287 million in March, $385 million in April and $381 million in May. Average home prices are still down in the low five hundred thousands (well below the July 2007 peak of $601,995), but unit sales exceeded 700 homes in both April and May, the best performance since last August. If the real estate market continues to improve, the county’s budget office may need to adjust its deficit estimate.

Still, the county’s budget deficit will be substantial and that means the public employee union contracts may very well be back on the table. Right now, the vote count looks precarious for the unions. Council Members Phil Andrews and Duchy Trachtenberg both recommended a 2-point cost-of-living adjustment cut last time. Council Member Roger Berliner supported a two-day furlough. New Council Member Donald Praisner ran on the notion that the contracts should be “reviewed.” The unions may be only one vote away from a contract cut.

Council Member Trachtenberg, Chair of the Management and Fiscal Policy Committee, had this to say to the Gazette:

“Clearly we are expecting revenue that is not on the high end, and we certainly recognize that next year’s budget cycle will be a difficult one,” said Councilwoman Duchy Trachtenberg (D-At large) of North Bethesda, chairwoman of the council’s finance committee. “It wouldn’t surprise me if at the end of the calendar year, we won’t have to look at more program savings, and a possible mid-year savings plan, which are what we try to do in a difficult deficit situation.”
Savings at mid-year would reduce next year’s deficit. That will in turn relieve the pressure on the unions’ contracts. It may therefore be in the unions’ interest to consider scouring their agencies’ budgets for potential reductions.

But any détente at the county level could be easily undone by the state. The lords of Annapolis may very well be preparing a nasty witches’ brew for Montgomery County, including a handoff of funding responsibility for teachers’ pensions. That move alone would easily swamp any savings identified by the unions. And so dealing with the county’s budget problems is not merely the responsibility of the county politicians and the public employee unions. It is also the responsibility of Montgomery’s state legislators to protect the county from any damage threatened by the state’s budget difficulties. We will be discussing this at length next week.