Latest on the State Budget

In a fiscal update given to the General Assembly, the Department of Legislative Services (DLS) lays out the scope of the state’s budget problem and the options for dealing with it. Would anyone like any arsenic, hemlock, mercury, snake venom or chloroform before reading further?

Here are the main points made by DLS.

1. Maryland’s economy is in trouble.
The state’s unemployment rate has increased from 3.5% in January 2008 to 5.0% in October. Initial unemployment insurance claims were up 62.6% in September 2008 from a year earlier. Existing home sales were down in ten of the first eleven months of 2008, sometimes by 30% or more from a year ago. Median home prices were 10.7% lower in November 2008 than November 2007. Vehicle sales were down 27.8% in October 2008 from a year earlier. And sales tax collections fell in seven of last year’s first ten months. All of these factors are responsible for driving state tax revenue forecasts down.

2. Maryland’s budget is primarily comprised of education, health and public safety.
Of the state’s $14.5 billion budget in FY08, 36% was accounted for by education aid, 15% was accounted for by Medicaid, 8% was accounted for by higher education and 32% was allocated to state agencies. Of the state agency spending, 29% went to health services and 26% went to public safety. There is no way to cut the budget without cutting education, health and public safety.

3. Aid to localities has driven long-run spending increases.
Between FY02 and FY09, the total general budget has grown from $10.6 billion to $14.8 billion, an increase of 40.3% Local aid has risen from $3.3 billion to $6.0 billion over the same period, an increase of 81.2% driven primarily by the state’s Thornton education program. Perhaps this accounts for Big Daddy’s now-infamous remark that the counties are “fat, dumb and happy.” This fact will put pressure on the counties to defend their aid.

4. Revenue forecasts are deteriorating.
In September, the Board of Revenue Estimates forecast receiving $14.7 billion in revenues for the general fund in FY10. Three months later, the board revised its forecast down by $963 million to $13.7 billion. The reason: the tanking economy.

5. Deficits are a long-term problem.
Despite the legislature’s effort to close the “structural deficit” during the 2007 special session, deficits have returned. DLS calls baseline spending increases “unsustainable” given its new revenue forecasts. Currently, DLS estimates general fund deficits of $391 million in FY09, $1.874 billion in FY10, $2.237 billion in FY11 and $1.844 billion in FY12. Slots revenues only have a serious impact starting in FY12 when they add $494 million to the state budget.

6. Transportation will be hit too.
DLS says that a “dramatic decline” in vehicle sales will reduce titling tax revenues by more than $1 billion over the next six-year capital planning period. Gas tax declines and increased operating expenses will also have an impact. The overall reduction to the state’s transportation program could total $2.5 billion. By FY14, the state may not be able to meet its system preservation needs, much less fund ANY new projects.

7. The options involve “hard decisions.”
DLS throws out a number of options for the legislature to consider, including:

Reduce and rebase formula grants including GCEI and highway user distributions (which are used by counties for transportation projects).

Restructure employee and retiree benefits by extending vesting and making them “more comparable” to the private sector.

Restrain “recent costly initiatives” including the 2007 health care expansion, the Chesapeake Bay Fund and the university tuition freeze. All of these were major priorities for the Governor early in his term.

Freeze pay and provider rates.

Maximize use of the capital budget to support the general fund. In other words, divert transportation revenues to other spending. This is exactly what Democrats accused former Governor Robert Ehrlich of doing when he was in office. It will also exacerbate the state’s Crisis in Transportation.

Setting the Spending Affordability Committee limit, policies for positions and using the rainy day fund.

Further revenue opportunities, in other words, taxes. No state politician I talk to believes that will happen.

The above leads me to believe that if President Obama sends infrastructure stimulus money to Maryland, there may be little or no increase in real transportation spending. Why? Because then the General Assembly will be very tempted to transfer the state’s transportation revenues to the general fund by an equal amount. That may make the general fund problem easier to deal with, but it will mean no net stimulus impact to Maryland’s economy. And the state’s downturn will continue.

Keep an eye on this one, folks.