Tuesday, May 26, 2009

Montgomery County's Desperate Budget Gamble

Montgomery County’s budget crisis, exacerbated by a State Board of Education decision at the very end, is over for the moment. Or is it?

The County Council approved a new budget last week containing a 1.1% decrease in spending from FY 2009, the first drop since FY 1992. The last hurdle to that budget involved a state requirement for “Maintenance of Effort” (MOE) on school spending, which holds that counties must at least maintain their per-pupil spending on education to be eligible for increases in state aid. Montgomery County applied for a $79.5 million waiver from the State Board of Education, saying that the county’s poor economy and its anti-tax Ficker Amendment prevented it from meeting MOE. Moreover, the county argued that since federal stimulus money earmarked for schools would enable the county to meet Superintendent Jerry Weast’s budget request, its limited county funds would be better directed to other parts of the government.

The State Board of Education denied Montgomery’s waiver request on two grounds: first, it was not persuaded that the county’s economic problems were worse than the state’s other jurisdictions (of which only two others were asking for MOE waivers), and second, it said that the county’s Ficker Amendment was no excuse to avoid MOE. That provoked an angry response from County Executive Ike Leggett and County Council President Phil Andrews and created a thorny last-minute problem: the county would now have to figure out how to direct $79.5 million to the schools from the rest of the government. How could they do that in a matter of days, especially in the context of a $587 million deficit?

Based on a recommendation from the County Executive, the council adopted this budget resolution language to get around the MOE decision:

10. This resolution appropriates $79,537,322 for the payment of debt service due in FY10 for the construction of Montgomery County Public Schools facilities.

a) Montgomery County Public Schools must make payment for the debt service through the Montgomery County Government as provided in subparagraph 1O(c). These funds must not be spent for any other purpose.

b) The inclusion of this amount for debt service will be part ofthe County's Local Appropriation and part of the calculation of the FY11 Local Appropriation required to comply with the State maintenance of effort requirement.

c) Reimbursement must occur no less than five days before each applicable debt service payment.
In plain English, the county gave the money to the schools as required by the Board of Education decision. And then they took it back as a special “debt service” charge on school construction. So the county’s position is that we are meeting the state’s MOE requirement. Even though in terms of net real dollars we clearly are not.

So why is this a desperate gamble? The State Board of Education’s decision affirmed that local government financing of schools was a “cornerstone” of state education policy. It was a rigid statement of principle. Will they now sit back, ignore the county’s action and allow Montgomery to collect its state aid? The consequences of pushback from the Board are potentially immense. No one yet knows if they will take on that fight with the county government. Montgomery’s leaders are praying they do not.

There was another approach available, but it would have generated its own problems. The County Executive’s proposed budget added $119.6 million to the revenue stabilization fund, defined as “a special revenue fund that accounts for the accumulation of resources during periods of economic growth and prosperity when revenue collections exceed estimates. These funds may then be drawn upon during periods of economic slowdown when collections fall short of revenue estimates.” It’s true that drawing on this fund would have required some explaining to the county’s credit rating agencies. But it would not involve risking the wrath of a clearly hostile state agency that has already demonstrated its indifference to the county’s financial plight and controls hundreds of millions of dollars of aid.

The county rolled the dice and gambled that the State Board of Education would be less likely to twist a dagger into its back than Wall Street. For all our sakes, we hope they are right.