Apocalyptic Budget Memo: MoCo Edition

Following is the text of a memo on the budget written by County Executive Ike Leggett to the County Council. He estimates a $370 million budget deficit for FY 2011 and argues that furloughs are needed in the current budget year. He also predicts that if the county is found to have not satisfied the state's Maintenance of Effort requirement for school funding - a real possibility - the county could be penalized $33-57 million by the state.

MEMORANDUM

July 24, 2009

TO: Phil Andrews, President, County Council
FROM: Isiah Leggett, County Executive
SUBJECT: FY10-11 Fiscal Update

Attached please find the materials requested for the Fiscal Update for the Management and Fiscal Policy and the County Council for this coming week. As the attached materials indicate, significant challenges and difficult choices remain for Montgomery County in managing the current year budget, as well as in developing the FY11 budget. The attached fiscal plan projection is not based on a "rate of growth" for FY11 expenditures, but rather is based on estimated FY11 expenditures at "Major Known Commitments" for all County tax-supported agencies. At this time, the fiscal analysis shows a gap of $370 million. This gap is before considering other factors including:

• additional State Aid reductions in FY10 and FY11 (these reductions are, unfortunately, a certainty, though the specific amount is not known yet);

• further deterioration in local revenues (e.g. property, income, and transfer and recordation taxes); and

• other unanticipated events (e.g. fuel price spikes, extraordinary stock market losses, etc).

Preliminary indications are that FY09 tax-supported revenue collections for the operating budget are, generally, on target with the March projections. This means that we can not reasonably expect any budgetary relief from future increases in local revenues, and will monitor indicators carefully for the possibility of a slower than anticipated recovery. The fact that we are on tract with our revenue estimates does not alter the projected $370 million gap for FY11. The expenditure projections contain approximately $57 million of expenditures for Montgomery County Public Schools (MCPS) and Montgomery College (MC) above Maintenance of Effort (MOE) requirements.

While additional time is needed to evaluate economic and fiscal data due to the already clear magnitude of the problem, we will need to implement an FY10 Savings Plan and/or employee furloughs in FY10. I do not approach either issue lightly though. Given, the position and service reductions made in preparing the FY10 Operating Budget, we will be very constrained in our options for an FY10 savings plan. Increases in lapse, elimination of nearly 400 positions, and other budgetary reductions have removed much of the flexibility that previously existed for instituting mid-year savings plan. For an FY10 savings plan, service reductions and mid-year employee layoffs may be required to achieve any meaningful and reasonably achievable savings.

As indicated in my FY10 Recommended Budget, employee furloughs may be an option, or supplement to a savings plan, since it would result in only temporary service reductions and would provide a source of feasible savings to carry forward into FY11. However, any furlough should be implemented across all tax supported agencies to ensure equitable treatment of employees and to produce substantive savings.

In closing I want to stress that, jointly, we have reduced cumulative gaps of nearly $1.2 billion in the last three years. I believe by continuing to work together we will produce a balanced budget in FY10 and FY11 that preserves essential services in education, public safety, and our social services safety net and aligns our ongoing expenditures with our resources.

c: Timothy L. Firestine, Chief Administrative Officer
Kathleen Boucher, Assistant Chief Administrative Officer
All County Government Department Heads and Merit Directors
Dr. Jerry D. Weast, Superintendent, Montgomery County Public Schools
Royce Hanson, Planning Board Chairman, Maryland-National Capital Park and Planning Commission
Brian K. Johnson, Ed.D., President, Montgomery College

FY10-11 Fiscal Issues

Risk and Uncertainty (Not included in fiscal plan projections):
• State Aid Reductions
o Not included in projections, but could be significant
o Timing of announced cuts: August 2009 through April 2010
• Local Revenue declines: Income, Transfer/Recordation, and Property tax (estimated $40 million reduction at Charter limit due to reduced inflation)
• MOE Penalty: If the SBOE finds the County did not satisfy MOE requirements the penalty could range from $33 M. to $57 M.
• Fuel or other Price Spikes

Lack of Options/Flexibility
• Savings Plan limits: lapse reductions, vacant position reductions, MC311 cuts
• Large transfers from Liquor Control and other funds already taken in FY10
• Reserves are already dangerously low in light of risks
• Cash flow limitations
• Very little discretion in terms of tax increases - "tax room"
• Impact Taxes: Actual FY09 Receipts were significantly under budget ($26.5 million) and will be for FY10-14 as well and will need to be replaced with tax supporting funding or addressed through project delays.
• Further service reductions and additional layoffs may be required given the foregoing and the pending imposition of further state aid reductions.

Exit Strategy
• Need to present rating agencies with a plan for restoring reserves, OPEB, and PAYGO and aligning expenditures with revenues over the long term.
• Need to leave the recession with a stronger fiscal position as we did in early 90's with Revenue Stabilization Fund, Retirement Savings Plan, Changes in Health Insurance premium share, and "tax room"

Savings Plan
• Previous savings plans have relied heavily on lapse which is severely restricted due to additional lapse reduction of $2.7 million across departments and MC311 reductions of $1.875 million.
• Relies on inter-agency cooperation in attaining savings plan targets
• Service reductions and mid-year layoffs may be required to produce meaningful and reliable savings or...

Furloughs
• Furloughs, across all agencies, should be seriously considered as an alternative to further service reductions and layoffs.