Tuesday, February 09, 2010

MoCo’s Budget Problem

A recent county budget presentation given by Chief Administrative Officer Tim Firestine to the Montgomery Delegation makes clear that the county’s budget problems are just as serious – and just as intractable – as the state’s.

In FY 2011 (which starts on 7/1/10), the county is projected to have $3.679 billion of revenues and $4.288 billion of spending for its tax-supported general fund (which does not include non-tax enterprise funds), leaving a deficit of $608 million. That annual deficit is projected to reach $519 million in FY 2012, $600 million in FY 2013, $683 million in FY 2014, $715 million in FY 2016 and $752 million in FY 2017.

The above figures do not include the state’s Maintenance of Effort fine, likely cuts in state aid or any assumption of teacher pension liabilities.

The biggest single revenue problem is an absolute reduction in income tax revenues available to the county. Income tax revenues grew by 21% in FY 2007, but fell by 13% in FY 2010.

The number of income tax returns and the taxable income reported in those returns fell in almost every tax bracket between 2007 and 2008. In the critical millionaire bracket, the number of returns fell by 27% and the taxable income plummeted by 39% in just one year. Tax year 2009 may prove worse than tax year 2008.

Revenue stagnation has caused the county budget to stop growing. This is an amazing fact for historically liberal, free-spending MoCo.

Just as with the state budget, the county’s spending projections assume cost increases that can be quickly discarded at the start of each year’s budget process. Wage increases are one example. But assuming away cost hikes will not be enough to deal with MoCo’s budget issues. Firestine indicated that seven options were on the table for FY 2011:

Compensation changes including no general wage adjustments (COLAs) or step increases, or benefit modifications (needs collective bargaining concurrence)

Furloughs across all county agencies

No retiree health insurance (OPEB) pre-funding

Reduce reserves from 6% to 5%

Eliminate most PAYGO [use of current revenues] from the capital program

Service reductions, program eliminations, employee layoffs

Looking for continuing cost savings because the fiscal problem is long term and structural for both the County and the State
Applying a wage freeze, no retiree health insurance pre-funding, cutting reserves and PAYGO and continuing mid-year layoffs reduces the FY 2011 budget gap from $608 million to $271 million. That means furloughs and program cuts are probably inevitable.

In relative terms, MoCo’s budget gap of roughly 15% is about equal to the state’s deficit. That augurs a cruel and desperate symmetry between the two. After the coming election, the state will no doubt attempt to balance its budget with tax increases and budget cuts that will hit its Economic Engine particularly hard. And MoCo will have to rely on state aid and the unlikely mercy of Annapolis budget writers to avoid financial calamity. Unless the economy improves soon, it seems that the two may claw and scratch each other as both tumble over the cliff.