Tuesday, June 01, 2010

Leggett Proposes Fiscal Reform

County Executive Ike Leggett has sent the County Council a plan for long-term reform of the county’s fiscal practices. Leggett’s proposals will be hard to follow, but he deserves credit for putting them on the table.

Leggett’s plan consists of three main elements.

1. Increase the Reserve Target
Right now, the county government aims to set aside 6% of its revenues into a reserve fund. Leggett would increase that target to 10% over the next ten years to counter volatility in revenues and spending. Leggett claims that other large jurisdictions with AAA bonds are moving to that target but does not name which ones are doing so.

2. Move to Structural Balance
Currently, the county matches all revenues and all spending in balancing its budget. The problem is that some of these items are one-time in nature (like revenue spikes and furloughs). Leggett would mandate balancing budgeted expenditures against recurring, or, permanent and ongoing, revenues. This is a subtle conceptual shift but it is aimed at preventing temporary solutions to permanent problems. The FY 2011 budget is a good example of this because of its reliance on furloughs and a “temporary” energy tax hike of two years. (Does anyone believe that tax is temporary?)

3. Use One-Time Revenues Responsibly
If the county is lucky enough to get a one-time revenue windfall, Leggett would establish strict policies regarding its use. The highest priority for any windfall would be to buttress the reserve. If the reserve is fully funded, then the money would be used to fund capital projects (as an alternative to bonds) or to pay down pension or retiree health liabilities.

This is tough medicine. The council does not like to tie its own hands on how it spends money. These policies together would direct money to reserves, capital funding and necessary benefit payments and force the county to consider structural issues in its budgeting. They would collectively discourage seat-of-the-pants budget maneuvers in the last week of deliberations – a time-honored tradition in MoCo. More ominously, they would put pressure on workforce reductions before county employee pay increases could resume.

One notable item omitted by the Executive is any halt to his newly proposed practice of using public bonds to finance private capital projects – a practice strongly defended by his spokesman. It is an awesomely irresponsible act to put private subsidies on a credit card at a time when the bond rating agencies are ready to pounce. Council Members George Leventhal and Mike Knapp have introduced a bill to outlaw this. Their bill should be included in any package of fiscal reform.

Reasonable people can also disagree on whether 10% is an appropriate reserve target. “Why does it have to be so high if we can’t spend the money?” asks one source. The issue calls for an examination of what other highly-rated jurisdictions are actually doing.

But overall, the Executive’s proposal is well taken. What he is really doing is taking on a culture of spending that became especially acute in his predecessor’s last term. Leggett also shares some responsibility by presiding over spending increases during his first three years in office. At least he is now changing course.

When the county’s revenues recover – as they inevitably will – there will be a temptation by some to declare, “Happy Days are here again!” Goodies will be handed out left and right, the county’s long-term issues (like retiree health care) will be neglected and when the next bust comes, the county will face another billion-dollar disaster. That cycle has to end.

Dieting is tough. But bloating to the bursting point – which is what just happened – is even tougher.