Tuesday, September 21, 2010

The Problem with Maryland's Wealth Formulas

Most state aid in Maryland is driven by wealth formulas that direct more aid per capita to “poorer” jurisdictions and less to “wealthy” jurisdictions, thereby effecting significant income transfers. But the wealth formulas used by the state have a critical flaw: they are absolutely unrelated to poverty.

Almost all state aid is distributed in one of four ways. First, it can be distributed on the basis of wealth. Second, it can be distributed on the basis of “workload,” or a tangible volume measure like population, road mileage or student enrollment. Third, it can reimburse jurisdictions for all or part of actual costs they pay for specific programs. Fourth, it can match prior year disbursements. A tiny minority of programs are tied to other formulas.

Wealth formulas are a dominant and growing method of determining state aid. In FY 1990, wealth formulas drove 38.5% of state aid. In FY 2010, wealth formulas drove 68.8% of state aid. Much of this increase is driven by the large increases in aid to public schools produced by the 2002 Thornton program.

Maryland’s wealth formulas are typically driven by two components: assessable property tax base and net taxable income. Both components have problems. First, high-value properties are often encumbered by high mortgages. People with highly assessed properties, big mortgages and little or no equity are hardly wealthy. Second, high incomes usually reflect high costs, and those are not considered in the wealth formula at all. Both of these issues plague Montgomery County, which has high incomes and high property values but also has big mortgages, high gasoline costs and lots and lots of foreclosures.

But perhaps a bigger issue is that the wealth formulas are utterly unrelated to the number of poor people living in each jurisdiction. Helping jurisdictions educate and provide services to the poor should be a central goal of any state as dedicated to income redistribution as is Maryland. Otherwise, why do it? Poverty is an especially important consideration in public school spending, which accounted for 88% of all state aid in FY 2010, because poor kids are likely to need free-and-reduced price meals as well as extra instruction.

Below, we show total population and population living in poverty for sixteen Maryland jurisdictions on which the Census Bureau has data for 2008. We also show total aid payments to each of those jurisdictions. Bear in mind that over two-thirds of these payments are driven by wealth formulas. Finally, we show state aid per person living in poverty for each jurisdiction.

In FY 2010, the state spent an average amount of $14,202 for every Marylander living in poverty. But that figure fluctuated wildly between the jurisdictions. Baltimore City leads the state in aid ($1.2 billion) and in poor people (119,340), but is dead last in aid per poor person ($9,704). Howard County, which has the highest median household income in Maryland, gets the most aid per poor person ($27,318). Why should the state’s richest jurisdiction get three times the aid per poor person as the state’s poorest jurisdiction? Montgomery County fares badly on this measure, having the state’s third-highest population in poverty and yet getting less than the state average ($12,397) in aid per poor person. Prince George’s County, which actually has fewer poor people than Montgomery, receives much more aid per poor person ($21,378).

Given the above data, it’s difficult to conclude that the wealth formulas as currently structured by Maryland serve any progressive purpose. Relative to poverty, the state aid payments appear to be sprayed around virtually at random. If they are to be useful for any reason other than parochial politics, the wealth formulas should include measures tied to the actual numbers of poor people living in each jurisdiction. If not, they should simply be abolished.