Monday, September 27, 2010

Welcome to the New Normal

Over the last two years, a number of adjectives have been used to describe the county’s ongoing budget crisis. “Unprecedented.” “Abysmal.” “Devastating.” “Unthinkable.” Well, maybe those adjectives were suitable as the county’s Great Recession got underway, but now they’re obsolete. Budget disaster here is the New Normal.

In the spring of 2008, the big budget battle was whether county employees would be asked to give up two points from their cost of living adjustments. (They would get to keep the remaining two to three points.) In the end, the County Council broke the charter limit and the employees kept their raises. But by the end of 2008, things had gotten so bad that the school employees voluntarily gave up their raises and the other unions followed. In late 2009, most of the employees’ collective bargaining agreements came up for renegotiation. Raises were off the table. By the spring of 2010, the terms of debate had shifted to whether all employees would be subject to furloughs of equivalent impact. Now layoffs are openly discussed.

That’s quite a long ways to come in just two years, folks!

This is the New Normal. And part of why it is the New Normal is that the county’s way of dealing with its problems often involves temporary measures. The FY 2011 budget includes both furloughs as well as a sunset energy tax. If both of those measures prove insufficient, they will likely be renewed and other temporary fixes will be installed. But that approach almost guarantees that planned expenditures will exceed estimated revenues in each year. And then the council will have to weigh the needs of warring constituencies, the unions, the predictably negative editorials of certain newspapers and, of course, the bond rating houses. It’s a recipe for gray hair, excess eating and lots and lots of Prozac.

Consider some of the points made by a recent budget memo sent to the council from its Staff Director and from the Executive Branch’s budget officials.

1. On a year-to-year basis, Montgomery County’s jobs base is still down. Its unemployment rate is bouncing around between 5% and 6% with no clear trend down. Both of these factors will affect income tax collections.

2. In 2009, the inflation rate was just 0.23%. That’s important because the charter limit on property taxes is tied to inflation. When inflation is low, the county has little ability to raise the amount it collects in property taxes, its greatest single source of revenue. The 2008 Ficker Amendment mandates that all nine Council Members must vote in favor of overriding the charter limit and raising property tax revenues above the rate of inflation. We expect that the next council will not be able to muster nine votes for such an increases. The low charter limit puts even more pressure on spending.

3. Existing home sales, home prices and new construction are all below the levels of 2000-2005. This will hold back property assessments, recordation taxes and transfer taxes – all major sources of county revenue. Again, that puts more pressure on spending.

4. The county’s Office of Management and Budget (OMB) is recommending that all departments will have to cut their budgets for next year by 10-15%. That comes on top of this year’s cuts, in which several agencies took double-digit reductions.

Additionally, three long-term factors loom large over the budget.

First, the General Assembly is poised to shift a portion of teacher pension liabilities to the county. The plan that passed the Senate in the last session would have cost Montgomery County $69 million or more annually by FY 2014. No one can say how we will pay that money.

Second, the county still has to deal with the state’s Maintenance of Effort law mandating that it at least maintain per-pupil local spending on education each year. The county received a waiver from that requirement last spring (and got a fine overturned by the General Assembly), but all bets are off for 2011. In bad budget times, this law’s effect is to concentrate cuts away from schools and towards other county functions, like public safety. There is clearly a limit to the county’s ability to do that.

Third, the best thing the County Council did on the budget this year was to pass a package of fiscal process reforms recommended by the County Executive. The goal of these reforms is to put the budget on a path towards sustainability as well as to protect the county’s AAA bond rating. One of their key components is to steadily build up the county’s reserve level from 6% of revenues to 10% over the next ten years, both to protect the bond rating as well as to prevent mid-year emergency cuts in bad times. If the council is to make progress on that goal, it will have to put aside more money for reserves just as it is cutting spending. That will be extraordinarily difficult, but necessary. Because if the county does not stick to a long-term plan for restoring some sense of order to its budget, the New Normal will be “normal” for a long, LONG time.