MARYLAND 'S BUDGET OUTLOOK THE STRUCTURAL DEFICIT

Transcription

1 MARYLAND 'S BUDGET OUTLOOK THE STRUCTURAL DEFICIT William S. Ratchfrd, II Annaplis, Maryland August 2007 Fr mre infrmatin n this dcument cntact William S. Ratchfrd, II 1039 Whitehall Cve Annaplis, Maryland (410) FAX (410) " ratch1039@al.cm"

2 MARYLAND'S BUDGET OUTLOOK THE STRUCTURAL DEFICIT What is a structural deficit? Structural deficits frequently have been prjected fr the state general fund. The term refers t the "gap" between the estimate f revenues frm current surces and the "baseline" expenditures prjected t be incurred by the state. Revenues frm current surces assume n changes in rates fr taxes r fees unless the change is required by statute. "Baseline" expenditures include the funding mandated by statute, realistic estimates f caselads in state prgrams, reasnable assumptins with respect t inflatin r ther cst adjustments, and cntinuatin f prir state cmmitments. A structural deficit relates t the state general fund that accunts fr apprximately half f the ttal fiscal 2008 budget f $30 billin. The ther half f the budget is cmprised f three ther funds: (1) special funds state revenues dedicated t a specific purpse such as transprtatin, land preservatin, debt service, and regulatry activities, (2) higher educatin funds tuitin, fees, charges fr drmitries and dining facilities, and research grants, and (3) federal funds funds received frm the federal gvernment t be utilized fr specific prgrams. Is the structural deficit prjected in fiscal 2009 fr real? In recent years structural deficits have been prjected fr the budget each year. These structural deficits were reslved by a cmbinatin f transfers frm ther state funds, reductins in spending, increases in taxes and fees, revenue cllectins exceeding estimates, and use f the fund balance frm the prir year. The fiscal 2008 structural deficit was ffset by almst $1 billin in fund balance and by a surplus f $175 millin in the state emplyees health accunt. Fr fiscal 2009 the structural deficit is a significant amunt (almst 10% f prjected general fund spending). Hwever, the state's current ecnmic grwth is nt as rbust as in fiscal 2005 and fiscal The fund balance available fr the fiscal 2009 budget is prjected t be slightly in excess f $100 millin. General fund revenues fr fiscal 2009 are prjected t be $14.1 billin. The general fund budget in fiscal 2008 ttals $14.3 billin. General fund spending fr the current year is slightly greater than general fund revenues fr next year.

3 What is the amunt f the structural deficit? Fr fiscal 2009 the structural deficit in the general fund prjected by the Department f Legislative Services (DLS) is $1.456 billin. The current prjectin f fund balance as the end f fiscal 2008 is slightly in excess f $100 millin. The magnitude f the structural deficit reflects additinal funding required fr the Thrntn prgram due t a larger increase in the gvernmental price deflatr, enhancements t pensin prgrams, the use f apprximately $175 millin in the emplyees/retirees health insurance prgrams t lwer health csts in the fiscal 2008 budget and $18-$20 millin fr a vting system with a paper trail. The structural deficit des nt take int accunt three aspects relating t emplyee cmpensatin that the state will need t address in future years. The teacher pensin systems and the emplyee pensin systems are nt fully funded. Current cntributin rates are 11.60% (teachers) and 8.86% (emplyees) using the crridr methd. Full funding requires rates f 12.78% fr the teachers system and 12.27% fr the emplyees system. Full funding requires an additinal $165 millin, apprximately $100 millin in general funds. Funding the liability fr retiree health insurance prgram cnsistent with GASB 45 requirements. The state has set aside $200 millin fr this liability and the baseline frecast prvides an additinal $200 millin in fiscal The ptential liability is in the magnitude f $14 billin. The cmmissin reviewing the issue des nt reprt until December The state is self-insured fr state emplyee wrkers cmpensatin claims. The balance in the self insurance fund was diverted t the general fund in fiscal The self-insurance fund shuld have a balance f $250 millin cmpared t a current balance f $25 millin. Can the structural deficit be reslved by budget reductins? The prjected structural deficit fr the fiscal 2009 general fund budget can be eliminated by budget reductins if the state decides t make significant reductins

4 in aid t lcal entities (particularly schls), entitlement prgrams, cmmunity health prgrams, higher educatin and public safety prgrams. Funding fr these prgrams ttaled 84% f the fiscal 2008 $14.3 billin general fund budget. Aid t lcal entities Medicaid, assistance payments, fster care, child care, prperty tax credits Cmmunity prgrams fr mentally ill, develpmentally disabled, substance abusers Higher educatin institutins Public safety prgrams Ttal $5.8 billin 2.7 billin 1.1 billin 1.1 billin 1.4 billin $12.1 billin Apprximately 25% f the ttal state budget is expended n salaries and benefits fr state emplyees. By cntrast cunty and Baltimre City gvernmental entities spend apprximately 75% t 80% f their budgets fr salaries and benefits f emplyees. In July the Bard f Public Wrks, based n a prpsal frm Gvernr O'Malley, reduced the fiscal 2008 budget by $153.2 millin including $85.6 millin in general funds. Lcal aid was reduced $3.6 millin ($1.0 millin utility prperty grant, $2.0 millin cmmunity clleges, $603,341 aid t educatin). A new $6.0 millin state grant fr prgrams assisting mentally ill and develpmentally disabled children was reduced t $2.0 millin. Other significant reductins include the University f Maryland ($12.0 millin), grants t private clleges and universities ($2.5 millin) and medical assistance ($23.5 millin) Gvernr O'Malley plans t utilize the StateStat system in the same manner he used CitiStat t imprve efficiencies in state agencies and t achieve additinal cst reductins. Gvernr O'Malley will be able t achieve cst savings that will reduce general fund spending by state agencies and assist in reducing but nt reslving the general fund structural deficit fr fiscal In June the Department f Legislative Services (DLS) submitted a general fund "dmsday budget" fr fiscal 2009 t the General Assembly. The budget included reductins f $1.406 billin. The premise f the "dmsday budget" is that n new revenues will be available in fiscal DLS als assumed that the general fund reductins adpted by the Bard f Public Wrks fr fiscal 2008 wuld have a carry frward impact f $50 millin in fiscal 2009.

5 The general fund "dmsday budget" fr fiscal 2009 ttaled $14,250 millin. This budget wuld be $72 millin less than the general fund budget fr fiscal 2008 ($14,312 millin). The fiscal 2008 budget has been adjusted fr the Bard f Public Wrks' $86 millin reductin. DLS prpsed the fllwing reductins in the general fund "dmsday budget" Amunt Percent Categry ($ in millins) f Ttal State aid t lcal entities $ % Bards f Educatin $505.3 Library Bards 18.0 Cmmunity Cllege Bards 32.2 Cunties, municipalities 90.2 State entitlement prgrams % State agencies % State emplyees/retirees % State cntributin fr OPED % Ttal $1, % Will the cunties and Baltimre City participate in the slutin? If the past is prlgue t the future, the cunties and Baltimre City will participate in the slutin t the structural deficit fr fiscal When the state faced a revenue shrtfall in the early 1990's the state reduced funding fr the cunties and Baltimre City n a temprary basis (lcal health grants, prgram pen space, waterway imprvement, schl transprtatin, and prperty tax credits) and n a permanent basis (prperty tax grant, share f liqur, cigarette and business franchise taxes, and transprtatin revenue sharing). The respnsibility fr paying teacher scial security was shifted frm the state t the cunties althugh a prtin f the cst was subsequently included in anther educatin frmula beginning in the mid 1990's. In ttal the cunties were respnsible fr mre than 20% f the slutin, mst f permanent. When the state faced the revenue shrtfall in the mid 2000's the state reduced funding fr the cunties and Baltimre City n a temprary basis (highway user revenues - $228 millin, prgram pen space - $167 millin, educatin aid $72 millin, cmmunity cllege aid - $52 millin, prperty tax credits - $10 millin, utility prperty grant - $4 millin, ther $2 millin). The nly permanent reductin was in plice aid as lcal jurisdictins are nw required t fund 30% f the state crime labratry. Reductins in lcal aid ttaled $535 millin in fiscal

6 2004, fiscal 2005, and fiscal 2006 and accunted fr apprximately 25% f reslving the prblem but nly n a temprary basis. As the Gvernr and the General Assembly will be lking fr a permanent slutin with respect t the fiscal 2009 general fund structural deficit, the cunties and Baltimre City culd be impacted by permanent reductin r repeal f the fllwing prgrams (fiscal 2008 data): Utility prperty tax grant (statutry allcatin) - $30.6 millin. Grant is particularly imprtant t Calvert, Anne Arundel, Prince Gerge's, Harfrd, Charles, and Mntgmery cunties. Reimbursement fr state prperty tax credits ("circuit breaker" prgram) - $62.4 millin (statutry requirement) Lcal health grants (statutry basis) - $66.5 millin grant is wealth based and particularly imprtant t Baltimre City, Prince Gerge's and ther lw wealth jurisdictins) Disparity grant (statutry allcatin) - $114.9 millin grant is wealth based and particularly imprtant t Baltimre City, Prince Gerge's and five ther lw wealth jurisdictins. Public safety prgrams - $82.6 millin (sme statutry, sme discretinary) The Thrntn educatin aid prgram, except fr the gegraphic cst f educatin index (GCEI) is a statutry mandate. Mandating the funding f the GCEI may be cnsidered as part f legislatin increasing revenues. Depending n the phase in, GCEI culd add $30 t $40 millin t the structural deficit. An effrt may be made t revisit a decisin f the Thrntn Cmmissin that teacher retirement csts remain 100% state funded. If csts were funded as part f the per-pupil amunt in the fundatin prgram, the state csts wuld be reduced by 50% r apprximately $310 millin. Csts t the lcal schl systems wuld increase by this amunt but due t equalizatin, prprtinally the csts wuld be higher in high wealth jurisdictins (Wrcester, Talbt, Mntgmery, Anne Arundel and Hward) and lwer in the lw wealth jurisdictins ( Baltimre City, Smerset, Carline and Prince Gerge's). This item was included in the DLS "dmsday budget." T ffset any permanent reductin in state funding the cunties and Baltimre City culd be granted additinal taxing authrity such as increasing the maximum lcal incme tax frm 3.20% t 3.50% r 3.75%. The maximum rate fr the lcal incme tax was increased as part f the fiscal slutin at the 1992 special sessin What revenue ptins may be cnsidered?

7 Revenue increases will likely be a large part f the slutin t the structural deficit. Currently the persnal incme tax and the sales tax accunt fr almst 80% f ttal general fund revenues. Business taxes, death taxes, cigarette taxes, alchlic beverage taxes, net lttery revenues and fees accunt fr the ther 20%. In 1997 the maximum state incme tax rate was reduced frm 5% t 4.75% and the persnal exemptin increased frm $1,200 t $2,400. The reductin was phased in ver a fur-year perid. In fiscal 2009 the incme tax at current rates is prjected t yield $7.5 billin. If the maximum rate was increased t 5% the change wuld generate apprximately $375 millin in revenue. In fiscal 2009 the sales tax at the 5% rate is prjected t yield $3.6 millin. A 1% increase wuld yield $710 millin. One-half f 1% wuld yield $350 millin. Expanding the sales tax base t certain activities currently exempt culd yield $200 millin. In fiscal 2009 the crprate incme tax at the 7% rate will yield $790 millin. A 1% increase wuld yield $112 millin althugh the full amunt wuld nt be realized until fiscal Under current law 24% wuld be allcated t the transprtatin trust fund and 76% ($85 millin) t the general fund. Cigarette taxes yield $285 millin and taxes n alchlic beverages yield $29 millin. Slt machines will be part f the discussin n revenues. At the 2005 sessin bth the Senate and the Huse passed slts legislatin. The Senate legislatin authrized 15,500 machines at 4 racetracks and 3 ther lcatins and the Huse legislatin authrized fr 9,500 machines at 4 lcatins. When the slts prgram was ttally phased in by the furth year the Senate legislatin prvided $785 millin fr state purpses and the Huse legislatin prvided $350 millin. The variatin reflects the smaller number f machines, an allcatin t all lcal gvernments and an allcatin fr imprving race tracks in the Huse legislatin. If slt machines are part f the revenue prpsal, the nly revenue that will be realized in fiscal 2009 will be licensing fees. Substantial revenue frm the slt machines will nt be attained until fiscal 2011 and the cmplete phase in will ccur in fiscal T prvide a "bridge" t the slts revenue, a temprary tax may be required. In 1992 a 6% bracket n incmes in excess f $150,000 (cuple) and $100,000 (single) was impsed fr a three-year perid. This type f temprary tax adjustment culd be utilized as the "bridge."

8 Will the transprtatin trust fund be invlved? The Cnslidated Transprtatin Prgram (CTP) apprved at the 2007 legislative sessin authrized $1.8 billin in capital spending in fiscal 2008 and $1.6 billin in fiscal Hwever, capital spending declines t $1.1 billin by fiscal The data des nt include the Inter Cunty Cnnectr (ICC) that is being funded in the budget f the Maryland Transprtatin Authrity. Part f the decline reflects cmpletin f the Wdrw Wilsn Bridge prject, but primarily the decline reflects increasing csts f the perating prgrams, particularly transit and the lack f additinal transprtatin debt capacity due t the revenue t debt-service cverage rati. Maryland Department f Transprtatin (MDOT) has indicated the need fr $400 millin t $600 millin in new revenue t enable MDOT t mve frward with a number f capital prjects, sme f which relate t transprtatin needs created by the Base Realignment and Base Clsure (BRAC) prgram. MDOT will likely prpse revenue increases in the gasline tax and/r the mtr vehicle titling tax as part f the financing prgram. Gvernr O'Malley has indicated an increase in the gasline tax will be cnsidered. Based n transprtatin capital needs, diverting transprtatin funds t ffset part f the general fund structural deficit seems unlikely. Hwever, lcal gvernments need t fcus n the allcatin f any increase in transprtatin revenues. Currently lcal gvernments receive a 30% share. In 1978 when the vehicle titling tax was increased frm 4% t 5% the additinal 1% was allcated t the general fund. In 1981 the additinal 1% was placed in the transprtatin revenue sharing accunt and a prtin allcated t the transprtatin trust fund and t the cunties and Baltimre City. In 1993 this distributin t the cunties and Baltimre City was discntinued and the amunt allcated t the general fund and in 1994 t the transprtatin trust fund. In effect the 1% is nt shared with lcal gvernments. If the titling tax is increased abve 5%, the additinal revenues may nt be shared with lcal gvernments, particularly in light f the nging increases in the perating csts f mass transit. If the gasline tax is increased, cnsideratin may be given t adjusting the existing 70/30 sharing rati with lcal gvernments s lcal gvernments may receive additinal funding but nt the same prprtin as previusly received.

9 Will prgram pen space funds be invlved? During the mst recent state fiscal prblem (fiscal 2002 thrugh fiscal 2006) apprximately $452 millin f state prperty transfer tax revenues were diverted frm prgram pen space and ther land preservatin prgrams t the general fund. Lcal gvernments lst $167.5 millin in prgram pen space funding. Gvernr O'Malley has expressed strng supprt fr utilizing revenues frm the state prperty transfer tax fr the statutry purpse f land preservatin and is unlikely t prpse temprary r permanent diversin f the revenues t the general fund. Hwever, sme legislatrs expressed cncern during the "real estate bm" f 2004 thrugh 2006 that land preservatin prgrams culd be ver funded, assuming state prperty transfer tax revenues cntinued t exceed $200 millin a year. Similar cncerns existed in the mid t late 1980's. In 1985 legislatin was enacted that established a maximum amunt f state prperty transfer tax revenues t be allcated fr land preservatin prgrams and directed the balance f tax revenues t the general fund. The diversin cntinued thrugh fiscal Even if n actin is taken at the 2008 legislative sessin with respect t state prperty transfer tax revenues, prgram pen space funds fr the cunties and Baltimre City will be significantly less in fiscal 2009 cmpared t the $97.1 millin received in fiscal The reductin reflects the fact that the riginal estimate f state prperty transfer tax revenues fr fiscal 2007 was verstated by apprximately $57 millin. Under current law the first $57 millin f fiscal 2009 revenues will allcated t ffset the fiscal 2007 revenue shrtfall f $57 millin. Assuming the revenue estimate fr fiscal 2009 is $160 millin, the lcal gvernment share f prgram pen space in fiscal 2009 will be apprximately $40 millin r less than half f the fiscal 2008 amunt. It is als likely that the fiscal 2008 estimate f the state prperty transfer tax ($188.6 millin) is verstated. Any shrtfall will be deducted frm the prgram pen space allcatin in fiscal What may be the time table fr actin? Sme legislatrs have suggested a special sessin be held prir t the 2008 sessin t reslve the pending structural deficit in the fiscal 2009 budget. Nvember wuld be an apprpriate time fr a special sessin fr the fllwing reasns:

10 The state wuld have clsed ut fiscal Actual data fr revenues and expenditures wuld be available. The Bureau f Revenues Estimates wuld have made its preliminary frecast f revised revenues fr fiscal 2008 and prjected revenues fr fiscal State agencies submit budget requests t the Department f Budget and Management (DBM) in September. DBM wuld have prepared a preliminary budget fr cnsideratin by the Gvernr. State agencies wuld have finalized the cst cntainment prgrams required by the Gvernr. Underlying data with respect t majr state spending categries such as aid t educatin (implicit price deflatr, enrllment, wealth), health and scial prgrams (enrllment, utilizatin, inflatin) and public safety prgrams (caselad) wuld still be preliminary but better than if a special sessin was held in earlier. Estimates f fiscal 2008 deficiency requests wuld be available. The Department f Legislative Services (DLS) wuld have submitted its preliminary frecast fr fiscal 2009 t the Spending Affrdability Cmmittee If the state incme tax was utilized t prvide additinal revenues the changes wuld be knwn prir t the beginning f tax year 2007, the year in which the changes wuld mst likely take effect. If ther tax surces were utilized t prvide additinal revenues, additinal revenues culd be realized during fiscal These revenues culd be utilized t ffset the deficit r t prvide part f the "bridge" if slt machine revenues were part f the lng term slutin. If slt machine revenues were part f the additinal revenues, implementatin f the slt machine prgram culd begin January 1, 2008 and full implementatin culd be available in fiscal 2011 instead f fiscal If the decisin is t wait until the 2008 sessin, the Gvernr will submit a budget reflecting the Gvernr's psitin with respect t cst cntainment and apprpriatins cntingent n the enactment f revenue ptins. The General Assembly will cnsider the Gvernr's prpsals and take actin n the budget and the revenue prpsals. Implementatin wuld begin June 1, 2008.