MEMORANDUM. Update on County Fiscal Plan and Economic Indicators

Transcription

1 AGENDA ITEM #4 December 8, 2015 MEMORANDUM December 4, 2015 TO: FROM: SUBJECT: County Council Stephen B. Farber, Council Administrato~ Jacob Sesker, Senior Legislative Analyst '4 Update on County Fiscal Plan and Economic Indicators OMB Director Jennifer Hughes, Finance Director Joseph Beach, and their colleagues will join the Council for this fiscal review. They will discuss the Fiscal Plan update on 1-6 and the revenue and. economic indicators update on Also see for the December 3, 2015 memo from Chief Administrative Office Timothy Firestine on new reduction targets for the FYI7 operating budget. Background hi June 2010 the Council approved for the first time a six-year Fiscal Plan that was balanced for the entire period. In June each year since then the Council has taken similar action. Every edition of the Fiscal Plan is a snapshot in time that reflects the most recent available data and policy assumptions. Each year's edition is updated in December, three months before the Executive's next recommended budget. To illustrate the snapshot in time concept, consider the following: In June 2013 the approved FY14-19 Fiscal Plan projected a 5.0% decline in "agency uses" for FY15 - that is, resources for the four tax supported agencies (County Government, MCPS, Montgomery College, and M-NCPPC - to $3.555 billion. The December 2013 Fiscal Plan update projected a smaller decline of 0.9% (to $3.710 billion). Actual agency resources in the Council's FY15 approved budget in May 2014 were up 3.8% (to $3.885 billion). Thus agency resources for FYI5 were $330 million above the projection made one year earlier. In June 2014 the approved FY15-20 Fiscal Plan projected a 1.2% decline in agency resources for FY16 (to $3.838 billion). The December 2014 Fiscal Plan update projected a larger decline of 6.1% (to $3.647 billion). Actual agency resources in the Council's FY16 approved budget in May 2015 were up 1.9% (to $3.958 billion). Thus agency resources for FY16 were $311 million above the projection made five months earlier. In June 2015 the approved FY16-21 Fiscal Plan projected a 2.1% decline in agency resources for FY17 (to $3.873 billion). An "illustrative" plan, based on updated revenue infonnation on the Wynne decision and disappointing FYI5 income tax receipts, projected a decline of 4.4% (to $3.783 billion),! The current December 2015 Fiscal Plan update projects a 4.5% decline (to $3.779 billion). Because the State requires Maintenance of Effort level funding for MCPS and the College, the projected decline for County Government and M-NCPPC in FYI7 is 11.5%, I See id=6&clip id=9734&meta id=86163 and Viewer.php?view id=6&clip id=9734&meta id=86164 for the Council's approved FY16-21 Fiscal Plan and the "illustrative" plan.

2 In her memo, Ms. Hughes cautioned on I that "this is a limited update to fiscal assumptions, the projections are preliminary, and the Fiscal Plan included as part of the County Executive's recommended budget next March will be different than this one." But she also described the larger fiscal context on 3: "Disappointing revenue growth continues to challenge our ability to meet increasing expenditure demands. Not only is continued restraint in the County's spending plans necessary, but more aggressive actions may be necessary to align ongoing spending obligations with ongoing revenues." This is so despite the $54 million FYl6 Savings Plan approved by the Council on July 28,2015. These revenue concerns are hard to reconcile with the County's apparent economic position, which has shown slow but steady improvement since the depth of the Great Recession in Most current economic indicators, while not as robust as pre-recession indicators, are modestly positive, and major stock indexes are at near-record levels. Meanwhile, State revenue growth is above projection, not below; for example, the September 2015 estimate for taxable capital gains income for 20]4 is for an increase of 24.5%. With regard to the State's disappointing November 2015 distribution of County income tax revenue in particular, the Finance Department has requested more information from the Comptroller's office. See < Key Points in the Fiscal Plan Update The Finance Department's current forecast of County revenues in FY16-17 is down $134.5 million from the June forecast, with declines for income and property tax revenue partly offset by higher transfer/recordation tax revenue. See for details. The current forecast for income tax revenue reflects both the November distribution and updated information on the impact ofthe Wynne decision. That impact - now projected to be $0 in FY16, $76 million in both FY17 and FY16, $31 million in FY19, and $16 million after FY19 - will be updated again in March. See 35 for details on the Wynne case, the U.S. Supreme Court decision, and the revenue impact. Intergovernmental aid in FY 17 is assumed to be unchanged until the Governor issues his proposed FY17 State budget next month. State aid is likely to increase somewhat, but the Governor's fiscal priorities may limit the amount. Congressional priorities may affect Federal aid. The projected reduction of 4.5% ($178.5 million) in total agency expenditures in FY17 does not include such factors as program annualizations, nor does it reflect possible compensation increases resulting from collective bargaining or funding above Maintenance of Effort for MCPS or the College. For MCPS and College expenditures, see footnote 2 on <92. Reserves are now projected to be 8.0% of Adjusted Governmental Revenues in FY16 (v. 8.2% in the FY16 approved budget) and 9.3% in FYI7. See point 4 on <92-3 and the table on 5. Other Assumptions Other assumptions in the Fiscal Plan update are outlined at the bottom of<94: Revenues reflect Finance's updated forecast. Property tax revenue is at the Charter limit with a $692 credit. Other taxes are at current rates, including the fuel/energy tax. The Council reduced the FYI 1-12 increase in that tax by 10% in FYI3, another 10% in FY14, and 7% more in FY15. The Executive had proposed retaining the full FYl1-12 increase, which was originally scheduled to sunset in FY13, and did not support these reductions. Reserve contributions are at the policy level and reflect legal requirements. 2

3 PA YGO, debt service, and current revenue reflect the Amended FY15-20 Capital Improvements Program. The Executive will transmit the proposed FY16-21 CIP next month. FY17 retiree health insurance pre-funding (OPEB) reflects the Annual Required Contribution. State aid, including for MCPS and the College, is flat in FYI7-22. See also footnote 6 on 4. Estimated FY16 expenditures reflect the FY16 Savings Plan approved by the Council. Revenue and Economic Indicators Update Mr. Beach will discuss the slides on 7-32 concerning the revenue and economic indicators update. The data in these slides confirm that while both economic and fiscal recovery continue to advance slowly, projections for income tax revenue in particular show a significant decline. The National Bureau of Economic Research determined that the Great Recession began in December 2007 and ended in June The national unemployment rate, which peaked at 10.0% in October 2009, was 5.0% in October 2015, the same level as in December State rates in October ranged from 2.8% in North Dakota to 6.9% in West Virginia. Maryland's rate, which during the recession was well below the national rate, was 5.1%. The County's rate peaked at 6.2% in January The estimated average rate for 2015, 4.1 %, is below the national and Maryland rates, but it was just 2.6% in 2007, and until January 2009 it had not reached even 4.0% in at least 20 years. The dashboard on 12 shows that compared to one year ago, resident and payroll employment, home sales, and home prices have all shown improvement. Resident employment is projected to reach an all-time high of 523,400 in 2015 (see (13), while home sales and prices remain well below their levels in 2006 and 2007, respectively (see 16-17). The revenue information on is useful. As noted above and on 19-22, the forecast for FY 16-17, compared to the June forecast, is down $134.5 million, while the forecast for FY is down $454.1 million. The slides on show the volatility of County income tax revenue, explain the one-time components of the State's large November distribution, and outline the economic factors that underlie the projections. The slides on project lower property tax revenue at the Charter limit (because inflation has been lower than forecast), higher transfer/recordation tax revenue, and a small reduction in other tax revenues. Other Key Points for the Fiscal Plan Update Two additional points are relevant to the current Fiscal Plan update: The update in March 2016, as part of the Executive's FY17 recommended operating budget, will reflect several factors not included in the current update. See Ms. Hughes' list on 3. Another factor will be the new budget reduction targets noted in Mr. Firestine's December 3 memo on A broader measure of unemployment that includes discouraged and underemployed workers was 9.8%. 3

4 As always, factors beyond the County's control can affect the County's fiscal prospects. Apart from "black swan" events,3 regional, national, and global economic concerns persist, and a downturn could take hold at any time. One factor that should provide greater stability for the region is the two year-federal budget agreement approved by the President and Congress in late October. The agreement eases the federal sequester limits imposed in 2013 by a total of $80 billion and suspends the federal debt limit until March 15,2017. Nonetheless, growth in federal employment and procurement is likely to remain restrained. Interactive Fiscal Plan These issues are relevant to the web-based Interactive Fiscal Plan tool developed by the Office of Legislative Oversight. The plan is a budget model that measures the effect of inputting alternative revenue and expenditure assumptions into the Fiscal Plan. 4 Its purpose is to help the Council and the community better understand the relationship among different budget elements and to enable users to explore alternative approaches to achieving a balanced budget over time. OLO is now completing the incorporation ofdata from the current Fiscal Plan update into its model. Other Fiscal Infonnation Additional key fiscal information can be found in two recent documents: The packet for the Council's November 17 discussion of factors driving the cost of government. 5 The packet for the Government Operations and Fiscal Policy Committee's November 30 discussion of implementation ofthe FYl6 operating and capital budgets. 6 Further key information will be available on December 8 with the release of the Superintendent's proposed MCPS operating budget for FYI7. The proposed budget is likely to include funding that is well above the Maintenance of Effort level assumed in the current Fiscal Plan update. f:\farber\16opbud\fiscaj plan update 12-8-IS.doc 3 "Black swan" events are random and unpredicted events of large size and consequence, such as the 9/11 attacks and the 2008 collapse of Lehman Brothers. 4 See 5 See id=6&clip id=10488&meta id= See 51]30/ G03.pdf. 4

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11 Montgomery County, Maryland DECEMBER 2015 REVENUE UPDATE AND SELECTED ECONOMIC INDICATORS Department of Finance December 8,

12 Overview Finance provides a full revenue update in December of each year, after the November income tax distribution At this time, near final data about the prior year income tax receipts are known, and updates are available to certain economic factors Another full update is done for the March budget 8

13 ECONOMIC OUTLOOK - SUMMARY 9

14 Signs of a Continued Economic Recovery A drop in unemployment rate from 4.4 percent in September 2014 to 4.0 percent in September 2015, a significant increase in resident employment estimated for CY15, and an estimated increase in wage and salary income in CY15 ( 4.4%) that follows an increase of 3.6 percent in CY14. Payroll employment is expected to increase 1.6 percent in CY15 that follows a 0.8 percent increase in CY14. Sales for existing homes are expected to increase 10.6 percent after declining 4.2 percent in CY14. 10

15 Causes of Concern The month-to-month volatility in the stock market to date has contributed to a decline in the Dow Jones Industrial Average ( 0.05%) and a modest increase in the S&P 500 index ( 1.46%) through November 25. Inflation through September ( 0.25%) is running well below CY14 ( 1.54%) and CY13 ( 1.52%). Median home prices are estimated to decline 0.13 percent in CY15 after no change in CY14. Fed funds rates have remained unchanged through November but with a 78 percent probability (CME Group November 25) of a rate increase in December. 11

16 ECONOMIC INDICATOR DASHBOARD LATEST DATA REVENUE AFFECTED EXPLANATION COMPARISON DIRECTION (yr.-over-yr.) INFLATION 0.25% Jan.-Sept Property Taxes Key determinant of property tax revenues at the Charter Limit 2014: 1.54% UNEMPLOYMENT RATE 4.0% Sept Income Taxes Indicates overall health of the job market 4.4% Sept RESIDENT EMPLOYMENT 522,387 Sept Income Taxes Primary determinant of income tax receipts 513,816 Sept PAYROLL EMPLOYMENT (Estimated) 487,800 Sept Income Taxes Another determinant of income tax receipts 476,700 Sept STOCK MARKET - S&P 500 2, Nov. 24, 2015 Income Taxes Key determinant of capital gains portion of the income tax 2, Dec. 31, 2014 HOME SALES 935 Oct Transfer/ Recordation Taxes Indicates activity affecting receipts 888 Oct HOME PRICES (Median Price Sol) $389,000 Oct Transfer/ Recordation Taxes Taxes are based on values, affects amount of taxes collected $387,310 Oct FEDERAL FUNDS RATE 0.12% Oct Investment Income County s return on investments closely correlated with the Fed Funds 0.09% Oct MC Department of Finance December 2015 Economic and Revenue Update 12

17 Employment (000s) Department of Finance estimates that the County s resident employment will reach an all-time high of 523,400 in CY15 ( 1.4%) over CY14. On a year-over-year basis, resident employment increased by nearly 8,600 from September 2014 to September of this year. Total Resident Employment (Montgomery County) est. Calendar Year SOURCES: Bureau of Labor Statistics, U.S. Department of Labor Montgomery County Department of Finance 13

18 Unemployment Rates The Department of Finance estimates that the County s unemployment rate will be 4.1 percent in CY15 compared to 4.4 percent in CY14. The unemployment rate in September was 4.0 percent compared to 4.4 percent in September Unemployment Rates for Montgomery County and Maryland 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 7.6% 7.0% 7.2% 7.0% 6.6% 5.3% 5.6% 5.8% 5.4% 5.2% 5.1% 5.4% 4.4% 3.9% 4.2% 4.1% 3.4% 2.9% 3.2% 2.6% est. Calendar Year MOCO MD SOURCE: Bureau of Labor Statistics, U.S. Department of Labor 14

19 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Y-o-Y Pct. Chg. Inflation was 0.49 percent in September Overall for the Washington-Baltimore consolidated region, the CPI increased a modest 0.25 percent for the calendar year ending in September. For calendar year 2014, the index increased 1.54 percent compared to 1.52 percent in CY13. Year-over-Year Percent Change in Consumer Price Index Washington-Baltimore CMSA 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% All Items "Core" SOURCE: Bureau of Labor Statistics, U.S. Department. of Labor 15

20 Annual Sales Home sales are estimated to increase 10.6 percent this year. Total sales of existing homes increased 12.9 percent in CY13 but declined 4.2 percent in CY14. EXISTING HOME SALES (Montgomery County) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ,494 11,461 12,142 10,355 10,376 10,401 9,500 10,155 10,976 8, est. Calendar Year SOURCES: Metropolitan Regional Information System, Inc. Montgomery County Department of Finance 16

21 Median Price Median home sales prices are expected to decrease 0.13 percent in CY15 following no increase in CY14. The estimated decrease in the median sales price this calendar year, potentially offsets the effect on tax revenues from the double-digit increase in sales of existing homes. Median Home Sales Price Montgomery County $500,000 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 $439,000 $444,000 $395,000 $400,000 $400,000 $399,485 $340,000 $350,000 $350,000 $368, est Calendar Year SOURCES: Metropolitan Regional Information System, Inc. Montgomery County Department of Finance 17

22 REVENUE UPDATE 18

23 FY16 and FY17 Summary The outlook for the remainder of this fiscal year (FY16) and next year (FY17) suggests a decline in revenues over the two-year period compared to the estimates prepared for the FY16 budget. This decrease is mainly attributed to revisions to income tax and property tax revenues. The combined decrease of all tax-supported revenues in FY16 and FY17 is $ million lower than previously estimated. 19

24 Revenue Update December revised revenues for FY16 are $ million below the FY16 Budget estimates. The major contributor is the estimated decrease income tax revenues but partially offset by stronger real estate transfer/recordation taxes. FY16 BUDGET - DECEMBER 2015 UPDATE ($MIL.) FY16 Budget Dec. Update Difference Income $1, $1, ($50.862) Property $1, $1, ($4.317) Transfer/Recordation $ $ $ Other Taxes: --Admissions $3.248 $2.909 ($0.339) --Fuel/Energy $ $ ($1.067) --Telephone $ $ ($0.458) --Hotel/Motel $ $ ($0.426) Investment Income n.a n.a n.a Highway User Revenue $4.125 $3.628 ($0.497) TOTAL $3, $3, ($37.090) 20

25 Revenue Update December revised revenue estimates for FY17 are $ million below the FY16 Budget estimates. The decrease is attributed to weaker income and property tax revenues. FY16 BUDGET - DECEMBER 2015 UPDATE ($MIL.) FY17 Estimate Dec. Update Difference Income $1, $1, ($68.970) Property $1, $1, ($23.320) Transfer/Recordation $ $ ($1.551) Other Taxes: --Admissions $3.457 $3.066 ($0.391) --Fuel/Energy $ $ ($1.820) --Telephone $ $ ($0.999) --Hotel/Motel $ $ ($0.431) Investment Income n.a n.a n.a Highway User Revenue $3.640 $3.663 $0.023 TOTAL $3, $3, ($97.459) 21

26 Total Revenues (Millions) Revenue Trend FY16-22 During the current six year period (FY16-FY21), total revenues are expected to be approximately $454.1 million below FY16 budget estimates. Comparison of Total Revenues: FY16 Budget versus December '15 Update $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 FY16 est. FY17 est. FY18 est. FY19 est. FY20 est. FY21 est. FY22 est. Fiscal Year FY16 Budget December '15 Update 22

27 est Pct. Chg. Income Tax Volatility Year-over-year percent changes in the income tax are volatile and highly sensitive to economic events such as recessions, changes in local, state, and federal tax rates, and capital gains. Annual Percent Change in lncome Tax Revenues from Withholdings, Estimated Payments, October 15 Filings, and Revenue Adjustments 30.0% 25.0% 24.0% 20.0% 19.5% Rate increase from 2.95% to 3.2% 15.0% 10.0% 5.0% 0.0% 0.1% 2.0% 9.7% 5.5% 6.7% 12.8% 12.7% 10.6% 8.8% 10.9% 4.3% 8.9% 7.4% 8.8% 7.2% 6.2% 10.0% 2.7% -5.0% -10.0% -15.0% -20.0% First Gulf War and Recession Beginning of Three-year Stock Market Decline and Recession -8.3% -3.3% Stock Market Collapse and "Great Recession" -11.9% -4.9% -3.8% Tax Year 23

28 Income Tax It is all about the November distribution. The largest share (five year average of nearly 82.0%) of the County s income tax revenues for any tax year comes in quarterly distributions of withholdings and estimated payments. The November distribution reflects actual results from the prior tax year (e.g., final tax year 2014 in November 2015) and provides a near final review of last year s tax liability this provides a base for future projections. The State Comptroller s Office also adjusts its distribution formula for the current fiscal year based on the prior tax year results (e.g., 2014 tax year final results affect quarterly distributions for this fiscal year). Income tax revenues represented 46.4 percent of total General Fund tax revenues in FY15 and nearly 44.5 percent of the County s total General Fund revenues. 24

29 Income Tax November distributions Actual Actual Actual Estimated Actual (millions) FY13 FY14 FY15 FY16 FY16 Difference October 15 th Filings and Adjustments $ $ $79.13 $ * ($42.70) Withholding and Estimated payments for 3 rd Quarter $ $ $ $ $ ($4.90) Total November Distribution $ $ $ $ $ ($47.60) * Includes $6.7 million reduction from Wynne decision for TY2014. Decrease in receipts from October 15th Filings and Adjustments is based on an adjustment to reflect final income tax receipts due the County for tax year 2014 as compared to tax year The State has indicated that the County s income tax receipts from withholdings and estimated payments for the third quarter of tax year 2015 are 3.6% higher than for tax year 2014 but below the estimate for the FY16 Budget. Increase in actual withholdings and estimated payments compared to last year is due to a 3.3% increase in income tax collections from withholdings and estimated payments statewide from November 2014 to November

30 Income Tax Economic Factors Resident employment is expected to increase 1.4 percent in CY15 and increase 0.8 percent in CY16. Those increases are different compared to March economic assumptions of 0.4 percent increase in CY15 and 2.9 percent in CY16. The lower employment growth in CY16 is based on the State s Board of Revenue Estimates recent September forecast that lowered employment growth in the State. Personal income is estimated to increase 3.5 percent in CY15 and 6.4 percent in CY16. Wage and salary income is expected to increase 4.4 percent in CY15 and increase 4.5 percent in CY16. 26

31 Income Tax FY16-21 Over the current six year period (FY16-FY21), income tax revenues are expected to be approximately $304.1 million below FY16 budget estimates reflecting the estimated $50.9 million and $69.0 million declines in FY16 and FY17, respectively. Income Tax Revenues (Millions) Comparison of Income Tax Revenues: FY16 Budget versus December '15 Update $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 FY16 est. FY17 est. FY18 est. FY19 Est. FY20 est. FY21 est. FY22 est. Fiscal Year FY16 Budget December '15 Update 27

32 Distributions S&P 500 Index Income Tax The amount of revenues from the November distribution had been correlated to the stock market (S&P 500 Index) until tax year That relationship ended starting in 2013 due to the fiscal cliff (TY2013) and possibly to non-stock market related income (TY2014). November Distributions from October 15 Filings and Adjustments and the S&P 500 Index $ $ $ $ $ $ est Tax Year Nov. Dist. S&P500 Year-End Close 28

33 Property Tax The inflation rate is expected to be 0.62 percent in calendar year 2015, which follows a 1.54 percent increase in CY14 and 1.52 percent in CY13. Inflation is used to estimate real property tax revenues under the Charter Limit excluding new construction. The reassessment rates for real property for Group Three for fiscal year 2017 will be released by the Maryland State Department of Assessments and Taxation (SDAT) at the end of this month. Preliminary indications are that this group may experience an increase in the real property tax base. 29

34 Transfer and Recordation Taxes Home sales are expected to increase 10.6 percent in CY15 but median prices are estimated to decrease 0.13 percent. Based on collections to date, the residential and nonresidential real estate market is estimated to experience solid growth in FY16. Because of the estimated increase of home sales in CY15, Finance estimates that the number of residential transfers increases 7.4 percent in FY16. Because of collections to date, total transfer tax revenues on residential transactions are expected to increase 10.5 percent in FY16. Because of the dramatic increase in the average transfer tax on non-residential transactions to date, total nonresidential transfer tax revenues are estimated to increase by over 45.0 percent in FY16. 30

35 Revenues ($millions) Transfer and Recordation Taxes Since reaching $241.7 million in FY06, transfer and recordation taxes declined to $127.3 million in FY12. By FY22, transfer and recordation taxes for the General Fund are estimated to reach $224.2 million $17.5 million below the FY06 peak. Transfer and Recordation Taxes: General Fund Only $250 $200 $150 $65 $66 $68 $71 $73 $79 $85 $100 $50 $109 $108 $112 $116 $122 $131 $140 $0 FY16 est. FY17 est. FY18 est. FY19 est. FY20 Est. FY21 Est. FY22 Est. Fiscal Year Transfer Tax Recordation Tax 31

36 Other Tax Revenues ($Millions) Other Tax Revenues Other tax revenues are estimated to decrease 1.3 percent in FY16 over budget estimates due to estimated decrease in fuel and energy tax revenues. Over the current six-year period (FY16- FY21), total other tax revenues are estimated to be $22.2 million below FY16 budget estimates. Comparison of Other Tax Revenues FY16 Budget and December '15 Update $310 $290 $270 $250 $230 $210 $190 $170 $150 FY16 est. FY17 est. FY18 est. FY19 est. FY20 est. FY21 est. FY22 est. Fiscal Year FY16 Budget December '15 Update NOTE: Other tax revenues include admissions, fuel/energy, telephone, and hotel/motel taxes. 32

37 OFFICES OF THE COUNTY EXECUTIVE Isiah Leggett C o u n t y E x e c u t i v e Timothy L. Firestine C h i e f A d m i n i s t r a t i v e O f f i c e r M E M O R A N D U M December 3, 2015 TO: FROM: SUBJECT: Executive Branch Department and Office Directors Stephen B. Farber, Council Administrator Timothy L. Firestine, Chief Administrative Officer FY17 Reduction Targets As previously communicated to you, FY17 operating budget reductions will be necessary to produce a balanced budget next year. The December Fiscal Plan update, which incorporates the approved FY16 Savings Plan and a revised revenue forecast, projects a gap of $179 million compared to the current approved budget. The target reduction amount is 2 percent of the FY16 operating budget and is inclusive of Savings Plan reductions included in the original FY17 MARCs. While I expect that these reductions will be difficult to identify, keep in mind that they only total about $20 million, well short of the current projected gap. Additional adjustments may still be necessary after the revenue forecast is updated again in late February. The target reduction amount and revised MARC for your department will be sent to you in a separate communication from your budget analyst along with budget submission instructions. It is possible that budget cuts of these amounts could reduce service levels, or even the elimination of services. Please note that it is permissible to consider the complete elimination of certain services if needed to meet your target reduction. To address these potential service disruptions and facilitate decisions in the FY17 budget, we are providing the following guidance: Guidance: Target reductions are a starting point. The development of the FY17 budget will be an iterative process that will require your ongoing engagement. You should assume that the submitted reductions will be accepted, but keep in mind that the County Executive may substitute cuts or add more cuts. Focus reductions on: non-core service areas (for example, non-mission critical, discretionary, or not legally mandated programs and services); services duplicated by another level of government (State and/or Federal government); services duplicated by another County department, agency, or non-profit; 33

38 FY17 Reduction Targets December 3, 2015 Page 2 services unique to Montgomery County (not provided by other jurisdictions in Maryland, the region, or nationally); services that could be or are partially performed in a more cost effective way by non-profits or contractors; services that could be privatized or outsourced; under-performing services; services with high per client costs or a small client base; facility consolidation (savings in energy, leasing, maintenance, staffing, etc.). Identify any existing local regulations, statutes, or policies that would need to be amended to implement a reduction you are recommending. Reductions through increased investment in Information Technology solutions will be considered. However, the reductions must be specific, the IT solutions must be implemented in FY17 and the continuing costs (maintenance agreements, licenses, staffing) must be included in the proposal. In addition, the Department of Technology Services must review and concur with the plan. Expenditure reductions should not cause revenue reductions. If necessary, discuss the County s reduction-in-force procedures with the Office of Human Resources prior to or soon after submitting your plan. Do not include reductions to CIP projects as counting toward your reduction targets. CIP reductions are being considered separately from this process. Do not include staff furloughs or any other reductions to existing pay and benefit levels that are subject to collective bargaining. Please coordinate your recommended reductions with other affected departments to the extent possible. Some savings may be directed top-down based on Executive priorities. Any top-down reductions will be coordinated with the appropriate departments. Your reduction proposals will be due to OMB on December 23. Please contact your budget analyst for additional information. All previous restrictions on hiring and procurements remain in place. As you know, the County Council approved the FY16 Savings Plan in July. You are expected to manage your department s expenditures to the revised spending levels consistent with the approved Savings Plan. I understand that these fiscal constraints continue to challenge you as you deliver services to our community. I believe that prudent fiscal management, along with the strengths and resilience of our management and staff, will ensure we continue to move forward. TF:jah cc: Administrative Service Coordinators and Functioning Equivalents Office of Management and Budget Staff 34

39 Information on the Wynne Case The Wynne case (Maryland State Comptroller ofthe Treasury v. Brian Wynne, et ux.) stems from the Maryland tax code provision that allows a credit for income taxes paid to other states with respect to the state income tax, but not the county income tax. The Maryland Court of Appeals ruled on January 28, 2013 that "failure to allow a credit with respect to the county income tax for out-of-state income taxes paid to other states on 'pass-through' income earned in those states discriminates against interstate commerce and violates the Commerce Clause ofthe federal Constitution.,,1 The Court stayed enforcement of its ruling pending resolution of the State's petition to the U.S. Supreme Court. The Supreme Court granted certiorari. On May 18, 2015 the Court, by a vote of five to four, affirmed the Court of Appeals decision holding that Maryland's personal income tax scheme violates the Commerce Clause. 2 Two actions taken by the Legislature are relevant. Last year, in the 2014 Budget Reconciliation and Financing Act (BRFA), the Legislature lowered the 13 percent statutory interest rate, which would have applied to required refunds from past years, to the average prime rate during FYI5, or about 3%. Language in the 2015 BRFA provided that once the Comptroller has validated claims for refunds, payments for these refunds (plus interest) would initially be made from the State's LoCal Reserve Account (for county income tax revenue). Counties could then reimburse the Account directly, or the Comptroller could withhold the amount owed from the State's quarterly income tax distributions to counties in nine installments after June As currently planned by the Comptroller's Office, this schedule would affect four distributions in FYI7, four in FYI8, and one in FYI9. Note that income tax distributions for municipalities will also be affected. The fiscal impact on County income tax revenue will not be final until the Comptroller validates claims for refunds filed by County taxpayers in late 2015 and other potential legal issues are resolved. The Finance Department currently estimates the following reductions from the March 2015 projection ofcounty income tax revenue: $76.7 million per year in FYI7-18, $31.5 million in FYI9, and $16.4 million in FY20 21, as shown in the table below. Quarterly Payment Ongoing Total $ 15,078,905 FY16 $0 $0 $0 FYI7 $ 60,315,618 $ 16,432,629 $ 76,748,247 FYI8 $ 60, $ 16,432,629 $ 76,748,247 FY19 $ 15,078,905 $ 16,432,629 $ 31,511,533 FY17-19 $ 135,710,141 FY20-21 $16,432,629 Updated November 13,2015 I See the Court of Appeals decision. Brian and Karen Wynne filed suit after the Comptroller ruled that they could not deduct from their Howard County tax biii the $84,550 they paid in income taxes to other states in The income stemmed from the Wynnes' ownership share in Maxim Healthcare Services, Inc., a Columbia company that does business nationwide. 2 See for a detailed history of the case. Also see htlp:llwww.scotusblol!..com! /opinion-analvsis-marylands-personal-income-tax-violates-lhe-commerce-clause! for an analysis ofthe decision. 35 II