Gov. Martin O'Malley's decision to seek $77 million in cuts to a budget that's barely 24 hours old is a sobering reminder that the state's economic recovery is tenuous at best. Maryland experienced no gross domestic product growth last year, and job creation here has been far from steady so far in 2014. Budget Secretary T. Eloise Foster introduced the budget cut proposals today by saying the administration wants to get ahead of any problems now in hopes of providing an extra cushion should revenues go south. But what trends we can measure so far offer only ominous signs that this may not be the end of the budget cutting for Mr. O'Malley during his term in office.
The $77 million, most of it trimmed from agency budgets, is a modest reduction by historical standards, amounting to about 0.5 percent of the state's $16.1 billion general fund budget. Compare that to fiscal 2009, when the governor made $414 million in general fund cuts through the Board of Public Works, almost 3 percent of the budget, or fiscal 2010, when he made $531 million in general fund cuts, nearly 4 percent of the budget. Former Gov. Robert L. Ehrlich Jr. faced a similar situation in his first year in office; he cut $208 million through the Board of Public Works shortly after his first budget took effect. That was 2 percent of the budget at the time.
On paper, Maryland appears to have a substantial cushion already. It has $795 million socked away in its rainy day fund, which amounts to the 5 percent of revenues that is required by statute. But in reality, that is money Maryland will never use; rather than the "rainy day fund," it should be called the "bond rating agency appeasement fund," as its existence has helped maintain the state's AAA ratings from all three major agencies. Mr. O'Malley never dipped into it during the depths of the recession and almost certainly won't during the remainder of his term.
The real cushion Maryland has for the next year is quite modest — $83 million in unallocated fund balance. The $77 million in cuts, plus assorted other measures approved by the Board of Public Works, will double that. Ms. Foster said that should prevent the need for any further adjustments during this budget year, but there are reasons to think that may be overly optimistic.
The Board of Revenue Estimates won't meet again until September, but Comptroller Peter Franchot cited some worrisome trends in state receipts so far this year. During the board meeting, he said that wage growth in Maryland during the first quarter was just 0.4 percent. As of the end of May, sales and use tax receipts are up just 1.1 percent over the previous year, and income tax withholdings are up just 2.1 percent. Both of those figures are below the state's revenue growth during the last fiscal year, and both are also substantially behind the revenue estimates the state approved in March, when sales tax growth was anticipated to be 5.4 percent for this fiscal year and individual income tax growth was projected at 6.6 percent. The difference between the actual growth rates so far and those the state forecast as recently as March would amount to more than $600 million on an annual basis.
The figures Mr. Franchot cited are, of course, very preliminary, and they include a first quarter when the national economy experienced an unexpected and large contraction, at least partially due to severe winter weather. The general consensus among economists is that growth will rebound during the rest of the year. Nonetheless, the situation isn't encouraging.
That said, some context is in order. When Mr. O'Malley was sworn in as governor in 2007, Mr. Ehrlich left him an unallocated fund balance of about $1 billion — but also projected gaps between revenues and expenditures that totaled $4.5 billion over the subsequent four years. Mr. Ehrlich had it even worse in 2003; Gov. Parris N. Glendening left him $13.6 million in cash and projected shortfalls of nearly $6 billion. By contrast, Mr. O'Malley is now set to provide his successor with $167 million in cash and $1.4 billion in projected deficits. Unwelcome as it may be that the state is making cuts so early in the budget year — and may find itself in a position to do so again before all is said and done — Maryland's budget is unquestionably on sounder footing than it has been in more than a decade.
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