2:35 PM EST, January 17, 2013
Amid the boasting typical of a governor's budget proposal, Gov. Martin O'Malley's new spending plan includes this peculiar claim to fame: The O'Malley administration has managed to effectively eliminate Maryland's structural budget deficit not just once but two times. This is a bit like bragging that you've married the same person twice — it suggests you've gotten to the right place in the end but glosses over some unpleasantness in the middle.
The fiscal unpleasantness, in Mr. O'Malley's case, was particularly severe, and to be fair, not really his fault. When Mr. O'Malley came into office in 2007, the state had a substantial cash reserve, thanks to the real estate bubble, but obvious underlying budget problems. That fall, Mr. O'Malley pushed through a package of new revenues — tax increases and slot machine gambling — and new spending that, on balance, should have put the state on sound footing. Then the global economy melted down, and the state was in worse shape than ever.
The climb back has been long and painful, but it is nearly complete — at least for the moment. The state's structural deficit — the chronic imbalance between projected spending and revenue — falls to just $166 million, according to the Department of Budget and Management. Considering the gap for this year was estimated at one point to be almost $1.9 billion, that's quite a turnaround, and little of it came easily.
The O'Malley administration and the General Assembly approved income and alcohol tax increases, shifted some teacher pension costs to local government and benefited from some modest improvements in the economy. The bulk of the improvement, however, comes from holding spending to a much slower rate of growth than had been expected — thanks in no small part to innovative efforts in the health department to hold down Medicaid costs. That the governor has managed to do that during such difficult economic times while maintaining historic investments in K-12 and higher education is remarkable and a testament to his priorities.
Still, it's not time for celebration just yet. Mr. O'Malley uses his budget book to tout Maryland's recovery from the recession and its record of job growth in recent years, but that progress is exceedingly fragile. A failure by Congress to raise the federal debt ceiling could ruin the economy again, and Maryland is more vulnerable than almost any other state to the kinds of spending cuts that will be required to bring the federal budget deficit back to a manageable size.
Meanwhile, there are some soft spots remaining in Governor O'Malley's budget. He is proposing that the state not make this year's installments in its plans to repay an income tax reserve fund the state raided during the height of the recession, or open space funds diverted by the Ehrlich administration. Each move saves the state $50 million. And Mr. O'Malley is proposing to continue for the next five years his practice of shifting real estate transfer tax funds from their intended purpose, land preservation programs, to the general fund, and instead paying for those programs through capital funds. Such a maneuver is legal, and previous budgets relied much more heavily on it and tactics like it. They got us through the recession, but their long-term cost is becoming apparent.
Debt service payments have increased from $654 million in Governor O'Malley's first year in office to a projected $984 million next year. By 2022, annual payments are expected to approach $1.5 billion. The state portion of the property tax is dedicated to making those payments, and it is expected to grow only modestly during that time. Before long, the state will likely have to raise the property tax rate or start dedicating money that could otherwise go to pay for schools, health care or other operating expenses to pay off the bonds.
The new spending and tax breaks the governor is proposing for next year are relatively modest. He is asking for a 3 percent pay raise for state workers, perfectly reasonable given the pay freezes and furloughs of recent years; a $25 million investment in school safety; $1.5 million for a much needed-study of the environmental and economic costs and benefits of allowing hydraulic fracturing in Western Maryland; and an assortment of new or expanded tax credits designed to boost employment in cybersecurity, the film industry and other sectors.
Still, legislators should carefully examine them and the rest of the $37.3 billion spending plan. The General Assembly could easily cut enough to wipe out what remains of the structural deficit, but that need no longer be the major focus. Given the uncertainty created by federal budget deliberations and the costs the state put off during the last few years, lawmakers need to concern themselves with increasing the resiliency of Maryland's finances. Governor O'Malley wisely proposed to increase the state's rainy day fund from 5 percent of revenues to 6 percent, and he is leaving another $236 million in unallocated funds. Legislators should seek to go further to help the state withstand what could be more difficult times ahead.
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