Balanced budget arrives in Baltimore after months of debate

After months of rancorous debate, the search for a solution to Baltimore's $121 million deficit draws to a close this week without the sweeping layoffs or deep service cuts that officials had threatened.

But analysts are warning of the potential impact of a little-remarked hike in the income tax, and of more tough fiscal times ahead, as federal stimulus funding dries up and the state tightens its belt.

A budget represents a "snapshot of the next year," not a "strategic plan," said Donald Fry, head of the Greater Baltimore Committee. He said officials should seize the lull after the budget's passage to draft a long-term roadmap for economic development.

Economist Anirban Basu, CEO of the Sage Policy Group, sounded a note of alarm over an increase in the income tax, which nearly doubles the disparity between rate in the city and that of Baltimore County.

"I've never seen such a stealth income tax increase in my life," said Basu, who warned that the hike could dissuade those considering a move to the city or prompt residents to leave.

"The city took two steps back when it only needed to take one step back," he said.

The city's financial situation remains far from ideal. Officials will pull $50 million from the rainy day fund to plug a hole from the current fiscal year — the first time that fund has been tapped. On Thursday, it appears at least 50 city workers will lose their jobs, although officials are trying to move as many as possible into other positions. And despite a host of new or increased taxes, there is no guarantee that the city will be in a better position as the next budget season begins.

But for now, as city officials catch their breath — and inspect the scars from a protracted budget battle — there is a palpable sense of relief.

Some services, such as tree cutting, will be reduced, taxes will creep upward and at least several dozen city workers will be out of work. But there will be few dramatic changes when the new fiscal year begins Thursday.

So ends the first major political test for the new mayor and city council president — a process that turned out to be anything but a dry exercise in arithmetic.

At least once a week, demonstrators for one cause or another have stormed City Hall to beg officials to save programs on the chopping block or to protest new taxes. Mayor Stephanie Rawlings-Blake and the City Council have skirmished, most notably over the creation of a new tariff on bottled drinks, and council meetings have become gasp-inducing spectacles as the city's legislators begged openly for each other's support, and cast surprise votes after last-minute changes of heart.

Ultimately, Rawlings-Blake, Council President Bernard C. "Jack" Young — both of whom took office in February — and the rest of the council managed to balance the budget without drastically cutting services or raising property taxes.

"I'm certainly pleased that I was able to work with the council to make it clear to them the expected revenue and the shortfalls and what I believed was necessary to keep the city moving forward," said Rawlings-Blake.

The mayor, who was sworn in after Sheila Dixon resigned in February as part of a plea deal in her criminal trial on charges of perjury and embezzlement, inherited the hefty deficit, as well as a police and fire pension crisis, from her predecessor.

About a month into her administration, Rawlings-Blake briefed council members on a raft of drastic trims to essential services she said would be necessary if the city could not find new revenue. In the doomsday budget, hundreds of police officers would lose their jobs, several neighborhood fire companies would cease operation and more than half the city's pools and recreation centers would turn away children and shut down for good.

City budget director Andrew Kleine said it was necessary to propose cuts to key services to prevent the budgets of other departments from being decimated. But some council members criticized the doomsday budget as a manipulative move to garner support for Rawlings-Blake's $50 million collection of new taxes.

The warnings of massive layoffs alarmed residents and city workers alike. Councilman James B. Kraft said they "hurt [Rawlings-Blake's] credibility with a lot of citizens."

"I believe people are more intelligent than that," he said, adding that he thought the mayor could have drawn support for the taxes without suggesting slashing essential services.

When Rawlings-Blake unveiled the revenue package, which included increases to energy, telecommunications, parking and income taxes, she asked the council to expedite two of the tariffs: the bottle tax and an annual excise tax on hospital and university beds.

Those taxes were estimated to bring in the most revenue — and they met with the strongest opposition.

Budget committee chair Councilwoman Belinda Conaway said she had anticipated an outcry over energy and income tax increases, but the measures met little protest. Rather, the council was barraged by beverage industry lobbyists and store owners who said the 4-cent bottle tax proposed by the mayor would spell disaster for small grocery stores by sending shoppers over the city line.

Backers touted estimates that the tax would bring in $11 million and could be avoided by those who bought drinks that were exempt, such as milk and juice. Critics pointed to the city's experience with a similar tax in the 1990s. That tax was killed, in part, because of its impact on business.

Although Young's staff made it clear he did not back the tax, the council president declared that he would recuse himself from the vote because he had a cousin who worked for the beverage industry—prompting some to say he failed to show leadership on a key issue.

Michelle Wirzberger, Young's legislative director, said the council president found himself in a difficult situation. If he voted for the tax, he would betray what he felt was the right choice. If he voted against it, he could be accused of a conflict of interest.

Council members scrambled to find another source of revenue. The idea of a tax on industrial energy usage was quickly shot down. Eight council members held an impromptu news conference to propose an alternative to the bottle tax: a new tariff on cable TV. That plan fizzled, too.

Basu said it is unfortunate that the beverage industry monopolized the council's attention. The increase to the income tax rate, which jumped from 3.05 to 3.2 percent — the highest allowed by the state — could have many more deleterious effects, he said.

"The city council was far too susceptible to a well-organized lobby against the bottle tax, but did not pay enough attention to the voice of the unorganized — the hard-working taxpayers of Baltimore City," he said.

Unlike the bottle tax, the income tax rate could scare off potential new residents or provide ammunition for those considering leaving the city, further eroding the tax base, he said.

Adding to the confusion was a letter Rawlings-Blake sent to council members which detailed which services would be restored with the first $41.5 million of the $50 million in new tax revenue, but did not specify uses for the remaining $8.5 million. Since the list of restorations in her letter reversed cuts to fire, police and other key programs, many council members interpreted the final $8.5 million in revenue to be optional.

"There was a misunderstanding," said Councilwoman Helen Holton, who as chair of the taxation and finance committee presided over a marathon of hearings on the proposed taxes. Holton and others initially focused on raising $41.5 million.

Rawlings-Blake pledged more contact with the council when crafting next year's budget.

"One thing I've learned as mayor is that more communication is better than less," she said. "Even if you believe you've been clear, you have to make sure you've been understood."

In May, layoff notices went out to about 600 city workers whose jobs would be cut if officials could not find new revenue.

Glenn Middleton, the head of AFSCME, the city's blue collar union, and the husband of Councilwoman Sharon Green Middleton, joined the fight for the bottle tax as Rawlings-Blake announced the proceeds could be used to prevent scores of layoffs in the public works department. Council members who had fought against the tax, including Councilwomen Rochelle "Rikki" Spector and Mary Pat Clarke decided to back it.

After word spread that Councilmen Carl Stokes and Warren Branch would support the measure, Rawlings-Blake held a news conference to nudge the council to a vote.

Yet Branch, a long-time public works employee, voted against the tax—surprising those who assumed Rawlings-Blake would not demand a vote unless the tariff was guaranteed passage. The measure appeared dead, until Holton, who had voted against the 4-cent tax, asked the council a few days later to consider a 2-cent tax that would expire after three years. That measure passed.

The 2-cent bottle tax, estimated to bring in $5.7 million, brought the total of new taxes or fees to nearly $49 million, restoring nearly all proposed cuts to the police, recreation and parks and public works.

Workers will be forced to take between four and 11 furlough days for a second year and, for the first time, will pay toward prescription drug premiums, a major cost saving for the city. Officials hammered out a $20 million, six-year payment-in-lieu-of-taxes deal with universities and hospitals in place of the bed tax.

Former Deputy Mayor Andrew B. Frank called the budget a "remarkable achievement." Frank, who left city government last month, said the broad range of tariffs could allow the city to lower property tax rates when the economy improves.

Higher rates

Energy tax increases from 2% to 2.3% for residents; from 6% to 9.2% for nonprofits; from 9% to 9.2% for businesses; industrial and manufacturing properties are exempt

Telecommunications tax increases from $3.50 to $4 a month

Bottle tax: 2 cents on canned or bottled beverages smaller than two liters. Milk and juice are exempt.

Income tax increases from 3.05% to 3.2%

Parking tax increases from 16% to 20%

Parking fines vary

The end of August discounts for early payments on property taxes and reduction of the July discount from 1.0% to 0.5%.

Cuts in service

Between 4-11 furlough days for city workers

Layoffs of at least 60 workers, numbers not finalized

No new trees planted; less frequent tree trimming

Less lighting inside parks

Most flower beds and shrubs will not be maintained

No funding for Baltimore Rising nonprofit

Reductions in grants to museums and artists

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