Teachers, local elected officials, affluent Marylanders and health care providers are among those likely to be aggrieved Wednesday when Gov. Martin O'Malley releases his budget for next year.
As part of a plan to address Maryland's $1 billion budget shortfall, O'Malley will propose a groundbreaking shift of teacher pension costs from the state to local governments, legislative sources said Tuesday.
The governor's budget proposal, which must be approved by the General Assembly, also will include spending cuts to Medicaid as well as higher income taxes for the top 20 percent of Marylanders by phasing out exemptions and deductions, the sources said.
In addition, O'Malley will propose collecting sales taxes on some purchases from online retailers that don't impose the levy now and taxing cigars at the same higher rate as cigarettes.
Some details of the plan emerged after legislative leaders and others were briefed Tuesday.
The most significant change would be a sharing of the burden for paying the retirement costs of public school teachers between the state and local jurisdictions — the 23 counties and Baltimore City. Since the pension system's inception, those costs have been borne by taxpayers at the state level. Changing that system would put added pressure on the counties and city to raise taxes — or to hold down teacher salary costs.
The change is expected to save the state an estimated $240 million the first year by shifting costs to the counties — an amount that is expected to increase over time. The figure effectively comes from shifting half of pension costs for teachers to the counties but shifting half of teacher Social Security costs to the state. Currently, the state pays about $955 million a year to cover the full cost of teacher pensions, and it pays none of their Social Security costs.
The General Assembly will spend much of the next 21/2 months considering changes to the governor's plan, but Democratic leaders reacted positively Tuesday. House Speaker Michael E. Busch called the pension plan a "balanced proposal by the governor." Senate President Thomas V. Mike Miller said the governor "has made some very bold decisions."
But some county leaders were dismayed after being briefed by the governor late Tuesday afternoon.
Montgomery County Executive Isiah Leggett, a Democrat whose county is facing a budget shortfall of more than $100 million, called the teacher pension proposal a "non-starter."
"The shift is not acceptable," he said. "The mechanisms to soften the blow are, I think, insufficient. I'm not prepared to accept it."
Howard County Executive Ken Ulman noted that O'Malley didn't propose a transfer of teacher pension costs during his first five years as governor.
"I think he understands the impact is very difficult. I'm disappointed that there's going to be a proposal to shift the burden to counties because I don't think we're in any better position to be able to afford it than the state is," said Ulman, a Democrat.
Anne Arundel County Executive John Leopold, a Republican who was not briefed by O'Malley, derided the governor's plan to shift teacher pension costs to the counties, calling it a "heavy burden" that would make it "extremely challenging" to uphold Leopold's plan to eliminate furloughs for county employees in his next budget.
"Essentially the state is asking the counties to bail it out," said Leopold, who has furloughed county employees for the last two years. "They want to set the rules and pass the bill to the counties."
The Senate GOP caucus has long called for the pension burden to be moved to the counties, a point Sen. David Brinkley noted Tuesday. "I'm glad he's coming around to our plan," he said.
But a House Republican leader objected to the tax provisions in the package.
"We should really be focused on reducing our spending, and we should be focused on the economy, business and jobs. And from what I know so far this budget seems to be very contradictory to that," said Eastern Shore Del. Jeanne Haddaway-Riccio, the minority whip. "Obviously it is going to be a concern when you make changes that affect business and taxpayers."
If lawmakers were dismayed by some provisions, they were relieved by some things that are not in the plan. Despite O'Malley's musings last week about the advantages of a sales tax increase, he will make no such proposal, officials said. While some individuals' tax payments may go up, rates themselves will not be touched. Nor will the budget rely on transfers from the Transportation Trust Fund or an increase in the state property tax, sources said.
The governor has not revealed his plans for transportation revenue and spending, which generally are handled separately. O'Malley has signaled that he intends to propose a gas tax increase or other revenue-raiser to bolster the transportation fund. He is also expected to propose a doubling of the revenue collected from the so-called "flush tax," the $30 a year fee that households pay for improvements to sewage treatment plants.
O'Malley's general fund budget will apparently meet or exceed the General Assembly's target for cuts to the so-called "structural deficit" – the long-term projected shortfall of revenues compared with expected spending. Currently that shortfall is almost $1 billion, and sources said O'Malley's proposal would reduce that amount to roughly $450 million-$500 million as part of a plan to eliminate the structural deficit entirely by the following year.
To do so, however, the governor will apparently have to sell the General Assembly on a tax increase that would affect the upper middle class as well as the rich — a possible flash point in affluent counties such as Howard and Montgomery.
According to sources in the legislature, exemptions for individuals would begin to phase out for individuals earning about $100,000 while couples filing jointly would begin to lose those breaks starting at about $150,000. Deductions would start phasing out at $150,000 for individuals and $200,000 for joint filers, the sources said.
According to Busch, that change would provide some compensation to county governments for the additional pension burden because it would effectively raise revenues collected from the local piggyback income tax.
"The counties would get some of the money from the exemptions if they were reduced," Busch, an Annapolis Democrat, said. "It would be a windfall to the counties. Not a huge windfall."
If approved, the tax changes would add about $180 million to state coffers and $110 million to those of the counties over the next 18 months.
Legislative sources said the structural gap would be further closed by spending cuts – a couple of hundred of million dollars of which would come from changes to Medicaid and other health programs.
While Senate President Miller had praise for the governor's work, he warned that O'Malley would need to throw himself into the fight to get it approved.
"It's going to take a lot of hard work, a lot of elbow grease, and he's got to sell it to the counties and to the members of the Senate and the House," the Calvert County Democrat said. "Both the far left and the far right are going to be having constituency groups that are challenging the governor."
Reporter Nicole Fuller contributed to this article.