Turnaround for budget raises some suspicions

THE BALTIMORE SUN

In the span of just 12 months, Baltimore's city government has gone from predicting its worst financial year in decades to realizing its most prosperous stretch in recent memory.

Gone are Mayor Martin O'Malley's dire 2004 warnings about deficits, tax increases and drastic service cuts. Today, as the City Council votes on the mayor's $2.32 billion budget plan for the next 12 months, his talk centers on surpluses, tax reductions and increased services.

But there are also whispers: Has something else been afoot - politics, perhaps - in the city's sudden reversal of fortunes from a projected $45 million deficit for fiscal year 2005 to an expected $59 million surplus?

Last year, the City Council engaged in contentious debate over the mayor's tax package to avoid a deficit. But O'Malley's 2006 spending plan has sailed through, in part, because it contains a 2-cent reduction in the property-tax rate. The council also was busy approving O'Malley's plan to spend most of the $59 million this year - including $20 million for overspending by city agencies.

O'Malley's critics say the administration underbudgeted revenues last year and pushed for new taxes to produce a surplus. That, they charge, enabled the mayor to roll back the property tax as he makes his expected 2006 run for governor.

"You'll probably see a surplus in 2006 because of the election," said Councilman Keiffer J. Mitchell Jr. "I don't know of any candidate who runs for higher office that runs on a deficit."

Administration officials say their typical conservative estimates last year planned more for a real estate bust than the boom that ensued. They said O'Malley would have had no political motive in pressing for new and increased taxes totaling $30 million on landlines and cell phones, energy bills and real estate transactions - a move that Republicans are expected to use against him.

O'Malley braved criticism from the business community in pushing the tax package that he says is essential to ease the property-tax burden on residents and to diversify revenues for a struggling city. The mayor and council have not attempted to reverse the measures because they fear the surplus could be a one-time occurrence.

"The reason we're in a better position this year than last year is the city's comeback is accelerating," O'Malley said. "The other reason is because of all of the difficult votes that we had to cast last budget season where we chose to diversify our revenue base."

Last year, officials with the city's major unions supported the mayor's $45 million tax package, hoping to avoid layoffs. The council trimmed it to $30 million, and minor reductions elsewhere made up the difference.

But critics question whether the city was really in bad financial shape, considering O'Malley engineered a $42 million bailout of Baltimore's schools. Six months after the fiscal year 2005 budget passed, the city's comprehensive annual financial report showed a healthy $120 million balance for fiscal year 2004.

"Last year they were crying, 'The sky is falling, the sky is falling,"' said Councilman Kenneth N. Harris Sr. "If you take the revenue generated from last year's new taxes and subtract it from the surplus, we'd still have a surplus. The citizens of Baltimore didn't need the new taxes."

City budget chief Raymond S. Wacks said all but $75 million of that $120 million balance is reserved for future expenses such as closing a landfill and cannot be touched.

"A reasonable level of reserves is essential for fiscal stability," Wacks said. "The city, as the largest business [in Baltimore], cannot afford to live paycheck to paycheck."

Critics say they understand the city's fiscal responsibility but say residents should not pay more taxes unnecessarily.

"We thought the budget estimates provided [last year] were understating the revenues the city would be receiving," said Donald C. Fry, president of the Greater Baltimore Committee. "We felt the city would get significant benefits from the real estate boom."

The city originally budgeted that it would receive $35.5 million in recordation and transfer tax revenues in fiscal year 2005, an increase of 11.3 percent over the previous year. Budget documents show the city now expects to collect $72.1 million. With the boost to both those taxes approved last year, the number jumps by $5.4 million to $77.5 million. That is a 118 percent increase over 2004.

The city projected it would receive $176 million in local income taxes in fiscal year 2005. Instead, it is on pace to collect $191.6 million, about 9 percent more.

The real property taxes were budgeted to increase from $420.4 million in fiscal 2004 to $431.5 million. The city now expects to collect closer to $454 million.

"No one has an accurate crystal ball," said Joseph T. "Jody" Landers III, executive director of the Greater Baltimore Board of Realtors. But, he added, city officials "grossly underestimated revenues."

"In hindsight," he said, "they could have done with a greatly scaled-back tax package and still come out ahead."

Business leaders, union officials and several council members point to the state comptroller's projections early last year that said income and property tax revenues throughout Maryland were coming in higher than anticipated.

Baltimore and Anne Arundel counties did not have similar dire projections and projected growth in their budgets for fiscal year 2005. The city budgeted a 2 percent decrease from fiscal year 2004 to fiscal year 2005. The $2.3 billion spending plan for fiscal year 2006 is a 6.5 percent increase.

"Anybody with their hands on the switch, anyone with access to the information, should have realized that there was going to be a significant boost," said Stephan G. Fugate, president of the fire officers union. "They either lied or they were stupid. And I don't think they're stupid."

Economists point out that the city faces far more difficult and long-term socioeconomic challenges than other jurisdictions, requiring it always to budget conservatively.

"No mayor wants to raise taxes," said Richard P. Clinch, director of economic research for the University of Baltimore's Jacob France Institute. "Hindsight is always 20/20. ... I would never penalize a politician for being fiscally conservative or for saving the good news for when he's running [for higher office.]"

Thomas A. Darling, an economist at the University of Baltimore's School of Public Affairs, studied the budget last year and said the city "was ignoring some really strong first-quarter trends."

"I think they were a little overly conservative at the time," Darling said. "There's an appropriate level of conservatism that needs to be in play. There's also politics."

Because O'Malley told the council last year that it had to raise taxes, council members have said there was little they could do except reduce the size of O'Malley's tax proposal.

"Their credibility has been used," said Councilwoman Mary Pat Clarke of O'Malley finance officials. "The sky-is-falling argument has fallen one too many times on the City Council."

City finances

Last year, Baltimore officials projected a dismal budget for fiscal year 2005, which ends June 30. The City Council, at Mayor Martin O'Malley's request, approved $30 million in new and increased taxes last year to help reduce a deficit. Now it appears fiscal year 2005 will be the best in recent memory for city coffers, and critics want the tax package revisited.

Budget Projected FY '05.........Revised FY '05

...............$45 million deficit ......$59 million surplus

Recordation/transfer taxes $35.5 million $77.5 million

Income taxes $176 million $l91.6 million

Real property taxes $431.5 million $454 million

Source: Baltimore City Department of Finance budget documents

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