Maryland Business for Responsive Government this week slammed the state government for its profligacy based on a new report from the National Governors Association and the National Association of State Budget Officers showing Maryland has the largest general fund budget growth in the Mid-Atlantic and the seventh highest in the nation. “These numbers clearly show that Maryland has a spending problem,” MBRG President Kimberly M. Burns said in the release.
Trouble is, the report, by its own admission, reveals only part of the state spending picture — and one that is decreasingly relevant as a guide to the overall fiscal situation in the states. The report deals with state general funds, which have traditionally been the vehicle for discretionary spending funded by state tax dollars. They typically cover basic state functions like public education. But as the report notes, that has become much less true in the last few years because states have used federal stimulus funds to pay for items that in the past had been accounted for in the general fund. The result: General fund spending accounts for 37.7 percent of state spending nationwide in fiscal year 2012, down from 45.9 percent four years ago.
In Maryland's case, that has made apples-to-apples comparisons of general fund spending from one year to the next highly misleading. Based on what the NGA/NASBO reported, Maryland's general fund spending has yo-yoed from a decrease of 1.4 percent in fiscal 2011, making it the seventh-stingiest state, to an increase of 11.4 percent in fiscal 2012, which would count as seventh most profligate. (Incidentally, the MBRG didn't issue a press release after this report was issued last year congratulating Maryland government on its restraint.)
In reality, budget growth has been much more steady. According to a recent Department of Legislative Services briefing to the state's Spending Affordability Committee, overall operating spending went up by a much more reasonable 3.8 percent this year. Maryland is somewhere in the middle of the pack in the Mid-Atlantic, between Pennsylvania (whose budget actually shrank this year) and Virginia, where operating spending grew by a scant 1.5 percent, and West Virginia and Delaware, where real budget growth was about 5.4 percent and 6.2 percent, respectively.
As for where all this places Maryland in its perpetual effort to find a sustainable balance between revenues and expenditures, there’s good news and bad news. State budget analysts project baseline operating spending growth — that is, how much extra the state will need to spend next year to meet its existing commitments — at a relatively modest 2.3 percent. At a time when ongoing state revenues are expected to go up 2.8 percent, that’s pretty good. But there are a few caveats.
For starters, the state has been muddling through the recession and its aftermath by making some permanent spending reductions and tax increases but also by using a lot of one-time tactics and relying heavily on federal aid. That means that even though revenue growth is now exceeding spending growth, the state still has to make up a gap of about $1 billion. Last year, the Spending Affordability Committee recommended that the governor and General Assembly seek to resolve about a third of this persistent gap between spending and taxes — known as the structural deficit — and they did. If the state keeps that up for another year or two, and the economy continues to recover, Maryland would have a chance to be in its best shape budget-wise in years.
Except, that is, for a couple of lurking problems. The first is a projected ballooning of debt payments. Maryland has been taking on more debt in recent years, in part to cover capital expenses such as land preservation programs that had previously been paid for with operating funds. But because of the collapse of the real estate market, the revenue stream the state uses to pay off its bonds — the property tax — is not expected to grow fast enough to cover the bond payments. That creates another $400 million-per-year problem down the road that will need to be covered either by a property tax increase or by cuts elsewhere in the budget.
The second big problem facing the state is the effort to cut the federal budget deficit. The Department of Legislative Services estimates that the automatic budget cuts triggered by the failure of the congressional supercommittee will cost the state treasury about $158 million in the first full year, with some of those cuts coming as soon as Maryland’s next budget year. But that probably won’t be the extent of the damage. The federal government is likely to come under pressure to make even larger reductions to the deficit than those that will now automatically go into effect. And because Maryland’s economy is heavily dependent on federal spending, cuts from Washington will likely mean lower state tax revenues in the years ahead.
All in all, it’s a good thing that Maryland hasn’t really exhibited the kind of spending problem that Maryland Business for Responsive Government claims. But it would do well to keep the group’s advice in mind and continue budgeting very cautiously, as much uncertainty lies ahead.