Pensions, bonuses and county budgets

This is the season when local governments finalize their budgets for the next fiscal year, and the grousing about their penurious circumstances is in full swing. Some are even complaining that the state's revised budget and tax plan — signed into law by Gov.Martin O'Malleythis week — has put a serious crimp in their finances.

In particular, they blame the state's decision to shift a portion of the cost of teacher retirement contributions to Baltimore City and the counties as ruinous to their own budgets. Already, Harford County Executive David Craig has decided he will not offer the one-time, $650-per-worker bonuses he promised county and school employees.


But there's just one problem with the narrative that portrays the state's elected leaders as the tax-and-spend bad guys and their local government counterparts as their innocent victims. In the vast majority of cases, counties are in better shape for fiscal 2013 as a result of the recent special session, particularly when compared to the "doomsday" budget that they would have faced otherwise.

That's because, while the teacher pension shift is going to cost local governments millions of dollars, the various tax increases lawmakers also approved are going to offset that cost. In some cases, local governments come out way, way ahead.


Take Anne Arundel County, for instance. The teacher pension shift will cost the county nearly $11.5 million next year. But because the legislature raised the income tax, applied the recordation tax to "indemnity mortgages," increased the tax on little cigars and smokeless tobacco, and raised the fees on death certificates, among other actions, the net effect is that Anne Arundel will be receiving $8.8 million more from Annapolis than it was previously due, for an overall 5.6 percent increase in state aid.

And the county is hardly alone. From the Eastern Shore to Western Maryland, the majority of counties are coming out ahead in a similar fashion. Only eight of the 24 are net losers, with Harford County suffering the biggest loss of all — about $4.8 million, according to a recent report by the Maryland Department of Legislative Services.

There are a number of reasons for Harford County's misfortune. One of the biggest is that the county receives no extra education aid under the Geographic Cost of Education Index that tries to offset cost-of-living differences. That was funded under the revised budget agreement.

But then, Mr. Craig could scarcely be surprised by any of this. Lawmakers have been talking about requiring local governments to share in the teacher pension obligation since the county executive served in Annapolis more than a decade ago, and the move was regarded as a near-certainty in the weeks leading up to the regular 90-day session. Under the circumstances, he was wise to only have been proposing one-time bonuses instead of permanent salary increases.

As much heat as Governor O'Malley and Democrats have taken for their pension decision, it's important to keep some perspective. The shift is gradual (over four years) and it has no impact on the state's direct aid to school systems. By fiscal 2016, the counties will face a collective $67 million shortfall from the move, but that's hardly a catastrophe. The state's additional pension payments are expected to increase more than twice as much over the same period.

Had lawmakers not simultaneously increased taxes and fees, the story would be a bit different, of course. But even so, it's hardly unreasonable for local governments to share in the pension costs just as they share in salary costs.

Nevertheless, the fact that the General Assembly agreed to raise taxes actually reduces the likelihood that most local governments will have to raise taxes, too. That's fortunate because they have far fewer budget-balancing options available to them. Often, the choice for counties comes down to layoffs or raising property taxes, two particularly unpleasant options.

Harford's situation is atypical, of course. Withdrawing the bonus should more than make up the fiscal 2013 shortfall, but not for future deficits. Mr. Craig, a Republican, is often mentioned as a possible candidate for governor in 2014, so how he balances his county's budget — whether through cuts, taxes or a combination of the two (and whether those choices satisfy county residents) — could provide a rare opportunity for him to make his mark in statewide politics.