There are plenty of worthwhile causes that won't get funded next year as a result of Gov. Larry Hogan's decision not to spend $80 million the legislature set aside in the fiscal 2017 budget, ranging from $19 million to help local school districts cover their pension obligations to $1 million for Baltimore's anti-violence Safe Streets program. The Democratic leaders of the legislature decry the governor for disrespecting their priorities, and the governor accuses them of playing games with the budget. But the jockeying for political edge is less important here than the underlying reality of the situation, which is that state tax receipts are looking significantly less robust than lawmakers expected just a few months ago.
That's somewhat perplexing, given the generally good news we've had recently about Maryland's economy. The report that Maryland gained nearly 10,000 new jobs in June was just the latest in a string of positive indicators, including increases in building permits and housing starts and dropping mortgage delinquency rates. The explanation appears to be a complicated one, dealing with some softness in income tax withholding but also anticipated tax payments related to capital gains, a small but significant factor in a wealthy state like Maryland. Regardless of this year's culprit, though, it continues a long-term trend in which state revenue growth lags behind the growth in state spending.
The $80 million the legislature fenced off was originally budgeted by the governor to pad the state's rainy day fund, a pot of money Maryland keeps in case of fiscal disaster but has steadfastly refused to tap even under dire circumstances. In reality, it functions as an investment to keep the bond rating agencies happy. The state Spending Affordability Committee had determined that the fund needed a balance of $1 billion for fiscal 2017, and the $80 million represented the amount the governor budgeted in excess of that figure.
It's not new for the legislature to cut funds from a governor's budget proposal and authorize him to spend it for specific purposes. The tactic this year to create such a pot of money and require him to spend all of it or none of it is new, and Mr. Hogan chose none despite favoring some of the line items in question. That means the $80 million reverts to what is known as unallocated fund balance — effectively money in the state's checking account that isn't planned to be spent during the coming fiscal year.
When the General Assembly session ended in April, lawmakers anticipated a fund balance of about $360 million at the end of fiscal 2017. In announcing the decision not to spend the $80 million, Budget Secretary David Brinkley said he was concerned about new fiscal projections showing tax revenues falling short of expectations. State fiscal experts peg the anticipated shortfall at about $150 million but say the situation may be even worse than that. Having a higher fund balance is a hedge against that possibility. It's fair to debate whether that's what's really driving the decision or whether even on those grounds the administration is being overly cautious. But though we rue the effect of the governor's decision on some programs — Safe Streets, in particular, is needed now more than ever — it's not irrational to say we should hang onto more cash at a time when revenues are soft.
What would be irrational is an attempt by the Hogan administration to later use the beefed-up fund balance as a justification for tax cuts. Mr. Brinkley was right when he said Wednesday that based on present conditions, significant tax cuts would have to be considered a long-term goal. Unfortunately, after the budget secretary made that remark, a spokesman in his department walked it back, saying it would be "incorrect" to assume it means there won't be a major tax cut proposal from the governor when the legislature reconvenes in January. Apparently next winter counts as "long-term" when you've got a re-election campaign to plan.
The advent of divided government in Annapolis should be a golden time for a high-level conversation about the state's economic future, tax structure and spending rules, but instead we've gotten some targeted tax cut proposals for favored constituencies, a clumsy attempt at reducing the prevalence of mandated spending in the state budget and annual fights about whether the legislature or the governor has the final word on appropriations. The overall effect, though, is something of a detente between those who want more spending and those who want lower taxes. It's not the ideal way to run the state, but it could be worse.