Legislators Dispute Implications of State's Structural Deficit


ANNAPOLIS (April 9, 2010)—Although the General Assembly is poised to pass the state's budget for the next fiscal year by Monday, debate will likely continue about Maryland's financial future as candidates gear up for November's elections.

Republicans will likely seek to raise the question of whether the legislature did enough in this session to bring long-term spending in line with revenues. They point to projections from the state's fiscal analysts that spending obligations will exceed revenues by more than a billion dollars annually for the next five years—even factoring in a projected economic recovery.

According to many Democrats, this "structural deficit" exists primarily on paper. Spending projections are based heavily on funding formulas approved before the current recession, and the legislature routinely provides less money to local school systems or private colleges than the formulas would have required.

Particularly when the state's revenues are down, these Democrats say, following the formulas is entirely optional—and therefore Republican concerns that the legislature will raise taxes next year to cover these costs are baseless.

"Stop calling it a structural deficit. It's a needs list, it's a waiting list, and that's all it is. When the money's not there, we don't fund it, and that's why every year we have a balanced budget," Delegate Mary-Dulany James, D-Harford, said.

According to Warren Deschenaux, the state's top policy analyst, it's a little more complicated than that. Deschenaux, the director of the Department of Legislative Service's Office of Policy Analysis, did not question that the state has balanced its budget each year—a requirement under the Maryland constitution.

But Deschenaux described annually ignoring funding formulas as "the game we play" to avoid raising the question of permanent and potentially unpopular changes that would let the state have a better idea of its long-term finances.

"If every year we start $2 billion behind and every year we have to scramble to find a solution—well, that's no way to run a railroad," Deschenaux said. "And frankly, you'd spend all your time figuring out how to pay for things and probably not enough time figuring out how to run them."

Deschenaux identified the key drivers of the structural deficit as automatic increases in spending on pensions for teachers and state employees, local and higher education and Medicaid.

Structural deficits are not confined to Maryland—according to Deschenaux, the state is in fact in better than average financial shape.

Structural deficits are not new to Maryland either. Many recent years' budgets left the state with long-term deficit projections that have been resolved each year.

"None of those (projected) structural deficits occurred, did they?" Delegate James said. "Those needs lists were not met—we cut the budget."

The proposed budget for the next fiscal year that Gov. Martin O'Malley released in January closed a projected $2 billion shortfall using both spending cuts and a series of fund transfers—including the use of hundreds of millions of dollars in one-time revenue sources.

Already, former Gov. Robert Ehrlich, a Republican who has entered the race against O'Malley, has accused the current administration of using "gimmicks" to avoid tough budget choices.

The House and Senate, which can cut but not add to the governor's proposals, maintained those provisions in the budgets they passed earlier this month.

O'Malley, a Democrat, said when he released the budget that the one-time actions will get Maryland through the recession while minimizing impact on residents.

Republicans, meanwhile, accuse him of just trying to get through an election year before increasing revenues with a tax increase to cover costs—what one delegate described on the House floor as "the great ambush tax of 2011."

Delegate Christopher Shank, R-Washington, the House minority whip, had offered a budget amendment earlier this year that would have blocked the legislature from increasing taxes next year. The amendment was not adopted.

"It's our concern that since (Democrats) rejected that amendment, and demonstrated an unwillingness to make appropriate cuts to the budget, that this will result in a massive tax increase in future years after the election," Shank said.

Shank had also helped craft a series of proposed budget cuts put forward by the House Republican Caucus in February that he said would have eliminated the structural deficit altogether this year. The proposals included laying off more than 1,500 state employees—a majority from the state university system-- and reducing Medicare contributions for state retirees.

A separate plan introduced by two Republican senators—David Brinkley, Frederick, and E. J. Pipkin, Caroline—called for major cuts in higher education spending and also recommended large-scale layoffs.

Even without adopting these proposals, Democrats have disagreed that a tax increase will be necessary next year.

"It is utterly wrong to say that the only choice next year is to raise taxes. That is not fact. We can do the same thing next year that we did this year," said Delegate Murray Levy, D-Charles.

According to Deschenaux, it may not be that easy. The federal government sustained several recent fiscal years, he said, allowing the state to reduce what it spent to maintain its operations without needing to cut back on total funding.

"We've been fortunate in having federal funds to help us with Medicaid and education funding the past two years, and we have also been very clever in identifying one-time sources of revenue," Deschenaux said.

"But these (one-time sources) are a finite resource—there's only so much we can take, and when we're done with that one, we have to go mining for something else. We've been mining now for the better part of this decade," he continued. "Unfortunately what all that mining does is undermine the surface, you know. We're sitting on a warren of caves and empty mines now."

Particularly because some transferred funds must be repaid, Deschenaux said, Marylanders may have to increase "what they're contributing to support the state enterprise" after exhausting one-time revenue sources.

"I think when you've gone through all of the other steps and you still have a gap and you're planning on having government next year as well as this year, I think it's logical to look at revenues," Deschenaux said.

Deschenaux also disagreed with Democrats that all funding formulas are easily malleable. While the Thornton K-12 education formula or the Sellinger aid to private colleges and universities can easily be changed, he said, it would be more difficult to reduce Medicaid eligibility or ignore pension obligations to state retirees—two rapidly growing state expenditures.

This year's legislative session has not been without accomplishments that reduce the state's structural deficit, Deschenaux said.

The House and Senate budgets cut several hundred million dollars of projected spending over the next five years, thanks to a series of cuts and a few changes to funding formulas.

Republican legislators have criticized the reductions as insufficient, but Deschenaux said he has seen indications from the General Assembly's actions this session that the legislature is prepared to make long-term fixes if revenues don't catch up to expenditures soon, by further revising the formulas and forcing counties to cover part of their teachers' pension costs.

"Although they haven't resolved (the budget's structural problems), they have resolved to resolve them, which is the next best thing," Deschenaux said.

Capital News Service contributed to this report.

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