Flush tax debate centers on revenue bonds

ANNAPOLIS — As the lid closes on the 2012 legislative session, lawmakers will likely double the flush tax from $30 to $60 to cover a projected $385 million shortfall in the Bay Restoration Fund, but some lawmakers say the tax hike aims to cover repeated raids on the fund that triggered a downgrade by Moody’s Investor Service 14 months ago.

“It wouldn’t be necessary to double the fee this year had they used the money they collected,” said Del. Jay Jacobs, R-Upper Shore, who voted against a tax hike. “And there probably wouldn’t have been a downgrade of the fund.”

The Moody’s report downgraded $44 million in revenue bonds issued on the fund, citing $200 million in cash raids in fiscal 2010 and 2011 as negative contributing factors. The ratings agency warned that more raids could occur in fiscal 2012 because the fund was not protected.

“A statutory restriction that limited the use of the Bay Restoration Fee to water quality purposes was recently changed to permit…transfer to the state’s general fund,” the Moody’s report said. “There’s no guarantee the state… won’t repeat this action.”

An additional $90 million was taken from the fund in fiscal 2012.

The Moody’s report also looked negatively on replacing the cash with general obligation bonds.

“We view bonding to repay the fund transfers as deficit financing,” the report said.

The state has replaced the raided cash with $272 million in general obligation bonds and authorized another $530 million in revenue bonds, of which only $50 million has been issued.

Robert Summers, secretary of the Maryland Department of the Environment, said the revenue bonds would be issued when cash is needed.

“The revenue bonds have been obligated against contracts under construction and will be sold in fiscal 2013-2015 to make cash payments,” Summers said in an email.

Issuing the revenue bonds will likely result in higher interest rates because of the Moody’s downgrade.

Gov. Martin O’Malley insisted when he announced the tax hike proposal in January that swapping cash out of the fund with general obligation bonds had not affected the effectiveness of the fund.

“We swapped for bond dollars,” O’Malley said in January. “In other words, taking the cash but putting back with bond dollars. …There was not a deviation of effort or a bait-and-switch situation where $10 was supposed to go to [projects] and only $8 did.”

Jacobs said the raids on the fund have hurt MDE’s ability to perform basic upkeep on the sewage treatment plants. He cited a report from the Maryland Reported Sewer Overflow Database that indicated 2,100 reports of sewerage overflows in 2011 and 94 overflows of 1 million gallons or more.

The Moody’s report said improving the bond rating would require revenue growth into the fund and statutory prohibitions against the state making “further raids on the fund balances.”

Summers said that a failure to double the flush tax at the state level would likely transfer responsibility to local governments.

“If the fund is not increased, local governments will have to finance the upgrades with local funding, which will in most cases require sewer rate increases,” Summers said in an email.

The bill prohibits reducing the flush tax in future years if bond debt is still outstanding on the fund. The debt on the $530 million in revenue bonds will carry a 15-year maturity once they are issued.