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Donald C. Fry: Bond rating nice, but look deeper

Donald C. Fry//Special to the Daily Record//July 17, 2014

Donald C. Fry: Bond rating nice, but look deeper

By Donald C. Fry

//Special to the Daily Record

//July 17, 2014

As ratings agencies suggested by recently renewing Maryland’s AAA bond rating, Wall Street views Maryland’s fiscal management as being on sound footing. Our state is clearly highly regarded in the bond market.

From the perspective of bond investors and of state lawmakers — who are tasked annually with crafting a balanced budget that matches spending with available revenue to fund state government operations — Maryland is in decent fiscal shape.

The most recent stamp of approval from Wall Street is a good thing. But it’s important to understand the perspective of rating agencies. The bond ratings articulate the significant, but ultimately narrow viewpoint of investors seeking to lend money to solvent borrowers.

A rating of AAA is a snap shot of current fiscal strength, but it does not constitute an assessment of the larger issue of Maryland’s business climate or its fiscal sustainability.

Lawmakers in Annapolis tend to focus primarily on ensuring that our state government operations are adequately funded and solvent — one year at a time. That’s what they are mandated by our state’s constitution to do. And they have demonstrated a consistent capacity to accomplish this in a decade of structural deficits through a combination of revenue increases, spending cuts and creative use of special funds and borrowing tactics.

But there is a broader perspective. It’s that of businesses and individual taxpayers from whom Maryland’s government operating revenue is derived.

Wall Street investors focus on government revenue numbers. Business leaders on the ground in Maryland care more specifically about how revenue is raised and spent and whether it is done so in a manner that nurtures a good climate for the economic growth and job creation that will ultimately drive our state’s future economic health.

For example, business leaders at the Greater Baltimore Committee contend that, despite Wall Street’s high regard for Maryland’s current fiscal management, better positioning our state for future economic prosperity must start with strategic tax restructuring and spending reforms.

Maryland has many strengths as a place for business growth — top-rate education, savvy workforce, tech and research resources and a high quality of life — but they must be more aggressively supported by smart tax and spending policies that will nurture the growth of our state’s existing businesses and encourage businesses elsewhere to want to locate here.

This is not to say that lawmakers in Annapolis are unaware of business climate issues. They are. But the nature of our state’s budgeting process tends to distill it into more of an annual exercise in short-term fiscal math rather than longer-term strategic fiscal planning.

That’s why a commission of private-sector fiscal experts convened by the Greater Baltimore Committee has been working for more than seven months to identify opportunities to make Maryland more competitive through better fiscal policies that complement our state’s substantial strengths. In the process, commission participants are finding a number of key challenges on both the revenue and spending sides of the budget ledger.

On the revenue side, for example, how does Maryland reconcile the fact that it routinely ranks high on reports such as the 2014 New Economy Index that measure states’ potential for economic growth, but ranks closer to the bottom when actual performance, such as growth in its gross domestic product, is measured?

Though well-positioned, according to experts, Maryland’s post-recession economy and job growth have been sluggish, trailing the national average for the last two years, according to the Bureau of Economic Analysis.

Issues relating to Maryland’s sluggish economic growth range from an over-dependence on federal government spending to a less-than-competitive tax structure — particularly combined state and local income tax rates and the way our current tax structure impacts small businesses whose income passes through to individual tax returns and their applicable rates.

On the spending side, GBC private-sector experts are scrutinizing the way Maryland sets its spending parameters and priorities. One key issue is the process by which Maryland lawmakers determine the state’s spending affordability from year to year.

For example, during the last 10 years, the General Assembly’s Spending Affordability Committee has recommended annual state spending increases from 9.6 percent in 2006 to zero in the first post-recession year of 2010. A state spending increase of 7.9 percent in 2007 was also among “affordable” recommendations in those years.

This raises the question: Is there any year in which it is appropriate to recommend a 7 percent or 9 percent increase in state operating spending?

Other challenges on the spending side of the state’s fiscal ledger include the projected increasing use of the General Fund to cover debt service and addressing the growing obligations to the state’s pension plan and retiree health care benefits.

Maryland has many advantages that make our state a desirable place to live and work and that promote a strong economy. But it’s fundamentally important that newly elected lawmakers who convene in Annapolis next January begin to pay serious attention to addressing fiscal issues that detract from our state’s ability to thrive.

Maryland can build on its substantial potential for economic growth, as well as maintain its AAA bond rating, without resorting to excessive fiscal creativity if our elected leaders can get our business climate right.

That needs to be their top priority in 2015 and beyond.

Donald C. Fry, president and CEO of the Greater Baltimore Committee, writes a monthly column for The Daily Record. His e-mail address is [email protected]


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