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Maryland’s budget battle ahead

Hogan, legislators face ‘difficult decisions’ with deficits growing

In roughly 30 days, Larry Hogan will be sworn in to office after running a campaign focused on improving the state’s business climate, reducing taxes and mending the state’s budget process that routinely yields hundreds of millions of dollars in shortfalls annually over the last decade.

Annapolis-SummitHogan, who will be sworn into public office for the first time in January, maintains that he was sent to Annapolis with a mandate to reduce spending and right the state’s economy and business climate.

“We have to make some very difficult decisions because state government cannot continue to spend more than it takes in,” Hogan said during a recent meeting with the press on the budget.

Hogan, who said his style is to speak bluntly about the challenges facing the state, said he did not wish to scare residents.

“What’s good for state government is good for Marylanders,” Hogan said. “If we can take the strong medicine now, I believe we can begin to heal the state economy and that will benefit all Marylanders. We cannot continue to say ‘yes’ to every demand for increased spending. The people are demanding we go in a different direction and it means we’ll have to have the courage to say ‘no.’”

Currently, spending in the budget is growing at a rate of about 6 percent annually. Much of this increase is being driven by the fact that 81 percent of the budget is mandated. Formulas for items such as the repaying state bonds, the pension and retiree health benefits are increasing faster than the 4 percent average annual growth in revenue, according to Democratic former state Sen. Robert L. Neall, Hogan’s senior adviser on the budget.

“We’ve got to set a clear set of consistent decisions that are grounded in sound fiscal discipline to reduce the size and scale of general fund expenditures not withstanding these obligations,” said Neall.

The debate ahead

But some Democratic legislators say Hogan, who claims a voter mandate to reduce taxes while controlling spending, is not the only one coming into the session facing high expectations from voters.

“There’s two ways of looking at it in terms of mandates,” said Sen. Roger Manno, D-Montgomery County and co-chair of the legislative Spending Affordability Committee. “I believe Gov. Hogan believes he has a mandate to do that. Many of us believe we have a mandate to provide a level of services, outstanding K through 12 while also working to eliminate the achievement gap, great environmental programs, job creation programs, health care, assistance to small businesses. You can’t eat cake and lose weight. That’s the policy dialogue we’re about to have.”

‘What’s good for state government is good for Marylanders,’ Gov.-elect Larry Hogan says. ‘If we can take the strong medicine now, I believe we can begin to heal the state economy and that will benefit all Marylanders.’ (The Daily Record/Bryan P. Sears)

‘What’s good for state government is good for Marylanders,’ Gov.-elect Larry Hogan says. ‘If we can take the strong medicine now, I believe we can begin to heal the state economy and that will benefit all Marylanders.’ (The Daily Record/Bryan P. Sears)

The ongoing structural budget deficit is not a new concern. In fact, projected gaps between government spending and revenue have persisted despite provisions in the state constitution that require a balanced budget each year.

Last year, legislators arrived in Annapolis needing to close a $90 million gap in the fiscal 2014 budget and figure out how to erase a $467 million projected gap for fiscal 2015. They left in April after passing a two-year $39 billion spending plan.

The song for the coming 2015 session will sound a lot like last year’s. In addition to a $400 million gap in the current year — after Gov. Martin J. O’Malley made cuts to the budget two days into the fiscal year — there is a projected fiscal 2016 deficit of more than $700 million.

Sen. Edward J. Kasemeyer, D-Howard and Baltimore Counties and chairman of the Senate Budget and Taxation Committee, said some of the problem is that year after year revenue projections from the Board of Revenue Estimates have proven to be inaccurate and are frequently revised down in the middle of a budget year.

“It seems like in the majority of years in the last decade we pass what we think is a balanced budget but during that year the revenue estimates decline and we find ourselves in a situation where the public, rightly, feels that we really didn’t manage the budget properly and spend too much money,” Kasemeyer said. “We certainly face, what looks like from the outside, legitimate criticism that we didn’t manage the situation properly.”

Last week, the Board of Revenue Estimates issued a downward revision of projected revenues of $271 million over the next 18 months.

“It is sobering that our revenues are not coming in as projected,” said Sen. Roger Manno, D-Montgomery County and co-chair of the legislative Spending Affordability Committee. “We have to take note of the fact that this is not an unusual occurrence and we’ve sort of learned to live in that world where revenues don’t come in at the levels they are projected by the Board of Revenue Estimates.”

Warren G. Deschenaux, director of the Office of Policy Analysis, told the state Spending Affordability Committee in November that it had one of two choices in fixing the ongoing budget problem.

“Increase economic activity or change the tax structure in Maryland,” Deschenaux said.

Hogan, the incoming governor, and former Sen. Robert R. Neall, the governor-elect’s senior budget adviser, see the situation differently.

Neall said the current budget “should be declared a federal disaster area” after O’Malley began cutting spending two days into the budget year and started requesting state agencies to freeze spending and hiring.

Hogan’s limited options

Neal said 81 percent of the budget is driven by mandated costs, including growth in education, Medicaid and post-retirement benefits. Additionally, O’Malley’s use of bonds to replace cash taken from dedicated state funds will increase the gap between the annual cost of paying off the debts and ,what is covered by the state property taxes.

Currently, that gap is about $140 million. In fiscal 2016, that figure will be nearly twice that amount. By fiscal 2019, the gap is projected to be more than $500 million.

Neall said solving the problem will require “fiscal discipline over possibly 10 years to get borrow in line.

Hogan has avoided specifics on exactly how he would tame the budget but during his nearly 45 talk with the press, the governor-elect and his chief budget adviser began to lay out some guiding principles and eliminated some options.

“A truly balanced budget is expenses, recurring expenses, fully supported by recurring revenue with a little left over for a rainy day,” said  Neall.

“I believe fiscal ‘16 must be a thoughtful departure from the way things have been done and preparing that budget is going to require a re-basing of every major expense we have flexibility on,” Neall said.

But members of the bipartisan legislative Spending Affordability Committee Wednesday unanimously approved a spending recommendation to Hogan that called for the incoming governor to reduce the state’s structural deficit by half — about $350 million. The balance would he handled in the short term through transfers and other options meant only for the current budget year, a tactic that has been used before.

Despite the dire picture painted by Hogan and Neall, the governor-elect said he was not interested in using a provision that would allow him to use money in the transportation trust fund to pay for ongoing expenses.

Hogan said such tactics have been used before and have not solved the problem. He acknowledged that he was potentially leaving himself few options other than cuts.

“We don’t want to rob the trust funds,” Hogan said. “We don’t want to play budget gimmicks. We’re going to try to come up with real solutions.”

Neall said that it may become necessary to reset formulas that mandate spending for things such as education — issues that will likely draw negative political attention.

“All of these decisions are going to affect the 5.5 million people who reside in Maryland and we’ve got to find a way that we don’t intrude too far into their lives because we’ll only be making a bad situation worse.

Hogan will face significant challenges in both the House and Senate where, despite gains by Republicans, Democrats hold overwhelming majorities in each chamber. Many of those Democrats say they are ready to “man the barricades” over any cuts to education.

“If he wants to just hammer education as a way to cut the budget and cut taxes, he will find very few friends in the legislature and even fewer friends out of the legislature, because I don’t think that is what Marylanders voted for in 2014 in the elections,” Sen. Richard S. Madaleno Jr., D-Montgomery and the incoming vice chair of the Senate Budget and Taxation Committee, said last week during a gathering of educators at a policy forum sponsored by the Maryland State Education Association.

Madaleno isn’t alone in his position.

“In terms of cutting deeply into programs that are lifelines for people and our kids, I think that the governor elect is going to need a lot of friends in the House and the Senate to do that and I project that he probably won’t find them,” Manno said.

Hogan is asking Democrats to set aside the politics.

“Policy makers are not always going to agree on everything nor should they be expected to,” Hogan said. “But unless we put aside the partisanship and work together to deal with our budget problems and restore our economy, then we will no longer have the ability to work together on the priorities on which we do agree.”

About this series

This is the sixth in a weekly series of stories by The Daily Record highlighting issues in the upcoming General Assembly session in preparation for the Annapolis Summit, a two-hour program on Jan.30 featuring the state’s top political leaders. All of The Daily Record stories in the series will be available on our website, TheDailyRecord.com

The summit will be hosted by Marc Steiner, whose “The Marc Steiner Show” on WEAA 88.9 FM at 10 a.m. weekdays is broadcasting a weekly feature on the same subjects as the newspaper series. The show also will be posted at steinershow.org.