Md.’s rosy fiscal picture belies storm clouds approaching, experts say

State fiscal leaders will return to Annapolis in January in the unusual position of not having to deal with a structural deficit in the coming year.

The following years are not projected to be so good. Fiscal leaders, including the legislature’s own analysts, and Comptroller Peter Franchot are encouraging the General Assembly to think beyond the coming year.

“You may really want to consider a multi-year approach that takes into account deficits, takes into account your goals and priorities for the next several years and also the fiscal challenges that the state might be facing,” said Victoria Gruber, the executive director of the Department of Legislative Services, which provides policy and budget analysis to the General Assembly.

Lawmakers return to Annapolis for the 2018 session in better fiscal shape than originally projected.

This article is part of The Daily Record's coverage leading up to the Annapolis Summit, an event that marks the start of Maryland's legislative session.

Read articles in the series:
Nov. 25: Juvenile justice reform at top of 2019 General Assembly agenda | Dec. 2: Md. lawmakers to take another pass at sports betting | Dec. 9: Md. lawmakers to weigh mandate, drug prices in 2019 | Dec. 16: A huge boost sought for Md. schools funding — but how to pay for it? | Dec. 23: Md.’s rosy fiscal picture belies storm clouds approaching, experts say | Dec. 30: Advocates again hoping to make marijuana legal in Md.| Jan. 6: Urgency on redistricting hinges on Supreme Court

Most recent projections given to lawmakers before Christmas estimate an $18 million shortfall between the amount the state expects to spend compared to projected revenues – essentially a rounding error in an $18 billion general fund budget.

Still, storm clouds do appear to be gathering on the horizon, said Gruber, acknowledging that the legislature tends to view her and her predecessor, Warren Deschenaux, as the harbingers of doom and gloom in annual budget briefings.

The state economy is not performing as analysts had hoped after 113 consecutive months of economic recovery. The one-year outlook on the structural deficit quickly turns bad with projected deficits returning in fiscal 2021 and growing to $1.3 billion by fiscal 2023.

Much of those projected shortfalls will continue to be driven by the gaps between revenue growth — about 3.5 percent annually — and anticipated spending. That spending, much of which is mandated, grows at about 5 percent annually. The difference is about $300 million per year, according to state Budget Secretary David Brinkley.

Short-lived ‘elation’

A “sense of elation” felt by some when the Board of Revenue Estimates issued improved revenue statements in September for 2018 and 2019 has been replaced by “the reality that these positive changes only helped our short-term fiscal position,” said Brinkley.

“The fact that Maryland’s fiscal health remains relatively volatile demonstrates precisely why it’s essential that we maintain fiscal discipline moving forward and it’s one of the reasons why Governor Hogan has repeatedly pushed for long-term mandate reform,” said Brinkley.

Those figures do not take into account the potential for billions in recommended new mandated spending on K-12 education expected from a legislative commission, not to mention the potential for an economic downturn.

Gruber warned the combination of all those factors could cause “a significant fiscal decline, and potentially some real challenges could arise.”

The governor and the legislature will also enter the session with more unallocated surplus than expected.

Franchot, who also chairs the state’s Board of Revenue Estimates, late this year issued a warning of an impending economic winter. He called for placing nearly $1 billion in the state’s rainy day fund in anticipation of a recession.

“It’s important to realize that the billion dollars I referred to, that I believe we should be parking in the rainy day fund, it may or may not be recurring,” said Franchot. “Some of it is. Some of it isn’t. We really need to assess where we are before we leap into the unknown.”

Similarly, budget analysts for the legislature are encouraging the House and Senate to be cautious with bills that carry large price tags.

What exactly will happen to the bulk of the surplus will be determined in the coming 90-day session.

The legislative Spending Affordability Committee, in a pre-Christmas meeting, unanimously recommended increasing the state’s rainy day fund to 6 percent — about $187 million. It also recommended leaving a cash fund balance of an additional $100 million. The balance of the unappropriated surplus would be used for one-time expenses.

The Kirwan report

The governor and the legislature appear likely to hold off the bulk of their debate over expected increases in schools funding as a majority of costs arising from the Kirwan Commission’s recommendations will be put off until 2020.

On Wednesday, House Speaker Michael Busch and Senate President Thomas V. Mike Miller Jr. asked the commission, led by William “Brit” Kirwan, to continue working on complicated funding formulas and costs estimates.

“Given the breadth of the commission charge and the rigor and the thoroughness with which the Commission has addressed its charge, we understand that it is virtually impossible for the formulas to be completed in time for action during the 2019 Legislative Session,” Busch and Miller said in the letter. “The work of the commission is too important to rush through without something so critical as funding formulas that will ensure that the debate in the General Assembly is backed by the best available data.”

Instead, the commission will make recommendations on approximately $325 million in education initiatives in for the fiscal 2020 budget. The state last year set aside about $200 million to jump-start expected Kirwan recommendations.

Most recent cost estimates set the price tag for increased education funding at $4.4 billion once it is fully phased in over a decade.

But a majority of the costs — about $3 billion — could be front-loaded into the first years of the plan. No revenue source has been identified.

Sen. Paul Pinsky, a Prince George’s County Democrat and the incoming chair of the Senate Education, Health and Environmental Affairs Committee, warned that there may be little appetite in the legislature to raise taxes.

Gov. Larry Hogan, at a school construction announcement in Prince George’s County in early December, restated his opposition to taxes and said the state could not afford a $4.4 billion expansion of funding.

“With the recent public statements of (Hogan) on the commission’s work, it appears we have more work to do to convince the governor that these generational changes are worth undertaking,” Busch and Miller wrote in their letter to Kirwan.

But Hogan, speaking to reporters on Thursday, was unmoved.

“We think that they have some great ideas, but we’re anxious to the proposals for how we come up with the funding,” said Hogan.