Maryland fiscal leaders are bracing for the economic impacts of a human health crisis that has effectively shut down business in the state in less than a month.
Analysts, budget experts and economists have warned for the better part of a year that the economy and its unprecedented period of growth was likely to slow down and recession could come maybe as early as this year. That was before anyone heard the terms COVID-19 — a disease that so far has claimed the lives of nearly 100 Maryland residents — or social distancing or the stay-at-home orders that effectively closed large swaths of the state and national economy.
Comptroller Peter Franchot said the sudden recession brought on by COVID-19 could mean historic write-downs in state revenue.
“We’re flying blind,” said Franchot, echoing others who say the dramatic effects of the public health crisis coupled with the shock to the economy are difficult to fully understand in real time. “The figures could be anywhere from 20 to 30% reduction in state and county revenues.”
The state could update some financial projections this month. Franchot said initial tax collection data will be delayed as a result of the 90-day tax holiday that will allow businesses and individuals to put off paying income, sale and other taxes.
But the state’s chief tax collector said there is anecdotal evidence in the empty shopping center parking lots, closed casinos and darkened store fronts.
Gov. Larry Hogan declared a state of emergency in Maryland on the same day he announced the first three COVID-19 cases in the state. In the days that followed, he has tightened restrictions on businesses and public gatherings, closing bars and restaurants, casinos and entertainment venues, shopping centers and non-essential businesses.
Public gatherings, initially limited to 500 people, are now essentially barred as the governor issued a stay-at-home order for all but essential travel and necessities.
“We’re basing (projections) on the fact that Maryland has been turned into a ghost state as far as economic activity — understandably so by the governor — because of the delay and deception and denial coming out of Washington as far as the coronavirus health issue,” Franchot says.
Hogan, the second-term Republican governor, agrees with Franchot’s concerns about the economic impacts.
“I don’t think that’s too unrealistic a number,” said Hogan of Franchot’s projections for lower revenues. “We’re talking about 25% unemployment. Revenues should be down dramatically.”
Franchot, who is a member of the state Board of Public Works, said the likely result will be unprecedented cuts to the state budget that will have to be made by the three-member panel that includes Hogan and Treasurer Nancy Kopp.
“We don’t know what the reductions will be but they will be historic and in all likelihood make 2009 — I remember one BPW meeting cutting a billion dollars from that fiscal year — that could be the tip of the iceberg.”
The board, led by Hogan, has the ability to trim 25 percent of a department’s budget without the approval of the General Assembly. Gov. Martin O’Malley, Hogan’s Democratic predecessor, used the board repeatedly to make budget corrections during the Great Recession.
O’Malley, who wished to avoid using the state’s rainy day fund that is widely praised by national bond rating agencies, used those reductions as well as shifting money around from various dedicated funds, including the transportation trust fund and money set aside for open space purchases, to balance the budget.
But this is unlike anything fiscal leaders or most state residents have ever seen in terms of the scope of the public health crisis and the real impact on personal and government budgets.
With the most recent recession, job losses occurred over a longer period of time driven by a housing bubble that burst.
The COVID-19 economic downturn is more sharp and driven by health policy that necessitated the closing of businesses to slow the spread of the disease. The effects on state and local budgets will also be more quickly felt.
“The revenue losses are going to be quick and enormous,” said Warren Deschenaux, the former head of General Assembly’s Department of Legislative Services and a nonresident fellow of the Maryland Center on Economic Policy, a progressive policy organization.
In just two weeks, the state has seen unemployment shoot up with more than 124,000 new first time unemployment claims. Nationally, the Federal Reserve Bank is projecting the possibility of massive unemployment approaching 30 percent.
The closure of non-essential businesses will also mean dramatic cuts in both personal income and sales taxes at traditional brick-and-mortar stores. Both of those taxes combine to equal roughly 75 percent of the state’s general fund revenue.
Revenue for the coming year had been expected to grow by roughly 3 percent.
Harford County Executive Barry Glassman said his county had also been projecting 3% revenue growth in the budget year that begins July 1. That number has since been revised down to 1% even before the Harford County Council has had an opportunity to review the spending proposal. Glassman, a Republican and former member of the General Assembly, said Hogan may have to reject a number of proposals passed by the legislature.
“Right now, the unknown would lead me to believe that we have to push the pause button on everything,” said Barry Glassman.
Topping the list is an expansion of education spending – the recommendations of the Kirwan Commissoin — that will eventually cost an additional $4 billion annually.
“The governor almost has to veto that bill, and if the legislative leadership is dead-set on moving forward with it, they’ve got to at least negotiate a delayed effect of a year or 18 months to make sure the economy does recover,” said Glassman, who said his former colleagues passed the plan under different circumstances than the state now faces.
“It was based upon the most optimistic fiscal projections and that unemployment would stay the same and revenues would stay the same and inflation would be the same,” said Glassman. “So all those fixed costs were based on pretty rosy assumptions, and it’s quite clear that all of that is off the table.”
Futhermore, to finance part of the Kirwan program the legislature passed several tax increases, all of which Hogan vociferously opposed even prior to the onset of the pandemic.
Hogan has said he hasn’t given any thought to potential vetoes in the midst of the crisis. The legislature is expected to deliver bills passed in the abbreviated session by Tuesday. Hogan would have 30 days to decide whether to sign or veto those bills.
Tools at hand
The dramatic reductions in revenue could leave Maryland, which is required by law to have a balanced budget, looking for ways to reduce spending, raise revenues or look to the federal government for help.
The General Assembly already has approved Hogan’s request to tap $50 million of the state’s rainy day fund.
“We’re going to tap into and perhaps drain the entire rainy day fund,” said Hogan.
Hogan also has a number of other arrows in his quiver, including hiring and spending freezes. He could also balance the budget by moving money from dedicated accounts — something he criticized O’Malley for doing, as it was backfilled with increased borrowing. He could also seek approval from a super majority of the legislature to break the lock on the Transportation Trust Fund.
The General Assembly created the lockbox in 2012 when it voted to increase the state’s motor fuel tax. That fund was one of the many tapped under O’Malley to balance the budget.
But lawmakers built in a provision where the fund could be used to balance the state budget in times of emergency and severe economic distress. The governor would need to declare the emergency and seek the approval of a super majority of both the House and Senate.
Hogan at least initially said he and other states will seek additional aid from the federal government in an expected new stimulus package.
“We’ve asked for half of the next stimulus package for the states,” said Hogan, who is also the president of the National Governors Association.
Hogan and the governors unsuccessfully sought half of the most recent round of federal stimulus. Instead, they received about $150 billion in direct aid.
Of that, Maryland state government will get about $1.3 billion with another $1 billion going to counties in Maryland with populations of more than 500,000 people. That funding can only be used for pandemic response efforts and not for replacing lost revenue.
The $1.3 billion in federal aid to the state — an amount enough to run the state government for about a month — is almost exactly the amount in the rainy day fund that will be tapped to cover those initial expenses.
‘Doing our best’
“They (federal officials) have done a reasonable job of helping us see some immediate expenses and helping us get through to this point or get through what we’ve got to do — at least what we can see in the foreseeable future,” said Sen. Guy Guzzone, D-Howard and chairman of the Senate Budget and Taxation Committee. “But again, we can’t foresee everything and that’s the problem.”
Legislators are trying to plan for a wide variety of scenarios, ranging from the most optimistic and a return to almost normal in a few months to those where the economy spirals down for months or the state faces a second round of the pandemic later in the year.
“We’re like everybody else in the world right now,” Guzzone said. “In the final analysis, we’re just doing our best, and we don’t know for sure.”
Guzzone said trigger provisions in the recently passed Kirwan bill would automatically pause state spending on the increased spending for education if revenue projections declined by 7.5% or about $1.4 billion in the current $18 billion general fund budget. A veto, he said, is unnecessary.
“We absolutely had no intention of spending money we don’t have in the midst of a crisis and that’s what we set up in the legislation,” said Guzzone. “The expectation as we were leaving session – and clearly by the actions that we took in amending the Kirwan bill — was that it would not take effect if revenues were down significantly and I think there is a good reason to believe they will be down.”