Maryland counties cautioned about ‘sugar high’ of federal virus aid

“Don’t get stuck too much on what many folks are calling a sugar high,” Andrew Schaufele, director of the Maryland Board of Revenue Estimates, tells county leaders. (The Daily Record/File Photo)

OCEAN CITY — A surge of federal pandemic aid could cause budget issues at Maryland’s local government level if poor “fiscal hygiene” is practiced.

That was the message from two state budget experts who cautioned local leaders attending the Maryland Association of Counties summer conference that a sugar high of federal pandemic aid will likely end in the next two years. The result could create problems for those who use one-time federal money for ongoing expenses.

“I am very upbeat about the near term,” said Andrew Schaufele, director of the state’s Board of Revenue Estimates. “I think the near term — by near term I mean the next year and a half to two years — we’re going to see some real strength. You all are going to see that in your revenues. I don’t think it will be sustainable.”

Schaufele told local budget officials the result will be a slowdown in growth that “will get to the point where it gets lethargic.”

“Keep that in mind when thinking about the future,” he said. “Don’t get stuck too much on what many folks are calling a sugar high. Remember that it’s not going to keep going like what you’re going to see over the next year and a half to two years.”

In all, Maryland will receive an estimated $70 billion in aid to the state. The amount is equal to about 13% of the state’s gross domestic product or equal to the state’s largest industry.

“That’s all the lawyers, all the accountants, all the engineers,” said Schaufele. “The most highest-paid individuals in the state of Maryland. That entire industry. It’s like they created it out of nowhere and infused all of that money into the state over the course of a year.”

The infusion of dollars stabilized state and local budgets.

“Effectively one year after (the start of) COVID, we’re seeing the same revenue picture that we were seeing before COVID. To me it’s still startling. It’s an amazing fact. It doesn’t seem like it should be.”

Warren Deschenaux, a former top budget analyst for the Department of Legislative Services urged caution when it comes to “one-time” federal stimulus money.

“What’s going to happen when that money runs out?” he asked, adding that it is “also possible that when the effects will peter out and how quickly and to what level those effects peter out will determine what the future looks like.”

The infusion leveled off the state budget picture over the previous and current budget year. But it will also come at a cost, according to Schaufele.

“Never bet on a free lunch,” said Schaufele. “In economics you get nothing for free. The feds pushing all this money out will have a cost. It will hurt our long-term growth rates.”

Early in the pandemic, amid mandated closures and stay at home orders, Maryland lost 400,000 jobs — about 15% of the jobs in the state.

The sharp losses worried Schaufele and other analysts. One early estimate, issued by the Board of Revenue Estimates and Comptroller Peter Franchot, set the potential budget hit at $2.8 billion.

“We really had no idea where this thing could be heading,” said Schaufele.

Local governments experienced a similar sugar rush when federal dollars hit.

“We did not see over the last couple of years an actual effect on local income tax from the pandemic and it’s largely due to federal spending propping that up,” said Chris Trumbauer, Anne Arundel County’s budget officer.

Anne Arundel saw drops in most revenue categories but experienced growth in income tax and property recordation and transfer taxes.

Trumbauer urged locals to be conservative about revenue outlooks. In that county, expected revenues were written down. Those expectations have been exceeded by $41 million.

“You can always find something to do with extra money you weren’t expecting,” Trumbauer said. “It’s really tough to deal with revenue shortfalls because that’s when you start talking about furloughs and layoffs and other things, which is no fun in budget world.”

This is especially true when it comes to spending one-time dollars on programs that will be ongoing expenses.

Some local leaders said that they feel pressure mounting to spend.

Michael Hewitt, a Republican St. Mary’s County commissioner, said members on his board are calling for expansions in hiring and salary increases. He and other members believe the federal “sugar high may wear off and that this stimulus money may be masking the real economy that’s out there.”

Hewitt said he and other board members are “being vilified” on social media because they won’t loosen the purse strings.

“The millennials on our board say these guys have got to go,” Hewitt said. “We say that the shoe hasn’t dropped yet. The day of reckoning hasn’t come for COVID.”