January 18, 2010

Budget talk can be confusing: How big is it?

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By Len Lazarick
Len@MarylandReporter.com

After Gov. Martin O’Malley releases his budget today, there may be some confusion about how much he actually plans to spend.

The overall state budget – the one that shows up every year around page 7 in the official budget highlights book – will likely be about $31 billion. That’s the same as this year after all the cuts.

Many media reports focus on the “general fund” budget that is less than half that total, about $13 billion. Some accounts have even referred to this the “operating budget.” It is not.

“The general fund budget is what we’re all expected to focus on and balance each year,” said professor Roy Meyers, who teaches government budgeting at the University of Maryland Baltimore County. “It’s the focus of attention of people everywhere,” including the National Association of State Budget Officers, for instance.

The general fund is the pot that collects most of the state revenue – the income tax, most of the sales tax and most most lottery revenues. It also includes proceeds from the alcohol, tobacco and estate taxes.

But the general fund doesn’t include the taxes on gasoline, real property, real estate transfers, and many charges and fees, such as university tuition and the flush tax. It includes none of the federal money coming back to Maryland – 25 percent of all state spending.

“I think the best focus is the most comprehensive one that focuses on all the funds expended by the state,” Meyers said. “I think it makes the most sense to look at the total funds being spent including federal funds.”

In other words, about $31 billion.

He referred to Article III, section 4 and 5a of the Maryland Constitution. It calls the budget “a figure for the total of all proposed appropriations and a figure for the total of all estimated revenues.” It also says these totals must be in balance.

Warren Deschenaux, the legislature’s chief fiscal analyst, defended the attention that goes to the general fund.

“I don’t think it’s inappropriate to be focusing on the general fund,”he said. “That’s where the main taxes are going.”

Still, he acknowledged that it’s important to consider the whole of state spending.

“The focus can be misleading,” Deschenaux conceded. “It’s going to understate spending,” since it doesn’t include federal money and “special” fund revenues. Those are dedicated to specific purposes.

But special funds are often redirected into the general fund barrel. This year and next, real estate transfer taxes created specifically to fund conservation land purchases and farmland preservation are being taken out of the special fund and put into the general fund. Bonds will be used instead to buy and develop parks, forests and the development rights to farmland.

“We’ll be paying for those decisions for 15 years,” Deschenaux said..

OPERATING: So what is the “operating” budget? “It’s really a description of something that doesn’t exist,” Meyers said.

Deschenaux described it as the portion of the spending plan that “supports government operations” – “everything in the budget bill” minus some capital spending and money set aside in reserve, such as the rainy day fund. He said it is perhaps $25 billion.

The term “operating” budget is seldom used in budget discussions. Other terms are used to describe different ways to analyze state spending.

BASELINE: There is the “baseline budget,” the estimated cost of maintaining current services under “normal” budget conditions – which Maryland hasn’t experienced lately. This “baseline” includes cost-of-living increases and merit pay for state employees. It also assumes full funding of all the programs mandated by state law such as school, police, library and pension aid to the counties.

Many of these mandates and expected growth have slowed or been cut in the past year.

“It’s important to know what you’re not budgeting as well as what you’re budgeting,” Deschenaux said. “It’s really a cut if you’re not doing what you said you were going to do.”

Professor Meyers believes the current “baseline” budget — about $2 billion more than expected revenues — “includes a lot of estimates that may not be true.”

SPENDING AFFORDABILITY: Democratic legislative leaders made much of their decision to allow zero growth in the “spending affordability” budget recommended to the governor in December. The joint spending affordability committee recommended spending $20.8 billion, a target almost $8 billion higher than “general fund” budget figure being used as the standard in much reporting.

This $20.8 billion is a rather flexible number that does include money spent on roads and transit. It also includes all university spending and tuition payments.

In past years, the spending affordability number has never included federal taxpayer dollars, which largely go to fund Medicaid health care. But this year for the first time it does include federal stimulus dollars used to supplement state general fund spending.

Republicans say it still leaves a $1 billion spending gap in the estimated $2 billion deficit. They tried to pass a deeper 7 percent cut in the spending affordability plan. But Meyers said, “I wouldn’t make a big deal out of it,” because he thinks the baseline estimates for spending are too high.

So when somebody asks “How big is Maryland’s state budget?” you can respond, “Which budget do you mean?” Or you can probably look it up on page 7 of the budget highlights book.

“Transparency is clearly not our goal in the budget,” Deschenaux observed with his usual dry wit, “but obfuscating is not our intention, either.”