January 12, 2011

Researcher says Maryland used ‘gimmickry’ to balance budget

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By Paige Winfield Cunningham

For MarylandReporter.com

ARLINGTON, Va. — While Maryland lawmakers seemingly balanced the state budget last year, it’s actually teetering atop unstable revenues, some experts say.

Speaking at George Mason University’s Mercatus Center on Tuesday, researcher Eileen Norcross said that Maryland and other states are using budget-balancing tactics that amount to no more than “gimmickry” and will leave them worse off in the long run.

These kinds of tactics surface in a number of different forms, Norcross said. These include using money for general purposes that have been earmarked for specific programs. Or relying on one-time federal grants or inconsistent dollars from state lotteries or cigarette taxes. Or even putting off payments into the pension fund.

Whenever a state uses these types of tactics because it doesn’t have enough ongoing revenues to cover ongoing expenses, it’s running a “structural” deficit  — even if its balance sheets add up in a given year, Norcross pointed out.

“For how long can you sustain state spending on lotteries, dumping funds, bonding, all of these tactics,” Norcross said. “Eventually you’re going to run out of steam.”

She’s done a case study on Maryland, which faced a $2 billion shortfall last year.

In response, officials cut $1 billion. But they turned to other measures to make up the remaining $1 billion. They transferred $800 million into the general fund from other funds and assumed $389 billion would be available in extra Medicaid funding that Congress had yet to approve. They also used $25 million in other one-time revenues and $2.7 million in federal stimulus funds.

Maryland’s structural deficit wasn’t as large as what some states are confronting. In fiscal year 2012, New Jersey will face a $10.5 billion deficit (26% of the budget) while California will grapple with a $19.2 billion deficit (18% of the budget). Illinois tops them all, facing a deficit that’s 47% of its general fund budget.

Lawmakers closed a $4 billion deficit in Virginia’s two-year budget last year, partly by deferring $750 million in payments into the state pension fund. The state will have to pay back those deferments—along with interest—over the next 10 years.

To some extent, the federal stimulus package passed in 2009 has sheltered states from the full impact of lagging revenues. In total, states used the stimulus funds to close $89 billion in budget gaps in 2010.

Now, states are facing another $26 billion in deficits in 2011, Norcross said. Turning to one-time, unstable revenue sources won’t work forever, she said.

“At some point, they’re not going to be able to bond their way out.”

Norcross was joined by Steven Malanga, a senior fellow at the conservative-leaning Manhattan Institute, and Mike Jerman, legislative director for Rep. Jason Chaffetz, R-Utah, to talk about how states can find their way out of ongoing deficits.

Without structural reform — cutting expenses enough so that they’re fully covered by consistent, ongoing revenues — states will continue to grapple with deficits and citizens will be shortchanged, Malanga said.

“The game has been rigged against taxpayers over the years,” he said.

Paige Winfield Cunningham is managing editor of Old Dominion Watchdog.