November 16, 2014

Rascovar: Hogan faces fiscal Maryland’s new normal

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Calculating Taxes Up And Down

By Barry Rascovar

For MarylandReporter.com

The outlook for the Maryland state government Larry Hogan Jr. starts running in January is grim: A sea of red ink far into the future.

Forget about major tax cuts or other campaign promises. That was a hope more than a firm commitment, and Hogan said as much to voters. His first priority then and now: getting Maryland’s financial house in order.

How bad is it?

Spending is running roughly $400 million ahead of revenues this fiscal year – and the same gap is projected for next year and the following 12 months.

Maryland’s estimated structural deficit during that time is nearly $1.2 billion.

Over the next six years, the total structural deficit is projected at close to $4.3 billion.

No wonder Hogan announced that fiscal whiz Bobby Neall would be plotting a budget triage plan by year’s end. It will be a Herculean task.

Neall has the credentials.

He sensibly downsized Anne Arundel County government as county executive. He was a strong advocate of cautious, common sense spending as a leader of the House and Senate budget committees. He’s been a voice in the wilderness on the Spending Affordability Committee crying out for far-reaching fiscal reforms – usually rejected by legislative liberals and the “progressive” O’Malley-Brown administration.

Neall correctly pointed out last week that one of the main trouble spots is the soaring cost of debt payments. Too many state bonds were issued in recent years. The proverbial chickens are coming home to roost.

Rising payments on state bond debt; spending growth hard to cut

Unless something is changed, debt service will triple from two years ago — to $268 million. By 2019-2020, debt service will hit $559 million.

Even worse, there’s only one realistic way to curb that rising expense — a step Hogan definitely won’t take: Raise the state property tax rate.

Other big spending-growth areas also will be difficult, if not impossible, to cut.

Education aid to the counties is set to rise by $304 million next year, higher education by $225 million and public safety by $175 million. Most of this is due to mandated increases.

Unexpected expenses related to the expansion of Medical Assistance under Obamacare adds a whopping $410 million next year as well.

The overall problem is easy to identify.

Too much spending

Too much spending by liberal Gov. Martin O’Malley; a weakened state economy that isn’t recovering as expected.

Not enough coming in; too much going out.

Welcome to the New Normal.

O’Malley and other liberals always assumed that Maryland would rebound strongly from the Great Recession. It never happened.

Job creation has remained uneven. It’s been flat for the past six months. Republicans in Washington have stalled growth in the federal bureaucracy that employs so many Maryland residents. Contractors in Maryland who are dependent on the federal government are seeing a definite slowdown that will continue with the GOP taking full control of Congress.

Adapting to a smaller federal government could be painful for Maryland. Yet that is part of today’s reality.

State government and state aid will have to shrink

The New Normal means Maryland government will have to shrink, too. It means less money flowing back to local governments as well.

Capital spending will be affected. In the past, a small state real estate tax was sufficient to pay debt service on general obligation bonds. But property values took a sharp plunge in 2008 and have yet to recover fully. That trend may persist for the rest of the decade.

This year, O’Malley for the first time dipped into the state’s general funds to pay for debt service. With housing prices stalled, Hogan is facing far larger debt service payments coming from the general fund starting next year.

The situation was made worse by O’Malley’s decision to pay some on-going budget expenses with proceeds from state bonds. This diversion has taken nearly $2.5 billion out of the state’s construction program and has increased debt service markedly.

It’s an ugly aspect of the New Normal.

Cuts not as easy as supposed

On the campaign trail, Hogan made cutting state spending sound easy. It’s not.

For starters, 58% of the growth in Maryland’s budget next year is required by law or by legislative mandates enacted in 2014. This is untouchable without assent from the liberal General Assembly.

Local aid will be hard to cut, too. Eight-six percent of that money goes to schools. Touching this ever-growing pot could be next to impossible given the popularity of education among voters.

Why not slash the bureaucracy? Amazingly, the size of the state’s work force is virtually the same as it was in 2002. There might not be as much “fat” on the bone as Hogan indicated during the campaign.

Settling for small adjustments

Hogan may have to settle for incremental reductions throughout government. He may have to take some distasteful steps, too, perhaps nudging up the state property tax slightly. He’ll almost surely have to lower aid to the counties – another unpleasant task that won’t win him friends in counties that supported him.

He won’t win fans by shrinking the school construction program, either. But it has to be done to restore a sense of fiscal equilibrium.

What a mess O’Malley is leaving behind. He let spending spin out of control. He ignored clear signs that growth in state revenue was slowing and that federal hiring and contracting were shrinking. These are long-term trends.

Budget issues will dominate Hogan’s first four months in the State House. He will need cooperation from Democratic legislators to get Maryland out of this fiscal bind.

Gridlock is not an option.

Barry Rascovar’s blog is www.politicalmaryland.com. He can be reached at brascovar@hotmail.com

  • MD observer

    This is the (predictable) price we pay for O’Malley’s outsized political ambitions. If only Hogan could clean house to rid the executive branch of its big spenders. Even here his hands are tied because his Treasurer Ms. Kopp is elected by joint ballot of the legislature.

    Big spending reductions are a thankless task. Hogan’s best bet as Mr R says is slow and steady cuts. I believe his best bet is 1 – 2% annually. But will we get honest budgeting from Hogan?

    • abby_adams

      I can already hear the Dem majority screaming about any cuts Hogan proposes. You can be sure any mention about bond issues will result in the same old line about Maryland’s AAA bond rating without mentioning that a big reason we keep that rating is the legislature has no problem raising our taxes to cover the payback. Only now the news surfaces about the dire state of our debt load. We certainly haven’t gotten that message from our local MSM or the Democrat politicians in this state now have we?

  • Candid Opinion

    Would it not be logical to use some of the revenue from the Lottery, the Casinos and the miriad of scratch off and lottery cards sold each week. This is a huge sum that is being distributed to I wonder where.

    • Ed

      The casino proceeds were set in the legislation allowing them. Some goes to the horse racing/breeding industry, some to education, some to the communities where the casinos are sited to pay for infrastructure and security costs, some goes to gambling addiction services. It was all parceled out as part of the enabling legislation. Lottery proceeds, I believe, go to education and the general fund. That money is already accounted for in the state budget. I’m curious what you thought they were doing with it, buying CDs for savings?

      • Laddyboy

        With the MILLIONS the State brings in; where is it? Where? Show me the proof!!!!!!

    • Fuster Cluck

      its a shame that the government needs to exploit the poor via lottery and gambling to get money for our government to function. you don’t see rich people in the lottery lines in MD. it’s lower income blacks/minorities most of the time, and they spend a lot of money on lottery tickets. sure people win sometimes, but the odds are in favor of the state and not the people playing. the poor are too stupid to realize they are being used and taken for a ride.

    • Laddyboy

      The Lottery and the other “Games” are nothing but a “voluntary tax” on the average Marylander. The funding from these “Games” were SUPPOSED to be used in the EDUCATION of the Children of Maryland. You cannot prove that by me.
      mr. omalley, brown and the other elite have STOLEN the funds from many “dedicated” funds, such as the TRANSPORTATION DEPARTMENT. Then threaten Marylanders with not being able to keep the roads in operating order. Where else did they obscound funds from? It will take YEARS to take care of the FREE SPENDING these elitse have done.
      Thanks mr. omalley and his co-conspirators including mr. sarbanes, mr. cardin and ms. mukulski.
      By the way does everyone know that mr. cardin and ms. mulkulski voted to give the Second Amendment RIGHTS of Americans to the “un”? Look at their votes. Do not listen to their voices or their nice “politically correct” sounding written responses.

  • abby_adams

    The “New Normal”? Some Maryland taxpayers have been screaming about the overspending for years! It will be herculean task to come up with a budget that will please the spend-a-holics in the legislature. After all, they’ve become used to handing out favors with abandon no matter the cost to taxpayers. Yet now we hear that O’Malley, Miller & Busch should have known the overspending couldn’t continue? Unfortunately two of the culprits involved are still in charge. Will a dose of the “New Normal” finally bring them to their senses? I have my reservations..

    • joe

      “Some Maryland taxpayers have been screaming about the overspending for years!”

      Absolutely correct, but response letters written to Maryland taxpayers and articles written by O’Malley, Miller & Busch concerning increasing taxes and over spending always painted a rosy picture.
      Maryland’s Democratic US Senators and House members are also delusional about increasing taxes and over spending!

      • abby_adams

        I agree. Yet we all know that any suggested “cut” will be met with cries of fowl from the Dems in Annapolis. It doesn’t take a math wiz or economist to realize that we’re in deep doo-doo thanks to MD’s propensity to raise taxes & raid so called “dedicated” funds while handing out even more goodies for votes. They’ve “Grubered” MD taxpayers for far too long.

  • fidler8

    When O’Malley took office in early 2009 the budget was about $30 billion. I suggest they start with that budget as the base. If they have to change some items mandated by law, then do so. Miller and Bushch assented to all the wild spending; now it’s their responsibility to bring it under control.

  • Fuster Cluck

    every state and county dept budget needs to be looked at closely, and cut. from top to bottom. the high up people down to the little guy. everyone. of course the unions will fight it. they are part of the problem.

    • Laddyboy

      Look at the “salaries” of the elite in Maryland’s government. W A Y too High!!

  • Laddyboy

    I can cut a lot of fat from the government of Maryland. The “salaries” of the elite in the government should be CUT to the SAME amout as the NORMAL salary of the AVERAGE employed and retired Marylander. The OUTLANDISH “salary” of the elite is really rediculous when campaired to an AVERAGED salary of Marylanders.