Over the last two years, Maryland politics has been dominated by a debate over how to deal with the state’s “structural deficit.” This deficit is a long-term imbalance between revenues and spending created by income tax cuts in the 1990s and an expansion of education spending in 2002. The Ehrlich administration was able to defer the consequences of these decisions because of a strong economy and repeated diversions of transportation funds. But Governor O’Malley decided to deal with the problem head-on early in his term, leading to the deficit reduction package of last year’s special session.
The problem is the weak economy. Every time the legislature takes action to correct the deficit, the Maryland Board of Revenue Estimates reports revenue shortfalls. And so the legislature must redo its work. If the shortfalls are serious enough between General Assembly sessions, the Governor will probably have to make unilateral cuts until they return to Annapolis.
Senator Madaleno brought the latest 90 Day Report, a review prepared by the State Department of Legislative Services, to our attention. The report had this to say about future state budgets:
As shown in Exhibit A-1.6, although there is a cash balance of about $226.4 million in fiscal 2009, there is a gap of about $350 million when comparing ongoing revenue to ongoing spending. As noted, action at the 2007 special session reduced the projected $1.7 billion structural deficit by about $1.4 billion through a combination of new revenues and spending reductions. Reductions adopted at the 2008 session largely offset downward revenue revisions that were received in March 2008 but did not make additional progress in reducing the structural deficit. There is a potential cash shortfall of about $243 million between revenues and current services spending projected for fiscal 2010. The shortfall is expected to widen to nearly $600 million in fiscal 2011, which mirrors the structural deficit. This is due mainly to the downward revision of revenue by BRE [Board of Revenue Estimates] in March, to an actuarial error in retirement contributions which adds nearly $70 million per year in additional spending for teachers’ retirement costs, and in the financing of health care expansion, enacted by Chapter 7 of the 2007 special session, which adds $70 million in general fund spending in fiscal 2011.Exhibit A-1.6 is reproduced below.
Based on the assumption that the constitutional amendment to implement video lottery terminals is approved by voters in the fall of 2008, the projected cash and structural shortfall narrows significantly by fiscal 2013. It is estimated that revenue from video lottery terminals will add nearly $500 million in revenue in fiscal 2012, increasing to an estimated $660 million in fiscal 2013. If the constitutional amendment is not successful, the structural deficit is projected to remain at the roughly -$600 million level.
These numbers are by no means necessarily the ones that will be used by the General Assembly in next year’s budget decisions. The revenue numbers in particular may be adjusted more than once by then. But in general, here’s how this might play out:
1. More tax hikes are very unlikely. The bulk of the problem will be dealt with on the spending side.
2. The spending increases passed in the special session, such as the establishment of a fund to clean up the Chesapeake Bay and a health care expansion, will be especially vulnerable. Legislators will say, “We thought we had the money for those things but it turns out we don’t. So we will have to wait until the money comes in before funding them.” College tuition freezes and transportation spending will also be endangered.
3. Both the special session and the 2008 general session largely spared the counties from cuts to state aid. That may not be the case next time. The counties are especially wary of any attempt by the state to pass on obligations for teachers’ pensions. Education aid may also be at risk. If aid cuts happen, they would greatly complicate county budget problems, especially in Montgomery County.
4. Slots proponents will be sure to exploit the new data, especially the 90 Day Report’s statement that “if the constitutional amendment is not successful, the structural deficit is projected to remain at the roughly -$600 million level.” Even anti-slots legislators will shudder at the prospect of replacing that amount of money, especially as election year approaches.
5. A $243 million deficit is projected for FY 2010, which will be decided next year. But a $596 million deficit is projected for FY 2011, which will be decided in 2010 – an election year. The General Assembly is surely tired of dealing with budget crises every year and will be tempted to take a break in 2009. But if they do that, the 2010 elections will be kicked off by a truly painful debate over even more tax hikes and/or spending cuts – a teeth-chattering prospect for every politician in Annapolis.
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