Senator Madaleno Comments on the Budget

Senator Rich Madaleno (D-18) sent the following message to his constituents on the budget. We reprint it here with his permission.

On Tuesday, the Senate Budget & Taxation Committee was briefed by the Department of Legislative Services (DLS) on our state’s finances and economic outlook. Unfortunately, the news is not good. I wanted to share with you some of the highlights from this meeting. All of the briefing documents are available on-line – just click here. The documents include a detailed summary of the budget reductions approved by the Board of Public Works last week.

While Maryland continues to perform better than other states during this national economic slowdown, we are seeing our revenue sources under perform estimates. Most critically, our two largest revenues accounting for 81% of total revenues, the personal income tax and the sales tax, continue to come in lower than predicted. Through May, the income and sales taxes were down $46.3 million and $23.9 million, respectively. Tobacco taxes have also come in $24 million lower than expected. Cigarette purchases are down by 25%. While this is good health news, it does add to our fiscal challenges.

It looks now as if our official revenue forecast for the fiscal year that began July 1st will also prove to be overly optimistic. If these same patterns continue for FY09, revenues will be off between $100 and $200 million. Fortunately, we have built in buffers in the FY09 budget totaling $226 million. However, every dollar of expected revenue that does not materialize eats into this buffer. As the buffer disappears, the anticipated deficit for the following year grows. Right now, the estimated FY10 deficit is $243 million. Without any excess revenue carryover from FY09, the FY10 deficit would be nearly $500 million.

The only good news is that this deficit is “cyclical” as opposed to “structural.” Our current problem is caused by a cyclical downturn in the economy as opposed to a structural imbalance in our spending and revenues. As a result, deficits are now only estimated for the next two fiscal years (10 & 11) if the slots referendum passes. We could use the $700 million plus we have in our Rainy Day Fund to help get through this cycle. However, without the revenues from slots, we will once again be facing a more than $1 billion structural deficit by FY12, and use of the Rainy Day Fund in this situation would be imprudent.

Perhaps the most interesting observation of our economic slowdown was that we are in a “slow-motion recession.” In 1991-92, the last time our state faced a severe economic crisis, our state experienced a rapid decline in our performance indicators. For example, at their peak in 1991-92, 35,000 Marylanders were making initial unemployment insurance claims per month. In the 2001-2002 downturn, initial unemployment claims were made by 25,000 Marylanders per month. Today, we have roughly 20,000 people making initial unemployment insurance claims per month, but that reflects an 18% rise over this time last year. Rather than a sharp rise in unemployment insurance claims coinciding with a steep set of job losses as we saw in 1991-92, we are seeing a gradual slowing of job growth combined with a steady increase in unemployment insurance claims.

In the short term, we are able to adjust our budget outlook to reflect these changes. In the long term, it seems as though the bottom of this recession will continue to elude us and will present larger budget concerns in the future. Should the recovery also turn out to be slow-motion, than our current revenue estimates for the out-years could also prove overly optimistic.

The housing slowdown is also causing significant economic problems for the state. Home prices are expected to be down anywhere from 5-8% for 2008, with a 12 month supply of homes on the market. While the state government does not use property taxes or transfer taxes for general fund expenditures, the housing market slowdown is impacted sales tax revenues. Construction-related sales tax revenues are down 6% this year. The decline in home sales and prices has a much greater impact on local government finances. The Maryland housing market does not appear close to a recovery and is expected to continue its decline, which is further evidence of the “slow-motion recession” that may stick with us for some time.

The general downturn is also having a significant impact on the Transportation Trust Fund (TTF). Both the gas tax and titling tax are below estimates. Coupled with a decline in sales tax revenues and the $50 million TTF reduction included in the legislation repealing the computer services tax, the TTF is behind $150 million in anticipated revenues. DLS reported that the current transportation program is unsustainable in this fiscal environment. As a result, projects will have to be eliminated from the program plan when the new six-year plan is released in the fall. This could make any new major construction unaffordable.

Compounding our transportation funding problem will be a lack of debt capacity should any new revenue become available. During the briefing, State Treasurer Nancy Kopp reported that the state will exceed its debt capacity guidelines next year for the first time in decades. Maryland has a self-imposed debt limit of 3.2% of total personal income. Thus, the state government’s total debt cannot exceed 3.2% of the total combined personal income of all residents.

Over the past six years due to a lack of surpluses, the state has issued bonds more aggressively to pay for projects such as new schools, roads, and prisons. With a slowdown in income growth, we will now exceed our debt limit. This is an extremely troubling development and one that the mainstream media did not report.

Treasurer Kopp informed the committee that her office will be contacting the credit rating agencies over the next few weeks to determine what effect this situation might have on our cherished AAA bond rating. As you know, Maryland has maintained the highest bond rating (AAA) for decades because of our fiscal prudence. Our excellent credit rating reduces the interest rates incurred for state borrowing, ultimately saving the state, and taxpayers, millions of dollars. In order to retain our rating, we may need to scale back our commitment to capital expenditures dominated by schools construction and transportation improvement to keep our debt within our guidelines. With the rating agencies already concerned about our fiscal situation if slots revenues do not materialize, this confluence of issues could be just the “perfect storm” needed to jeopardize our AAA rating.

I certainly wish I had better news to report. It is often said that timing is everything in life. Last year, we finally took action to correct the state’s structural fiscal imbalance through a number of budget cuts and tax increases. I continue to applaud Governor O’Malley for addressing this issue which had festered for years. Unfortunately, this downturn comes just as we restored balance to our fiscal affairs. Such timing!

As always, I will update you on our state’s fiscal outlook as we get a clearer picture of our revenues.

Rich Madaleno

Editor's Note:
Given recent developments on the budget, we are not surprised by many elements of the Senator's commentary. But two items he reports have not been generally acknowledged in the mainstream media.

1. The possibility of cancellation or postponement of transportation projects.
Back in April, I made this prediction about the Transportation Trust Fund:

The loss of $50 million from the computer tax repeal, the slowdown of TTF revenue sources and rising commodity prices will greatly reduce the amount of money left for new projects. As a matter of fact, if the state protects tens of millions of dollars in planning money for mass transit projects (like Baltimore’s Red Line and MoCo’s Purple Line and CCT), it is entirely possible that all other new work aside from the ICC will be deferred.

This may be dangerously close to reality.

2. The risk of losing the state's AAA rating.
No politician of either party wants to lose this rating and face higher interest payments on state debt. It will be the highest priority of the entire leadership in Annapolis to protect it. That means no spending program is safe.

I would expect slots supporters to attempt to capitalize on this budget news in the near future.

Update: Maryland Moment completely missed the real story on the state's credit rating.

How to Get Clout in Annapolis, Part Two

In Part One, we covered the prevailing opinion of many about our county’s state legislators: they need to improve their effectiveness in protecting Montgomery’s interests in Annapolis. Step one in doing that is examining the incentives of the opponents.

One of the biggest obstacles to Montgomery’s clout in Annapolis is Senate President Mike Miller. Back in May, we offered this description of Miller’s practice of power:

Better than anyone, Mike Miller understands the volatile and fragile mix of ego, fear, hope, insecurity and the needy desire to be loved that defines most politicians. He knows how to push every one of those buttons. He praises obedient Senators as courageous. He predicts dire consequences for the wayward. He shuffles subcomittee chairmanships and vice-chairmanships like cards in an ever-winning hand. He elevates junior Senators above senior ones when they stick with the boss. A longtime Annapolis player told me, “We call him Big Daddy. When people screw up, he doesn’t get mad at them. Instead, he tells them he's ‘disappointed.’ No one wants to let Dad down.”

Big Daddy is a formidable opponent for anyone seeking more power in state politics, including Governors. Mike Miller wants two things: first, as many Democratic seats in the Senate as he can get, and second, making the holders of those seats dependent on him for money and support. Those two goals go together. As the Democratic Party pushes out into conservative areas (like the Baltimore suburbs, the Eastern Shore and Western Maryland) and increases its Senate ranks, the Democrats who hold those outlying seats are vulnerable. Both Miller and Governor O’Malley have an obvious incentive to direct as much campaign money and state funding to those districts as possible. If Miller can help those vulnerable Senators survive, they will be grateful – and obedient – to the boss. This will increase Miller’s stranglehold on power. But the strategy is only feasible if the resources controlled by Miller and O’Malley are directed to these fragile districts. That means they cannot be tied up in Montgomery County, especially if the delegations in Baltimore City and Prince George’s County are restive.

House Speaker Mike Busch has similar incentives as the Senate President, but he has a larger margin in his chamber and is generally more subtle than Miller. As for the Governor, he is focused on winning Baltimore County in his re-election campaign. So the three most powerful politicians in the state are united in one objective: directing state funding to just about anywhere else other than Montgomery County. Why? Because it does no good to them to shore up an area that is supposedly wealthy enough to take care of itself and liberal enough to vote Democratic no matter what. This is a severe problem for every Montgomery County politician, state and local.

Montgomery has carried this burden for a long time but now things are coming to a head. As we have previously chronicled, the tax hikes of the 2007 special session and the spending cuts of the 2008 general session have not eliminated the state’s long-run budget deficit. Since the legislature will not implement any more major tax increases prior to the next election year and many significant spending cuts have already been made, only two options remain: revenue from the slots referendum and sending teacher pension obligations, which are now mostly paid by the state, down to the counties. Montgomery budget officials tell me that if pension funding is shifted down from the state, the county would face an extra $120 million per year in costs or more. Putting that in perspective, each percentage point of the county’s 5% public employee union pay increase equals about $20 million. That means Montgomery County could cancel the entire pay increase for all of its unionized employees and still be unable to pay the cost of assuming state-funded teacher pensions. One high-ranking budget official described the fiscal impact of a state handoff of pension funding as “a nuclear explosion.”

Will Montgomery County be spared this fate if the slots referendum passes? Not necessarily, for three reasons. First, it will take several years for any casinos to be up and running. Second, slots revenues may not be as high as projected (currently estimated at over $500 million per year). Third, an election year is coming in 2010. The Governor and the legislative leaders will be looking to spend some serious money to get votes. If slots money is not enough, pension obligations may have to be shed. And that means a state-sponsored fiscal nuke will annihilate Montgomery County’s budget.

But our delegation can fight back. We’ll learn how in Part Three.

State and County Budgets Create Perfect Storm for MoCo

The Gazette and Free State Politics have both covered the state’s continuing budget problems. Now the Gazette informs us that Montgomery County is facing at least a $240 million deficit next year even after closing a $297 million deficit this year. These twin typhoons are coming together to pound the county once again.

First, let’s look at the state budget. Back in April, we noted that despite tax hikes and spending cuts in the 2007 special session and the 2008 general session, the state had not completely closed its long-term deficit. At that time, the state’s Department of Legislative Services (DLS) projected a $243 million deficit in FY 2010 and a $596 million deficit in FY 2011. Thereafter, deficit amounts depended on the passage of the slots referendum. DLS said:

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.

Since then, the Comptroller’s office released estimates of state revenues through May. The Comptroller wrote:

General fund revenues for the month of May totaled $961.0 million, an increase of 15.1% over May 2007. For the fiscal year to date, general fund collections are $11.312 billion, growth of 5.1%. After a steep decline in April (adjusted for the rate increase), the sales tax showed some growth in May. Year-to-date, revenues are slightly under expectations, with underperformance in the individual income tax, sales tax and tobacco tax offset by strong performance from most other revenue sources.

We reproduce the summary data below.


A 5.1% increase in general fund revenues is not a disastrous performance, but the Comptroller states that it is “slightly under expectations.” That is the key. A very large chunk of state spending is driven by formulas, including education, special education, community colleges, Medicaid, library subsidies, land conservation, community services to seniors and aid to counties, municipalities and local health departments plus more. That says nothing of benefit payments to state employees. If these formulas call for a spending rate growth that exceeds the growth in revenues, there will be a gap that must be resolved by the Governor and legislature. Right now it appears that the state’s deficit may very well exceed the $243 million originally projected for next year.

And now we look at Montgomery County’s budget. This blog blanket-covered the County Council’s agonizing, but ultimately successful effort to close its $297 million deficit in May. Now they face at least a $240 million deficit next year. But that could change depending on the state of the county’s economy.

Back in May, I wrote the following on the county’s budget:

As for the future, the most volatile components of the county’s revenues are the two tied to real estate sales: the real property transfer tax and the recordation tax. According to the county’s Department of Finance, residential real estate sales volume averaged over $500 million per month from 2006 through the first eight months of 2007. Since then, residential real estate sales volume has averaged between $200 and $300 million per month. It is this collapse in residential real estate transactions that has caused many of the county’s current budget problems. All policymakers – both inside the government and inside the unions – should watch this figure in the Finance Department’s monthly economic updates. If it rises back up to $400 million per month or more, the county’s real property transfer and recordation taxes will begin to recover. If it falls further, tougher times are ahead.

Since then, the county’s Department of Finance reported residential real estate volumes of $287 million in March, $385 million in April and $381 million in May. Average home prices are still down in the low five hundred thousands (well below the July 2007 peak of $601,995), but unit sales exceeded 700 homes in both April and May, the best performance since last August. If the real estate market continues to improve, the county’s budget office may need to adjust its deficit estimate.

Still, the county’s budget deficit will be substantial and that means the public employee union contracts may very well be back on the table. Right now, the vote count looks precarious for the unions. Council Members Phil Andrews and Duchy Trachtenberg both recommended a 2-point cost-of-living adjustment cut last time. Council Member Roger Berliner supported a two-day furlough. New Council Member Donald Praisner ran on the notion that the contracts should be “reviewed.” The unions may be only one vote away from a contract cut.

Council Member Trachtenberg, Chair of the Management and Fiscal Policy Committee, had this to say to the Gazette:

“Clearly we are expecting revenue that is not on the high end, and we certainly recognize that next year’s budget cycle will be a difficult one,” said Councilwoman Duchy Trachtenberg (D-At large) of North Bethesda, chairwoman of the council’s finance committee. “It wouldn’t surprise me if at the end of the calendar year, we won’t have to look at more program savings, and a possible mid-year savings plan, which are what we try to do in a difficult deficit situation.”

Savings at mid-year would reduce next year’s deficit. That will in turn relieve the pressure on the unions’ contracts. It may therefore be in the unions’ interest to consider scouring their agencies’ budgets for potential reductions.

But any détente at the county level could be easily undone by the state. The lords of Annapolis may very well be preparing a nasty witches’ brew for Montgomery County, including a handoff of funding responsibility for teachers’ pensions. That move alone would easily swamp any savings identified by the unions. And so dealing with the county’s budget problems is not merely the responsibility of the county politicians and the public employee unions. It is also the responsibility of Montgomery’s state legislators to protect the county from any damage threatened by the state’s budget difficulties. We will be discussing this at length next week.

It’s Over – For Now

After a torturous few months, the Montgomery County Council finally reached a unanimous budget agreement today. But while the bleary-eyed Council Members are no doubt working their way through their liquor cabinets as we write this, the fiscal hangover will arrive all too soon.

Yesterday’s cliffhanger boiled down to this: three Council Members (Duchy Trachtenberg, Phil Andrews and Roger Berliner) wanted $20 million in “labor savings” gained by a 2-day furlough, while two Council Members (Valerie Ervin and George Leventhal) said they would not violate the public employees’ contracts. Marc Elrich expressed dissatisfaction with the structure of the property tax while Nancy Floreen argued for more cuts not connected to the labor agreements. The final solution announced this morning by Council President Mike Knapp contained elements of every one of these ideas. We present the text of his proposal to our readers:

Statement by Council President Mike Knapp

To enable the Council to reach common ground and complete action on the FY09 operating budget, I propose the following final steps in the budget process:

1. Reduce the amount of property tax proposed by the County Executive by $20 million.

2. Keep property tax rates at the current level and provide a credit to owner-occupied homes of $579.

3. Reduce expenditures and change resources as follows:

$8.0 million from County Government and MCPS, to be achieved by reducing employee/personnel costs and securing productivity improvements and increased efficiencies. Each will report back to the Council about how these reductions will be achieved.

$1 million in fund balance from Montgomery College.

$3.5 million from the Council’s changes on May 15 to PAYGO (cash) in the FY09 capital budget and resources for Park and Planning.

After a long night of yelling, negotiating, coffee-swilling and perhaps coffee-throwing, none of the Council Members had any fight left in them to repeat the political theater of prior days. All praised the placid Mike Knapp and none claimed victory over the others for their priorities. Apparently they have tired of providing fodder for loose-tongued bloggers and I do not blame them.

But everyone on all sides of the debate – the Council Members, their staff, the Executive Branch, the union leaders and all other observers – expect that the approval of this budget is only the first round in a bruising match. That is because FY10’s budget will most likely also have a deficit in the hundreds of millions and similar debates will no doubt erupt. Drink up, Council Members, because here is what the morning after will look like:

1. The public employee unions preserved their contracts this time. But two Council Members (Phil Andrews and Duchy Trachtenberg) openly favored two-point reductions in their cost of living adjustments (COLAs). One more, Roger Berliner, favored a two-day furlough proposed by Mr. Andrews. Another one, incoming Council Member Donald Praisner, suggested a need to “review” union contracts during his special election campaign. That leaves the County Council only one vote away from approving “labor savings” next year. The unions are well aware of this situation and must work out a strategy to respond. They would be well-served to stick together.

2. All sides must watch the real estate market, which drives the county’s volatile recordation and transfer taxes. In an earlier post, I stated:

According to the county’s Department of Finance, residential real estate sales volume averaged over $500 million per month from 2006 through the first eight months of 2007. Since then, residential real estate sales volume has averaged between $200 and $300 million per month. It is this collapse in residential real estate transactions that has caused many of the county’s current budget problems. All policymakers – both inside the government and inside the unions – should watch this figure in the Finance Department’s monthly economic updates. If it rises back up to $400 million per month or more, the county’s real property transfer and recordation taxes will begin to recover. If it falls further, tougher times are ahead.

If the real estate market does not turn up by the end of this year, projected revenue growth for FY10 may be even slower than the anemic rates that constrained the FY09 budget.

3. The county is getting hit badly by rising fuel costs. The agencies’ budget requests did not adequately predict the meteoric recent rise in gas and diesel prices. If the County Executive submits a supplemental budget request to cover higher fuel costs, will the County Council be able to locate the money without offsetting spending cuts?

4. As we documented a month ago, the state budget continues to deteriorate. Rumors are flying that the state will have to cut aid to the counties next spring, perhaps even passing down the burden of paying teacher pension contributions. This would add MANY millions more to any county budget deficit next year.

The County Council, and especially its ever-smiling (but seldom-blogging) President Mike Knapp, performed very well this year under heavy pressure. They will need to rise to the occasion at least one more time before the current economic downtown is over.

Deadlock

The County Council gathered today to pass its budget for next year. Because that budget calls for a property tax hike in excess of the rate of inflation, the county’s charter requires seven votes for it to pass. Instead, the County Council split on a 4-4 vote. Deadlock.

First the preliminaries. The council voted unanimously to divert $25 million from the PAYGO program to the operating budget. As we reported yesterday, PAYGO is a cash contribution made by the county to its capital program, which is otherwise financed by bonds. Council Member Marc Elrich recommended this measure yesterday and the rest of the council agreed. The council also voted to cut its “reconciliation list,” or the new spending it intends to add to the County Executive’s proposal, from $40 million to $25 million. The two measures combined freed up $40 million for the budget, equal to the amount of “labor savings” proposed by Council Members Duchy Trachtenberg and Phil Andrews last week.

And then came the vote on Council President Mike Knapp’s proposed budget. That budget included a property tax hike of $138 million – equal to the amount proposed by the County Executive, but structured differently. The budget also did not alter the county’s labor contracts. Council Members Knapp, Valerie Ervin, George Leventhal and Nancy Floreen voted in favor. Council Members Elrich, Trachtenberg, Andrews and Roger Berliner voted against. Deadlock.

During the campaign season, many of these council members – all Democrats – tend to sound alike. All favor labor rights, helping poor people, fiscal responsibility, “smart” growth policy and high-quality services. The way to truly evaluate the differences between these council members is how they deal with the gritty specifics of governing. Ms. Floreen loves to say, “The devil is in the details.” (Spend a half-hour with her and she will say it twice.) She is absolutely correct and, in this budget season, there is plenty of hell to go around.


Valerie Ervin and George Leventhal stand on a principle: labor agreements must be honored. Ms. Ervin credits her former membership in the United Food and Commercial Workers Union (parent union of MCGEO) with helping her survive her days as a low-income single mother. Mr. Leventhal believes that high-quality services, especially the schools and public safety, are the reason why people move into Montgomery County. While many residents may be angry about taxation, he asserts that they are not angry at the public employees who serve and protect them. For both Ms. Ervin and Mr. Leventhal, any violation of the public employees’ agreements will erode the county’s ability to provide effective services and damage its value to residents over the long run.


Duchy Trachtenberg, Phil Andrews and Roger Berliner also stand on a principle: taxpayers and employees must both share the pain of reaching a budget in tough times. Ms. Trachtenberg believes that there are people in the county who are more vulnerable than public employees, including the poor, the homeless, seniors and the mentally ill. Mr. Andrews believes that it is only fair to ask county workers to accept pay reductions if residents are paying higher taxes. Whereas before he favored a two percent cost of living [COLA] reduction and “labor savings” in the amount of $40 million, he proposed today that public employees be furloughed without pay for two days. He expects that measure to save $20.5 million, which he would use to reduce the property tax hike. Mr. Berliner agreed with Mr. Andrews and declared that his furlough proposal did not “break the contracts.”

Marc Elrich did not vote against the budget because of the labor agreements, but because he disagrees with the structure of the property tax. As originally proposed by County Executive Ike Leggett, the property tax hike would have contained a significant rate increase but also a large increase in the tax credit. This would have been a rather progressive tax. The County Council voted 7-1 to decrease both the rate and the credit, effectively shifting the burden away from business and apartment buildings and onto homeowners. The council’s rationale was to lower the tax burden on renters by limiting its impact on rental buildings. Mr. Elrich would like a return to something resembling the County Executive’s proposal and is trying to leverage his vote accordingly. Since the property tax formula can be changed in multiple ways, perhaps Mr. Elrich can gain some movement in his desired direction.

Nancy Floreen said, “I don’t see the crisis particularly because we just added $20 million to the budget. I am bewildered by what the ‘crisis’ is.” Ms. Floreen has a point: the council added $40 million to the County Executive’s original spending proposal before cutting it back to $25 million today. These are hardly the acts of desperate times. She further advised against a “last minute reduction taken out of the backs of the people who provide the services.”

The council is now debating the disposition of $20 million out of a $4.3 billion budget. In almost any business or labor-management context, this relatively small sum could be worked out. But the issue has been hardened by the fact that both sides have adopted a position based on principle. Mr. Leventhal and Ms. Ervin will not bend on the labor agreements; Ms. Trachtenberg, Mr. Andrews and Mr. Berliner insist that tax increases must be accompanied by “labor savings.” Either side can block the budget because it requires seven of the sitting eight votes to pass.


And what of Council President Mike Knapp? Pity upcounty’s gentle giant. He is the man in the middle. The District of Columbia elects its Council President for a full term. The holder of that office possesses many carrots and sticks to cajole colleagues into line. But under Montgomery County's rotating Presidency, Mr. Knapp holds his office for only one year. He has much responsibility and little commensurate authority. He faces a badly divided County Council and is struggling to get them past their differences. But he must get them to agree. Because for a county government that is required by law to balance its budget, deadlock is not an option.

Council Votes 6-2 to Preserve Labor Agreements (Updated)

Last Friday, Council Members Duchy Trachtenberg and Phil Andrews voted in the council’s Management and Fiscal Policy (MFP) Committee to recommend $40 million in “labor savings” or “employee participation,” alternative terms for under-funding the county’s collective bargaining agreements with its employees. Today, they sought support for their proposal from the full County Council. They found none.

Labor contracts were not the only budget item considered by the Council. They also discussed the nature of the proposed property tax hike. The MFP Committee recommended that the County Executive’s proposed rate and his proposed credit be cut. The effect of that structural change would be to channel the tax burden onto homeowners and away from commercial properties, including apartment buildings occupied by renters. That proposal was approved by the Council by a 7-1 vote, with Council Member Marc Elrich dissenting. Council Members Trachtenberg and Andrews also recommended lowering the amount by which the property tax would exceed the charter limit from $138 million (which was the County Executive’s proposal) to $118 million. Ms. Trachtenberg and Mr. Andrews were joined by Mike Knapp and Roger Berliner, but Valerie Ervin, Marc Elrich, George Leventhal and Nancy Floreen voted against it. And so the property tax reduction failed on a 4-4 vote. Interestingly, Ms. Floreen commented that she voted against the reduction because she wanted to see a larger one.

But the main action of the day concerned “labor savings.” The 300+ people who mobbed the room were not there to lobby for a $20 million reduction in a tax hike. The vast majority were public employees present to defend their livelihoods. And at least from the perspective of political theater, the County Council did not disappoint.


Former union organizer Valerie Ervin hurled the first thunderbolt. “We could fund this budget right now and not go into the COLAs [cost of living adjustments],” she said. “A lot of this other stuff is just subterfuge.”

George Leventhal objected to any hint of “subterfuge,” defending the county government’s record of clean government. But he agreed with Ms. Ervin on the COLAs, saying, “I don’t really appreciate the term ‘employee participation.’ That’s a euphemism for busting contracts.”

Phil Andrews would not back down. He looked the 300+ public employees in the eye and told them, “Employees need to do their part… It would be unfair to expect taxpayers to pay a tax increase to fully fund employee contracts that would be 8% next year.” He praised MFP Chairwoman Trachtenberg, who had joined with him in recommending labor savings, for her “intelligence, diligence and guts.”

Duchy Trachtenberg also stuck to her guns. “I have stood with labor on a number of issues,” she said, citing her support for living wage legislation and the SEIU’s organizing campaign at Montgomery College. “I represent a million residents. Most of them don’t have an opportunity to join a union and benefit from collective bargaining agreements… I don’t disrespect you, but I respect the unrepresented, the seniors, the disabled and the homeless.” She told the crowd, “I have been the object of a lot of vilification. It doesn’t do any good to attack another person on a policy difference.”

But the other Council Members did not seem convinced that reducing the COLAs was the only alternative. Council Member Marc Elrich brought up possible savings from the county’s annual PAYGO expenditure. PAYGO is a cash contribution made by the county towards capital projects, which are mostly financed by bonds. Council staff told Mr. Elrich that next year’s capital budget would be paid for by $330 million in bond issuances and $30 million in a cash PAYGO contribution. If the county did not make its cash contribution this year, it would not necessarily delay any capital projects which would be mostly covered by bonds. In fact, the unions recommended reducing PAYGO by $10 million last week, just one part of their suggested $67 million package of cuts and alternate revenues. Mr. Elrich’s idea received support from several other Council Members, though Ms. Trachtenberg opposed it.


And then Mr. Leventhal pointed out the real role played by the council in labor contract decisions. For non-schools government employees, the council does indeed set funding levels for contracts. But with regard to the public school system, the council only approves its budget as a whole. Contract funding is decided by the school board. Mr. Leventhal called Board of Education President (and former County Council candidate) Nancy Navarro to the witness table. He asked her whether the school system, if handed a budget cut by the council, would respond by cutting employee raises. She replied, “The board feels very strongly that its strategic investment is in the compensation of our employees.” And then she said that while she could not speak for the rest of the board, she personally would not vote to underfund contracts. Mr. Leventhal concluded that if the council cuts contracts for non-school employees but the school board preserved its employees’ pay, significant inequities in pay scales would result.

After Ms. Ervin recognized several exceptional county employees in the room – including one fire fighter who had heroically raced into a burning building to rescue victims inside – the County Council took its vote on the contracts. Ms. Trachtenberg and Mr. Andrews were the only Council Members on the short end of a 6-2 vote. While some of their colleagues defended their good faith, none were willing to break the county’s commitment to its employees.

But the issue is far from decided. In order to fund the contracts, the council must approve a property tax hike that exceeds the rate of inflation tomorrow. The county’s charter states that seven votes are necessary to do that. Both Mr. Andrews and Ms. Trachtenberg have publicly opposed breaking the limit, which would be sufficient to block it. One of them must budge. If they do not, there is no obvious alternative and catastrophe would result.

And so the lights will be on in the County Council building very, very late tonight.

Update: The Gazette and the Post have also covered the story.

REVOLT!

In a moment that defined their political careers, Montgomery County Council Members Duchy Trachtenberg, Phil Andrews and Valerie Ervin put the fate of the public employees’ cost of living adjustments on the table last Friday. Present to greet them were over 300 chanting, stomping, clapping and occasionally yelling union members.


Council Members Trachtenberg, Andrews and Ervin are members of the council’s Management and Fiscal Policy (MFP) Committee. The committee’s charge on Friday was to discuss the extent to which savings on the county’s labor costs should be applied to fix its $297 million budget deficit. “Labor savings” ultimately means funding less for personnel costs than is called for in the county’s collective bargaining agreements: a practice derisively labeled by the unions as “contract busting.”

A word about the union members in the pictures. Assembled by pugnacious MCGEO President Gino Renne in the nearby County Executive Office Building, they were in no mood for “contract busting” and marched across a rain-soaked street to confront their council overseers. Their radioactive yellow battle color is not intended to please the eye and it certainly does not. It is designed to attract attention. They certainly received plenty of it on Friday.

Council Member Trachtenberg, chairwoman of the MFP Committee, opened the meeting with new transfer and recordation tax receipt numbers for April. Transfer and recordation taxes depend on property sales and they have been devastated by the recent collapse in the county’s real estate and construction market. According to Ms. Trachtenberg, the county received $13 million in transfer and recordation taxes in April 2008, down from $18 million in April 2007. For the year to date, transfer and recordation taxes totaled $138 million, down from $180 million the year prior. “Taxpayers are reaching a breaking point,” declared Ms. Trachtenberg and that justified a 2% reduction in the unions’ negotiated COLAs.


Council Member Andrews agreed. Citing the fact that personnel costs accounted for 80% of the county’s budget, he told the ornery union members, “What’s fair is to ask everyone to help.” As he has for months, he criticized the unions’ agreements as “unaffordable” and stated flatly, “I would not have negotiated the contracts that came over to us.” Supporting Ms. Trachtenberg, he said, “I believe that the 2% COLA reduction is a fair way to go.”

Pictures cannot do justice to the unholy din created by the roaring public employees. Hundreds of police officers, bus drivers, librarians, deputy sheriffs, correctional officers and park and planning workers rose to their feet to challenge Council Members Trachtenberg and Andrews. “What are you giving back?” one cried. “We are the taxpayers!” another yelled. “You’re hitting us twice!” pointed out one employee who was also a county resident. Worker after worker decried simultaneous increases in fuel and food costs, cuts in county services and proposed cuts in COLAs as a squeeze on their standard of living from multiple sides.

And then Ms. Ervin took the mike. She is a 25-year veteran organizer and trainer in the labor movement and everyone knew what she would say. “I was a proud member of the UFCW union,” she announced to the crowd. “We do not have to balance this budget on the backs of working people.” She recounted a bookful of statistics on poverty and income inequality to the groans of the audience (some of which we will examine on this blog) and concluded with, “Montgomery County is affluent for only some people.” “I believe that cutting salaries will hurt our local economy,” she said, “and I will not support a 2% COLA reduction.” We present the crowd’s reaction below.


In the end, the MFP Committee did not recommend a 2% COLA reduction. Instead, Ms. Trachtenberg introduced a motion calling for $40 million in “labor savings” with the exact mechanism to be decided later by the rest of the County Council. Mr. Andrews concurred and Ms. Ervin ferociously dissented. Neither the council members nor the staff justified this particular number against a lesser or greater amount. No mention was made by anyone of the unions’ identification of $67 million in additional revenues and savings as reported on this blog. The Post and the Gazette also omitted that fact from their coverage.

So what will become of the committee’s proposal for “labor savings,” a euphemism for underfunding the contracts? There do not appear to be any other votes on the council for the MFP Committee’s proposal, especially considering the fact that the union contracts are affordable in the next fiscal year. Instead, a rough consensus is forming in favor of a slightly lower property tax increase than that proposed by the County Executive along with a carbon tax proposed by Council Member Nancy Floreen.


But even that plan involves breaking the county’s charter limit on property tax increases, which generally holds tax receipt gains to a level equaling the increase in the consumer price index. Seven of the eight County Council Members must vote to exceed that limit. Both Council Members Trachtenberg and Andrews oppose breaking the charter limit, enough to kill any property tax hike. Will either of them budge on that position, thus enabling the union contracts to be preserved? That is the big question. We will have an answer by Thursday.

Labor Between the Hammer and the Anvil

As Montgomery County's budget battle draws to a clamorous climax, a new bomb has been dropped.

Yesterday, Council Member Trachtenberg sent the following letter calling for a 2 percent cost of living reduction to each of the county's public sector unions:



The unions countered in two ways.

1. In a letter to Ms. Trachtenberg sent today, MCEA, SEIU Local 500 and the school supervisors listed $67 million in new revenues available to the council next year. Those revenues include:

$14 Million
Adjustments in OPEB [contributions to future retiree healthcare liabilities]; would allow for 8 year payout, but does not assume the same level of increase; $11 million in savings from MCPS and $3 million from other agencies.

$9 Million
Net gain from increases in energy tax [as proposed by Council Member Floreen].

$10 Million
Could be taken from PAYGO.

$19 Million
Reduction of .5% into the reserve [maintained by the county to protect its AAA credit rating].

$15 Million
Potential carry-over carry over funds that were set aside in the FY 08 budget for emergencies, such as snow removal that were not needed.

2. In their letter to Ms. Trachtenberg, the unions state, "An additional source of revenue is to take into account any revenues in excess of projections in the current budget. We have no knowledge of what that figure is since it has not been shared by the County Executive’s office." Indeed, rumors are flying that the county's income tax receipts may be higher than first thought. The unions have sent a Freedom of Information (FOIA) request to the County Executive's office seeking a monthly tabulation of new income tax revenues received from the state. They hope to discover evidence that income tax receipts are higher than projected, thus relieving the pressure on their contracts.

One of the sad aspects of this showdown is that it may not be necessary. A week ago, we demonstrated to our readers that the County Executive's budget projects $301 million in new revenues for FY09 against $154 million in added union labor costs. At least for next year, labor's cost of living adjustment is easily affordable. Nevertheless, the hammer is falling.

In the private sector, an employer could not do what the county is considering. If a private company attempted to unilaterally change a labor agreement, the union could strike, file unfair labor practice charges, get enforcement orders from the National Labor Relations Board and the courts and file suit to collect benefit contributions. Only employers under bankruptcy protection could unilaterally alter wage levels. Montgomery County may be in a recession, but it is not under the supervision of a bankruptcy judge!

The fate of the unions' COLAs is far from certain. Council Members Trachtenberg and Phil Andrews can block the County Executive's proposed property tax increase, which requires seven of the eight sitting council members to pass. But altering the union contracts would require five votes. It may be difficult for Ms. Trachtenberg and Mr. Andrews to find three more council members willing to cut the COLAs when there are less electorally-threatening alternatives available.

And if the council simultaneously rejects the property tax hike and rejects COLA reductions, what then? No one knows. But the choice must be made in less than a week.

Nancy Floreen Calls for Across-the-Board Spending Cuts

Montgomery County Council Member Nancy Floreen challenged all county agencies to present a plan to cut their budgets by 2% below the County Executive's proposal on her blog today.

Floreen contends that a 2% across-the-board cut would enable the council to chop the County Executive's property tax increase in half. However, because she would still break the charter limit, her proposal would require seven votes to pass. Floreen argues:

As far as I am concerned, the proposed tax burden is untenable, particularly for the average homeowner facing increased fuel, food and health care costs. I am afraid that this budget is way out of line. In today’s economy, it is unaffordable... I know my colleagues have put their hearts into trying to limit spending. But I don’t believe we have gone far enough. Our neighbors in Fairfax County, the District of Columbia, and Prince George’s County are looking at budget increases of no more than 1.3%. We in Montgomery County need to join the rest of the region in looking toward a more sustainable budget.

It is impossible to overstate the turmoil going on in Rockville right now over the budget. Two council members - Duchy Trachtenberg and Phil Andrews - oppose a property tax increase, enough votes to kill it. Council Member Trachtenberg is eyeing the county's labor contracts for savings. The County Council's Education Committee voted to restore $26 million for public schools and $9.1 million for Montgomery College last week. How can resistance to the property tax hike, increases for education, adherence to union contracts and Floreen's call for across-the-board cuts be reconciled?

We'll find out soon enough. Zero hour for the budget is next week.

Challenge to the Unions, Part Two

In Part One, we reported on County Council Member and Management and Fiscal Policy Chairwoman Duchy Trachtenberg’s letter to public employee union MCGEO offering a choice between layoffs and COLA reductions. Today we examine whether those measures are justified by the county’s dire budget situation.

Concerned over the county’s long-run finances, Council Member Trachtenberg asked council staff for an estimate of the future obligations to the county imposed by its public employee union contracts. Two weeks later, the County Council’s merit staff director responded with a 129-page memo outlining those costs. Page 2 of the memo contained this statement:

Councilmember Trachtenberg has requested information on agency compensation costs over time. One measure of these costs is the cumulative fiscal impact of the current or pending three-year negotiated agreements with the six County and MCPS unions, starting with the base year. See the fiscal impact statements on pages 37-39 and 111-113. The cumulative fiscal impacts are $117.9 million for MCGEO [government employees], $45.4 million for the FOP [police], $37.2 million for the IAFF [fire fighters], $61.9 million for non-represented employees in County Government, and $577.7 million for MCPS.

The total of these amounts, $840.1 million, does not include higher ongoing costs for health benefits for active and retired employees, nor does it include the $1.2 billion cost of the proposed eight-year pre-funding schedule for future retiree health benefits.

Are these marginal costs really accurate? We looked up the supporting data on pages 37-39 and 111-113, which correspond to pages 53-55 and 127-129 in the pdf document. Following is our tabulation of all marginal costs reported.

The marginal costs for each of the employee categories amount to $134 million in FY08, $176 million in FY09, $225 million in FY10 and $21 million in FY11 for a total of $557 million over the four years. (The estimate is low for FY11 because only the fire fighters’ agreements cover that year.) This total is much lower than the $840 million reported on the second page of the staff report, even though that summary refers to the pages tabulated above. There is simply no data in those pages to justify the $840 million estimate.

Furthermore, marginal cost data for FY08 should not be construed as a future obligation faced by the county. FY08, the current fiscal year, expires on 6/30/08. Those costs have mostly been paid already.

Finally, the analysis includes marginal costs due to fire and rescue management and non-represented employees. Why should the unions be held responsible for additional spending on employees they do not represent?

Subtracting out costs for the almost-expired FY08, the fire and rescue management and the non-represented employees, the remaining future obligations faced by the county total $154 million in FY09, $193 million in FY10 and $20 million in FY11, or a combined $368 million. This is a far cry from the $840 million cited at the beginning of the staff report.


Are added salary costs of $150-200 million per year sustainable? The answer depends on the county’s economic performance and the county government’s revenue collections. According to revenue statistics released by the County Executive, revenues collected by the county are projected to rise by $109 million in the current fiscal year (between 7/1/07 and 6/30/08). That overall rise in receipts occurred despite the facts that a) county receipts from the real property transfer tax dropped from $107 million to $80 million (down 25%), b) receipts from the recordation tax dropped from $73 million to $53 million (down 27%) and c) the county may have entered a recession. The above means that even in a really bad year, the county’s revenues continued to rise.

The County Executive’s proposal projects a further rise in receipts in FY09 of $301 million, partially due to his property tax increase. This would be more than enough to pay the $154 million in extra costs associated with the union contracts. At least for next year, the county should be able to meet its labor obligations if it adopts a budget similar to the County Executive’s recommendation.

As for the future, the most volatile components of the county’s revenues are the two tied to real estate sales: the real property transfer tax and the recordation tax. According to the county’s Department of Finance, residential real estate sales volume averaged over $500 million per month from 2006 through the first eight months of 2007. Since then, residential real estate sales volume has averaged between $200 and $300 million per month. It is this collapse in residential real estate transactions that has caused many of the county’s current budget problems. All policymakers – both inside the government and inside the unions – should watch this figure in the Finance Department’s monthly economic updates. If it rises back up to $400 million per month or more, the county’s real property transfer and recordation taxes will begin to recover. If it falls further, tougher times are ahead.

Challenge to the Unions, Part One

In a story first reported by the Washington Post’s Ann Marimow, Montgomery County Council Member and Management and Fiscal Policy Committee Chairwoman Duchy Trachtenberg has written to UFCW Local 1994 (MCGEO), one of the county’s public employee unions, offering a choice between layoffs or smaller pay increases. We reproduce the letter and discuss its importance below.

April 29, 2008

Gino Renne, President
UFCW Local 1994 MCGEO
600 S. Frederick Ave., Ste. 200
Gaithersburg, MD 20877

Dear Mr. Renne:

In light of the difficult decisions County Council faces for the upcoming budget, I am turning to elected union leadership for counsel during this process.

The strong advantage of having union represented county employees is that the union structure, through its elected leadership, is an excellent conduit to reach out to the rank and file. It is important to each councilmember to hear and respect what options county and school employees would prefer as the Council balances the interests of residents across Montgomery County while making our final budget decisions. Without unions in place, this process would be much more difficult.

With the uncertainty of the County Council’s willingness to break the charter limits and concerns over jeopardizing our AAA credit rating, we may well not have the revenue needed to execute the current CBAs [collective bargaining agreements] without invoking their provisions for Reductions in Force. In an abundance of caution, I want to begin a conversation about all available options that might come forward to avoid force reductions as we face the budget deficit.

I am reaching out for an honest and open discussion of options to address our budget deficit. This invitation is extended to MCGEO, SEIU 500, FOP [police], IAFF [fire fighters] and MCEA [teachers]. To facilitate our discussion, below is a list of ideas that have come to my attention that warrant a response from organized labor. You are all invited to submit a memo outlining your concerns and options you feel will be acceptable to the county and school system employees you all represent.

1. If your members were given a choice between a reduction in COLA [cost of living adjustment] or involuntary layoffs through each contract’s provisions for Reduction in Force, which option do you think your rank and file would find most acceptable?

2. The County Executive projects only 58 employees will take an early retirement buyout option. Do you concur with this position, or do you believe there is more demand for this option? What are the best ways to structure these offers to make them more appealing to your members?

3. Would you have members interested and able to participate in a voluntary layoff program that would protect their seniority and health insurance while they drew unemployment for six months? Would there be more interest if this option could be used as a way to bridge a member to retirement?

4. During the District 4 Special Democratic Primary, Don Praisner proposed an extensive labor management cooperation program to help identify savings, much in the same manner as MCGEO’s letter to council. Would your members be interested in such a program?

These questions by no means limit our conversation. For further clarification of this request and any other questions you may have, please contact Eric Hensal through my office. Eric is a former union organizer with a depth of experience in labor issues and a Masters of Public Administration earned through the National Labor College. I am sure you will find Eric an excellent resource as we all chart a course through the current budget crisis.

Cordially,

Duchy Trachtenberg
Chair, Management and Fiscal Policy Committee

cc: Honorable Ike Leggett, County Executive
Honorable Mike Knapp, Council President
Honorable Phil Andrews, Council Vice-President
Steve Farber, Council Staff Director

The letter is a dramatic development in the county’s budget crisis for several reasons.

1. There are only about two weeks to go before the County Council begins voting on the FY09 budget. This letter to the unions comes late in the game. As recently as April 9, the Gazette reported that Council Member Trachtenberg “said the contracts with county employees should be honored.”

2. When Ms. Trachtenberg refers to “the uncertainty of the County Council’s willingness to break the [property tax] charter limits,” she is referring to a situation over which she has some control. After all, Ms. Trachtenberg told the Gazette, “I do not support going over the charter limit.” Added to Council Member Phil Andrews’ opposition to the property tax increase, the tax hike is in real danger of not passing because it requires seven of the current eight council votes. Ms. Trachtenberg’s opposition to the property tax hike may in fact be creating a need for the sort of choices she is now offering the unions.

3. The reference to Eric Hensal is noteworthy. Hensal lost a special election in Takoma Park to fill Marc Elrich’s vacant city council seat and went on to manage Don Praisner’s District 4 County Council campaign. During the District 4 campaign, the Post reported that Hensal was seen entering the County Council building for lunch appointments with staffers for Marilyn Praisner and Ms. Trachtenberg. Has he now been hired as council staff or as a consultant by Ms. Trachtenberg? If he is a consultant, a reference to him in the letter is very unusual. Why would a sitting council member allow a third-party consultant to speak for her on such a vital matter as employee layoffs or COLA reductions?

But there is more. The public sector unions have not forgotten Don Praisner’s frequent criticism of their contracts during the special election. Nor have they forgotten how the Praisner campaign branded union-backed Nancy Navarro as a “special interest” candidate. Are any of the unions likely to view Mr. Praisner’s campaign manager as a desirable interlocutor for labor relations issues?

4. Ms. Trachtenberg gained a famous fan through her letter: none other than Robin Ficker. On Maryland Moment, Ficker squealed with delight:

Trachtenberg is just the kind of person I like---one tough cookie when she wants to be. Continue asking the tough questions Duchy. Social security recipients get a 2.3% increase in 2008 with NO step increases. I loved Charles Barkley. I would ask him, “Charles I know you want to run for Governor of Alabama, but before I vote for you I want to know your views on the economy, NAFTA and healthcare.” He would reply, “Well, I do have a view on the death penalty----they should use it on you!” Trachtenberg reminds me of Barkley.

All of the above is subject to one awful truth: the county is facing a $297 million budget deficit and the County Council has two weeks to go before the tough votes come. Ms. Trachtenberg did not create this deficit and the problems are real. In Part Two, we will examine whether the county can meet its contractual obligations to the unions in the current budget environment.

MoCo State Legislators on the Millionaire Tax

Preserved for eternity, here are the published comments and the votes by state legislators from Montgomery County (as well as remarks by the County Executive and County Council President) on whether a surcharge for millionaires should replace the computer services tax. Whether you agree with David Lublin or with me, the millionaire tax emerged as a major philosophical dividing line in the county delegation.

Delegate Charles Barkley (D-39), who voted against the millionaire tax, from the Post:

"You can only hit a cash cow so many times before they say, 'We're going to take our milk somewhere else,'" said Del. Charles E. Barkley (D-Montgomery).

Delegate Kumar Barve, the House Majority Leader (D-17), who voted for the millionaire tax, from the Post:

House Majority Leader Kumar P. Barve (D-Montgomery) defended the repeal bill, modeled on an O'Malley plan, as "a balanced compromise" that would eliminate the computer services tax before it is scheduled to take effect July 1.

"You will be preserving the place of Maryland in the high-tech sweepstakes," Barve said. "I urge you to kill this thing, right here, right now."

Delegate Brian Feldman (D-15), who voted against the millionaire tax, from the Sun:

"A majority of the Montgomery County delegation have a lot of concerns," said Feldman, who said he hopes lawmakers will consider making deeper cuts in O'Malley's spending programs before raising taxes.

"Maybe this isn't the time for new initiatives," he said.

Senator Jennie Forehand (D-17), who voted for the millionaire tax, from the Gazette:

But repealing the tax is a no-brainer to prevent computer firms from leaving the state, said Sen. Jennie M. Forehand (D-Dist. 17) of Rockville.

"Some of the things we passed in November has a negative impact in the counties and put them in a negative situation," she said. "Unlike the millionaires who are well-grounded and are making their money in the state, they won’t leave. But tech companies who would have been affected by this tax could easily have uprooted their businesses and moved."

Delegate Bill Frick (D-16), who voted against the millionaire tax, from Maryland Moment:

Del. C. William Frick (D-Montgomery), a member of the Ways and Means Committee, said he is "disinclined to change the income tax brackets."

"We worked hard on them and reached what we think is an appropriate compromise in the special session," Frick said.

Senator Brian Frosh (D-16), who voted for the millionaire tax, from the Post:

Sen. Brian E. Frosh (D-Montgomery) said he thinks lawmakers should step back and consider whether raising the tax rate is good public policy, irrespective of the consequences for his county.

"I understand that people say it would hit Montgomery County harder than some other jurisdictions, but we don't get taxed by jurisdiction," Frosh said. "I don't perceive it as a geographic issue."

Delegate Hank Heller (D-19), who voted for the millionaire tax, from the Gazette:

"I don’t think we have to apologize" for fighting higher taxes, said Del. Henry B. Heller (D-Dist. 19) of Leisure World. "Montgomery County, instead of [being] a major decision-maker ... will end up either being the obstructionists or having to go along with it."

The so-called "millionaires tax" will cause Montgomery residents to move across the Potomac River to Northern Virginia, weakening the economy, Heller said.

Delegate Tom Hucker (D-20), who voted for the millionaire tax, from the Post:

"I have to represent all my constituents, not just the millionaires," said Del. Tom Hucker (D-Montgomery). "I think those folks can afford to pay more state income taxes, especially in the wake of enormous federal income tax cuts that they have benefited from for the last six years."

Senator Nancy King (D-39), who voted for the millionaire tax, from the Sun:

…Montgomery County Democratic Sen. Nancy J. King, said she would reluctantly opt for an income tax increase, "If I had to."

Montgomery County Council President Mike Knapp from the Gazette:

The tech tax repeal will burden Montgomery County residents unfairly, said County Council President Michael J. Knapp (D-Dist. 2) of Germantown.

Of the state’s 6,150 millionaires, 41 percent live in Montgomery County; Baltimore County has the next highest number.

"Montgomery County is solving a statewide problem — again," Knapp told reporters in Rockville on Monday.

Senator Rona Kramer (D-14), who voted against the millionaire tax, from Maryland Moment:

Sen. Rona E. Kramer (D-Montgomery), who chairs the county's Senate delegation, said she wants the computer services tax repealed, but would prefer cuts in transportation spending than changes in the income tax structure.

"Montgomery County already does the yeoman's share of supporting the state budget," she said. "It's absolutely inappropriate for one jurisdiction, Montgomery County, to pick up the tab for 50 percent of one tax."

And from the Sun:

"I would not support it," Sen. Rona Kramer, a Montgomery County Democrat on the budget committee, said yesterday.

O'Malley's proposal is a political mistake, she said.

"He's coming to the one jurisdiction where he's still popular and saying: 'We're going to make you compromise again,'" Kramer said. "It's going to make him look terrible."

Montgomery County Executive Ike Leggett from the Post:

Leggett said he favors a repeal, partly because the planned tax significantly affects the thriving technology industry in the Washington suburbs. Leggett said, however, that he opposes raising the top personal income tax rate because a large number of wealthy Marylanders live in Montgomery and that he is wary of cuts to transportation funding.

"I want to be supportive of resolving this, certainly as it relates to this computer tax, but Montgomery County cannot be the sole source of solving a statewide problem," he said.

Senator Richard Madaleno (D-18), who voted against the millionaire tax, from the Post:

Sen. Richard S. Madaleno Jr. (D-Montgomery) acknowledged that the number of those who would be affected by the millionaires’ tax is small. "But this is a class of people who generate a lot of tax revenue for Maryland and Montgomery County," Madaleno said. "To create a disincentive for them to stay would be damaging to the rest of us."

And again from the Post:

"Opponents of this tax are not going to characterize it as a millionaires tax," said Sen. Richard S. Madaleno Jr. (D-Montgomery), a member of the budget committee. "It's going to be just another tax increase. . . . This is just more fodder for conservative talk radio."

Madaleno echoed arguments by other Montgomery officials, who have suggested that a higher income tax rate could prompt people who are creating jobs in the county to move. He suggested making cuts in transportation funding to repeal the tech tax.

Madaleno also questioned the political consequences in his county of the governor's support for the millionaires tax.

"I think it could be damaging to O'Malley in the part of the state where he probably remains the strongest," Madaleno said.

Madaleno posted an essay on this topic and others on Free State Politics.

Delegate Craig Rice (D-15), who voted against the millionaire tax, from the Sun:

"This is another ill-fated Senate move," said Rice of the Senate bill, which he criticized for not replacing the computer tax with a long-term revenue source. "We need to move forward with taxing other services."

By an 8-12 vote, [House Ways and Means] committee members also rejected a proposal from Rice that would have cut $150 million from transportation projects but eliminated the tax on millionaires.

And from the Gazette:

"I think Montgomery County has work to do," said Rice (D-Dist. 15) of Germantown. "I think as a delegation, we have got to do a better job at standing together on these things. We should not be balancing tax policy on one class of people."

Delegate Luiz Simmons (D-17), who voted against the millionaire tax, from Maryland Moment:

Del. Luiz R.S. Simmons (D-Montgomery) said he is frustrated to see his county become the "last refuge of unimaginative people" during budget crises.

"The tax is always imposed on us," Simmons said, adding that he thinks state leaders perceive Montgomery as a land of wealthy suburbs that is immune to the social ills that require government spending. But he said much of the county is middle-class and struggling during the economic downturn.

"I'm not trying to give you gobbledygook, but if you take a cumulative effect of these tax increases, what you will get is a migration of people out of the county," Simmons said.

"It has nothing to do with defending the millionaires," he added. "I'm not a millionaire. I'm just concerned about us taking hits on many different fronts and the confluence of those is going to hobble our economy."

Delegate Herman Taylor (D-14), who voted for the millionaire tax, from the Gazette:

"You’re exchanging one for the other," Del. Herman L. Taylor Jr. (D-Dist. 14) of Ashton said of the new income tax bracket. "I don’t know if that’s a good compromise. Just like the computer tax, we’re going to have to wait and see. Instead of hitting millionaires’ businesses, we hit millionaires directly."

Delegate Jeff Waldstreicher (D-18), who voted against the millionaire tax, from the Gazette:

"The question is how do we replace those revenues in a way that is true to our progressive values and fair to Montgomery County," said Del. Jeffrey D. Waldstreicher (D-Dist. 18) of Kensington.

And here is Senate President Mike Miller’s assessment from the Sun:

Senate President Thomas V. Mike Miller said lawmakers from Montgomery County held the key to breaking the deadlock, noting that they were the most adamant opponents of both the "tech tax" and the proposed levy on those earning more than $1 million annually. He said the county also receives the most in state transportation funding, leaving its representatives reluctant to redirect that money.

The county "is in the eye of the storm," he said.

That it is, Mr. Miller. That it is.

The final vote tally among Montgomery County’s state legislators is:

For replacing the computer tax with a surcharge on people making $1 million a year or more:

Senator Brian Frosh (D-16)
Senator Rob Garagiola (D-15)
Senator Nancy King (D-39)
Senator Mike Lenett (D-19)
Senator Jamie Raskin (D-20)
Delegate Saqib Ali (D-39)
Delegate Kumar Barve (D-17)
Delegate Bill Bronrott (D-16)
Delegate James Gilchrist (D-17)
Delegate Hank Heller (D-19)
Delegate Sheila Hixson (D-20)
Delegate Tom Hucker (D-20)
Delegate Anne Kaiser (D-14)
Delegate Susan Lee (D-16)
Delegate Roger Manno (D-19)
Delegate Heather Mizeur (D-20)
Delegate Karen Montgomery (D-14)
Delegate Kirill Reznik (D-39)
Delegate Herman Taylor (D-14)

Against replacing the computer tax with a surcharge on people making $1 million a year or more:

Senator Rona Kramer (D-14)
Senator Rich Madaleno (D-18)
Delegate Charles Barkley (D-39)
Delegate Al Carr (D-18)
Delegate Kathleen Dumais (D-15)
Delegate Brian Feldman (D-15)
Delegate Bill Frick (D-16)
Delegate Ana Sol Gutierrez (D-18)
Delegate Ben Kramer (D-19)
Delegate Craig Rice (D-15)
Delegate Luiz Simmons (D-17)
Delegate Jeff Waldstreicher (D-18)

Budget Cutbacks at MPW

Recently, we have offered frequent coverage of budget problems at both the state and county levels to our readers. This week, the Gazette reported that MCGEO – the county government employees union – submitted a list of budget savings to the county including limits on toilet paper provided to inmates. In that spirit, we at MPW are announcing a package of budget cutbacks at this blog to deal with our own financial difficulties.

1. MPW owner David Lublin has called his union contract with myself, Kevin Gillogly and Paul Gordon “unsustainable.” Apparently our provisions on catch-up pay to the bloggers on Free State Politics are excessive. So David is cutting our cost-of-living increase to zero, which should save him a lot of money. In return, he is terminating his union-avoidance consultant.

2. We will be introducing a new comment fee for our readers. Anyone posting comments of praise for our opinions, writing skills or superior good looks will be exempted from the fee. Extra charges will be assessed on anyone making more than a million dollars per year, any developers, any members of MCDCC or PGCDCC and any politicians who voted to pass the much-hated blogger tax.

3. We will no longer be employing Itchy and Scratchy as security service providers to this blog. Our readers are aware that we have occasionally criticized certain officials inside the county government. So a couple months ago, we decided to hire a security service for fear of encountering active intimidation by county government employees. But now Itchy and Scratchy will have to return to the state fundraising circuit.

4. Our much-anticipated $65,000 bathroom project with a private shower is indefinitely postponed. The reason is simple: our readers access our content from remote locations. If you are not in our physical presence, what need do we have for hygiene?

5. The saddest casualty of our budget cuts may be David’s hairless chihuahua, Muffitt. He can no longer afford to feed caviar to Muffitt on a daily basis so her fine dining needs will now be covered by donations from the Columbia Country Club.

But fear not for Muffitt! We are sending her to work on Senate President Mike Miller’s staff and, in a couple years, she will leave to pursue her fortunes as a high-priced, Miller-connected lobbyist! Muffitt’s burgeoning career in Annapolis will no doubt pay the bills for MPW (as well as David’s mortgage)!

Transportation in a Crunch

By Marc Korman.

A recent Gazette comic, reproduced below, sums up the recent action by the General Assembly when it comes to transportation. A big loser in this year’s session, and a potential loser in future years, is the state’s transportation funding.


Coverage of the General Assembly’s repeal of the 6% computer services sales tax mostly ignored the negative effect on transportation and instead focused on the new millionaire’s surcharge, really just a new tax bracket, that taxes earnings over $1 million at 6.25%. Far less attention was paid to the $50 million cut from the state’s Transportation Trust Fund for each of the next five years. Just a few months ago, the General Assembly and the Governor received much earned praise for adding $420 million in new annual revenue for transportation.

The opponents of the computer services tax repeal proposed even deeper cuts to transportation, with Senator Madaleno proposing a $150 million annual cut to the Transportation Trust Fund. In a posting to Free State Politics and republished here at MPW, Senator Madaleno justified his proposal by noting that it would still leave in place a $300 million increase from prior to the Special Session. Senator Madaleno also stated that the projects slated to be funded were not good uses of the state’s money. Given the state’s transportation needs, I find the argument a bit curious because the idea that the local transportation projects have no validity because they will only improve “traffic flow in the immediate vicinity of these intersections” begs the question of why they are being funded at all. If Senator Madaleno’s claims are true, and these projects are of such low priority and value, then perhaps our legislators need to convince the Department of Transportation to pick better projects instead of deciding to cut funds.

But the real point for all of those proposing transportation funding cuts of any size is that the needs are real and we need more funds, not less. Even if individual legislators do not support all of the projects on the list of needs, surely each individual Senator supports a majority of these and numerous others. Some of the needs are:

1. The Inter County Connector-$2.4 billion
2. The Purple Line-$105 million to $1.685 billion (depending on the method selected)
3. Corridor Cities Transitway-$850 million estimate
4. BRAC Enhancements in Bethesda-$70 million estimate
5. Georgia Avenue and Forest Glen Road Crossing - Cost unknown, but I put it in to avoid the wrath of MPW’s writers.

Instead of searching for ways to meet these needs, everyone is proposing cuts. If we are not going to raise the gas tax, the least we can do is stop raiding the Transportation Trust Fund. As I said, it was only a few months ago that we were praising the $420 million increase. It was just a year before that we were criticizing Bob Ehrlich for raiding the Transportation Trust Fund. In 2010, I do not want the Democrats to be accused of the same transportation policy failures.

A Note of Concurrence from Adam Pagnucco

Marc Korman's argument is even more powerful than he originally stated. The fact is that Maryland's Transportation Trust Fund (TTF) is already under assault.

First, the revenues devoted to the fund are endangered by the poor economy. The major sources for the TTF are gas taxes, motor vehicle titling taxes and fees (like registrations and licenses), operating revenues (like tolls) and a portion of corporate income tax receipts. All of these revenues will probably record shortfalls in the coming year.

Second, construction material prices are soaring. According to the Bureau of Labor Statistics, national wholesale prices have skyrocketed by 31% for ready-mixed concrete, 73% for gasoline and 78% for asphalt between 2004 and 2007. The situation is exacerbated by an ever-weakening U.S. dollar and rising commodity demand from India, China and other developing countries. These price increases threaten the financial solvency of some construction contractors and will stretch already scarce dollars at MDOT.

Of the $400+ million transportation increase approved by the General Assembly’s special session, $150 million was planned for new projects such as the ones listed above by Marc. The loss of $50 million from the computer tax repeal, the slowdown of TTF revenue sources and rising commodity prices will greatly reduce the amount of money left for new projects. As a matter of fact, if the state protects tens of millions of dollars in planning money for mass transit projects (like Baltimore’s Red Line and MoCo’s Purple Line and CCT), it is entirely possible that all other new work aside from the ICC will be deferred. That means that if the legislature attempts to raid the TTF – as Governor Ehrlich did repeatedly – there may be little left to plunder.

There is another possibility. The legislature could choose to defer system maintenance, which was supposed to receive an extra $250 million per year. The state prioritized system maintenance in the wake of the I-35 bridge collapse in Minnesota. If the state does cut maintenance and a major infrastructure failure occurs, the political consequences will be cataclysmic.