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.

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 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.

More Wobbling on the Property Tax

While the great debate between David Lublin and myself over the property tax is now over, the great tumult over the issue on the County Council is just getting started.

The Gazette reveals that Council President Mike Knapp is now uncertain about his vote on the County Executive's property tax proposal. This follows votes against the tax in the Management and Fiscal Policy Committee by Council Members Duchy Trachtenberg and Phil Andrews and an abstention by Valerie Ervin. Council Member Nancy Floreen has also expressed doubts about the tax.

Because the District 4 council seat will not be filled until after the budget is decided, seven of the remaining eight Council Members must vote to break the charter limit to pass the property tax hike. So far, we count two votes against, two votes not committed and four votes with no expressed position. That's a bad sign for passage of the tax hike.

Do any of our readers know if it's possible for the County Council to turn down the property tax hike and not re-open the public employee contracts?

On Progressive Taxation and Property Taxes

David Lublin raised a number of good points on the property tax increase that deserve a response. Let’s take them in order.

(1) Lots of people have lived in homes for a long time that have appreciated substantially. Particularly for retirees on a fixed income, an increase of over $1000 (very easy to hit in SoMoCo) can be tough even if they live in a high-value home. Even if economic theory says they can borrow against their homes, people really hate that idea for understandable reasons. In any case, this market isn't the best one for realizing the profit.

David rightly points out that some people on fixed income could potentially receive a $1,000 property tax increase under County Executive Ike Leggett’s proposal. Under the formula in my previous post, a home receiving a county property tax increase of $1,000 would have a net assessment of $891,789 (and a much higher gross assessment and market value if the homestead credit applied). But the county provides residential property owners of at least 70 years in age a “senior property tax credit” of 25% of their combined state and county homestead credits. So a senior would be allowed to own an even more valuable home than a non-senior before being subject to a $1,000 property tax increase – perhaps even a home approaching $1 million in market value.

But no one will want to pay that amount of property tax increase. So suppose we relieve the tax increase on seniors with homes approaching a million dollars in market value. If there is to be a property tax increase at all, someone will have to pay more as a result – perhaps seniors occupying homes worth $300,000. But suppose we relieve them too from the extra taxes. Then the burden will fall on young families – a group with substantially less wealth than seniors and significantly less retirement security. Where should the burden fall?

Progressive taxation, a bedrock principle of progressive economic philosophy, holds that tax burdens should advance with income levels. Recent events suggest that principle may be out of fashion in Montgomery County.

(2) Focusing just on the millionaires tax is a mistake. Don't forget all those sales and income taxes raised during the special session. Also don't forget all those fees which were jacked up under Gov. Ehrlich. The voters won't. All things being equal, Americans like having more disposable income. If this is done to maintain services, it will need to be convincingly explained--not necessarily an easy sell though it can be done.

I am not about to forget the tax package from the special session. Because it relied primarily on sales taxes, it was regressive. To quote once again the analysis by the Maryland Budget and Policy Institute:

The poorest 1/5 of taxpayers will pay nearly 0.8% more of their income in taxes. The middle 1/5 will pay half that percentage: just over 0.4%. The wealthiest 1/5 will pay between 0.3% and 0.5% of their incomes in increased taxes. This overall regressive distribution occurs because the regressive nature of the sales tax increase overwhelms the progressive features of the income tax changes.

The County Executive’s property tax proposal is progressive and may, in conjunction with the new state millionaire tax, flatten the tax burden. These two progressive tax proposals, which together total $238 million, have attracted immense opposition from a substantial portion of Montgomery’s political leadership. But the $700+ million regressive state sales tax hike passed without a whimper. That is a chilling but instructive development in this county’s political environment.

In any case, I agree that any tax hike, no matter its character, must be explained to voters. The public employee unions are not in the best position to do this since most people will perceive their defense of public services as a defense of their memberships, which is of course their role. It is the responsibility of the politicians to explain why county services are worthy of a tax increase if that is what they believe. That is especially true of politicians who were eager to accept the support and aid of labor during the last election campaign. For the most part, that defense has yet to begin.

(3) The debate has been cast as an either/or debate with no middle ground. Either taxes go up a great deal or services are cut substantially. Like all money issues, this one can be negotiated to all sorts of points inbetween. Both sides know this but are posturing right now is my guess.

I suspect the County Council will have to settle somewhere in the middle. Such is the way of legislative bodies. But the decision to surpass the charter limit truly is an either/or decision. If the council rejects the County Executive’s tax proposal, they will have to cut the budget by a further $128 million.

There is another option. As Delegate Al Carr pointed out in a comment on an earlier post, the County Council is considering increasing taxes on electricity and natural gas. This is a far more regressive option than the County Executive’s property tax hike and it does not need a super-majority to pass. The shade of Annapolis may be descending on Rockville.

(4) The recession may just be starting with next year's budget looking even more grim. As at the state level, the chances of getting both budget cuts and tax increases over the course of several years are starting to look pretty good.

A recession is a distinct possibility as we recently reported. People on the lowest rung of the income ladder, not those earning one million dollars a year, are on the leading edge of the downturn. The residents at the bottom will be sure to bear the brunt of any spending cuts. They should not also bear the brunt of the tax increases. Under the County Executive’s property tax proposal, many working-class people are indeed spared further tax hikes after their setbacks in the last special session. They will not be spared the lash of a home fuel tax hike.

I completely agree with David's judgement that the tax and budgetary choices are going to get tougher at both the state and county levels, not easier, in coming years.

None of this has any bearing on some key questions other have raised: (1) does labor deserve the pay increases, (2) does MoCo need to pay them to maintain quality services, and (3) can MoCo afford the pay increases. The first is a morality, not a market, question. The second is largely market driven. The third is driven by the tax base, economic needs, and taxpayer willingness to pay. I haven't thought much about any of these questions so I won't weigh in just yet.

On point (1):

Speaking as someone who has been involved in several union organizing campaigns, the notion of what a worker “deserves” is a very explosive question. Many public employees are starting to believe that their leaders think they are paid too much. This argument has been stated, or at least hinted at, by more than one of the Democratic candidates in the District 4 County Council race. Economic arguments can be conducted rationally but the question of what a worker “deserves” is a question for the heart. Right now, hearts are pounding inside the public sector workforce.

On point (2):

In a recent survey of county employee compensation, we learned that Montgomery faces potential problems competing for labor in the region. Fair-to-middling (at best) pay levels, a lack of defined benefit pensions and high housing costs may deter top talent from coming here in the future. The existing workforce, originally recruited in times when the county’s housing stock was more affordable, is still known for its excellence. But the entry level talent will gradually erode unless the county keeps up with its neighbors.

On point (3):

In 2006, Montgomery County reported the 8th-highest median household income of all 3,077 counties in the United States. The County Executive’s proposal taxes the median assessed household an extra 38 cents per day. Readers can form their own opinions on whether we can afford that.

But there is a much larger argument here: where does the county’s economic competitiveness come from? Montgomery is perceived to be one of the higher-cost jurisdictions for residents and businesses in the region. So why are people willing to pay those costs? One reason is the excellent reputation of the schools and public services. As a former resident of the District of Columbia and a rural area in upstate New York, I have a meaningful standard of comparison for the county’s service quality.

But Montgomery’s true competitors are jurisdictions like Fairfax – counties that also have good schools and abundant resources. We are never going to compete with Virginia by matching them on tax rates. Instead, we will have to equal or surpass them in our quality of education, planning, parks, police and other public services. Those services comprise a valuable, productive asset that preserves our standard of living, maintains our property values and protects our economic edge. The money we spend on the public sector is an investment, not money thrown down a black hole. Any investment has to be evaluated not merely on its cost but also on the return it generates for its holders. Why are we hearing so much about the cost but so little about the return?

How to Calculate Your Property Tax Increase (Updated)

Much is being made of County Executive Ike Leggett’s proposal for a property tax increase. Here’s how to calculate what it means for you.

Leggett’s property tax proposal has two components. First, he is increasing the property tax rate. Second, he is also increasing the property tax credit that homeowners receive for their primary residences from $613 to $1,014. The combination of the rate increase and the tax credit increase skews the resulting tax hike towards homes that are worth more money.

So here’s how to determine how much more taxes you would pay under his proposal. First, look up the gross assessed value of your property on the county’s property tax account website. (This will be the assessment listed on the county property tax line at the top of the bill.) Second, if your home is your personal residence and you have lived in it for more than a year, you will likely have a county homestead credit. This credit is designed to prevent your net, or taxable assessment from increasing by more than 10% per year. Find your county homestead credit, which will appear in the middle of your bill if you have one, and subtract it from your gross assessment. This is your net assessment. Third, multiply the net assessment by 10% to estimate its value as of 7/1/08. (This assumes that your net assessment is still “catching up” to where it would be without the restraint of the homestead credit. The homestead credit, after all, restrains but does not eliminate taxable assessment increases.) Fourth, multiply your 2008 net assessment by 0.008208 and then subtract $613. This would be your county property tax levy without Leggett’s proposal. (It does not include state taxes, solid waste or water charges.) Fifth, repeat the above exercise by multiplying your 2008 net assessed value by 0.009779 and subtracting $1,014. This would be your county property tax levy under Leggett’s proposal. The difference is your county property tax increase if Leggett’s proposal was passed by the County Council.

The County Executive states that the median assessment for a Montgomery County home is currently $343,200. Under the math above, that home’s county property tax would rise from $2,204 to $2,342, or 6.3%. That's an increase of 38 cents per day. A home assessed at $220,000 would see a tax bill cut from $1,193 to $1,137, or 4.7%. A million-dollar house would see a tax bill increase from $7,595 to $8,765, or 15.4%. (That’s a good size hit on top of the recently-passed state millionaire tax.) The break-even point is $255,331 in net assessed value (after any homestead credit). Homes worth more than this would see a tax hike while homes worth less would see a tax cut.

I performed this math on my own house in Silver Spring. If I had no homestead credit, my home’s assessed value on 7/1/08 would be $463,953. If Leggett’s proposal were passed, my county property tax bill would rise from $3,195 to $3,523 – an increase of $328. That works out to 90 cents per day. But with a homestead credit, my home’s assessed value on 7/1/08 will be $328,544. So my county property tax bill would rise from $2,084 to $2,199 – an increase of $115. Now that’s 32 cents per day.

Try the above formula for your own home. We all have different economic circumstances. Some of you will conclude that your potential property tax increase is unaffordable for your personal budget. If that’s your opinion, you should certainly contact the County Council. But I am ready to pay 32 cents per day - or even 90 cents per day - if it means maintaining quality public services in the county.

Update: In a work session of the County Council's Management and Fiscal Policy Committee yesterday, Chairwoman Duchy Trachtenberg and Council Member Phil Andrews voted against the property tax increase. Because of the District 4 vacancy, two opposing votes are sufficient to kill the property tax hike. If both council members stick to their votes, the County Council will have to locate $128 million in cuts to replace the tax.

Update 2:
In a comment on this post, District 18 Delegate Al Carr points out that the County Council is considering increasing fuel and energy taxes. In the staff memo he linked, Senior Legislative Attorney Mike Faden writes, "A resolution to increase fuel/energy tax rates, sponsored by the Council President, is scheduled to be introduced on April 15, 2008. This resolution would increase the rates currently in effect to produce $11.1 million more revenue. This resolution is introduced as a placeholder to allow the Council, if necessary, to adjust the rates of the fuel/energy tax."

This is big news and we are grateful to Delegate Carr for supplying it. Few household costs have been increasing more noticeably than electricity and natural gas. And a straight tax hike on fuel will ensnare many households at the bottom end of the income distribution that would escape the County Executive's property tax proposal. There may be at least as much resistance to increasing fuel taxes as there is to increasing property taxes. And if the property tax hike fails, then fuel taxes may be increased more as a result. Fuel tax increases are not subject to the charter limit and may be passed by a straight majority vote of the County Council. This is a very meaningful development and I hope the Gazette and Washington Post reporters who read this blog will follow up.

Thanks to Louis Wilen and Al Carr for correcting my earlier failure to account for the homestead credit. When readers correct and improve my content, I will credit them publicly.

MoCo Property Tax Increase in Doubt

Last Friday, Montgomery County Council Member Duchy Trachtenberg flatly told the Gazette, "I do not support going over the charter limit." This is a serious blow against passage of a county property tax increase.

Article 3, Section 305 of Montgomery County's charter restricts property tax increases to the change in the Consumer Price Index with exceptions for "(1) newly constructed property, (2) newly rezoned property, (3) property that, because of a change in state law, is assessed differently than it was assessed in the previous tax year, (4) property that has undergone a change in use, and (5) any development district tax used to fund capital improvement projects." Seven out of the nine County Council Members must vote to override this limit and raise the property tax by a higher amount.

To close a $297 million county budget deficit, County Executive Ike Leggett offered a budget that combined spending cuts with a $128 million property tax increase. Leggett's property tax proposal combines a 7.5% rate increase with a hike in the property tax credit for homeowners from $613 to $1,014, thereby making the tax over-weighted towards commercial properties and higher-value homes.

Council Member Trachtenberg was the first member of the council to openly oppose the property tax increase. Instead, she favors scrutinizing the county's labor costs. According to the Gazette:

Montgomery County needs a "good black and white description" of how much employee salaries, health benefits and pay raises are going to cost the county as it faces a budget crisis, the chairwoman of the Management and Fiscal Policy committee said Thursday.

"It’s very important that we have the bottom line and we have a sense of how we’re going to pay for the wages and the cost of living increases over the next few years," said Councilwoman Duchy Trachtenberg (D-At large) of North Bethesda. "The problems we’re going to face are not for one year only."

Trachtenberg said the contracts with county employees should be honored.

"But I’m suggesting we need to identify what we’re going to pay in these contracts and how we’re going to pay for them," she said.

Council Member Nancy Floreen has also been skeptical of the tax hike, telling the Gazette, "My basic reaction is that I have to be persuaded that we need to expand the property tax rate as much as [Leggett] is proposing... Those are big dollars they are counting on to pull them through and I’m just not there yet." Last Friday, Floreen said on her blog, "Given that these [property tax] increases would be in addition to the State’s bump in income taxes and the sales tax, I’m not convinced the community can bear them. On the other hand, the alternative would be significant cuts in service, which I’m not sure folks are willing to do either."

If Council Members Trachtenberg and Floreen both oppose the property tax increase, it will fail. Because the winner of the District 4 vacancy will not be certified until May 23, after the budget has been passed, there will be only six other sitting members on the County Council when the tax's fate is decided. Seven votes are needed to break the charter limit.

Pass the CARR Bill

Montgomery County faces a $297 million budget deficit. Prince George’s County is projecting a $100 million budget deficit. Baltimore City is seeing a 20-30% drop in recordation receipts and transfer taxes. So there is lots of talk in these jurisdictions and others of raising taxes and fees, freezing hiring and perhaps even delaying compensation increases for employees, all traditional methods of dealing with budget deficits. But new District 18 Delegate Al Carr has a better idea.

Carr points out that state law allows Baltimore City and the counties to set just one property tax rate that applies equally to all categories of real property. So in Baltimore County, for example, the county levies $1.10 per 100 dollars of assessed value regardless of whether the property is a house or a giant office building. Baltimore City’s rate is $2.27, again applied equally to housing or commercial properties. No county government is allowed to establish different rates for different property types.

Over the long run this can cause problems. Take Montgomery County. According to the county’s Department of Finance, residential property (including condominiums) accounted for 69.6% of the county’s total assessed value of real property in 1991. By 2007, that percentage had climbed to 76.8%. On the other hand, commercial property’s percentage of total assessed value fell from 30.4% to 23.2% over the same period of time. The state’s homestead tax credit limits tax increases on owner-occupied homes to 10% per year, but that merely delays tax increases rather than eliminates them. The bottom line is that, at least in Montgomery, the property tax burden has been slowly shifting from commercial owners to residents.

Maryland’s municipal governments, unlike the counties, are free to set different rates on different classes of property. The District of Columbia charges 85 cents per 100 assessed dollars for residential property and $1.85 per 100 assessed dollars for commercial property. A new Virginia law allows counties and cities in Northern Virginia to establish different property tax rates and Arlington County is considering doing so. Carr’s bill, HB 676 – cosponsored by Delegates Barkley, Bobo, Feldman, Gilchrist, Hucker, Kaiser, Lafferty, Manno, McIntosh, Montgomery, Tarrant, Taylor and Waldstreicher – would give Maryland’s counties and Baltimore City the same ability to establish different property tax rates that these other jurisdictions have. (District 18 Senator Rich Madaleno is sponsoring the companion bill in the Senate.) Hereinafter, this bill shall be designated the Commercial Assessment Rate Review (CARR) bill by the authority vested in me as the author of this blog post!

Won’t raising commercial property tax rates cause real estate and job losses? Not necessarily. Consider the District, which charges a commercial property tax rate more than double the residential rate. Commercial property manager Transwestern estimates the District’s office vacancy rate at 5.8%, one of the lowest rates in the country. Transwestern proclaims, “The District remains one of the top-performing areas in the nation with a strong tenant base, low vacancy rate and high barriers to entry.” Sounds like that higher commercial rate is really killing their economy.

And the CARR bill would even enable counties to lower commercial property tax rates below residential rates. Consider a county seeking to revitalize a run-down commercial center. Right now it could not do it through cutting the commercial property tax rate. With the CARR bill, it could.

The point is that this bill gives county governments new options for changing their revenue mix in good times and bad. And at this moment, Montgomery, Prince George’s, Baltimore and other jurisdictions need those options. Otherwise residential taxpayers and public employees could pay the price. So what are you waiting for guys? Pass the CARR bill!