Maryland’s General Assemblyin April passed a $34.2 billion budget, which includes $14.6 billion in general fund spending — an increase from last year’s $13.2 billion.Three states — Florida, Minnesota and Iowa — will have larger general fund increases this year. Nationwide, general fund spending is expected to increase by 2.6 percent.

The study also points out that Maryland might not be in as bad of shape as many other states, considering it has the country’s sixth-largest rainy-day fund and was one of 27 states that did not have to institute midyear budget cuts in the past year.

Growth in individual income tax collection led the way. The state has received $5.1 billion in income tax receipts so far this fiscal year, compared with $4.9 billion at this point in fiscal 2010.

Sales tax receipts have also grown slightly, to $2.7 billion so far this fiscal year from $2.6 billion a year ago.

The continuing decline in property values reinforces the widely-held belief that local government revenues will remain in major stress in coming years, even as the State government’s main revenue sources (income and sales taxes, both very much affected by immediate changes in the overall economy) seem to be reflecting overall modest growth trends.

HB 72, as introduced, included a number of cost-saving reforms for current and future employees.  As this bill worked its way through the budget process, the House and Senate approved differing approaches, which were ultimately worked out in conference committee.  Below is a summary of final actions taken with respect to pension reform.

• All current members of Employees’ Pension System and Teachers’ Pension System who are in the Alternate Contributory Pension Selection (including governmental units), have their employee contribution increased to 7% of pay for service on and after July 1, 2011, and retain the 1.8% benefit multiplier.
• New hires in the EPS and TPS contribute at 7% to receive a 1.5% benefit multiplier.
• Eligibility for full service retirement for EPS and TPS members enrolled on and after July 1, 2011 is Rule of 90 – age and service must equal 90 – or age 65 with at least ten years of eligibility service.
• Early service retirement is age 60 with at least 15 years of eligibility service (maximum reduction is 30%).
• Average Final Compensation for benefit calculations goes from the average of the three highest to five highest years for new members enrolled on or after July 1 2011 for all systems, except the Judges’ Retirement System and Legislative Pension Plan.
• Vesting for new members enrolled on or after July 1, 2011 goes to 10 years from 5 years for all systems, except JRS and LPP
• New members of the State Police Retirement System enrolled on or after July 1, 2011, will be eligible for service retirement at age 50 or 25 years of service (up from 22 years of service).
• Cost-of-living Adjustments (COLAs) for all current active members (for service earned on and after July 1, 2011) as well as new members enrolled on or after July 1, 2011 will be capped at 2.5% when the System earns its assumed rate of return (currently 7.75%) or capped at 1% in  years when the interest assumption is not met.  This revised COLA cap does not apply to the Employees’ Retirement System, Teachers’ Retirement System, JRS or LPP
• Law Enforcement Officers’ Pension System member contributions increases from 4% to 6% in FY2012, and then to 7% in FY2013 (applies to current and new members, including participating governmental units).
• DROP continues for the SPRS and LEOPS with interest at 6% compounded monthly for current members, but decreases to 4% compounded annually for new accounts established on or after July 1, 2011. (For the SPRS, DROP period is extended to 29 years of membership service in order to retain maximum four year participation).

With respect to funding, the bill directs $120M from reform savings to the General Fund in FY2012 and FY2013, and caps the savings reinvestment of reform savings in the System at $300M per year.

The links below provide county detail of the State Aid and costs for local government.

• State Aid to Local Governments in Conference Committee Budget Plan
• New Costs for Local Governments in Conference Committee Budget Plan

The following documents summarizing all conference committee actions can be found on the General Assembly website.

• Conference Committee Report
• Conference Committee Summary

SECTION 3. AND BE IT FURTHER ENACTED, That:

(a) Notwithstanding §§ 5-301 and 5-302 of the Education Article or any other provision of law, the funds appropriated in Section 2 of this Act shall be allocated to the following counties or regions as provided below. The Board of Public Works shall approve the individual projects, which may or may not be eligible for funding under the Public School Construction Program provided that the proposed project is a public school improvement that meets a school or community need:

Anne Arundel County…………. $5,000,000
Baltimore City …………………$9,000,000
Baltimore County………………$7,000,000
Eastern Shore (Caroline, Dorchester, Kent, Queen Anne’s, Somerset, Talbot,
Wicomico, and Worcester Counties)……………$1,250,000
Howard County…………………$4,000,000
Montgomery County…………….$9,000,000
Northeast Maryland (Cecil and Harford Counties)…………$1,250,000
Prince George’s County…………$9,000,000
Southern Maryland (Calvert, Charles, and St. Mary’s Counties)…………..$1,250,000
Western Maryland (Allegany, Carroll, Garrett, Frederick, and Washington Counties)……..$ 750,000

(b) In approving funding for projects, the Board of Public Works shall consider:

(1) requests from the local jurisdictions; and

(2) projects that:

(i) benefit older school buildings;
(ii) benefit schools with high proportions of children eligible for free and reduced price meals;
(iii) can be completed within one year;
(iv) eliminate or reduce the use of relocatable classrooms;
(v) are designated as A or B by the Interagency Committee on Public School Construction and are not fully funded in the fiscal 2012 Capital Improvement Program approved by the Board of Public Works; or
(vi) reduce energy consumption or incorporate high performance “green” building principles.”

The House and Senate will need to take final action on this proposal and the other related items by Monday for these provisions to take effect on July 1.

As reported by the Washington Post, both sides have resolved differences over State employee and teacher pensions and retiree health care.

Under that compromise, state retirees will see their maximum out-of-pocket costs for prescription drugs more than double, as well as other health-care costs rise, but not as much as they would have under a plan proposed by Gov. Martin O’Malley (D) and largely endorsed by the state Senate. In 2020, the costs will more than double again when retirees are shifted to federal Medicare coverage. The course-correction on the state’s underfunded pension, meanwhile, will result in state workers paying a combined $200 million more annually through higher payroll deductions, and the state kicking in an extra $300 million. If the state realizes its projected annual rate of return of 7.75 percent, Maryland’s pension system will return to a federally recommended 80 percent solvency rate in 12 years, or 2023. Next year, Maryland’s state retirement system is projected to be funded at 59 percent.

A few items in the budget are contingent upon the 3% increase in the alcohol sales tax, which is in a separate bill, SB 994.  As reported by the Gazette.Net, the House will consider whether to support with the Senate’s plan to phase in the alcohol sales tax in over three years or to implement it all at once.

If delegates go along with the Senate alcohol tax plan, it would provide $21 million for additional education aid for Prince George’s County and Baltimore city, $5 million to reduce the developmental disabilities waiting list and about $3 million would go to the general fund. The Senate dedicated more money to developmental disabilities with the remainder going to the general fund. However if the House opts to raise the levy all at once, it could bring roughly $60 million more into the general fund.

Below is a summary of the major budgetary decisions with respect to local governments:

• Rejected a transfer of 50 percent of teacher retirement expenses to local employers, but did approve a substantial (approximately $17m annual) cost shift for the administration of the system to schools and community colleges
• Provided a one-time payment to counties (totaling $5 million) and municipalities ($8.2 million) for local roadways (county and municipality allocations)
• Restored $58.5 million in education funding by increasing the per pupil foundation amount for each county’s distribution
• Shifted 90 percent of costs associated with the assessment function (approximately a $35 million impact), but reduced the shift to 50 percent after two years
• Rejected language that would authorize the Governor to flat fund programs on the FY 2012 level through FY 2016
• Rejected significant proposed changes to the funding of Program Open Space and other programs currently supported by transfer taxes
• Rejected proposal to permanently repeal the statutory requirement for “payment in lieu of taxes” for State forest and reserves, but discontinued the payments for two years
• Adopted language to clarify that the calculation of withheld funds for a county missing MOE is based on the total increase in foundation funds regardless of the source of the funding
• Adopted language to clarify the nature of the MOE funding mandate, specifying that MOE is a condition of receiving annual school funding increases
• Adopted language to require local school systems to pay a share of costs of children in State custody who are placed in a nonpublic placement
• Adopted language to authorize all county boards of health to establish fees for food service facilities based on actual cost of licensing and conducting related food safety inspections

A complete summary of all budget actions affecting local governments will be available soon.

If a shutdown were to happen, the federal money that helps states pay the administrative costs of their stretched unemployment programs could dry up, forcing states to advance the money to keep the programs running. Federal grants for a variety of programs — including research, higher education and training local law enforcement officers — could be delayed.

Furloughing nonessential federal workers and halting payments to federal contractors could have a domino effect as local tax collections plummet in the Washington area and other places with many federal workers. And if national parks were closed, some states could lose tourism business, and the local tax revenues they generate.

Other tax and revenue concerns involve other businesses, such as lunch vendors, local transportation, and other services commonly patronized by federal employees during their work day. The National Association of State Budget Workers put out a briefing paper last week detailing the effects of a shutdown. Their position is that a short shutdown spanning two or three days would do minimal damage to state tax revenue and local businesses. They estimate that any longer than a week would cause some states to have a cash-flow problem. That briefing paper can be read by clicking here.

The budget officers’ association noted that during the shutdown in 1995, Maryland spent $1.4 million a day to keep its federally paid employees at work.

To read the full New York Times article, which details several instances of how a shutdown would effect individual states, please click here.

To read MACo’s prior blog coverage of the potential federal government shutdown, please click on the links below:

Federal Government Shutdown Most Likely Averted – How Will Maryland Be Affected? (posted 3/21/2011)

New Funding Extension Introduced to Prevent Federal Government Shutdown (posted 3/15/11)

Congressional Debate on Government Funding and Shutdown Still Ongoing (posted 3/11/11)

Federal Government Shutdown Could Hit Maryland Economy Hard (posted 3/1/11)

RETIREMENT AGE: The Senate adopted the “Rule of 92” to receive full pension benefits. This means that the age of an employee or teacher at their retirement and their length of service must add up to 92. Under the current requirements, adopted again by the House, anyone can retire with full benefits at any age after 30 years of service or at age 65 after 10 years of service.

COST OF LIVING ADJUSTMENTS: Both houses tie cost-of-living adjustments to the rate of return on the investments of the pension system. If the return falls below the target of 7.75% in any year, the Senate said retirees would get no cost of living increase.  The House said pensioners would get a 1% increase regardless of investment performance, and a 3% COLA if the target was met. The Senate capped the COLAs at 2%.

NEW PROPOSAL: The Maryland State Education Association has offered a counter-proposal that combines higher employee contributions and lower cost-of-living adjustments.

RETIREE HEALTH BENEFITS: There are substantial differences between the House and the Senate over how much to cut benefits and raise premiums for retiree health insurance.  The House wants to make retirees pay 25% of premiums, but the Senate set it at 20% and increased the deductible.

House Conferees-Delegate Norman Conway, Delegate John Bohanan, Delegate Tawanna Gaines, Delegate Melanie Griffith and Delegate Peter Hammen – Advisors -Delegate James Proctor,  Delegate Sheila Hixson,  Delegate Adrienne Jones and Delegate Wendell Beitzel

Senate Conferees-Senator Ed Kasemeyer, Senator Nathanial McFadden, Senator Edward DeGrange, Senator Richard Madaleno and Senator George Edwards – Advisors-Senator James Robey, Senator Verna Jones, Senator Ulysses Currie and Senator David Brinkley

As previously reported in the MACo blog, both the House and the Senate rejected a massive shift of teacher pensions, rejected a dismantling of Program Open Space and other transfer tax funded programs, but agreed to a substantial cost shift for administration of the pension system.  The Conferees will likely address reforms to pension and health care benefits for employees, and different approaches to revenues from the two houses.