Note — information on the county-by-county fiscal effects are now available in the FY 2013 Budget Highlights Document. The Governor’s Blog site also includes more extended detail, including a PowerPoint presentation used at this morning’s press event.

Edit 12:15pm — The county-by-county estimates of the fiscal effects of these proposals on local government are now available. More formal detail may be available at a later date, but this summary shows the FY 13 effects (though not subsequent years)

Edit Thursday 9am — The BRFA bill, the omnibus legislation effecting most of the changes described below, is now electronically available, filed as SB 152. The full bill text is available online here.

With the release of Governor O’Malley’s budget on Wednesday, and the emerging details of the broader fiscal plan to resolve the FY 2013 budget deficit, counties appear to be affected by a number of elements. Details will likely emerge in the days (and weeks) ahead, but for now, these appear to be the major proposals that hit the county bottom line:

Teacher Pension Shift

Though rejected by every education study commission, and denounced by the Governor as recently as last year’s MACo winter conference, the Administration now proposes a partial shift of costs for teacher pensions to county budgets. (See this Conduit Street post for more details on the recent history of the teacher pension debate) The Governor’s plan, with nearly all elements expected to be included in the Budget Reconciliation and Financing Act (BRFA), would:

• Shift funding responsibility for all teacher retirement costs (both pension and social security) to become a half-state, half-local responsibility (currently, school board budgets include all the funding for social security, while the state budget provides funding for the state-run pension system)The shift would begin in FY 2013 with a fiscal effect totaling $239 million, but the amount of local responsibility would likely increase in FY 2014 and beyond, since the system’s contribution rate is held artificially low for this year by actions from last year’s budget debate.
• The shift would affect most employees at public schools (including more than teachers per se, but all employees who are in the state pension program), community colleges, and libraries — though the reference to “teacher pensions” acknowledges the much larger fiscal effect of that group compared to the others
• The shift is not “wealth equalized” as was recommended by the recent commission studying pension system sustainability, but simply reduces state funds in a calculated share of these payments, and shifts that funding responsibility to the school board budget — however, other measures (described below) are intended to have a similar effect, to provide offsetting resources or relief to assist jurisdictions with the added new costs.

Income Tax Changes – Phase-Out Deductions and Exemptions

The Governor’s plan seeks to limit the effect of income tax deductions and personal exemptions for higher-income earners, for married couples beginning at a taxable income of $150,000. This change, effectively increasing the taxable income base for calculating both the state and county income taxes, would generate $182 million in state revenues and $111 million in county revenues for FY 2013. Note — this change, effective for the full tax year 2012 beginning at the first of this year, means that essentially 18 months of revenue is collected in the first effective fiscal year — and future annual revenues should be substantially (roughly a third) less than the FY 13 first-year estimate.

Indemnity Deed of Trust – Recordation Tax Loophole

When commercial entities structure substantial real estate sales, they currently employ a device known as an indemnity deed of trust (or IDOT) to create ambiguity in the borrowing process and legally avoid paying transfer taxes on the value of the transaction. The Governor’s plan is to close this tax loophole in a fashion similar to that proposed in HB 420 from the 2011 session (click here to read MACo’s testimony supporting that bill). The effects of this policy change would be to have more commercial property transactions become taxable like any other sales — a fiscal estimate of $40 million has been distributed to reflect these anticipated new local transfer tax revenues.

Eliminate Income Tax Reserve Repayment

In 2009, the Administration’s budget plan transferred $367 million from the Local Income Tax Reserve Fund, a little-understood account maintained by the Comptroller and used to make distributions of income taxes to county governments (when employers submit tax withholdings or individuals make payments, they are separated into a state share and an anticipated local share, which rests in this account — the funds are then distributed at least quarterly in estimated payments to each county). The fund was targeted for this transfer as its cash balance was routinely very substantial.

Following that transfer, the counties were required by state law to begin a ten-year repayment of that reserve fund beginning in FY 2013, totaling $36.7 million each year. In the Governor’s fiscal plan, this repayment will be eliminated, recognizing that the balance of this reserve fund has not even approach zero even after the transfer of funds away from it.

Absolve School Payments for Federally Funded Employees

A further element of the plan would eliminate state law requiring local boards of education to reimburse the state for pension costs of federal grant-funded employees (teachers). The Administration estimates that this will relieve $37 million in costs currently borne by the local school boards (effectively reducing a $239 million cost shift to become a roughly $202 million shift).

Other Local Programs Flat-Funded

In an action similar to those of recent years, the Administration budget plan will include statutory changes (in the BRFA bill) to modify funding formulas that would otherwise call for funding increases to local programs, and to instead fund those programs at the same level as in FY 2012. Details are not yet clear, but this likely effects support for police aid, local health departments, and other shared functions that receive formula-driven state support.