Disparity Grants: No Solution to Pension Shift

As the General Assembly debates the Governor’s proposed shift of teacher pension costs to county government, much has been made over the proposed “offsets” designed to lessen the short term fiscal effects on county governments. Among these elements is an addition to the disparity grant – a state-funded program to augment revenues for those counties who receive unusually low yield from their own income tax effort.

Here we look at the proposed supplemental disparity grant and evaluate its effectiveness as a “solution” to resolve the financial worries of the state’s least wealthy jurisdictions.

The Disparity Grant Is Not Really A “Hold Harmless”

The widely held belief is that the disparity grant is proposed as a tool to hold those counties harmless against the new costs of the proposed pension shift. A common misunderstanding is that the provision would automatically adjust the extra funding for each county based on the net effects of the various components of the budget reconciliation bill — meaning that the disparity counties would be “protected” from further cuts if the pieces of the plan don’t all pass.

Not so.

The extra disparity grant amounts are set directly in the budget bill itself, spelled out in simple dollars – not a formula. If the proposed teacher pension shift happens, but other components of the Governor’s plan do not, this would leave the disparity grant counties even more exposed to immediate cost burdens.

The Disparity Grant Is Not Even Calculated On County Effects

Even if the Governor’s plan were to pass intact, would the disparity grant amounts leave the county governments truly “harmless” in FY 2013?

No.

The first and most obvious reason why this would not happen is that the disparity grant is calculated assuming that $37 million in funding relief being provided to school boards is counted as an “offset” to the county government. However, with the state’s maintenance of effort law guiding county funding decisions and this school board relief ignored by that law, the net effect is no reduction in county costs. The full pension shift is being borne by county governments, not just the “net” figure used in the Governor’s widely distributed summary.

Further, the state plan also assumes that the full local share of income taxes are directed to county governments. However, under current law a full 17% of income taxes for all municipal residents are directed to the city or town government instead. In counties with substantial municipal population centers, this could mean a sizable share of the projected county revenues will instead be sent to towns who have funding responsibilities for neither school boards nor teacher pensions.

Overall, even in the most favorable scenario for the county bottom line, the offset provided to the disparity grant counties is inadequate to remedy the new fiscal burdens proposed.

The Disparity Grant Disappears After One Year, Even Though Pension Costs Rise

Given the uncertainty of the funding for FY 2013, disparity grant counties are correct to be concerned about the protections being suggested in the Governor’s budget plan.  However, FY 2014 and beyond represent an even greater worry – as there is no assurance in the budget reconciliation bill that any offsets would be provided in the out years.

In Maryland one-year funding can be accomplished by the budget bill itself, but it requires legislation (the budget reconciliation bill) to create a new multi-year structure. The extra funding for the disparity grant is only in the one-year budget, not the multi-year bill.

The pension shift costs are estimated to grow rapidly, from $239 million statewide to roughly $330 million just a year later, with county governments absorbing that cost inflation and more. However, the disparity grant counties see only a one year offset (whose foundations are suspect already) provided for in the budget bill, rather than a multi-year assurance of any offsetting relief from this massive shift.

Michael Sanderson

Executive Director Maryland Association of Counties

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