Budget Blog Series: Spending Affordability and the State’s Fiscal 2014 Baseline Budget

This item is the second of a series on the State’s operating budget process.  The first article highlighted some of the changes that could arise in the Governor’s Fiscal 2014 budget with respect to county governments.  This discussion will look more closely at the spending affordability process and how the Department of Legislative Services(DLS) calculated the State’s Fiscal 2014 general fund shortfall and structural deficit.

Spending Affordability Committee

The Spending Affordability Committee (SAC) was created in 1982 from an outgrowth of proposals by the General Assembly to control growth of the operating budget. These proposals looked at using economic indicators to tie the growth of ongoing State spending to the growth of the Maryland economy.  Although the SAC makes a recommendation on the level of new debt authorizations and the level of state personnel, the primary responsibility of the SAC is to recommend a target for budget growth to the Governor and General Assembly  based on the current and prospective condition of the state’s economy.

Each year, the SAC, composed of members of the General Assembly and three public members, typically holds three meetings.  The first meeting, which usually includes all members of the House and Senate fiscal committees, examines the relationship between ongoing general fund revenues and general fund expenditures for the upcoming fiscal year.  The second meeting usually examines the state’s debt capacity, the capital budget, the Transportation Trust Fund, and other issues affecting the state’s budget such as federal sequestration.  The SAC makes its recommendations in the third meeting. The Governor and General Assembly are not required to follow the SAC recommendations, but typically they comply.

At its first meeting on October 17, the Department of Legislative Services (DLS) briefed the SAC providing members with a general overview of revenues and expenditures for Fiscal 2014.  Based on their forecast of revenue and expenditures, DLS is projecting a $247 million general fund shortfall between fiscal 2013 and 2014 and a general fund structural deficit of $638 million.  The remaining section of this blog article will discuss how DLS arrived at its projections and calculated the general fund shortfall and structural deficit.

Forecasting Ongoing Revenues 

Each year, DLS forecasts estimated general fund revenue using a number of economic indicators and information from the Board of Revenue Estimates (BRE). The BRE, composed of the State Treasurer, State Comptroller, and the Secretary of the Department of Budget and Management, reviews the recommendations of the Bureau of Revenue Estimates each year and officially submits revenue projections to the Governor three times a year: March,  September, and December. These estimates project how much general fund revenue will increase or decrease from one fiscal year to the next.  General fund revenue sources include the personal income tax, sales and use tax, state lottery, corporate income tax, and alcohol tax, to name a few.  In its analysis, DLS uses the September revenue estimate for the purpose of projecting a general fund surplus or shortfall for the upcoming fiscal year.

For Fiscal 2014, DLS is projecting general fund revenue growth of 2.7%, for a total of $15,317.5 billion.

Calculating Ongoing Expenditures

To calculate ongoing general fund expenditures for the upcoming fiscal year, DLS constructs what is known as the baseline budget. A baseline budget assumes the following about all programs in the budget: 1) they will be fully funded at statutory amounts; 2) inflationary increases will occur in budgeted programs; 3) program deficiencies are funded;  4) employees will receive salary adjustments; 5) employee benefits will increase by certain inflationary adjustments; and 6) utility and other basic operational costs will increase.  These costs are added onto the legislative appropriation for the current fiscal year to project expenditures in the upcoming year.

Since a number of programs in the general fund budget are being funded through special funds, DLS calculated its baseline inclusive of these funds.  The State’s Fiscal 2014 baseline budget is $17,611.5 billion, which is $1,180.5 billion more than Fiscal 2013.   The increases in the baseline budget can be attributed to the following: 1) ongoing requirements and entitlements; 2) new legislative requirements; 3) state agency costs; 4) agency programmatic and operating expenses, and 5) the reserve fund.  The largest increases include: 1) in debt service, $160 million; 2) teachers retirement, $97.6 million; 3) medical assistance, $95.7 million; and 4) education and library formulas, $95.4 million.

Calculating the Fiscal 2014 General Fund Budget Shortfall

To calculate the state’s general fund budget shortfall and structural deficit, DLS looked specifically at ongoing general fund revenues and expenditures, but then made adjustments for the Budget Restoration Fund.  The Budget Restoration Fund was created during the May 2012 Special Session as a pass-through account for tax revenue generated by HB 1302, State and Local Revenue and Financing Act of 2012.  The Attorney General determined that these revenues could not be brought directly into the general fund since an adjustment would need to be made to the budget that passed in April.  Instead, the revenue was directed by law to special funds and then transferred to the general fund through a budget amendment.

This calculation gets further idled by higher than expected revenues from the closeout of Fiscal 2012 and projected revenues for Fiscal 2013. Making one time transfers of this temporary excess would make it easier to close a one year budget gap, but would do little to bring down ongoing expenditures to close the overall structural deficit.

To calculate the one year budget shortfall of $247 million, DLS subtracts overall expenditures ($16,326 billion), which includes an appropriation to the Reserve Fund, from total revenue available ($16,079), which includes balances and transfers.  The structural deficit of $638 million is calculated by subtracting ongoing operating costs and deficiencies ($15,955 million) from ongoing revenues ($15,317 million).  The chart on page 17 of the SAC briefing document provides an overview of this analysis.

The next item in this operating budget series will examine the baseline budget for State Aid to Local Governments.

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