State Will Evaluate Local Income Tax Reserve Account

In response to a budget analysis by the Department of Legislative Services (DLS), the Department of Budget and Management (DBM) has indicated that they are “evaluating the impact and implications of prior transfers and non-repayments from the Local Income Tax Reserve Account.”  This issue was raised during a budget hearing before the House Appropriations Committee on the State Reserve Fund.

To balance the State budget in two different fiscal years, a total of $916.8 million has been transferred out of the Local Income Tax Reserve Account to either the General Fund or the Education Trust Fund. In subsequent years, language in the Budget Reconciliation and Financing Act repealed the requirement that the State and local governments repay $716.8 million of these funds resulting in an unfunded liability in the Account.

From the budget analysis,

The State collects income taxes for local jurisdictions and makes payments to the counties and Baltimore City from this account. According to GAAP, the State is supposed to maintain a sufficient fund balance to pay future refunds, in case the income tax is no longer collected. If the account is insufficiently capitalized at the end of a fiscal year, the State is required to report the underfunding as an unfunded liability in the Comprehensive Annual Financial Report (CAFR).

As long as there is not a plan to replenish the funds that were transferred in fiscal 2011, the State will continue to have this unfunded liability. The concern is that the account has not yet been reimbursed and there is no plan to fully reimburse the account. This creates a GAAP balance that the State is disclosing in the annual CAFR and also will limit the State flexibility during the next recession. The Secretary should brief the committees on plans, if any, to reduce the unfunded liability in the Local Income Tax Reserve Account beyond the $100 million repayment proposed in the budget.

In response to DLS’s analysis, DBM responded that it is evaluating the account.

As noted in the analysis, Governor Hogan’s FY 2016 budget plan repays the proposed FY 2015 transfer from the Local Income Tax Reserve Account. The Administration urges the General Assembly to honor that repayment commitment. Beyond this planned repayment, the Administration is evaluating the impact and implications of prior transfers and non-repayments from the Local Income Tax Reserve Account. Any recommendations regarding the unfunded liability in the Account are forthcoming.

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