Economy’s Unpredictability Plays Into State Spending Recommendations

Today the Spending Affordability Committee made a number of recommendations to the Governor and General Assembly concerning the State’s level of spending in the fiscal 2018 budget, addressing the economy’s sluggish growth and volatile state revenues. In doing so, members from both chambers and sides of the aisle agreed on one point: no one can predict where Maryland’s economy goes next.

The Committee voted to recommend that the budget, as submitted by the Governor and approved by the General Assembly, reduce the structural deficit by 50 percent. Last year, the Committee recommended maintaining spending affordability by limiting growth in the budget in line with average anticipated growth in personal income for calendar 2016 and 2017: 4.85 percent. Last year, a structural surplus was projected for the near future. Since then, however, slower than anticipated economic growth has resulted in downward revised general fund revenue estimates, and a structural deficit totaling $377 million in fiscal 2018 which grows in out years to nearly $1.5 billion in fiscal 2022.

The Committee further recommended to maintain the balance in the Rainy Day Fund at 5 percent of estimated revenue, authorizing the use of any funds above that balance to address imminent cash shortfalls in the current and fiscal 2018 budgets. The balance in the Fund for fiscal 2017 is currently at 6.01 percent of revenues. The Committee, mindful of revenues’ volatility, further recommended to maintain a general fund balance of at least $100 million in fiscal 2018.

The Committee recommended to authorize $1.065 billion in new GO bonds for the 2017 session – $70 million higher than the Capital Debt Affordability Committee (CDAC)’s recommendation of $995 million, the level at which it opted to freeze authorizations last year through fiscal 2026. From the 2016 Spending Affordability Committee Report:

The committee supports CDAC’s debt affordability criteria, which limits debt service to 8% of State revenues and debt outstanding to 4% of State personal income. The committee also supports the objective to slow the growth in debt service costs and reduce the debt service to revenue ratio. The committee is concerned, however, that CDAC’s recommendation to freeze authorizations through fiscal 2016 will reduce the purchasing power of the capital program. It is estimated that construction inflation at 2% per annum will diminish the purchasing power by a total of $191 million from fiscal 2018 through 2022.

CDAC’s objective can be achieved without substantially eroding the purchasing power of the capital program. In its 2015 report, the committee recommended increasing the fiscal 2016 authorization, which totaled $1,045 million, by 1% annually through the planning period. This 1% annual growth rate would equate to an authorization level of $1,065 million for the 2017 session. This moderate growth rate limits increases in GO bond authorizations to projected State property tax increases. Since general funds and other State revenues are projected to increase at annual rate in excess of 1%, this reduces the ratio of debt service to revenues in the out-years.

The Committee also recommended authorization of $32 million in new academic revenue bonds for the University System of Maryland, concurring with CDAC’s recommendation, and keeping the maximum number of state employment positions at 80,323 (which currently includes 5,067 vacant positions, 645 more than last year).

The full report is available here.