Spending Affordability: Deschenaux’s Final Show

The Spending Affordability Committee (SAC) received its final briefing from the Department of Legislative Services (DLS) Executive Director Warren Deschenaux on Tuesday, November 14.

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Warren Deschenaux, courtesy DLS’ new website

Capital Program 

Earlier this year, the Capital Debt Affordability Committee (CDAC) recommended an annual $995 million GO bond authorization level – the same level as the previous three years. The CDAC’s 2017 recommendation does not include an annual inflation adjustment, despite the fact that beginning in early calendar 2016 and through the first nine months of calendar 2017, construction inflation has risen significantly.

DLS indicated that the State’s capital commitments made in the 2017 session exceed the levels of GO bonds currently programmed in the 2017 CIP and recommended by CDAC.

The 2016 SAC recommendation, recognizing the need to address the increasing reliance on general funds for debt service, established a limit on new GO bond authorizations that increased by 1% on a year-over-year basis – less conservative than CDAC’s approach.

There is a $500 million difference between what CDAC has recommended, and what SAC has recommended over the last several years. SAC recommended $1.65 billion last year, and last year, the legislative authorization followed the SAC recommendation.

Debt Service

Now that we have debt, we have to pay for it.

– Warren Deschenaux.

Generally, the State has been using more and more general fund revenues for general fund debt service appropriations since 2013. From fiscal 2004 to 2013, general funds were appropriated for debt service costs only once. This was mainly because GO bonds were selling at substantial premiums; property values increased in excess of 10 percent in some fiscal years, resulting in additional State property tax revenue; and the State property tax rate was increased from $0.084 per $100 of assessable base to $0.132 in fiscal 2004, and then reduced to $0.112 in fiscal 2007.

The Annuity Bond Fund no longer generates sufficient revenues to support all GO bond debt service costs, requiring use of general funds for supplementation.

Provisions in the Federal Tax Plan That Affect State Debt

The biggest issue in the Federal tax plan impacting the State budget is the potential termination of private activity bonds (PABs). Each state gets an allocation for PABs. In Maryland, these bonds are used for housing development programs, student loans, and financing the Purple Line – as much as $300-350 million in some years. The Maryland Department of Housing and Community Development has said that elimination of PABs would significantly impact their programming.

The bill also proposes repeal of tax credit bonds, including Qualified Zone Academy Bonds and Qualified Energy Conservation Bonds. Since fiscal 2001, the State has issued $204 million in federally subsidized bonds, of which $166 million are tax credit
bonds. DLS estimates that tax credit bonds have reduced State debt service costs by $56 million.

Finally, the bill proposed the repeal of advanced refunding bonds, which provide the opportunity to refinance at a lower interest rates before bonds are callable, if interest rates decline. DLS reported that Maryland has saved $300 million that is attributable to advanced refunding.

The Bottom line: if PABs go away, our CIP will have to look very different.

– Warren Deschenaux.

House Speaker Busch asked what percentage of GO bonds fund hospitals, higher education and K-12 education projects, and learned that about 80 percent do, not including bonds repaid with special funds.

Transportation Trust Fund Forecast

Unlike last year, this year’s draft forecast by the Maryland Department of Transportation (MDOT) does not include future capital funds set aside for highway user revenue restoration. Of course, the General Assembly prevented MDOT from doing just that through budget language passed last session.

Like last year, however, MDOT and DLS disagree on their Transportation Trust Fund (TTF) projections, with DLS planning more conservatively.

DLS assumes that transportation taxes and fees generate $167 million less in revenues over the five-year forecast period than MDOT assumes. In addition, MDOT assumes a 2.4 percent increase for operating expenses, whereas DLS assumes a 5 percent increase. According to DLS, MDOT’s forecast could potentially result in $1.1 billion in planned debt that MDOT will not be able to issue, because it will not be able to cover the debt service.

House Appropriations Chair McIntosh asked whether MDOT’s reported decrease in expenditures associated with the Total Maximum Daily Load program resulted in a reduced program, or “counties picking up the costs.” DLS told her that was not the case.

State Personnel

Since fiscal 2002 the Executive Branch, excluding higher education, has abolished
almost 7,700 positions. DLS identified a need for nearly 1,300 additional authorized positions in addition to the need to fill approximately 1,200 existing positions.  Cost containment hiring freezes, limited employee compensation, and uncompetitive salary levels impede the State’s ability to attract and retain employees, according to the DLS analysis. Despite ranking fifth in personal income, Maryland state salaries ranked twenty-ninth out of the United States. According to the analysis,

Many of the understaffed areas have very high vacancy rates currently. Some of the
understaffing reflects current practices deviating from statute (e.g., State Department of Assessments and Taxation).

Responding to a question from House Speaker Busch, Deschenaux indicated that the State has 258 additional vacancies in state law enforcement over last year – which translates into higher overtime costs, stress on existing personnel and arguably an adverse impact on state prison conditions.

Warren Deschenaux’s last day is November 30 – after which time, he told the SAC,

all will be safe.