DLS Briefs House Committee On Budget Big Picture

The House Ways and Means Committee received a fiscal briefing from the Department of Legislative Services (DLS) on January 22, 2019. This briefing provides a comprehensive overview of the Governor’s fiscal plan, the State’s economic and revenue outlook, a detailed look at the Governor’s FY 2020 proposed budget, aid to local governments, Transportation Trust Fund outlook, the capital budget, and an outlook for Maryland’s economy in light of Federal changes.

The Quick Look at Fiscal 2020 Budget shows that the budget funds all mandated State aid to local governments. The Governor’s spending plan produces a structural deficit of about $62 million in fiscal 2020. The Administration anticipates a structural deficit of $902 million in fiscal 2021 and almost $1.6 billion by fiscal 2024. A cash shortfall of $1.8 billion is forecast by fiscal 2024.

The shortfalls are exacerbated by the Administration’s tax relief proposal and a plan to provide general fund relief to the Transportation Trust Fund (General funds, rather than the Transportation Trust Fund, support $125 million of the $167 million mandated capital grant to the Washington Metropolitan Area Transit Authority (WMATA). Annual general fund grants of $167 million to WMATA are programmed in the Administration’s forecast). Together, the proposals consume $1.1 billion of general funds from fiscal 2020 through 2024.

Highlights of the Potential Legislative Issues include:

  • The Administration’s spending plan fails to comply with the SAC recommendation for structural balance. Reductions of $62 million are required for compliance.
  • The long-term structural deficit remains unresolved and is of a magnitude that will prove difficult to manage during this term.
  • The appropriate level of cash reserves to maintain given the challenging budget outlook.
  • Securing funding for the fiscal 2020 recommendations of the Commission on Innovation and Excellence in Education. The allowance does not specifically fund any of the commission’s fiscal 2020 recommendations but includes $36 million for unspecified education initiatives. Another $200 million reserved by statute for Kirwan implementation is not included in the allowance.
  • The Administration plan to fund a mandated capital grant to WMATA with general funds rather than Transportation Trust Fund revenues.
  • The Governor’s proposal to dedicate (beginning in fiscal 2021) $125 million per year of ETF revenue to debt service on a $1.9 billion school construction initiative. Use of ETF dollars for this purpose could result in the State exceeding debt affordability limits and reduces the funding available for enhancements to operating funding for K-12 education.
  • Whether to proceed with plans to shift Medicare eligible State government retirees to Medicare Part D for their prescription drug coverage effective January 1, 2020 or consider modifications to the plan to mitigate the financial impact on retirees. A federal court is expected to rule on the legality of the State’s plan in the second half of calendar 2019.

State Aid to Local Governments

The local aid section is available here. Overall, aid to local governments increases by 3.9 percent. Total public school aid increases by $251.9 million, or 3.9 percent; transportation aid increases by $19.6 million, or 8.1 percent; public safety aid increases by $7 million, or 5.3 percent; disparity grant aid increases by $5.4 million, or 3.8 percent; and local health grants increases by $2.7 million, or 5.1 percent.

Fiscal 2020 Capital Budget

The FY2020 Nontransportation Capital Budget Totals $1.854 Billion.

Debt Components: Includes $1.085 billion of new general obligation (GO) bonds plus another $4.2 million of GO bonds recycled from deauthorizations and $34.0 million of Academic Revenue Bonds (ARB). Proposed new GO bond authorization levels are consistent with the Spending Affordability Committee (SAC) recommendation for fiscal 2020 and through the five-year Capital Improvement Program (CIP) covering fiscal 2020 through 2024.

GO Bonds Fiscal 2020-2024: During the five years covered by the 2019 CIP, new authorizations will total $5.525 billion. Compared to the Governor’s previous flat annual $995 million reflected in the 2018 CIP, this adds $90 million in fiscal 2020 and a total of $550 million through the planning period.

Pay-as-you-go (PAYGO) Components: The PAYGO portion of the nontransportation capital program totals $731 million, which is comprised of $121.4 million in general funds, $493 million in special funds, and $116.6 million in federal funds. The general fund figure includes $38.2 million budgeted in the Dedicated Purpose Account for Program Open Space (POS) repayments established by Chapter 10 of 2016 as amended by the Budget Reconciliation and Financing Act (BRFA) of 2018. As introduced, the Governor’s budget submission reflects these repayments as special funds.

PAYGO Outlook

General Fund Support for the Capital Program Increases: With a projected structural balance for fiscal 2020, SAC recommended greater general fund PAYGO support of the capital program. As introduced, the budget provides $121.4 million in general fund PAYGO (note this figure is adjusted to reflect $38.2 million in the Dedicated Purpose Account for the POS repayment) compared to $65.5 million for fiscal 2019 and just $9.5 million in fiscal 2018. Components that comprise the majority of the funding include:

  • Transfer Tax Repayment: In accordance with Chapter 10 as amended by the BRFA of 2018, the budget provides $46.4 million in general funds for fiscal 2020 POS repayments. Of this amount, $38.2 million supports capital programs supported with the transfer tax in the departments of Natural Resources and Agriculture compared to just $6.0 million in fiscal 2019.
  • School Construction and School Safety Improvements: The budget provides $43.5 million in general funds to support school construction initiatives. This includes $30 million for the Healthy School Facilities Fund established by Chapter 561 of 2018, which mandates $30 million in each of fiscal 2020 and 2021. Another $13.5 million is dedicated to school safety, including $10 million at public schools as required by Chapter 14 of 2018 and $3.5 million for nonpublic school safety enhancements.
  • Department of Housing and Community Development (DHCD) Programs: The budget provides $21 million of general fund support for DHCD programs, including $12 million for the Baltimore Regional Neighborhood Initiative as mandated by Chapter 29 of 2016 and another $5.0 million for the SEED Community Development Anchor Institution Fund as required by Chapter 31 of 2016. The general funds budgeted to support DHCD programs are in keeping with the SAC recommendation to prioritize the use of general funds for programs not eligible to receive tax-exempt bonds, although as introduced, the capital budget still programs a significant amount of GO bonds for DHCD programs that will require the issuance of taxable bonds (approximately $86 million).

Federal Government Shutdown

  • Funding for several federal departments and agencies lapsed on December 21, 2018, at midnight. About 800,000 federal employees are impacted of which 380,000 have been furloughed while the rest continue to work without pay as they are deemed “excepted” for safety or security reasons. The Administration has announced plans to recall tens of thousands of additional employees to work without pay.
  • Nine Cabinet departments are shutdown: Agriculture, Commerce, Justice, Homeland Security, Housing and Urban Development, Interior, State, Transportation, and Treasury. Although the Department of Health and Human Services is funded, certain agencies within the department are shutdown including the Food and Drug Administration (FDA).
  • According to data from the Office of Personnel Management (OPM), as of the second quarter of 2018, there were 129,000 federal civilian Executive Branch jobs located in Maryland, excluding the Postal Service and classified agencies. Employment at departments and agencies shutdown total almost 43,000, about one-third of the total or almost 50% of the non-defense total.
  • Combining OPM data for Maryland with the data for Virginia and the District of Columbia indicates that almost 180,000 federal jobs are impacted by the shutdown across the three states. The data from OPM also includes the average salary at each agency. Assuming each impacted job is full-time year-round and earns the average salary results in lost wages of about $802 million per bi-weekly payroll.
  • Using data from the U.S. Census Bureau on commuting flows results in an estimate of 93,000 Maryland residents currently furloughed or working without pay reflecting lost wages of about $420 million per pay period. That translates to about $31 million of State and local income tax withholding. Lost sales tax revenue could be around $1.5 million per pay period although some of that might reflect delayed rather than foregone consumption.
  • Federal employees who are required to work during the shutdown are guaranteed to get paid for the time they worked. Congress passed and the president has signed legislation to pay furloughed federal employees for the shutdown period when it ends.
  • The shutdown is also impacting workers at private-sector federal contractors. There is no official data on the number of employees funded by federal contracts. Press reports have highlighted workers who provide janitorial, security, and cafeteria services at shuttered federal buildings dealing with a lack of hours and therefore pay. Impacted private-sector workers could also include a wide variety of jobs from information technology support to scientific research depending on the agency and the contract.
  • In past shutdowns, whether or not private-sector contract employees were paid for the period when they could not work was up to each individual company. Legislation has been introduced in the Senate to ensure lower wage contract employees are reimbursed for the shutdown.

Recession Scenario

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Useful links from the Briefing document:

Economic and Revenue Outlook

Operating Budget

State Aid to Local Governments

Capital Budget

Appendices

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