Spending Fiscal Leaders on Surplus: Bolster Rainy Day Fund, Repay Unfunded Liabilities, Invest in One-Time Capital Projects

This week, Maryland’s Spending Affordability Committee approved several recommendations to help guide state budget decisions in the months ahead, including bringing the State’s Rainy Day Fund up to 9% of revenue, repaying unfunded liabilities, and prioritizing one-time construction costs.

As previously reported on Conduit Street, the Board of Revenue Estimates this month voted to once again increase the revenue projections for fiscal 2022 to $21.6 billion, representing a $495 million increase from the September estimates. Additionally, the Board adjusted the official revenue forecast for fiscal 2023 upwards by $543 million to $22.8 billion.

The December revision follows the Board’s actions in September, writing up fiscal 2022 revenues by $995 million and predicting an additional $1.37 billion in revenues for fiscal 2023. That came days after Maryland closed the books on fiscal 2021 with a $2.5 billion general fund balance.

All told, state budget writers and policymakers have roughly $6 billion in unanticipated revenue as they construct the fiscal 2023 state budget.

Source: Department of Legislative Services

 

The Spending Affordability Committee approved the following recommendations for the 2022 legislative session:

Operating Budget Spending Limit and Sustainability

While this favorable fiscal position allows policymakers some flexibility to use available resources to address the ongoing needs of the State, the Board of Revenue Estimates (BRE) notes that actual out-year revenue growth could be affected by economic uncertainties, including inflation, which suggests that the State should approach decisions about how to use this surplus cautiously. Therefore, the committee recommends maintaining a structural balance in fiscal 2023 to support ongoing budget sustainability.

General Fund Balance and Use of Surplus

Estimated cash balances — after assuming a 5% balance in the Rainy Day Fund — total $4.3 billion at the close of fiscal 2022. This surplus provides the State with the unique opportunity to invest resources toward unmet needs and priorities.

Recognizing that the fund balance is one-time in nature, the committee recommends against making ongoing investments with the cash surplus. Instead, ongoing needs can be accommodated within the significant structural surplus forecast for fiscal 2023 and beyond.

The committee recommends investing the cash surplus in the following one-time purposes:

  • Achieving a minimum ending fiscal 2023 general fund balance of $200 million. Over the last five years, annual general fund deficiency appropriations have averaged about $150 million. Therefore, a balance of $200 million is sufficient to cover a normal level of deficiencies and provide a hedge against modest changes in revenue collections.
  • Increasing the Rainy Day Fund balance to 9.0% of general fund revenues. Allocating a portion of the surplus to the Rainy Day Fund positions the State to (1) avoid deep cuts and maintain social safety nets during periods of economic stress and (2) provide resources to protect government services and meet new needs in such periods. The General Assembly and the Governor should collaborate on implementing clear criteria for using Rainy Day Fund.
  • Committing $225 million toward repayment of funds previously borrowed from the Local Income Tax Reserve Account reduces the outstanding unfunded liability by more than 30%.
  • Allocating a minimum of $300 million to address long-standing deferred maintenance and facility renewal needs in Department of General Services (DGS) operated facilities and at State parks and allocating $200 million to the public four-year institutions of higher education and regional higher education centers for deferred maintenance and facility renewal.
  • Investing in pay-as-you-go (PAYGO) capital to fund previous commitments, offset the impact of a recent spike in construction inflation, mitigate the planned reduction in the general obligation (GO) authorizations in fiscal 2023 and expand the capital program.
  • Investing in one-time purposes such as improving cybersecurity, accelerating the replacement of outdated information technology systems, capitalizing investments that build capacity to provide ongoing programs and services including infrastructure for apprenticeships and other career pathways to reduce barriers to attracting and training workers in skill shortage occupations in government and the private sector — and offering hiring and retention bonuses to attract more workers to State government.

Capital Budget

The Capital Debt Affordability Committee (CDAC) recommendation limits fiscal 2023 GO bond authorizations to $900 million, which is $215 million below both the level recommended by the Spending Affordability Committee (SAC) in December 2020 and the amount programmed in the 2021 Capital Improvement Program (CIP).

The committee is concerned that the CDAC recommendation does not provide a level of capital investment necessary to address the critical infrastructure needs of the State at a time when interest rates remain low but likely to increase, and construction inflation is relatively high.

While the committee finds reducing GO authorizations to $900 million unnecessary given the State’s improved affordability ratio and low interest rates, the committee recognizes that substantial one-time cash balances are available to support a robust capital program.

Therefore, the committee recommends that the General Assembly adhere to the $900 million limit proposed by CDAC if the Governor’s PAYGO and GO proposals:

  • Fund all the projects preauthorized by the General Assembly for fiscal 2023.
  • Allocate funds to make strategic investments in facility renewal for State parks, State facilities managed by DGS, and higher education facilities.
  • Set aside $300 million in GO bonds for allocation by the General Assembly. The substantial amount for the General Assembly reflects a small share of the historic amount of resources (potentially over $3 billion between GO authorizations, bond premiums, and general fund balances) available to the State for capital projects in fiscal 2023. If the Governor’s budget submission does not adhere to these proposals, SAC will reconvene and consider a higher authorization level for fiscal 2023 only that keeps the State well within the affordability ratios.

As to the long-range plan, the committee supports the CDAC debt affordability criteria, which limits debt service to 8% of State revenues and debt outstanding to 4% of State personal income. However, the committee is concerned that the CDAC’s recommendation through the planning period, which returns the authorization level to the amounts currently programmed beginning in fiscal 2024 ($1.125 billion), fails to account for recent increases in construction inflation.

Accordingly, the committee recommends rebasing GO bond authorization levels beginning in fiscal 2024 to $1.205 billion and include annual 4% increases instead of the 1% currently recommended by CDAC.

Higher Education Debt

The University System of Maryland (USM) intends to issue up to $30 million in academic debt for fiscal 2023, which is the same amount authorized in fiscal 2022 and is consistent with the amount programmed in the 2021 CIP for fiscal 2023. This level of issuance will result in a debt service ratio within the 4.5% of current unrestricted funds and mandatory transfers criterion recommended by the system’s financial advisers.

The committee concurs in the recommendation of CDAC to allow for $30 million in new academic revenue in the 2022 session for USM.

Payment of Debt Service

During the fiscal challenges of the last decade, the State has allocated premium revenue from the sale of GO bonds to paying debt service. However, paying debt service with the proceeds from bond sales is not an efficient approach to paying debt service when large general fund balances are forecast. Therefore, the committee recommends dedicating bond premiums from the sale of GO bonds solely to capital projects in fiscal 2023.

State Employment

The committee is concerned about the high level of vacancies in State government and the general deprofessionalization of its workforce. Considering the State’s budget outlook, the committee recommends that the fiscal 2023 budget include funding for general salary increases and targeted salary enhancements to classes with significant vacancies.

The Department of Budget and Management (DBM) should also consider one-time payments, such as recruitment and retention bonuses, to attract qualified employees to the State. In addition, DBM should explore the creation of subsidized apprenticeships and other career pathways in all agencies with hard-to-fill positions, focusing both on upskilling current employees and recruiting new employees beginning in high school.

Infrastructure Investment and Jobs Act

The enactment of the federal Infrastructure Investment and Jobs Act of 2021 reflects historic investment in the nation’s infrastructure priorities – funding improvements across all modes of transportation, water systems, and broadband. Of the $727 billion in grants of interest to states, Maryland expects to receive more than $7.2 billion.

As was witnessed with the swift yet successful allocation of prior COVID-19 relief assistance during the 2021 session, resources are most effective when there is a collaboration of priorities between the branches of government.

As such, the committee expects the Administration to work with the General Assembly to develop the State’s plan for using resources available through the Infrastructure Investment and Jobs Act. This includes resources allocated to Maryland via formula and specifically concerning the planned uses of the funds and decisions regarding pursuing competitive grants that require a State match.

The Spending Affordability Committee studies and reviews the status and projections of State revenues and expenditures and the status and projections of the Maryland economy. The Committee’s purpose is to limit the rate of growth of State spending to a level that does not exceed the rate of growth of the State’s economy.

Annually, the Committee recommends to the Governor and Legislative Policy Committee the fiscal goals of the State government budget for the next General Assembly session. Committee recommendations cover levels of State spending, new debt authorization, and State personnel, and the use of any surplus funds.

Stay tuned to Conduit Street for more information.

Useful Links

Spending Affordability Committee Meeting Materials

Previous Conduit Street Coverage: Board of Revenue Estimates Approves Another $1 Billion Write-Up

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