Maryland’s U.S. Representative Dutch Ruppersberger, along with U.S. Representative Randy Hultgren, an Illinois Republican, have sponsored a bill to bring back the federal tax break on advance refunding bonds. The federal tax exemption for the refinancing tool was removed in the federal tax reform bill.
Advance refunding bonds allow counties to refinance tax-exempt municipal bonds to save taxpayer money on outstanding debt. Previously, counties could issue one advance refunding bond per municipal bond – saving taxpayers billions nationwide on public infrastructure. That ended December 31, 2017.
I’m proud to lead this bipartisan effort on behalf of local governments in Maryland who rely on this tool to finance projects that benefit everyone. We need to do what we can to help local governments create jobs while building roads, schools, hospitals, fire and police stations. When counties can issue an advance refunding bond, it saves taxpayers billions nationwide – and an average of nearly $37 million annually here in Maryland. This can translate into lower property taxes.
Federal tax reform could negatively affect the market for municipal bonds, increasing the cost of infrastructure projects for state and county governments.
Budget analyses prepared by the Department of Legislative Services for the General Assembly contain a wealth of information.
In this week’s presentation of the Operating Budget Analysis of Public Debt to the Budget and Taxation Committee, the Department describes how federal tax reform could decrease demand for municipal bonds with carry-over effects on the cost of debt for state and county governments.
The State of Maryland and counties use municipal bonds to finance a variety of public works projects, including transportation infrastructure.
From the Analysis’s Effect of Reducing Taxes on the State and Municipal Bond Market:
Most State GO bonds issued by the State are tax-exempt bonds. The purchaser of these bonds does not have to pay federal taxes on the bonds’ interest earnings. This makes these bonds especially attractive to individuals in high income tax brackets and corporations. This reduced the top bracket on individual taxes from 39.6% to 37% through calendar 2025 and reduces the top corporate income tax rate from 39% to 21% permanently. Lower tax rates reduce the amount of tax avoided by investing in tax-exempt bonds.
The Department describes the basis for this change:
Financial institutions, like banks and insurance companies, are estimated to own 25% of tax-exempt bonds. These institutions would require a higher interest rate to purchase tax-exempt bonds.
Some reports note that owners of pass-through entities, such as partnerships and Subchapter S Corporations, may also be less likely to purchase tax-exempt bonds, thereby dampening the demand and driving up prices.
DLS estimates the effect of these additional costs based on findings of a research firm’s data from the federal tax reform debates. DLS found that the State’s premium would have been reduced from $94 million to between $56 million and $69 million in its most recent bond sale in August 2017 because of higher rates.
Governor Larry Hogan, flanked by Comptroller Peter Franchot and Secretary of Budget & Management David Brinkley, today announced the “Commitment to Education Act of 2018,” a proposal to ensure that taxes on casino revenues set aside for education are used to supplement, not supplant state funding for public schools. According to Governor Hogan, his plan will add $1 billion in school construction funding and $3.4 billion in operating funding for public schools over the next ten years.
According to Governor Hogan, his legislation would phase-in casino revenues to a special fund (the “lockbox”) over the next four years. The first 20% percent would be used for school construction projects (around $100 million next year) and the rest would be used to supplement operating budgets.
The Administration is expected to provide more details on the proposal in the coming days.
Stay tuned to Conduit Street for more information.
Maryland residents among those most impacted by the costs of the crisis.
When it comes to the opioid epidemic, some costs are easier to quantify than others leaving the full scope of impact open to estimation.
Governing reports on the national and local efforts to tie a full dollar figure to the impacts of the epidemic:
In November, S&P Global Ratings looked at Medicaid spending, which the authors reasoned was one of the few available state-by-state comparison measurements on the opioid crisis. The report noted that 3 in 10 non-elderly adults on Medicaid struggled with opioid addiction in 2015 — double the rate of 2010.
The S&P report found that the states with the biggest impact on their finances included Kentucky, New Hampshire, Ohio, Rhode Island and West Virginia.
Data that has been collected by AEI shows that Maryland is among the states where residents are carrying a large burden of the costs.
Meanwhile, the American Enterprise Institute (AEI) estimates that the top five places residents shouldering the biggest burden are, in order, West Virginia, the District of Columbia, Maryland, Ohio and Connecticut.
The institute, which will release the full results of its study later this month, incorporated data on the societal cost of opioids from a 2016 Centers for Disease Control and Prevention report and a more recent report from the White House Council of Economic Advisers. Together, those reports concluded the epidemic cost the country a half-trillion dollars in 2015 alone.
The AEI report found that the per resident cost ranged from $465 in Nebraska to $4,793 in West Virginia. Their report took into consideration overdose deaths, abuse disorders, health-care and criminal justice costs, and worker productivity.
The article notes that full picture of financial impacts on the local level have been hard to gather as local governments tend to not calculate opioid-related costs until they become a significant part of their budget. Additionally indirect costs, such as loss of economic productivity and children entering state care due to loss of their parents, remain most difficult quantify.
MACo Associate Director Barbara Zektick submitted written testimony to the House Ways and Means Committee in opposition to House Bill 129 and House Bill 296, “Income Tax – Subtraction Modification – Retirement Income of Correctional Officers”, on February 7, 2018.
These two similar pieces of legislation are among a number of subtraction modification bills that would mandate reductions in local revenue by reducing an eligible individual’s taxable income. Due to the clear fiscal impact that these modifications would have on local governments and their ability to provide needed community services, counties generally oppose such changes.
Additionally, the effects from federal tax reform on local and county government revenues are still uncertain.
MACo suggests that consideration be given instead to providing state tax credits, which do not mandate the depletion of resources from all counties for education, public safety, and needed community services.
Counties welcome the chance to work with state policymakers to develop flexible and optional tools to create broad or targeted tax incentives, but resist state-mandated changes that preclude local input.”
Follow MACo’s advocacy efforts during the 2018 legislative session here.
The Department of Legislative Services (DLS) is recommending that the General Assembly reduce disparity grant allocations in the Governor’s proposed budget by $2.7 million, affecting Prince George’s, Somerset and Wicomico counties.
Disparity grants are grants to low wealth jurisdictions with higher local income tax rates, intended to smooth out the effects of disparities in income tax revenue generation potential. The Governor’s proposed budget allocates $140.8 million in disparity grants, according to the formula. The Budget Analysis explains how that formula works.
For fiscal 2019, Cecil, Prince George’s, Somerset, Washington, and Wicomico counties are receiving increases from the fiscal 2018 grant, while the grant to Baltimore City declines under the formula. Unlike other counties, Cecil’s increases results from its raising its local income tax rate from 2.8 percent to 3 percent.
At the briefing of the analysis before the House Appropriations Committee, the DLS analyst indicated that the Governor had not cut these grants this year, as he had last year- but sometimes DLS “can’t help themselves” from recommending disparity cuts, anyway.
Secretary of Budget and Management David Brinkley testified that the Administration did not concur with the recommendation and instead preferred full funding of the disparity formula according to law. Chair McIntosh said, “good.”
The Governor’s 2019 budget proposal increases state public education funding by 2.5%. The bump is a combination of mandated formulaic increases and $15.2M in hold-harmless grants to ensure no jurisdiction receives less state education aid than it did in 2018.
The majority of State education aid falls into one of three categories.
General Education Aid
General Education Aid provides a minimum level of operating support for all students, driven by total student enrollment and local wealth. The foundation program is the main program in general education aid and accounts for almost half of State education aid. The foundation program ensures a base level of funding. The foundation program is calculated by multiplying the per-pupil foundation amount by local enrollment.
At the statewide level, the foundation formula is designed to have the State pay roughly 50% of program costs; however, the State’s share for the less wealthy jurisdictions is higher than 50% and the State’s share for more wealthy jurisdictions is lower than 50% (wealth equalization).
The amount of State aid that a jurisdiction receives is based on FTE student enrollment and local wealth
No jurisdiction may receive less than 15% of the base per-pupil amount from the State
Other General Education Aid
Geographic Cost of Education Index (GCEI): GCEI is a Maryland‐based index that adjusts the amount of State aid a local school system receives based on regional differences in the cost of educational resources.
The GCEI formula does not reduce funding for jurisdictions where educational resources are less expensive
Unlike every other major State aid program, GCEI was not mandated until fiscal 2017
GCEI only applies to the foundation program and the State pays the State and local shares
Guaranteed Tax Base: GTB provides additional funds to jurisdictions with less than 80% of the statewide wealth per pupil that provide local education funding above the minimum local share required by the foundation program.
The State provides the funds that would have been generated locally if the jurisdiction had the wealth base that is guaranteed
Per pupil GTB amount for any one local school system is limited to 20% of the per-pupil foundation amount provides a minimum level of operating support for all students, driven by total student enrollment and local wealth.
Targeted Education Aid
The targeted formulas recognize the additional costs associated with educating certain student populations:
Special education (0.74 X base level of funding per pupil)
Compensatory education (based on free and reduced-price meal status) (0.97 X base level of funding per pupil)
• Prekindergarten funding is accounted for in the compensatory education formula
Limited English proficiency (0.99 X base level of funding per pupil)
Although the State provides approximately 50% of the total estimated cost of each program, local governments are not required to provide the other half. Funding amounts and distributions are based on local wealth and enrollments of the three targeted student populations, however, no jurisdiction may receive less than 40% of the full per-pupil amount from the State.
Noninstructional State Aid
Student Transportation: Each local school system is required to provide transportation to and from school for all public school students.
Transportation funding consists of a base grant that is adjusted annually and a per pupil grant based on the number of students with special transportation needs
Other Noninstructional Aid: Includes early education, food service, adult education, and a variety of innovative programs.
Teacher Retirement Costs
Prior to 2012, the State paid 100% of teacher retirement costs
In 2012, legislation required locals to share in the cost of retirement
Retirement aid is not wealth equalized
In fiscal 2016, local share ranged from 25%-30%
The Maryland Commission on Innovation and Excellence in Education, Known as the Kirwan Commission because it is chaired by former University System Chancellor Brit Kirwan, is charged with reviewing and assessing current education financing formulas and accountability measures. The Commission was originally set to complete its work in time for the 2018 session of the General Assembly, but last October asked for an extension when it became clear the deadline was not realistic.
Maryland lawmakers on Tuesday unveiled a plan to amend the state constitution to ensure that taxes on casino revenues set aside for education are used to supplement, not supplant state funding for public schools.
Also this week, Baltimore City became the latest jurisdiction to announce plans to file lawsuits against opioid manufacturers, doctors, and so-called “pill mills,” in an effort to stem the drug abuse epidemic that is killing tens of thousands of Americans each year.
Could a compromise be in the works for the restoration of local highway user revenues? A new wave of bills may be pointing in that direction.
Finally, the Department of Legislative Services (DLS) has released their annual report detailing state aid to local governments and local effects of the state budget. The report includes details on virtually every component of state aid to local governments in the proposed FY 19 budget.
On the latest episode of the Conduit Street Podcast, Kevin Kinnally and Michael Sanderson break down the plan to place casino revenues in an education “lockbox,” analyze the possible outcomes of opioid litigation, discuss the new wave of highway user revenue bills, highlight some interesting tidbits from the DLS report, and more!
MACo has made the podcast available through both iTunes and Google Play Music by searching Conduit Street Podcast. You can also listen on our Conduit Street blog with a recap and link to the podcast.
If you are having trouble using this media player, listen on our website.
The Department of Legislative Services has released several reports that detail information on local governments, and local effects of the state budget. As always, these reports represent an extraordinarily valuable resource for county officials and financial managers.
The Department of Legislative Services has prepared this overview document to provide legislators and the public with a better understanding of the fiscal and social issues confronting local governments in Maryland. Topics discussed in this report include the following:
• Structure of Local Governments
• Demographic Indicators
• Local Government Finances
• Tax Rates for Local Governments
• Local Revenue Growth
• County Salary Actions
• Public School Funding and Student Enrollment
• Local General Fund Balances
• Local Debt Measures
• Balance of State Payments
This report includes detail on virtually every component of state aid to local governments in the proposed FY 19 budget. Most areas are shown county-by-county, with comparisons to the prior year, and with additional analysis reflecting trends or changes important to the programs.
This report looks at local revenue sources and tax bases, with a variety of comparisons across jurisdictions and over time. Once again, the detail in these analyses makes the report deeply valuable for local professionals and policy makers.
The January distribution of local income tax revenues includes the final reconciling distribution for tax year 2016 and the interest/penalty distribution for the first half of fiscal year 2018. The January distribution to the counties totals $57.8 million, a 12.1% decrease from last year. This distribution will be made on January 31, 2018.
Reconciling distributions can be volatile, in part because they typically involve higher income households. Additionally, while the number of tax returns processed through the first half of the fiscal year was essentially equal to the number of returns processed by this point last year, 2.9 million (Table 3), more of the returns were processed earlier in the year compared to the same time period in 2016.
This distribution is the last tax year 2016 distribution; any remaining revenue from tax year 2016 activity will be distributed through the delinquent distributions and, ultimately, the unallocated distribution for tax year 2016. Year to date, cumulative local income tax distributions total $4.6 billion (Table 2), a 0.6% increase over the same time period last year.