Conduit Street Podcast: County Collaboration on Tax Reform, Lockbox Redux, Employer Mandates, and Bad Docs

The MACo Legislative Committee formally adopted a statement this week to express its views on broad-based tax reform proposals pending before the General Assembly, designed to react (in various ways) to the recently enacted federal tax reforms. Absent state action, some Maryland taxpayers would see an increase in their state and county tax liability — the potential means to offset these changes sit before the legislature in multiple variations of changes to deductions, exemptions, rates, and brackets — each with distinct distributional effects.

Governor Larry Hogan this week announced a “lockbox” proposal to ensure that taxes on casino revenues set aside for education are used to supplement, not supplant state funding for public schools. Last month, legislature leadership announced a plan to place a constitutional amendment on the November ballot. The ballot question would ask voters to approve of putting a “lockbox” on casino money (around $500M per year), requiring it to be used for education above the amount set by state formulas. The Governor’s proposal would not require a referendum, it would be done through statute.

The House Economic Matters Committee voted down SB 304, Maryland Healthy Working Families Act – Enforcement – Delayed Implementation, which would have delayed implementation of the Maryland Healthy Working Families Act until July 1. The vote was 12-11. The focus now turns to a new wave of employer mandate proposals.

A proposal to strengthen Maryland’s Prescription Drug Monitoring Program is likely to spur a debate over who should have access to the database and under what circumstances. As heroin and opioid deaths continue to skyrocket in Maryland, County Health Officers could play a vital role in sharing vital information and best practices with identified prescribers, and increase awareness and improve intervention efforts in cases of patients who may be doctor shopping.

On the latest episode of the Conduit Street Podcast, Kevin Kinnally and Michael Sanderson break down MACo’s position on broad-based tax reform proposals, discuss the competing education “lockbox” initiatives, examine employer mandate proposals, preview the looming debate on Maryland’s PDMP, 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.

Listen here:

If you are having trouble using this media player, listen on our website.

The Effect of Less Desirous Debt

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.

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The cost of borrowing could increase for State following federal tax reform, according to the Department of Legislative Services. The same effect could be seen in the county market for municipal bonds, a vehicle for local transportation infrastructure projects.

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.

For more information, see the Effect of Reducing Taxes on the State and Municipal Bond Market from the Budget Analysis.

Hogan Announces Plan for Casino Revenue “Lockbox” to Boost Education Funding

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.

Last month, legislature leadership announced a plan to place a constitutional amendment on the November ballot. The ballot question would ask voters to approve of putting a “lockbox” on casino money (around $500M per year), requiring it to be used for education above the amount set by state formulas. The Governor’s proposal would not require a referendum, it would be done through statute.

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.

Preventative Maintenance Saves County Funds in the Long Haul

MACo Policy Associate Kevin Kinnally testified in support of House Bill 403, “Community Colleges – Facilities Renewal Grant Program – Established”, before the House Appropriations Committee on February 13, 2018.

The bill establishes a grant program that would provide for needed improvements, repairs, and maintenance at community colleges. Counties currently are a part of a state-local cost formula that allows both parties to contribute to the funding responsibility. This investment could promote long-term cost savings through preventative action on smaller maintenance projects.

From MACo Testimony:

The grant program envisioned in this legislation will provide helpful assistance in tackling maintenance projects that will improve the learning environments of community college students and may extend the life of community college facilities, a joint investment of counties and the State of Maryland.

The facility renewal program will fund for small renovations those projects with total estimated costs of less than $1 million. Under this legislation, each year beginning in fiscal 2019, the Governor must appropriate 5% of the annual appropriation for the Community College Construction Grant Program to the new facility renewal program.

The funds would be distributed evenly to community college applicants, with no college generally receiving more than $500,000 grant funding in one fiscal year, and with community colleges alternating years in which they receive grants. In this way, the program assures that all community colleges statewide are provided with some assistance for needed renovations and improvements.”

Follow MACo’s advocacy efforts during the 2018 legislative session here.

Conduit Street Podcast: #FixtheFund, Opioid Litigation, Wave of HUR Bills, Local Aid Intrigue, and more!

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.

Listen Here:

If you are having trouble using this media player, listen on our website.

Another Way To Skin the School Construction Cat

MACo Research Director, Robin Eilenberg, testified in support with amendments of Senate Bill 92, “Maryland School Overcrowding Reduction Act of 2018”, in front of the Senate Budget and Taxation Committee on January 31, 2018. This bill aims to change current school construction laws that would increase flexibility for county and local governments in their ability to seek alternative financing for school construction.

While counties support this increased flexibility, in addition to the potential of lowering school construction costs, there are concerns about underlying laws surrounding the treatment of capital leases under school funding rules that are not addressed in the bill.

From MACo Testimony:

While this legislation makes some changes to existing law, however, it does not address a central hurdle to experimentation – a lack of clarity in the treatment of capital leases under school funding rules.

Incentives for counties and school boards to reduce school construction costs could help spur best value development and renovation. The incentive program envisioned in this legislation, however, misses an opportunity to encourage cost-effective practices across all types of construction, whether traditional or alternative.”

Follow MACo’s advocacy efforts during the 2018 legislative session here.

Final Knott Commission on School Construction Report Released

The final report is released for the Commission Chair’s briefings for the House Appropriations Committee and Senate Budget and Taxation Committee.

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Many recommendations in the Knott Commission Report aim to streamline processes and reduce school construction costs.

The 21st Century School Facilities Commission (Knott Commission) final report has been released and the recommendations, at first glance, seem to be largely in line with the Commission’s prior discussions.

In the briefing for the House Appropriations Committee, Delegate Maggie McIntosh, Chair of the Committee, made opening remarks and stated that the Report would be put into bill form and could be a major piece of legislation to come out this year.

Martin Knott, Chair of the Commission, spoke of 4 needs in school construction:

  1. Flexibility for locals and streamlining processes;
  2. Incentives for positive construction practices;
  3. A focus for the role of the State on providing technical assistance to small school systems with fewer resources; and
  4. Transparency in existing facility conditions.

Knott also spoke about the need to prioritize school facilities that support educational goals, and emphasized the importance of the State remaining a strong partner in funding school construction.

The four areas described by Knott are generally aligned with MACo’s school construction advocacy. County governments share responsibility for financing K-12 school construction with the State, whose funding depends on statutory formulas and regulations. MACo advocates efforts to promote the smartest and most effective funding for modern schools, and urges State policymakers to retain the State’s strong commitment to this top funding priority.

During the briefing, Knott noted the Commission’s consensus on the recommendations. Delegate Ghrist also noted during the hearing that the Governor’s Office was fine with the final report’s recommendations.

Alternative Financing

One subject of the Commission’s discussions was alternative financing. As Knott said, the Commission took a long and hard look at this area.

MACo has advocated for alternative financing law reform to expand the tools available for counties and school boards as they seek the most effective options for school construction and renovation.

Included in the recommendations are several items for alternative financing. For example, the report recommends that the State:

  • Explore the possibility of creating a school construction authority that includes members with expertise in school construction to accelerate State school construction funding and provide more flexibility for financing school construction projects;
  • Provide technical assistance to help facilitate P3s, such as developing template lease agreements between developers and school systems;
  • Encourage innovation through alternative financing by providing a financial incentive to assist one or more LEA(s) interested in pursuing alternative financing to cover the associated risks;
  • Consider allowing school systems to enter into long-term lease agreements for school buildings;
  • Explore the feasibility of regional (multi-district) school construction projects including regional P3 zones.

MACo will post the full report here when it is available online.

Governor Budgets More Dollars for School Construction

The Governor’s FY 2019 budget contains millions more in capital improvement program funding — the central source of state funding for Maryland school construction.

The following chart shows the Governor’s FY 2018 budget proposal for school construction, the General Assembly’s final capital budget for FY 2018, and the Governor’s FY 2019 budget proposal.

Screenshot 2018-01-19 14.50.41

Additional capital funding is provided to schools with high enrollment or high numbers of relocatable classrooms, and to Baltimore City schools, under separate statutory provisions.

The General Assembly may add or subtract funding from the capital budget. The General Assembly may not take final action on the capital budget until they have passed the operating budget. Following the General Assembly’s passage of the capital budget, the capital budget bill must be signed by the Governor and is subject to the Governor’s line-item veto power.

As described by the Department of Legislative Services:

Unlike the operating budget, in acting on the capital budget bill, the legislature
may amend the budget to add and delete projects from the capital bond program. The legislature may also increase project funding and add contingent, conditional, or restrictive language to the bill regarding how the funds may be applied.

For more information, see Maryland’s Budget Process from the Department of Legislative Services and the FY 2019 Governor’s Budget. Within the capital budget book, here is a direct link to the school construction program section.

Maryland FiRST Receives Funding in Governor’s Proposed Budget

The Governor’s FY 2019 Capital Budget includes $32,240,000 for the public safety communications system.

As described in Governor Hogan’s 2019 Capital Budget, his allocation of funds to the Department of Information Technology include $10,500,000 to continue construction of a statewide unified public safety radio communications system, and $21,740,000 to complete construction of a statewide unified public radio system.

 

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MD FiRST coverage map courtesy of the Department of Information Technology.

MACo has advocated for continued funding for the MD FiRST program in the past. The system is critical for several Maryland counties that use it on a daily basis as their primary public safety radio network. It will also be essential for all counties statewide to communicate with each other, the state, and regional and federal partners during response to regional emergencies.

More information about MD FiRST

Prior coverage: MACo Asks Governor To Fully Fund Lingering Budget Items (2016)

The Capital Budget Process

The General Assembly may add or subtract funding from the capital budget. The General Assembly may not take final action on the capital budget until they have passed the operating budget. Following the General Assembly’s passage of the capital budget, the capital budget bill must be signed by the Governor and is subject to the Governor’s line-item veto power.

As described by the Department of Legislative Services:

Unlike the operating budget, in acting on the capital budget bill, the legislature
may amend the budget to add and delete projects from the capital bond program. The legislature may also increase project funding and add contingent, conditional, or restrictive language to the bill regarding how the funds may be applied.

For more information, see Maryland’s Budget Process from the Department of Legislative Services and the FY 2019 Governor’s Budget.

Here is a direct link to the Governor’s Proposed 2019 Capital Budget.