Conduit Street Podcast: Pondering Potential “Pay-Fors”

On the latest episode of the Conduit Street Podcast, Michael Sanderson and Kevin Kinnally discuss ways in which Maryland could increase state revenues. A lingering structural deficit, coupled with new and expensive funding proposals, could bring forth a plethora of revenue-generating policy proposals, sometimes known as “pay-fors” — literally, paying for something that the government wants to buy.

Listen here:

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.

You can listen to previous episodes of the Conduit Street Podcast on our website.

Useful Links

Previous Conduit Street Coverage: Tax Foundation: Wayfair Q&A

Previous Conduit Street Coverage: Fiscal Briefing: Budget Outlook & Local Aid Loss

Pry Back the Door on School Construction Funding

The Capital Debt Affordability Committee enters a discussion of State and County school facility funding as they work towards a recommendation on the State’s debt levels. 

The second of three meetings of the Capital Debt Affordability Committee included questions and comments from the committee’s membership, which include State Treasurer Kopp, and State Budget Secretary Brinkley, and State Comptroller Franchot.

The Committee heard presentations from the Department of Budget and Management and the Director of Public School Construction. In an overview, the Department of Budget and Management described how school construction continues to be the largest slice of the State’s capital debt pie.

The Director of Public School Construction, reporting for the Interagency Commission on School Construction, described the challenges presented by rising school construction costs in recent years.

“The cost of school construction has been outpacing capital improvement program spending for a number of years” – Maryland Interagency Commission reports to the Capital Debt Affordability Committee

The Director of Public School Construction requested a total fiscal year 2020 capital allocation of $419.6 million. That figure includes $310 million for the capital improvement program and additional funding for construction programs targeted to address school overcrowding, school safety, indoor air quality, and improvements for aging schools. The Director also shared his goal to refine estimates for school construction cost needs in future years through use of a statewide facility assessment.

The discussion of the Committee, which will make its recommendation for State debt levels at its next meeting, revealed their interest and insight in the dynamics of the shared state and county responsibility for school construction. This dynamic is somewhat unique to Maryland as local school boards do not have a separate authority to raise revenue in our State.

Topics raised by the Committee included:

  • Eligible costs as a limiting factor in the State’s school construction participation;
  • Comparable commitments of county governments and the State toward school construction funding;
  • Whether Maryland provides more school construction funding than other states; and
  • The absence of a State fund dedicated to school maintenance costs.

For more meeting background, see September 12, 2018 Meeting Materials of the Capital Debt Affordability Committee.

Revenues, Taxes, and Wynne — Updates from State’s Chief Economist

Andrew Schaufele, Director of the Bureau of Revenue Estimates, briefed MACo’s Legislative Committee Wednesday, September 12, 2018 on the state of the State’s economy. 

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Director of the Bureau of Revenue Estimates, Andrew Schaufele

Schaufele delivered good news regarding the state’s revenues — there’s a $504 million surplus! This was 2% more than estimated, much of which has been attributed to capital gains. Of that surplus $200 million has been set aside to help fund changes anticipated to occur as a result of the Kirwan Commission. The state also beat sales tax estimates.

Schaufele also provided updates on:

  • The Wynne Case. Challenges are ongoing with three separate cases in the courts. As was reported on Conduit Street, the Office of the Attorney General has formally requested the Circuit Court of Anne Arundel County to review the Maryland Tax Court’s ruling which essentially raises the Wynne Case refund interest rate from three to 13 percent – a decision which would likely cost Maryland counties $30 to $40 million. County attorneys have been engaged on this issue filing amicus briefs and working with the Attorney General’s office.
  • Federal Tax Reform. Tax payer reactions to federal tax reforms add a level of uncertainty to estimates. However early data shows that shifts in tax payments and deductions have impacted the flow of money into the state and counties to the tune of tens of millions of dollars in the immediate years to forecasts of hundreds of millions of dollars in future years.

Members of the MACo Legislative Committee include representatives from Maryland’s 23 counties and Baltimore City. The committee meets regularly on Wednesdays at the MACo office during the general assembly session. During the interim, the committee meets quarterly to develop legislative priorities for the coming year.

For more information:

MD AG Seeks Judicial Review of Wynne Whammy (Conduit Street)

Court Strikes Wynne Interest Rate, Costing Counties $30 Million (Conduit Street)

First Quarter Income Tax Distributions: Tax Reform Impacts Materialize (Conduit Street)

This Dollar Doesn’t Go As Far

Federal tax reform’s negative implications on state infrastructure financing are adding up in Maryland.

At the meeting of the Capital Debt Affordability Committee this week in Annapolis, a presentation by the Office of the Treasure described a few of the negative implications of federal tax reform on Maryland’s ability to finance infrastructure through general obligation bonds.

As described by the Office of the Treasurer:

The 2017 cuts to corporate and individual federal tax rates impacted the cost of
Maryland’s general obligation bond program in a few key ways:

  • Lower tax rates led to decrease in demand for tax avoidance vehicles, including tax-exempt municipal bonds, which contributed to a roughly 50 bps spike in yields for AAA paper at the beginning of 2018
  • Qualified Zone Academy Bond program was eliminated, which will increase the debt service costs of certain school renovation projects
  • Tax exemption for advance refunding bonds was eliminated, which makes it
    more difficult to realize savings on existing debt

All of these changes will increase the cost of the State’s capital program moving
forward.

During the debates in Washington, the National Association of Counties and others voiced concerns regarding the implications of  the elimination of tax exemptions on state and municipal borrowing. MACo urged Maryland’s Congressman and advocated to preserve the tax exemption on municipal bonds for similar concerns.

An increase in the cost of financing infrastructure projects means that tax dollars spent on building schools, roads, and other needed infrastructure do not stretch as far. With labor costs also increasing in recent years, additional investment is already required to keep pace and maintain aging public facilities. Putting the two together, each project becomes more costly, at a time when projects are already becoming more costly.

While the final federal tax reform legislation preserved the municipal bond tax exemption, the tax exemption on advanced refinancing bonds was eliminated.

As described by Investment News,

The biggest hit to the muni bond market was the elimination of so-called advanced refunding, which allowed municipalities to issue new tax-free bonds to pay off existing debt.

During the meeting of the Capital Debt Affordability Committee, Comptroller Franchot raised concerns regarding how the elimination of the tax exemption for advanced refinancing bonds might be affecting Maryland counties and other entities.

For more information on Maryland’s debt program, see the complete powerpoint of the Office of the Treasurer and this coverage from Investment News.

State Enjoys $339M Windfall, Leaders Advised to Save

Attendees at the MACo Summer Conference session, Navigating Murky Waters: Predicting Unpredictable Revenue Streams heard the State’s top revenue estimator Andrew Schaufele discuss how difficult estimating revenues has become – and how much of that has to do with the top 1 percent having most of the money, and earning much of it through capital gains.

This week, the State announced that as it closes out fiscal 2018, it has received 2 percent in revenues above estimates – a total of $339 million in unanticipated dollars for public services. A large chunk of that – $218.7 million – came from the personal income tax, which came in at 2.4 percent above revenue estimates. The latter matters for counties, which receive their own “piggy back” local personal income tax.

The windfall, Schaufele states, largely results from capital gains realizations – a revenue source which is basically unestimatable:

In this era of extraordinary volatility, we have estimated no growth in capital gains to deter large negative variances, opting for the lesser of two evils.

Comptroller Peter Franchot urges State leaders to pocket the extra cash:

I urge our state’s leaders to regard this year-end boost like an unexpected bonus to be saved for future use, not to be spent immediately.

Sure enough, in his closeout report, Schaufele provides a foreboding prediction:

….surely in the future there will be an unpredictable correction that will reverse these good fortunes.

Of course, that future period will most certainly take place after the November election.

Conduit Street Podcast: Digging Deeper on “Elevating Teaching,” Candidate Shuffle, & More!

On the latest episode of the Conduit Street Podcast, Michael Sanderson and Kevin Kinnally discuss the latest news from the Kirwan Commission, including new recommendations on pre-K, teacher pay, and college and career readiness, and explain the process for replacing a candidate for public office in the event they decline their party’s nomination, which is exactly what happened this week in Prince George’s County

Listen here:

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.

You can listen to previous episodes of the Conduit Street Podcast on our website.

Useful Links

Previous Conduit Street Coverage: Kirwan Commission Begins Finalizing Recommendations

Previous Conduit Street Coverage: Kirwan Commission Considers Major Pay Increase for Teachers

Previous Conduit Street Coverage: Mathis Drops Out of Prince George’s County Executive Race, Will Endorse Alsobrooks

Revenue Forecasters Share Tricks to Their Trade at #MACoCon

County revenues generally come from property and income taxes – but how much should an administrator, elected official or budget officer expect to receive each year? This question has become increasingly difficult as counties still recover from the Great Recession, tax reform leads to uncertainty, and growth trends shift with an aging population and changing income sources. Even the State has modified its revenue projection processes, accounting for increased volatility. What’s a county to do?

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Andrew Schaufele, Director of Bureau of the Revenue Estimates: when more tax revenue comes from the top 1%, as it has, revenues become harder to estimate
.

MACo Summer Conference attendees learned how state revenue estimators and county budget officers predict the future in unpredictable environments at the session, “Navigating Murky Waters: Predicting Unpredictable Revenue Streams,” on Friday, August 17, 2018 at 2:15 pm.

The session began with Andrew Schaufele, Director of Bureau of the Revenue Estimates from the State Comptroller’s Office showing how his office anticipates state revenues during volatile times, and how he provides counties valuable information about county income tax revenues.

He spoke at length about the structural change that occurred to our economy after the Great Recession – and how his office quickly had to adjust its revenue estimating models to accommodate for this permanent change.

John Hammond, longtime Budget Officer for Anne Arundel County showed how he uses his magical crystal ball to inform county officials about how much revenue they can expect to receive in future years. He stressed the importance of maintaining a reserve fund balance to guard against volatility, and applying one-time revenue sources to capital expenditures, rather than operating.

Finally, Jonathan R. Seeman, Director, Budget, Finance & Information Technology, Queen Anne’s County provided perspective on how smaller counties must provide revenue projections with limited resources. He demonstrated how Eastern Shore counties experience some of the most volatile income tax receipts in the state- and why the November distribution of local income taxes is so important.

The session was moderated by The Honorable Kevin Hornberger of Maryland House of Delegates.

MACo’s 2018 Summer Conference was held August 15-18 at the Roland Powell Convention Center, in Ocean City, MD.

State Proposes Volkswagen Remediation Spending Plan, $12M for Counties

The Maryland Department of the Environment (MDE) has a plan to spend an additional $76 million on specific projects to reduce diesel emissions from the transportation sector – and it plans to make about $12 million of those funds available to counties.

In 2015, the federal government found Volkswagen AG liable for violations of the Clean cars and air pollutionAir Act, because from 2009 to 2016, the company sold diesel vehicles with devices installed that allowed for illegal amounts of nitrogen oxide emissions. The resulting settlement agreement with the automobile manufacturer created the Environmental Mitigation Trust Fund, which includes $2.7 billion earmarked for projects that remediate excess nitrogen oxide emissions from the air.

Maryland is eligible to receive about $75.7 million of that money – but first it must complete and have approved a plan for how it will allocate the funds. After consulting with the Maryland Departments of Energy and Transportation, MDE released its draft plan this week outlining how it plans to spend the money.

The draft includes spending 15.8 percent of the funds – about $12 million – on projects proposed by local governments and communities:

Local Governments and Communities and Environmental Justice (15.8%): Local governments and communities will be given a chance to submit project ideas for funding. Funding will be awarded on a competitive basis based on the primary goals of this spending plan. Proposals from highly affected communities (communities with heightened levels of ground-level ozone) will be weighted. A portion of the funds will be set aside specifically for transit bus and school bus replacements.

MDE will be accepting comments on the proposed Mitigation Plan until close of business on August 31, 2018. Comments can be emailed to mde.vw@maryland.gov.

MDE is also already accepting proposals from counties and others for eligible mitigation projects that can potentially be incorporated into future versions of Maryland’s Mitigation Plan. Those wishing to propose a project for inclusion in the plan may complete and submit this form by close of business on December 31, 2018.

Those sending comments or proposals by mail may use this address:

Mobile Sources Control Program
Maryland Department of the Environment
1800 Washington Blvd. Ste. 705
Baltimore, MD 21230

Helpful Links

Infrastructure Investment, One Oyster at a Time

oyster-989182_1280Governor Larry Hogan is providing millions of dollars in additional funding for oyster recovery efforts. The source? The Transportation Trust Fund.

About $8 million from the fund will support the Department of Natural Resources (DNR) over the next four years. According to DNR’s press release, the funds will support “ongoing and future [oyster] industry efforts, including dedicated funding for equipment, labor, material, supervision and support.”

Increased funding will go toward oyster propagation and replenishment efforts through 2023 with no less than $925,000 annually going to support the wild oyster fishery, with the Department of Natural Resources coordinating with county oyster committees and watermen on shared projects and priorities, including the establishment of oyster seed areas, monitoring, sampling, seed and shell plantings, surveying and transplanting.

Deputy Transportation Secretary Jim Ports alludes to the transportation nexus in the release:

The Chesapeake Bay is a great source of business to both the Helen Delich Bentley Port of Baltimore and the oyster industry. Thanks to our partnership with the Department of Natural Resources, this new oyster restoration agreement provides even more money directly to Maryland watermen to ensure a sustainable oyster industry for years to come.

Oyster experts also join forces with port powerhouses at the MACo Summer Conference general session, “The Wealth in our Water,” on Thursday, August 16 from 12:45 pm – 1:45 pm. Maryland Port Administration’s Dominic Scurti joins the Oyster Recovery Partnership’s Ward Slacum and Andrea Vernot, President & Managing Partner of Choptank Communications, to discuss the deluge of ways the Bay keeps Maryland’s economy flowing – from tiny oysters to supersized ships.

The 2018 MACo Summer Conference will be held August 15-18 at the Roland Powell Convention Center in Ocean City, Maryland. This year’s theme is “Water, Water Everywhere.”

Learn more about MACo’s Summer Conference:

 

Vanderbilt Study: Tennessee Pre-K Program Shows Disappointing Results

Children participating in Tennessee’s Voluntary Pre-K (VPK) program were more likely than those who didn’t attend the program to need special education services and showed higher instances of school rule violations in later grades, according to the latest results of an ongoing study by researchers at Vanderbilt University.

The researchers also found no differences in attendance rates between students who enrolled in the pre-K program and those who didn’t, and that VPK had no effects on attendance and retention in the later grades.

According to the Vanderbilt Study:

The inauspicious findings of the current study offer a cautionary tale about expecting too much from state pre-k programs. The fact that the Head Start Impact study – the only other randomized study of a contemporary publicly funded pre-k program – also found few positive effects after the pre-k year adds further cautions (Puma et al., 2012).

State-funded pre-k is a popular idea, but for the sake of the children and the promise of pre-K, credible evidence that a rather typical state pre-k program is not accomplishing its goals should provoke some reassessment. It is apparent that the phrase “high-quality pre-K” does not convey enough about what the critical elements of a program should be.

Expanding “high-quality” pre-kindergarten for all four-year-olds and low-income three-year-olds is a hallmark of the [Kirwan] Commission on Innovation and Excellence’s preliminary report. As previously reported on Conduit Street, the Early Childhood Education workgroup, one of four workgroups tasked with costing out the Commission’s preliminary recommendations, last week released initial cost estimates for expanding high-quality, full-day pre-K in Maryland — and the numbers are staggering.

According to the workgroup, expanding “high-quality,” full-day pre-K to low-income (300% FPL) three- and four-year-olds in Maryland would cost approximately $1 billion.

The Commission’s four working groups will continue working to develop a consensus on the design, implementation plan, and cost for each of the preliminary recommendations. Once the working groups have completed their work, they will present their recommendations and cost estimates to the full Commission. The chair will work with staff and consultants to develop a draft cost estimate based on the recommendations of the working groups for the full Commission’s consideration.

The 2016 Commission on Innovation and Excellence in Education was created by legislation introduced in the General Assembly. The Commission membership parallels that of the earlier Thornton Commission.

Learn more about the Kirwan Commission and its efforts to ensure that Maryland students receive a fair, equitable, and high-quality education at the MACo Summer Conference session “Angling for Educational Excellence: Kirwan 2.0.” The session will be held from 10:15 -11:15 am on Saturday, August 18.

Speakers:

  • Dr. William “Brit” Kirwan, Chair, Commission on Innovation and Excellence in Education
  • The Honorable Craig Rice, Council Member, Montgomery County
  • The Honorable William Valentine, Commissioner, Allegany County

Moderator: The Honorable Maggie McIntosh, Maryland House of Delegates

The 2018 MACo Summer Conference will be held August 15-18 at the Roland Powell Convention Center in Ocean City, Maryland. This year’s theme is “Water, Water Everywhere.”

Learn more about MACo’s Summer Conference: