DLS Suggesting Highway User “Swap” For General Fund Relief

As reported earlier today, the Department of Legislative Services (DLS) has recommended that the General Assembly eliminate the extra local transportation funds provided in the Governor’s proposed budget, to be distributed to local roads and bridges. They recommend only continuing funding current funding levels.

In a Senate budget subcommittee briefing, DLS staff indicated that they will be recommending using the Governor’s proposed “capital grants” to backfill a proposed cut to traditional formulaic highway user revenues to counties. They will propose diverting those funds to fill gaps in the General Fund supporting the Maryland State Police. More on those recommendations will apparently come later in subsequent budget hearings.

But what about the “lockbox” law that Maryland voters passed by referendum in 2013, prohibiting the use of Transportation Trust Fund transfers to balance the General Fund? Surely that protects diversion of highway user revenues, which flow from the Transportation Trust Fund?

No so. The “lockbox” law includes an exemption for highway user revenues. Under the Maryland Constitution,  Article III – Legislative Department,  Section 53:

[T]he funds in the Transportation Trust Fund may be used only:

(1) For the purpose of paying the principal of and interest on transportation bonds as they become due and payable; and

(2) After meeting debt service requirements for transportation bonds, for any lawful purpose related to the construction and maintenance of an adequate highway system in the State or any other purpose related to transportation. ….

This section does not apply to an allocation or use of highway user revenues for the counties, municipalities, or Baltimore City that is authorized under Title 8, Subtitle 4 of the Transportation Article[.]

At today’s hearing, Maryland Transportation Secretary Pete Rahn testified that he disagreed with the proposal, in part because it runs against the intent of the “lockbox” law. Did voters realize, when they voted for this Constitutional amendment, that it would not protect against raiding funds for local roads and bridges – 83 percent of the cited “highway system in the State?”

Seems unlikely.

DLS Analysts Recommend “Flat Funding” Local Road Funding, Again

The Department of Legislative Services has recommended that the General Assembly eliminate the extra “capital grants” provided in the Governor’s proposed budget, to be distributed to local roads and bridges. They recommend only funding the limited extra amount required to maintain current funding levels.

The DLS analysis of the Department of Transportation, Office of the Secretary includes these recommended reductions:

Baltimore City funding reduced from 5,484,423 to 2,000,000
County Governments reduced from 27,422,115 to 4,000,000
Municipal Governments reduced from 20,109,551 to 19,000,000

The analysis, and the presentation from the staff during the hearing, allude to future recommendations that may work in concert with this funding reduction to address technical concerns raised by DLS.

For further background on this county priority issue, and the DLS objections, see previous Conduit Street coverage: Highway User Revenues – What’s On The Table?

Maryland’s Tax Structure Among the Most Stable

A report from the Pew Charitable Trusts ranks Maryland’s state tax system as the third most stable among all fifty states.

The report, assessing the volatility of state revenue sources, was released this week. From the Pew website:

Nationwide, overall state tax revenue had a volatility score of 5.1 for the 20 years ending in fiscal 2015, up slightly from 2014’s score of 5.0. This means that total tax revenue across the states typically fluctuated 5.1 percentage points above or below its overall growth trend. Tax revenue was more volatile than the national benchmark in 30 states and less so in 20 states.

Maryland rated a volatility score of 3.5 on the Pew index – with only South Dakota and Kentucky grading a lower score. That indicates that the Maryland system of revenues is less prone to dramatic fluctuations year to year than that of most other states.

Visit the Pew website for more details, and an interactive map including the report’s findings.

MACo Supports Consensus Bill Creating New Local POS Formula Committee

MACo Policy Associate Kevin Kinnally testified in support of legislation (HB 105) that would reconstitute and revive a statutory committee responsible for reviewing the formula used to allocate local Program Open Space dollars before the House Appropriations Committee on January 31, 2017 . The Department of Natural Resources (DNR) sponsored the bill.

Language in the Joint Chairman’s Report (JCR) for the FY 2016 capital budget required the formation of a comprehensive workgroup to look at various land preservation programs and their funding, including local side POS. From the MACo testimony:

The JCR narrative specifically required the workgroup to study and make recommendations regarding “the status of the requirement to evaluate the Program Open Space – Local allocation formula annually by a committee.” HB 105 represents the workgroup’s findings on the committee, which has not met since the early 1980s.

HB 105 reconstitutes the committee with appropriate state and local representatives, specifies that the committee serves in an advisory role to the Department of Natural Resources, requires the committee to meet before the end of 2017 and then at least every five years thereafter, and clarifies the factors and criteria the committee must consider when reviewing the local POS apportionment formula.

Local POS is a successful and necessary program that assists county governments in both land acquisition and preservation and the development of recreational facilities. HB 105 updates essentially obsolete sections of Maryland’s Code and creates an improved mechanism to review the local POS apportionment formula.

MACo Legal and Policy Counsel Les Knapp, Maryland Association of County Park and Recreation Administrators (MACPRA) President and Anne Arundel County Department of Recreation and Parks Director Rick Anthony and Howard County Parks and Recreation Director John Byrd participated in the creation of HB 105 during the 2015 interim, along with state and municipal representatives.

Useful Links

HB 105 of 2017

MACo Testimony on HB 105

DNR Website

Highway User Revenues – What’s On The Table?

County governments, still feeling the permanent effects of devastating cutbacks to state roadway funding, have made restoring Highway User Revenues a perennial legislative priority.

In this article, we explain the Governor’s proposed funding in the FY 2018 budget, its components, and where it fits into the broader debate about a multi-year restoration back to historic funding levels.

Part 1 – Highway User Revenues, Deep Cuts Linger

Technically, Highway User Revenues (HUR) are not a budget line item, but rather they are a statutory distribution of the transportation revenues themselves. A share of fuel taxes and other transportation revenues, set by state law, is directed to local governments through the HUR formula. The dramatic drop in that funding is illustrated in the Department of Legislative Services’ “Overview of State Aid To Local Governments” below:

In the FY 2018 proposed budget, the Governor does not make any changes to Highway User Revenues per se. The distributions to local governments remain in place — 1.5% across 23 counties, and 0.4% across the municipalities. Because transportation revenues are expected to decline slightly, so will these local distributions (compared to the amount in FY 2017).

Part 2 – Extra Grants, Take One (FY 2016 and onward)

Given the Governor’s commitment to restore local road funding, he introduced a multi-year restoration bill during his first legislative session, in 2015. That bill failed, but the Governor has remained committed to the principle, and in his subsequent budget has introduced extra funding – in the budget, not by statute – to make comparable distributions.

2015-transp-grantsIn 2015, the Governor proposed a supplemental budget, with $25 million in new “transportation grants” to local governments. The essential effect of this extra funding was to keep funding flat for each of the three recipients of HUR (because municipal governments has previously received a special municipal-only grant from other sources, their share of the $25m was the largest). The General Assembly passed the budget with that funding intact – thereby creating a two-tier funding for local roadways, using a combination of Highway User Revenues (by statutory allocation) and Grants (by a budget line item). The grants were designated to be distributed (among municipalities and counties) according to the same formula as HUR, and their use was restricted to the same purposes as HUR funding. While they look different in the budget, these funds are effectively just an additional layer of HUR funding.

Part 3 – Extra Grants, Take Two (proposed for FY 17, and again for FY 18)

After the General Assembly did not pass legislation requiring a phase-in restoration of HUR, the Governor still followed through on his intention to fund incrementally more funds, beginning in FY 2017. The Governor proposed to do so by expanding the extra transportation grants, to effect the first year of the 8-year phase-in proposed in his own bill (HB 484 of 2015). This extra $28 million layer of funding was proposed to be distributed more in keeping with the traditional HUR formula:  $23.7m across 23 counties, $3.5m to Baltimore City, and $1.4m to municipalities.

During the 2016 legislative session, this funding was passed by the full Senate, and passed by the full House. However, in a surprise late-session decision, the conference committee appointed to resolve differences in the budget plan struck the final layer of grant funding — and the $28 million of new funds was struck from the budget, leaving only the “hold harmless” grants to continue for a second year.

fy18-proposed-transp-fundingThe Governor has responded by submitting a FY 2018 budget, once again, with the first installment of the phase-in funded as extra grants. The county-by-county detail on these grants is available online from the Department of Legislative Services.

The debate for the General Assembly, again this year, will primarily be the affordability of the “new capital grants” — the line in the chart at left totaling $28 million. That is the difference between a simple flat-funding budget and the first installment toward a multi-year restoration of local road funding – a top priority for MACo.

Is The Terminology “Capital Grants” A Problem?

At the February 1 meeting of MACo’s Legislative Committee, DLS Director Warren Deschenaux offered his opinion that the term “capital grants” for the extra transportation funding was a misnomer – in budgeting parlance, “capital” refers to buildings and permanent structures – and would not ordinarily include the sort of routine maintenance and repairs that constitute the bulk of local Highway User Revenues spending. This follows on similar concerns raised by the staff analysts during last year’s debate.

A solution exists, though, as recommended by the staff analysts:

To ensure adequate oversight by the General Assembly, it is recommended that language be added to the budget bill making the appropriation of this local transportation aid contingent on enactment of legislation modifying the HUR formula and authorizing transfer of the appropriation to the operating program of the State Highway Administration (SHA) to be distributed pursuant to changes made by that legislation.

In other words – eliminate the special capital grants, and simply add the extra distributions via the original statutory formula distribution of transportation revenues. This could be done for one year only, or in some ongoing basis. By placing the new revenues in the HUR statute, all the assurances and protections of that longstanding program would apply, and the full range of proper uses would be continued. The technical issue has a fairly simply solution – particularly in a year where a budget reconciliation bill is expected to be part of a final fiscal package.

The Road Ahead For The 2017 Session

MACo, the Maryland Municipal League, sympathetic legislators, and many other stakeholders who support the restoration of local roadway funds will focus on:

-retaining the funding level provided in the proposed FY 2018 budget

-pursuing a statutory change to lock in a multi-year restoration of funds back to historic levels

DLS Releases Abundance Of Helpful Local Financial Data

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.

Local Government Finances and Demographics

From the Introduction:

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
• County Salary Actions
• Demographic Indicators
• Public School Funding and Student Enrollment
• Local Government Finances
• Local General Fund Balances
• Tax Rates for Local Governments
• Local Debt Measures
• Local Revenue Growth
• Balance of State Payments

Overview of State Aid

This report includes detail on virtually every component of state aid to local governments in the proposed FY 18 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.

County Revenue Outlook

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.

Two Year Charts

State Aid to Local Governments – Two Year Charts by Aid Program

State Aid to Local Governments – Two Year Charts by Governmental Entity

Analysts Propose Cost Shift Onto Local Health Departments

In the February 1 budget hearing for the Department of Health and Mental Hygiene’s Office of the Secretary, analysts from the Department of Legislative Services proposed a $1.6 million cost shift to local health departments to oblige them to absorb costs of contractual employee health insurance.

The narrative from the DLS presentation explains the rationale:

There are two large increases within the DHMH Administration allowance for fiscal 2018. The first is an increase of $1.6 million to cover the cost of health insurance premiums for contractual employees at local health departments. However, this increase is entirely different from how DHMH and the local health departments cover the cost of health insurance premiums for the regular employees at the local health departments. Normally, these costs would be billed to the local health departments through the budget, and it would be up to each local health department to determine how they would come up with the funds to cover these costs, whether through the funds that they receive through the Core Local Health formula or through any other State or local funds that they receive. The Department of Legislative Services recommends that this cost be covered using the same budgeting methodology as for regular local health department employees, and thus recommends reducing these funds.

If approved, this would further reduce effective state funding for health departments (already subject to a funding freeze at last year’s levels in the budget reconciliation bill), and likely be offset with service cutbacks.

MACo To Ways & Means Committee: Prioritize Schools, Infrastructure

On Tuesday afternoon, January 31, MACo’s President Baltimore County Executive Kevin Kamenetz, Board Member Allegany County Commissioner William Valentine, Associate Director Barbara Zektick and Executive Director Michael Sanderson spoke to the House Ways & Means Committee on MACo’s 2017 legislative initiatives. The MACo panel followed Department of Legislative Services’ analysts, who presented a wealth of information contained in the report, Overview of State Aid to Local Governments: Fiscal 2018 Allowance.

County Executive Kamenetz started the briefing by calling the Committee’s attention to this year’s budgetary provision making counties responsible for nearly all operating costs for the assessment and directorial functions of the State Department of Assessments and Taxation (SDAT) – 70 percent in fiscal 2018, and 90 percent for every year thereafter. He remarked that making counties pay for an agency over which it lacked any managerial authority compromised the agency’s impartiality concerning assessments, and generally would lead to inefficiencies in governance.

About school construction, he said:

School construction costs have risen rapidly over the past ten years for a variety of reasons, including labor markets, regulatory changes, increases in enrollment, and programmatic shifts. Even though costs have increased, the State’s commitment has not. This has left counties primarily responsible for shouldering cost increases.

Commissioner Valentine asked for support for a Local Infrastructure Fast Track for Maryland, calling attention to counties’ many infrastructure needs:

Prior to FY 2010, local governments received 30% of highway user revenues – and now they receive less than 10%. And yet, local governments own and maintain 83% of our roads. County leaders from all across the State, from both parties, and from both rural and urban areas agree that these devastating cutbacks have gone much too far and lasted too long.

Committee Vice Chair Frank Turner asked about the rationale for the SDAT cost shift, suggesting that it seemed unfair to counties.

State Restores School Construction Money for Baltimore City, Baltimore County

The state’s Board of Public Works reinstated $10 million of school construction money for Baltimore City and Baltimore County Wednesday, after the school districts presented plans to install air conditioning in overheated classrooms.

The decision came as the board, which includes Governor Larry Hogan, Comptroller Peter Franchot, and Treasurer Nancy Kopp, held its annual “begathon,” in which superintendents from around the state are summoned to Annapolis to discuss their requests for school construction money.

According to The Baltimore Sun,

The city plans to cool all of its schools within five years, and the county has plans to install air conditioning within four years.

“We really appreciate the effort,” Gov. Larry Hogan told city schools CEO Sonja Santelises.

But Hogan and Comptroller Peter Franchot were less enthusiastic about Baltimore County’s plans.

“I have some healthy skepticism … I think the jury is still out,” Franchot told county schools Superintendent Dallas Dance.

The total state budget for school construction is $334 million. The board was discussing the first 75 percent of that amount — $213 million. The requests are for the budget year that begins July 1.

School superintendents were called before the board in alphabetical order to pitch their plans and answer questions, a process expected to last well into the afternoon.

In the current budget year, the board withheld $5 million from the city and $10 million from the county over the lack of air conditioning in schools.

After the meeting, Santelises said she was pleased to receive the $5 million that had been withheld.

“The real win is for the city, and that we now have an example of what it means to come together around something,” she said.

Santelises said the school system will need to figure out which projects to spend the money on.

“The release of this $5 million will allow us to get some vital infrastructure projects done,” she said. “It’s a big deal.”

Baltimore County, likewise, will need to evaluate how to spend the money that is being released, Dance said. He said he plans to return to the Board of Public Works to offer more details on how the final 13 schools will get air conditioning, in hopes of getting the rest of the money that was withheld.

“We’re excited to get the $5 million back but as I shared with the governor, I hope we can add $5 million to that very soon,” he said.

While money was restored for Baltimore city and Baltimore County, the board withheld from Howard County $9.6 million of next year’s school construction money.

Hogan said he was not satisfied with Howard Superintendent Renee Foose’s answers to questions about how a mold problem at one of the county’s schools has been handled.

Hogan indicated the money could be restored after the board reviews a report on the issue that’s forthcoming and “we can really assess what’s going on with the mold issue.”

Useful Links

Baltimore Sun Article

Previous Conduit Street Coverage of the “Begathon”

Why Do Five Jurisdictions Lose $45M In Education Funds?

Governor Larry Hogan last week released his fiscal 2018 budget and accompanying Budget Reconciliation and Financing Act of 2017, boasting that it “responsibly holds the line on spending without raising taxes, cutting services, or raiding special funds.” For education, Hogan said, his plan would fully fund the state’s spending formulas for K-12 and community colleges.

It’s true, the budget fully funds K-12 education according to law, at $6.4 billion. Community colleges are also fully funded at $256 million.

However, direct education aid for Baltimore City, Calvert, Carroll, Garrett, and Talbot counties declines by a combined $45 million. Baltimore City is the most deeply affected, with a $38m loss in year-to-year total state education funds.

So, if the Governor has fully funded K-12 education according to law, why are five jurisdictions losing $45 million in educations funds?

Declining Student Enrollments

In Maryland, nearly all state education funding is distributed on a per-pupil basis, meaning that the more students a school system serves, the more funding it receives.

By contrast, when the number of students declines, schools can experience a sudden drop in funding. School systems often strive to offer equivalent courses and programs, even with fewer students. This dynamic can strain local budgets – reflecting the reality that not every dollar spent in a school system is truly a “variable cost.” A 1% drop in students across a county school system may mean some cost savings in bus transportation and meals service – but may not have any effect on the majority of system-wide costs for education and administration.

Wealth Calculations

That strain is compounded when a decline in enrollment flows through wealth formulas, as most state education aid does. As a county’s overall tax base is divided by fewer students (for a per-pupil wealth calculation), the jurisdiction appears more wealthy under state wealth formulas, and its aid amounts are adjusted downward. Thus, not only does the system receive funding for fewer students, it also receives fewer dollars per student – a troubling compounding effect.

One of the factors in calculating the per pupil foundation amount is each county’s wealth, which is calculated using net taxable income and property values. In 2013, determination of NTI was changed to account for taxpayers who file later in the year, and in turn, cause the calculation to increase for certain counties and therefore reduce their per pupil foundation amount.

Looking Ahead

The Kirwan Commission, whose work has already commenced, has been charged with evaluating a wide range of issues with school funding — with a close look at the wealth calculation and annual funding changes among their topics.

However, with the abrupt drop in funding, it seems likely that the General Assembly may, working with the Governor, seek to find a temporary remedy to address these “cliff effect” funding decreases.

Previous Conduit Street Coverage

DLS Budget Briefing

Kirwan Commission Recommendations