This Has to Change

By Adam Pagnucco.

Going into this year’s budget deliberations, the County Council was told two important things.

First, county budget director Jennifer Hughes wrote the following on April 5.

The County Executive’s recommended budget, released on March 15, 2018, closed a $208 million budget gap, raising the cumulative amount of budgetary shortfalls resolved in County Executive Leggett’s proposed budgets to more than $3.7 billion. Due to many economic pressures, the shortfalls between projected budget demands and projected revenues will likely continue into the foreseeable future. Our income tax revenues are projected to grow only modestly and the economic recovery continues to be modest and fitful. Additionally, we have not yet adjusted our revenue projections to reflect the effects of H.R. 1, the Tax Cuts and Jobs Act of 2017 (TCJA). There will be an impact on our revenues due to TCJA although the magnitude of the impact is uncertain at this time.

Second, the council’s own senior legislative analysts wrote this on April 27.

FY18 tax revenue is now estimated to be $106.1 million below the FY18 approved budget, and $11.1 million below the estimate from December’s estimate. FY19 tax revenue projections are $76.8 million below the FY19 projections made less than one year ago.

So shortfalls “will likely continue into the foreseeable future” because the economic recovery is “modest and fitful.”  The GOP’s federal tax law could be a problem.  And next year is already projected to see a $76.8 million shortfall after this year’s shortfall, which was over $100 million.

Suppose you were an elected official reading that information.  What would you do?  Perhaps you might say, “Wow, things are kind of tight.  We need to cut back a little because if there is a downturn, we are going to have a problem.”

That’s not what happened.  Instead, the council tapped a total of $77.7 million in one-time fund transfers to finance ongoing spending both this year and next year.  Here are the one-shot revenue sources we know about:

$62.4 million in retiree health fund money (for FY18)

$4 million from the Public Election Fund (FY19)

$10.5 million from the Employee Health Benefit Self Insurance Fund (FY19)

$800,000 inter-fund from Park and Planning (FY19)

$77.7 million total

Believe it or not, there could have been more.  There were serious discussions of financing additional spending by tapping into retiree health money a second time.

The council was justified in taking money out of the Public Election Fund since its balance ($11 million) far exceeds the likely total cost of public financing this cycle.  But the $10.5 million transfer out of the county employees’ health insurance fund is problematic since it contains premiums paid by employees in addition to taxpayer money.  A group of employees has already sued to stop such transfers although both the Circuit Court for Montgomery County and the Court of Special Appeals have ruled against them.

This continues a pattern we have written about before: the council’s practice of using one-shot revenues to pay for ongoing spending on top of the Executive’s budget.  The council has used such methods to add many millions to the budget over the years, though it’s hard to tell exactly how much came from one-time sources because their financing methods are not posted along with the items that are added.  As a result, this is all rather opaque even for someone such as your author who used to participate in the council’s budget process.  (Yes, that makes me part of the problem!)

The council might reply by citing the fact that the county has enjoyed a triple-A bond rating for a long time.  That’s true.  There is much to recommend about the county’s financial practices, including its top-notch pension plan funding ratio (currently 92%) and its reserve ratio, now close to ten percent of revenues.  But the bond rating agencies care primarily about one thing: can bond issuers repay their debt?   Because the county contains a subset of very wealthy neighborhoods and has demonstrated a repeated willingness to raise taxes on them (along with the rest of us), we have a pretty low risk of default.  That probably allows us to get away with using band-aids a little more than some other triple-A jurisdictions that have less resources , like Prince George’s.

Ultimately, the bond ratings agencies’ interests are not identical to county residents.  The ratings agencies are perfectly happy to see more tax hikes that go to debt service.  They are less concerned with whether residents get better services to go along with higher taxes.  That’s our business.  And here is what is happening, folks.  The economy is not as great as our elected officials say it is.  Even Ike Leggett’s own budget director says, “the economic recovery continues to be modest and fitful.”  The county is resorting to band-aids, transfers and using money that is supposed to go to health insurance to add more ongoing spending.  Eventually, if it keeps doing such things, those options are going to dry up when the next recession comes.  And if the next downturn is bad enough, there will be three options on the table.

Raise taxes – again

Lay off county employees

Lose the bond rating

This has to change.  We need elected officials who can prioritize spending and exercise restraint now to head off problems later.  If you agree, remember that on Election Day.