By Adam Pagnucco.
After arguably the worst communications debacle in county government history, the Elrich administration is now belatedly defending its recommended FY21 operating budget. But we are waaaaaaay past that now. Whatever one thinks of Elrich’s budget, it is obsolete.
That’s because it is based on revenue projections from an economy that no longer exists.
Virtually everyone paying any attention understands that the economy is in ruins. That’s not just true for MoCo; it’s true for the entire country and beyond. J.P. Morgan is now projecting that the nation’s second-quarter gross domestic product could decline at an annualized rate of 5-10%. In Maryland, unemployment claims are at nearly five times their regular levels. Here in MoCo, tens of thousands of employees are now enduring cuts in work hours – if not outright layoffs – in the industries most affected by the “social distancing” used to combat the coronavirus. Consider 2018 Montgomery County employment in the following industries from the U.S. Bureau of Labor Statistics.
Restaurants and other eating places: 29,647
Services to buildings and dwellings: 13,585
Personal and laundry services: 5,852
Child day care services: 4,854
Fitness and recreational sports centers: 4,005
Performing arts and spectator sports: 1,469
Motion picture theaters: 494
Wage losses in these industries are certain to show up in reduced income tax receipts. Because of the nature of these kinds of jobs, the affected workers will likely never recover that income. All of this is going to profoundly hit the county budget. And it is coming in the middle of the county’s budget process, which normally concludes in mid-May.
As Fred Sanford used to say, this is the big one!
We haven’t seen anything quite like the coronavirus pandemic in a century, but we have seen economic crises before. The last one MoCo encountered happened a decade ago. The Great Recession had been underway since 2008 but did not truly destroy the county’s budget until the spring of 2010. As required by the county’s charter, then-County Executive Ike Leggett released his recommended FY11 budget on March 15. Just ten days later, Leggett sent a memo to the county council explaining that circumstances had changed since his budget was transmitted. Leggett wrote:
I am sending this memorandum to recommend that we jointly take additional actions to strengthen the County’s financial position in the current fiscal year and for FY11.
There is no perfect time to formulate a budget. Since I recommended my budget earlier this month, we have already received more bad news that points to additional fiscal deterioration. This includes a dramatic increase in the County’s unemployment rate from 5.2% to 6.2% and may signal further erosion of income tax revenue. In addition, Anne Arundel County’s bond rating was recently downgraded from a AA+ to a AA rating due to several factors including the deteriorating condition of Anne Arundel’s reserves. At the same time, the Department of Finance has been in discussions with the bond rating agencies relative to an upcoming bond sale and is concerned about feedback they have received from the rating agencies on our fiscal position.
At that time, Leggett recommended increasing the energy tax and transferring money from non-tax supported funds into the general fund, which is the county’s main vehicle for funding most governmental functions.
On April 5, Leggett followed with a second memo explaining that the county’s March income tax distribution had fallen significantly and that Moody’s had placed the county on a watch list for a potential bond rating downgrade. Things were getting worse. Leggett wrote that he “asked the OMB and Finance Directors to meet with the department heads of all large County Government departments to identify outstanding, remaining purchases and reimbursements for FY10 or early FY11.”
On April 22, Leggett sent a third memo to the council outlining a $168 million writedown in income tax revenue and a resulting total fiscal gap of “approximately $200 million.” Leggett forwarded a long list of recommended spending cuts along with a larger increase to the energy tax to close the gap. By this point, Leggett had essentially re-written his recommended budget, which was released just 5 weeks earlier.
The resulting budget passed by the council in May was the ugliest budget in county history. It broke collective bargaining agreements, furloughed county employees, doubled the energy tax and spent 4.5% less money than the prior year’s approved budget, the first actual dollar spending cut that anyone could remember. But it did not resort to mass layoffs and the county kept its AAA bond rating. For all its fiscal brutality, this budget saved the county from financial disaster. It was Leggett’s greatest achievement and it was shared by a county council that did its job.
Today’s policy makers should heed the lessons of 2010. (The only current elected officials who were in county office that year were Council Member Nancy Navarro and then-Council Member Marc Elrich, who is now the executive.) Chief among them are that teamwork, honesty, speed, an absence of finger pointing and political courage were all crucial to success. No one was trying to score points. Everyone was trying to do their best. Amazingly, it all happened in an election year.
Here is what must happen now.
1. Elrich must stop defending his recommended budget. It no longer matters whether it was a good budget or not. It’s not going to happen now. The actual revenues generated from the county’s emaciated economy will not support it. And once the council starts making changes, he has to be constructively involved, as Leggett was. Standing aside and taking potshots from the sidelines would be a failure of leadership.
2. The finance department must revise its revenue estimates, especially for income taxes. Leggett’s finance department was able to see a deterioration in income tax receipts within three weeks of the release of his recommended budget. Today’s finance department must react with the same speed.
3. The office of management and budget must prepare a menu of savings options for the council. Everything – Elrich’s collective bargaining agreements (which now contain raises of up to 7-8%), hiring freezes, attrition and more – needs to be on the table. The council must know what number it needs to hit and they need to have choices on how to get there.
4. A discussion must take place about the county’s reserves. As of FY20, the county’s reserves (including its agencies) were estimated to be more than $500 million, or 10.5% of revenues. That’s a lot higher than the 6% reserve level possessed by the county in 2010 and is a direct result of Leggett’s long-term plan to bolster reserves and maintain the bond rating. It’s a great goal to have a 10% reserve, but that money is kept available for emergencies – and that’s exactly what we have now. County leaders should discuss whether we need to maintain reserves at that level or if they can be used to plug government spending holes and/or to fortify the economy. Comptroller Peter Franchot has already recommended that $500 million be allocated from the state’s rainy day fund to assist small businesses.
5. With public participation in the budget process limited by the coronavirus, the county must keep residents and businesses informed of the latest budgetary and economic developments. The county has a large media apparatus that it can tap for doing so.
Ike Leggett proved that he was up to the task of dealing with a crisis. Now it’s time for today’s elected officials to show that they are too.