Tag Archives: budget

Is MoCo’s Budget in Trouble?

By Adam Pagnucco.

Montgomery County’s $120 million budget shortfall has set off political fireworks this election season, including attacks from Delegate Bill Frick (D-16), who is running for Executive, and Republicans who question how taxes could be going up while revenues are going down.  County Council incumbents pooh-pooh it, insisting that the budget decline is unremarkable and the economy is strong.  County Executive spokesman Patrick Lacefield, who once predicted that any loss of the county’s $30 million in liquor profits would cause a big property tax hike, now says that the $120 million shortfall is “pretty small” at just 2.2 percent of the county’s budget.

What is going on here?  Is MoCo’s budget in trouble?

First, the incumbents are right to point out that mid-year corrections, including budget savings plans, are not uncommon.  Between FY08 and FY11, the County Council approved five mid-year cut packages ranging from $30 million to $70 million each due to the Great Recession.  In FY16, the council approved a $54 million savings plan associated with the U.S. Supreme Court’s Wynne decision and disappointing income tax receipts in the prior year.  While mid-year cuts happen occasionally, it’s important to note that their history indicates that they are often – but not always – produced by looming economic problems.

So what’s causing this one?  No one is totally sure yet, but there seems to be two phenomena at work.

Declining Income Tax Payments from the Wealthy

In Maryland, the state collects income taxes on behalf of local governments and remits them in periodic distributions.  Part of MoCo’s problem originated in its November income tax distribution from the state, which includes extension filers who tend to be disproportionately very wealthy.  It’s difficult to forecast income tax payments from wealthy people because their dependence on capital gains and business income can be volatile.  The chart below from the state’s Bureau of Revenue Estimates contrasts the annual change in average federal adjusted gross income between all MoCo taxpayers (pink bars) and the top 100 MoCo taxpayers (blue line).  Income change for all taxpayers usually varies by single digits each year while income for the super-wealthy almost always varies by double digits.  This creates serious forecasting challenges for the county government since the super-wealthy have a material impact on its budget.

One relevant fact is that the November distribution may be down by 29% in MoCo but, according to the state, it is also down by 30% in Howard County and 26% in Baltimore County.  One thing these three jurisdictions have in common is that they all have substantial concentrations of very wealthy people.  That suggests that some of MoCo’s problem is not specific to the county but rather to variations in the incomes of the super rich.

Why is this happening?  One explanation lies in capital gains income.  Council analyst Jacob Sesker writes:

To a large degree, that volatility is the result of the year-to-year variations in the capital gains income of a small number of County residents. Illustrating this point, part of the projected FY18 decline in income tax revenue can be traced to a sharp drop in the capital gains of the County’s top 50 taxpayers, who realized gains in tax year 2016 that were 50% of the gains realized in tax year 2015, resulting in $21 million less in County income tax revenue (Revenue Administration Division of the Maryland Comptroller). Staff’s review of tax return data published by the Comptroller indicates that roughly 1.8% of Montgomery County returns report income of $500,000 or greater. On average, these returns explain more than half of any year-to-year increases in income tax revenue, and explain more than 100% of any year-to-year declines in income tax revenue.

Another factor could be the tax bills being considered by Congress, which contain numerous large cuts for wealthy individuals and corporations.  The super wealthy could be deferring capital gains and business pass-through income to next year when they would be subject to significantly lower rates.  If true, that would mean less income tax revenue this year but perhaps more next year when the deferred income is reported.  That’s just a theory but it can’t be ruled out.

Broader Economic Weakness

There are other facts that can’t be explained by the tax planning of the super wealthy.  First, FY17 (the year of the 9% property tax hike) closed out with $25 million less than expected.  Second, the county is writing down $206 million over the next six years in property taxes, energy taxes, transfer taxes, recordation taxes, telephone taxes and hotel taxes in addition to a $212 million income tax writedown.  The energy tax revision alone is $100 million over six years.  The reason for that is unclear, but it’s worth remembering that since commercial energy users pay roughly double the tax rates of residential users, some assumptions regarding employer energy use may be operative here.  It seems unlikely that a “strong economy” would produce such broad, multi-tax writedowns of the kind just put forth by the county.

What’s the bottom line?  Over the years, we have learned that under most circumstances, economic trends usually matter more than singular events.  One good year should not cause irrational exuberance and one bad tax distribution should not cause panic.  Whether the recent shortfall turns out to be meaningful or not, MoCo’s serious budgetary challenges are long term in nature.  They relate to decade-plus trends of lagging growth in employment and income, repeated funding of ongoing spending with one-time revenue sources and the county’s recent passage of large tax hikes and expensive employment laws at the same time, a unique combination among Washington-area jurisdictions.  That is on top of any targeting of Maryland and general economic insanity by Congress.  The big question is not about one tax distribution from the state but whether a combination of all these long-term factors will catch up with MoCo in a really bad way in the next couple years.

That’s a question for the next Executive and County Council.

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Bill Frick: Name One Program You Would Cut

Name one program in the county budget that is not working and can be cut.  Tell us how much in annual savings that would yield.

For too long, Council members have used the County budget as a piggy bank to fund their pet projects and ideas, often ones that could not survive a serious cost/benefit review.

As we reorient County government to be a constituent-consumer focused organization, we can find savings.  For example, the county employs nearly 40 personnel in its 311 call center, despite the dramatic shift in technology away from phone calls and towards electronic communications.  If Montgomery County complemented this with a constituent service app, as exists in neighboring jurisdictions, many constituent services would be routed directly to the relevant agencies instead of going first through bureaucratic call centers, and we could save taxpayer money.

Finally, the County should not be a leader in corporate welfare.  I would end our tax credits for investors, money that goes from everyday taxpayers straight to the pockets of wealthy investors, often to reward them for making investments they would have made regardless.  This is a fight I led at the state level as the architect of the Tax Credit Evaluation Act, legislation to spotlight and reform our runaway subsidies, and by going toe-to-toe with Hollywood to make sure our tax dollars were being spent productively.

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Roger Berliner: Name One Program You Would Cut

Name one program in the county budget that is not working and can be cut.  Tell us how much in annual savings that would yield.

I have been a leading proponent of trying to find ways that our county could operate more efficiently.  Working with the County Executive, I was the lead sponsor of legislation that created the Organizational Reform Commission, led by a diverse and talented group of citizens to identify ways we could make our county government more efficient.  However, at the end of the day, while there were steps we were able to take that made our county government more efficient, direct dollar savings were not significant.

I have for years argued that the County Executive should move to what is known as “zero based budgeting”.  What is zero based budgeting?  “Zero-based budgeting is a repeatable process that organizations use to rigorously review every dollar in the annual budget, manage financial performance on a monthly basis, and build a culture of cost management among all employees.”  That would be my goal as County Executive.

In addition to rigorous scrutiny of costs, there are initiatives that you don’t readily think of that can produce cost savings – initiatives like having our county buy 100% renewable power and putting solar on our county rooftops.  Those initiatives alone will save many millions of dollars going forward.  Sometimes doing the right thing actually can save taxpayer dollars!

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George Leventhal: Name One Program You Would Cut

Name one program in the county budget that is not working and can be cut.  Tell us how much in annual savings that would yield.

I will work diligently with the Office of Management and Budget, and with every department, to find savings and process improvements if I am elected to lead this government. I understand the mission of every county department. I have low tolerance for redundancy. I am prepared to prioritize, and to say no to additional spending where saying no is warranted. One place we could start is by looking at how the county provides health care to its employees.

Montgomery County will spend $245 million in FY2018 on employee health coverage. In 2011, I commissioned a Task Force on Employee Wellness and Agency Consolidation, which recommended adoption of an employee wellness program. It took the Leggett administration until 2015 to get the program fully up and running. Between 2017 and 2018, health claims dropped by $3 million, although it is not clear this is statistically significant, or directly caused by participation in employee wellness programs. I am confident that continued implementation of employee wellness efforts will lead to continued reduction in utilization of health benefits, and increased savings.

The task force also recommended consolidating procurement of employee health coverage between county government, the school system and Montgomery College. The school system and the college have declined to adopt this recommendation. School employee unions feared their members might lose their more favorable benefits. However, the county’s Office of Human Resources already administers health benefits among different bargaining units, and could easily administer health benefits for school system and college employees, resulting in substantial overhead savings, and savings from group purchasing. I will continue to advocate for unified administration of health benefits among all three agencies.

Additional overhead savings, and efficiencies from volume purchasing, could also be achieved by consolidating procurement of all goods and services for county government, MCPS and Montgomery College in a single office.

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Marc Elrich: Name One Program You Would Cut

  1. Name one program in the county budget that is not working and can be cut. Tell us how much in annual savings that would yield.

While there’s no one program we could cut that would produce enough savings to fund the education, transportation, and other investments the county needs, I want to explain how I would take a different approach to how the county makes budget decisions.

Montgomery County faces enormous economic and fiscal challenges: slow job growth, federal budget cuts, an aging population, poverty and its attendant social costs, inadequate infrastructure, and rising school enrollment.  Revenue projections indicate that just maintaining current services will continue to be a challenge, not to mention dealing with the costs necessary to address some of the critical unmet needs facing us.  We have to find ways to maintain the services our residents expect while addressing challenges that can impact our quality of life.

The next County Executive will need to get as much value as possible from every tax dollar, and the only way to do that is to bring a new way of thinking to how we spend our $5 billion budget.  While that’s easier said than done, my record shows I can deliver.  During my first term on the County Council, for example, I recognized that the proposed renovation of the Circuit Courthouse had morphed into an incredibly expensive total replacement.  The project didn’t make sense.  I challenged the assumptions behind the change and I ultimately helped save the county tens of millions of dollars by demonstrating that a renovation could be done much more efficiently.

If elected, my team will move away from the county’s traditional budgeting approach, which starts with last year’s spending and adjusts it incrementally.  We won’t balance budgets with across-the-board cuts that punish good programs and protect poor performers.

Our budgets will instead be built from the ground up to achieve the outcomes residents want, such as closing the opportunity gap, reducing commute times, making housing more affordable, and improving public safety.  We will work to foster a culture of innovation, cooperation, creativity, and transparency so we can move away from a “this is how we’ve always done it” mindset into a model of continuous improvement.

What does that mean?  We will work with our employees, nonprofit partners, and our customers – both residents and businesses – to ensure that our service delivery follows best practices and meets our customers’ expectations.  We will insist on accountability and make funding decisions based on performance.  We will publish an annual report, available to everyone, showing how tax dollars were spent, the measurable progress we are making toward our outcomes, and where we need to do better.

I have no doubt that, by realigning work to reflect best practices, insisting on performance accountability, and creating a culture of teamwork, we can operate existing programs more efficiently.  Doing so will allow us to pivot existing human and capital resources to better address the challenges facing us.

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A Reply to Nancy Floreen on MCPS Funding

By Adam Pagnucco.

Thanks to Council Member Nancy Floreen for writing about MCPS funding in recent years in response to my blog post.  First, a note of appreciation.  While we may disagree about MCPS, we agree wholeheartedly on the issue of economic growth, which is the anchor for the county budget.  The political winds on growth shift back and forth in county politics over the decades, but Floreen has consistently pushed an economic development agenda.  She was for jobs before jobs were cool!  All the things the county has done right in economic development – and there have been a few of them – have Floreen’s fingerprints all over them.  It’s one reason why your author admires her and is sad to see her leave the County Council.

Let’s begin with areas of agreement.  First, Floreen is absolutely right about the terrible days of the Great Recession.  The county had not faced anything like it since the 1930s.  Everything had to go on the table in those days – spending cuts, layoffs, furloughs, broken collective bargaining agreements and an energy tax hike – because the alternative was default.  Floreen was Council President in 2010, the worst year of the recession.  She, the County Executive and her colleagues saved the county from fiscal disaster.  That achievement should not be forgotten.

Second, Floreen mentions the state’s teacher pension shift as a stress point on county finances.  Again, she’s absolutely right.  For many years, the state’s payment of teacher pension benefits was the one state program that disproportionately benefited Montgomery County.  That’s because our high cost of living as well as our prioritization of schools leads us to pay higher teacher salaries than the rest of the state, which results in higher pensions.  In 2010, nearly all of MoCo’s state legislators running for election promised not to shift pension costs to the counties.  But in 2012, Governor Martin O’Malley pushed a plan to do exactly that and most of our state legislators voted for it.  The result is that Montgomery County pays roughly $60 million a year for teacher pensions now, more than any jurisdiction in the state.  Compare that to the size of last year’s property tax hike, which was $140 million a year.  No matter what is said about the county, the state should not be let off the hook.

Now to the areas of disagreement.  It’s interesting that Floreen says our blog post is misleading but does not actually refute any of the data on which we rely.  She simply picks other data and disagrees with our characterizations.  We are sympathetic to her problem: it’s hard to refute data that happens to be true!  One thing she contests is our choice of FY10 as a base year for comparison.  We picked FY10 because it was the peak year of overall county spending before the Great Recession fully kicked in.  So comparing FY10 to FY16, the year before the tax hike, is valid because it’s a peak-to-peak comparison that includes both the cuts to departments in the early part of the period as well as the restoration that occurred afterwards.

She also disagrees repeatedly with our referring to MCPS as going through austerity.  Our basis for doing so was the county’s local dollar spending per pupil, which comes from county budget documents and was not contested by Floreen.  In nominal terms, here is the county’s local spending per pupil from FY06 through FY17.

The data shows that the county cut its local per pupil contribution to MCPS for three straight years and froze it for four straight years.  This period greatly exceeds the length of the Great Recession.  The local per pupil contribution went up after last year’s property tax increase.

Last year’s per pupil bump looks significant, but here is the same data adjusted by the Washington-Baltimore CPI and presented in real terms using 2017 dollars.  (We estimated 2017 inflation at 2.02%, the average rate of the preceding years in the chart.)  Clearly, even with the tax hike, the county’s local-dollar commitment to schools is not what it once was.  And the CPI underestimates major cost drivers for the schools, such as the costs of serving rising numbers of students who live in poverty and need language services.

Floreen then talks about the county departments that were cut during the recession.  She’s right: they were cut.  But after the recession ended, most of them were restored to levels exceeding what they were before the recession.  Meanwhile, county dollars for MCPS were cut by $33 million between FY10 and FY16.  Floreen doesn’t deny that, but she notes that local dollars aren’t the only source for MCPS’s budget.  The schools get plenty of state money too.  Floreen says this:

What really matters is the total MCPS budget, not the State share versus the local share. The higher State spending for MCPS in recent years reflects that the State’s funding formulas, at long last, are starting to recognize our students’ actual needs, as shown in our higher ESOL and FARMS populations. The State aid increases, which were long overdue, enabled us to provide continued strong support for MCPS during the Great Recession without further decimating every other function of government.  Why is that not a good thing?

Floreen is conceding a central point of our original post which is reinforced in the per pupil data above: the county depended on state aid to keep MCPS afloat while it restricted its own contributions to the school system.  Meanwhile, MCPS enrollment grew from 140,500 to 156,514 between FY10 and FY16, an 11% increase.  The Great Recession by itself can’t be cited as a justification for restricting county dollars for schools because the restrictions continued long after the trough of the recession had passed.  Indeed, fifteen other counties increased their local per pupil contributions after the recession ended, including nine controlled by Republicans.  The message here is, “The state was paying for our schools so we didn’t have to increase county per pupil spending on them.”  Is that “continued strong support for MCPS” as claimed above?  Is it satisfactory for parents and voters?  Let the readers decide.

Finally, Floreen repeats her longstanding point that last year’s 9% property tax hike was intended to support MCPS.  That’s true: MCPS did get a big share of that money.  But so did the rest of the government.  Last year, we laid out how the county could have cut the tax hike in half, still given MCPS all the money requested in the County Executive’s budget and done it without spending cuts to other agencies.  County Executive Ike Leggett, who originally proposed the tax hike, asked the council to cut the rate increase in half after the General Assembly passed a law easing the county’s liability from a U.S. Supreme Court decision on income taxes.  But the council chose to keep every penny of the original tax hike and spread it across every agency instead.  That’s not an Education First budget – it’s an Everything First budget.  The result of the tax hike was a tremendous boost for the 40-point triumph of term limits at the ballot box.  Even the council’s own spokesman at the time now says the tax hike was unnecessary and is vowing to stop another one if he is elected to Floreen’s open seat.

Look folks.  We get this is tough medicine.  We understand that elected officials don’t like to be criticized, especially around election time.  And we understand that Nancy Floreen, a Council Member we respect, would like to go out on top.  But it’s important to understand the past to prepare for the future.  The schools need small, steady increases in per pupil funding to deal with their challenges.  There can no longer be wild swings between extended periods of per pupil cuts and freezes followed by huge tax hikes intended to undo the effects of those cuts and freezes.  To fund MCPS fairly without raising taxes, the county will have to restrain the overall growth of the rest of the budget to pay for it.  There cannot be any more Everything First budgets.  With four Council Members leaving and the Executive race wide open, it will be up to the next generation of county officials to chart a better way forward.

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Setting the Record Straight on MCPS Funding

By Council Member Nancy Floreen.

Adam Pagnucco’s recent post on the County Council’s budgeting work made an astoundingly misleading claim: “The County imposed seven years of austerity on MCPS [in FY10-16] while lavishing double-digit increases on nearly every other function of government.”  While I ordinarily ignore this kind of online misrepresentation of Council activity, this goes too far over the top to let pass.

As Council President in 2016, I plead guilty to leading the charge for two tax hikes to support MCPS.  The FY17 property tax hike enabled us to reduce class size and focus on the achievement gap; we exceeded the State-required Maintenance of Effort level (MOE) for the MCPS operating budget by $89 million.  The recordation tax hike enabled us to fund key school construction projects that would otherwise have languished.  We did this in a historic partnership with the Board of Education, which agreed to channel more of its funds to the classroom, and, bravely, less to employee compensation.

Were the preceding seven years really a period of “austerity” for MCPS and “lavish” times for others?  Consider the facts.

1. The choice of base years matters. FY10 was an anomaly. From FY01-09, we had funded MCPS at a total of $576 million ABOVE the MOE level, thus creating a much higher required spending base.  But no good deed goes unpunished.  When revenues sank like a stone during the Great Recession, this higher base became an impossible burden, even after we approved a property tax increase in FY09.

2. During the worst years of the recession, FY09-12, only two agencies – MCPS and Montgomery College – saw increased funding. To be sure, the increases were small (1.8 and 3.2 percent, respectively) and relied on higher State aid. But during this same period, vital County functions like Police, Fire and Rescue, and HHS were down 3.4, 5.0, and 14.7 percent, respectively.  Recreation was down 23.5 percent, and Libraries was down 29.2 percent.  These deep cuts were without precedent.  The new spending base we were forced to create was so low that any later increase seemed disproportionately large.  We consistently prioritized funding for MCPS and the College during this period.  As the Rolling Stones would say, they didn’t get what they wanted, but they got what they needed. This we could not do for the rest of County government.  I was Council President in that awful time.  There were furloughs for all County employees, including first responders.  MCPS furloughed no one.

3. The “austerity” claim fails to account for massive additional County funding for MCPS that is not included in the MCPS budget or in MOE.  So, for example, in FY18, we approved total expenditures for MCPS that include $2.37 billion for the MCPS operating budget PLUS $317.5 million more in the County budget.  This pays for debt service on school construction bonds, pre-funding MCPS retiree health benefits, support services ranging from Linkages to Learning to crossing guards, and MCPS technology modernization.  In FY13-16 alone, this additional County support totaled $1.08 billion.  These dollars are not technically included in the MCPS budget, but they should be. To put the FY18 additional County support in perspective, this amount is larger than the total FY18 budget for Police, Fire and Rescue, or HHS.  Again, this massive support for MCPS is all ABOVE the MOE level. And not counted.

4. Is the flip side of this alleged “austerity” for MCPS in FY10-16 really “lavishing double-digit increases on nearly every other function of government”?  Tell that to one of our most important and beloved departments, Public Libraries.  The libraries provide our one million-plus residents of all ages (including students from MCPS) with an ever-growing wealth of materials and technology.  But the department’s budget of $40.3 million in FY09 did not reach that level again until FY16, seven years later, even in nominal dollars.  The FY18 level, $42.7 million, is barely equal to FY09 in real dollars. “Lavish” indeed!

5. One key fact is that 90 percent of the MCPS budget is for the salaries and benefits of active and retired employees. MCPS’ benefits cost much more than the County’s. If MCPS’ employee share of health insurance costs was the same as the County’s, the savings would be $24 million.  Add to this the fact we alone in the State fund a supplement to MCPS employees’ State pension benefit. This alone cost $25.3 million last year.  The regular pension cost in FY18 is another $71.8 million, plus $56.8 million more for the State’s shift of teacher pension costs.  We also pick up the tab for pre-funding MCPS retiree health benefits (paid from the County budget, not the MCPS budget).  This set us back $74.2 million in FY18 and is now projected to cost $547.8 million in FY18-23.  Is that what you call “austerity”?

6. What really matters is the total MCPS budget, not the State share versus the local share. The higher State spending for MCPS in recent years reflects that the State’s funding formulas, at long last, are starting to recognize our students’ actual needs, as shown in our higher ESOL and FARMS populations. The State aid increases, which were long overdue, enabled us to provide continued strong support for MCPS during the Great Recession without further decimating every other function of government.  Why is that not a good thing?

7. In fact, a more complete and accurate comparison of FY10-16 tax supported operating budgets by agency shows that MCPS received a 12.9 percent funding increase compared to 13.0 percent for Montgomery County Government, 15.9 percent for Montgomery College, and 8.3 percent for Park and Planning. In addition, a significant portion of the FY10-16 increase of 803.9 percent in pre-funding retiree health benefits and 41.5 percent in debt service benefited MCPS!

As we go into an election year of hyperbole and catchy phrases, know that the Council, on which I have been so privileged to serve, is committed to thoughtful fact and policy based budgets, responsive to ALL our residents’ needs. We are also constantly mindful of the burden that our decisions place on our residents’ pocketbooks.  MCPS will always need more support.  Has it been singled out for unfair treatment – “austerity” for MCPS and “lavish” increases for everyone else?  The facts say otherwise.

Nancy Floreen has served on the Montgomery County Council since 2002.  She was Council President in 2010, during the Great Recession, and again in 2016.

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Lessons Learned from the Giant Tax Hike, Part Two

By Adam Pagnucco.

The untold story of last year’s 9% property tax hike is that it was not merely the product of needed funding for public schools or the adverse consequences of a U.S. Supreme Court decision on income taxes.  It was also the product of an innate bias towards more spending built into the County Council’s budget process.  That bias created mounting pressure to fund ever-growing spending programs accumulated over many years which contributed to the tax increase.  The next generation of county elected officials must reform this process or they too will eventually feel compelled to raise taxes.

All state and local operating budgets must be balanced each year as a matter of law.  At the state level, the General Assembly may cut spending items in the Governor’s budget but they generally cannot add to them.  (The legislature can and does pass laws mandating spending on certain items in future years.)  Several counties with Executives follow the state’s model, as does the City of Baltimore.  But the Montgomery County charter grants all final budgetary authority to the County Council, which can do almost anything it wants to the Executive’s recommended budget.  It can add, subtract or rearrange spending items subject only to requirements in state law, such as mandatory minimum funding levels for public schools and the college.  Other than that, the only constraint on the council’s power is that the budget it passes must be balanced for the fiscal year.

Every March 15, the Executive is required by the charter to send a recommended budget to the council.  The council then begins its process for reviewing and changing the budget that lasts roughly two months.  The council’s vehicle for altering the Executive’s recommended budget is the reconciliation list (commonly called the rec list), which is a ledger of spending additions and deductions.  Each council committee, and the full council itself, can post additions or deductions to the rec list.  The last step in the process is figuring out how to finance some portion of the additions since they always exceed the deductions.

In theory, there are two sound places to go to fund additions to the Executive’s budget: new tax revenues or offsetting spending cuts.  In practice, the council’s use of these resources is limited.  Tax increases are typically proposed by the Executive, who distributes the revenues they generate across spending items in the recommended budget.  In such cases, the new revenue is not available for further spending desired by the council unless it alters the Executive’s choices.  The council could also cut the Executive’s spending items and use the money for its own items.  But the Executive’s spending proposals have constituencies who will squeal if they are diverted or cut.  No one likes to be the bad guy at budget time!

Page one of the council’s final draft reconciliation list for FY18.  These are some of the new spending items the council wanted to fund last spring.  The challenge was how to pay for them.

If new taxes and spending cuts are insufficient to pay for new spending desired by the council, other funding sources must be identified.  In the past, favorite sources for funding included setting aside less reserve money than proposed by the Executive, setting aside less money for retiree health benefits, occasional transfers of cash from the capital budget and other one-time fixes.  In FY12, the Executive proposed $10 million for snow removal and the council redirected $4.1 million of that for new spending on the reconciliation list.  Snow removal costs must be paid, so if they were to ultimately prove larger than budgeted funds, the council’s action would be tantamount to a backdoor drawdown of the reserve.

Since FY05, the council has added a combined $245 million to the Executive’s budgets through its reconciliation lists.  One does not have to be a certified public accountant to see what the effect of these additions will be over time.  Many spending items added by the council are ongoing, such as hires of new employees and expansions of programs expected to continue indefinitely.  But some of the funding sources for the new spending are one-time in nature, like capital budget transfers and reserve drawdowns.  Repeated use of one-time funding sources for ongoing spending creates enormous long-term pressure on the budget.  Eventually, especially when a downturn comes, the new spending must be trimmed or taxes must be raised.  Guess which is more likely to occur?

Why does this happen?  It’s not because elected officials are stupid.  It’s because of the incentives they face.  From mid-March through mid-May every year, Council Members are besieged by requests for more spending from the community.  Every year, there are three nights of hearings jam-packed with constituents wanting more money for their favored programs.  They are followed by dozens of meetings with groups who want even more than that.  Aside from occasional admonishments from council administrator Steve Farber and Executive Branch budget officials, there are almost no voices for moderation in the budget process.  And here’s the thing: whether it’s hiring social workers, funding more childcare assistance, deploying more police officers in communities that need them, removing more tree stumps or much, much more, almost all the new spending proposals have merit.  Given the incredible pressure brought to bear by groups with genuine funding needs, it’s kind of a miracle that the budget gets balanced at all.

All of this creates serious problems for the County Executive.  The charter grants the Executive a line item veto over spending items, but this is never used because the council would simply override it.  The Executive could abstain from including the council’s new spending in next year’s budget, but again, the council could just put it back in.  For the most part, the Executive and his top aides grumble in private and put on a happy face for Wall Street, but they did go public in objecting to a $10 million draw from the reserve two years ago.  Instead of fighting the council, the Executive’s staff simply tries to figure out how to retain and pay for the council’s new spending in next year’s budget.  And each year, the job gets a little harder without new revenue.

This process is a big reason why the county has had seven major tax hikes in the last sixteen fiscal years.

Next year, a new County Executive and at least four new Council Members will take office.  This new generation of officials will have a choice.  They can keep the existing budget process and eventually come under pressure for yet another tax hike, as happened last year.  Or they can reform it by requiring that new ongoing spending be offset by actual ongoing spending cuts, not one-time measures.  Failure to learn this lesson will mean repeating history.

We will conclude with one last lesson from the Giant Tax Hike in Part Three.

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MoCo’s Giant Tax Hike, Part Six

By Adam Pagnucco.

Montgomery County’s giant tax hike will have consequences.  Here are a few of them.

1.  Term limits are more likely to pass.

There are several reasons why Robin Ficker’s newest term limits amendment will probably pass if he gathers enough signatures to place it on the ballot, but the tax hike is one of the biggest.  The last time the council broke the charter limit in 2008, voters responded by passing Ficker’s charter amendment to make tax hikes harder.  With a new tax hike in place, voters may be tempted to respond with term limits.

Ficker has taken notice.  He regularly runs Facebook ads linking term limits, the tax hike and the council’s 2013 salary increase like the one below.  Commenters respond predictably.

Ficker vs Elrich

Ficker may have a new ally in his quest to evict the council: MCGEO President Gino Renne.  After the council voted to abrogate his union’s collective bargaining agreement, Renne told the Post, “I’m tired of these clowns,” and said his union might support term limits.  An alliance between Gino Renne and Robin Ficker would be one of the strangest events in the history of MoCo politics.  Whoever can produce a picture of these two smiling and shaking hands will be awarded a gift certificate from Gino’s beloved Department of Liquor Control.

2. Outsider candidates could be encouraged to run for county office.

If term limits pass, two things will happen.  First, the County Executive’s seat and five seats on the County Council will be open in 2018.  Second, the tax increase will be blamed for the success of term limits.  Both factors could lead to the entry of outsider candidates with a message like this: “We need new leadership.  We need to do things differently.”  Translation: we need to run the government without giant tax hikes.

Some of these outsiders may use the county’s new public financing system to run.  But the strong performance of David Trone, who started with zero name recognition and won many parts of CD8, will encourage self-funders.  This being Montgomery County, there are a LOT of potential self-funders, including those who have previously run for office.  Candidates in public financing can raise as many individual contributions of up to $150 each as they are able to collect, but the system caps public match amounts at $750,000 for Executive candidates, $250,000 for at-large council candidates and $125,000 for district council candidates.  A wealthy self-funder could easily overwhelm candidates who are subject to these caps and make a mockery of public financing.

3.  More charter amendments on taxes are possible.

Ficker’s 2008 property tax charter amendment, which instituted the requirement that all nine Council Members must vote to override the charter limit on property taxes, was a mild version of his previous ballot questions on the subject.  His 2004 Question A, which would have abolished the override provision entirely, failed by a 59-41 percent margin.  Now that the 2008 amendment has been proven ineffective, Ficker could be encouraged to bring back his more draconian version soon.  In the wake of this new tax hike, would voters support it?

Passage of a hard tax cap would have very grave consequences for the ability of county government to deal with downturns.  In 2010, the County Council responded to the Great Recession by passing a tough budget combining cuts, furloughs, an energy tax increase and layoffs of 90 employees.  When the next recession comes, if the county has no taxation flexibility, it might have to pass a budget laying off hundreds of people and gutting entire departments.  If the levying of giant tax hikes in non-emergencies causes the voters to abolish the possibility of levying them in true emergencies in the future, it would be a serious calamity.

4.  Governor Larry Hogan is a big winner.

One of Governor Hogan’s favorite political tactics is to play the Big Three Democratic jurisdictions against the rest of the state, with the City of Baltimore being his prime target.  But he can also point to Prince George’s County, where the County Executive (and a potential election opponent) proposed a 15% property tax hike, and also to Montgomery County, where the council passed a 9% increase.  His message to the voters will be a simple one.

“Look, folks.  This is what you get when you allow liberal Democrats to have one-party rule: giant tax hikes.  That’s why you need people like me in office to stop them.”

How many MoCo Democrats will ask themselves this question: “What is easier for me to live with? Larry Hogan or nine percent tax hikes?” What do you think their answer will be?

Hogan received 37% of the vote in Montgomery County in 2014.  He had a 55% approval rating in MoCo according to a Washington Post poll last October.  A Gonzales poll taken in March found that registered voters in the Washington suburbs (defined as MoCo, Prince George’s and Charles) gave Hogan a 62.6% job approval rating, with 35% strongly approving.  If Hogan can use the tax issue to run in the low 40s, or even as high as 45% in MoCo, he will be very difficult to beat for reelection.

Reelecting himself is not Hogan’s only priority.  He would also like to elect enough Republicans to the General Assembly to uphold his vetoes.  That task is easier in the House of Delegates, where Democrats hold 91 seats, six more than the 85 votes required to override vetoes.  If the GOP can pick up seven seats, as they did in 2014, they can uphold the Governor’s vetoes on party line votes.  That would cause serious change in how Annapolis operates.  Could big tax hikes in Democratic jurisdictions like Montgomery help the GOP get there?

5.  It will be harder to get more aid from Annapolis.

In 2007, former Baltimore State Senator Barbara Hoffman commented to the Gazette on Montgomery County’s ultra-wealthy reputation in Annapolis.  “They have to overcome the view that they’re rich and trouble-free. … That’s not true anymore.”  She was right then, and she is even more right now.  The county has massive needs for transportation projects and both operating and construction funds for the public schools.  But when the county levies giant tax hikes on itself to pay for these needs, is it letting the state off the hook?  State legislators from other cash-strapped jurisdictions that lack wealthy tax bases like Bethesda, Chevy Chase and Potomac are perfectly happy to let MoCo tax itself while they ask the state to tax MoCo even more to pay for their needs.  (Remember the 2012 state income tax hike, of which MoCo residents paid 41% of the new revenue?)  As a result, the next time the Lords of Annapolis are asked to help Montgomery County, they could very well reply, “Tax yourselves to pay for it. You always do.”

6.  A major argument in favor of the liquor monopoly has been proven hollow.

County officials predicted that if the liquor monopoly was lost, annual property taxes would have to rise by an average $100 per household.  Instead, the monopoly was preserved and the council passed a property tax hike that will cost an average $326 per household.  The tax hike was in the works since at least January 2015, long before small businesses and consumers launched their campaign to End the Monopoly.  And the $25 million in new spending added by the council to this year’s budget actually exceeds the $20.7 million that the liquor monopoly is projected to return to the general fund.  This proves once and for all that liquor monopoly revenues do not prevent tax hikes!

7.  There will be pressure in the future for another tax hike.

As we discussed in Part Three of this series, the U.S. Supreme Court’s Wynne decision, which requires counties to refund taxes paid on out-of-state income, was one reason for the current property tax hike.  Senator Rich Madaleno’s state legislation extended the time that counties had to pay for refunds from Fiscal Year 2019 to 2024.  Below is a table showing the fiscal impact on all Maryland counties combined, of which Montgomery accounts for roughly half.  While the legislation enables counties to spend less in FY 2017-2018, it requires them to spend more in FY 2020-2024.  MoCo will have to spend around $20 million a year in most of the out years.

Madaleno Wynne Bill Fiscal Impact

Given its $5 billion-plus annual budget, Montgomery could easily afford the out-year payments by slightly slowing the growth rate in its annual spending.  But instead, the council added $25 million in new spending on top of the Executive’s FY 2017 budget, and unless it is cut, that spending will continue in future budgets.  The cumulative impact of that new spending plus future Wynne refund payments will start to be felt in three years.  At that point, the council could very well face a choice between trimming back their added spending or raising taxes.  What do you think they will do?

8.  Economic development will now be harder.

Despite the wealth in some of its communities, Montgomery County struggles with the perception that it is not business-friendly.  While its unemployment rate is low by national standards, its real per capita income fell steeply during the recession, much of its office space is obsolete and it lacks Northern Virginia’s two major airports and its new Metro line.  The chart below shows the county’s private sector employment from 2001 through 2014.  Despite recent sluggish growth, the county had fewer private sector jobs in 2014 than it did in 2001.

MoCo Private Employment 2001-2014

And while the county lost private sector jobs, the Washington region as a whole grew by 9.5% over this period.

Washington Private Employment 2001-2014

There may be a variety of factors explaining MoCo’s weak economic performance, but consider this: in the last 15 fiscal years, the county has seen six major tax increases.  The county broke its charter limit on property taxes in FY 2003, 2004, 2005, 2009 and 2017 and it doubled the energy tax in FY 2011.  (Most of the latter increase is still on the books.)

Good government is an exercise in balancing needs.  Education, transportation, public safety and public services are valuable and require resources, at times necessitating tax increases.  But all of that is impossible without a vigorous private sector that creates jobs and incomes and pays the government’s bills.  Those priorities must be balanced, and when they are, progressive policies can be afforded.  But if they are not, economic growth will fail, government services will be harder to sustain, taxes will fall increasingly on a shrinking base and a downward spiral could begin.

In the wake of its long-term stagnant economy and its Giant Tax Hike, how close is Montgomery County to that tipping point?

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MoCo’s Giant Tax Hike, Part Five

By Adam Pagnucco.

The untold story about the Giant Tax Hike is that it could have been cut substantially while still maintaining every dime of funding for MCPS in the Executive’s recommended budget.  How could that have been done?

The Executive called for an increase in property taxes of $140 million over the charter limit.  Three sources of savings were available to offset it.  First, Senator Rich Madaleno’s state legislation enabling the county to extend the time necessary to pay tax refunds mandated by the U.S. Supreme Court’s Wynne decision freed up $33.7 million.  Second, the County Council had obtained $4.1 million by not funding some elements of the employees’ collective bargaining agreements.  Third, county agencies other than MCPS were due to receive a combined $36.3 million in extra tax-supported funds in the Executive’s recommended budget.  Using some or all of that money for tax relief would have reduced the tax hike even more.  If all of that money were redirected, the tax hike could have been cut in half with MCPS still getting the entire funding increase in the Executive’s budget.

Instead, the council kept the entire 8.7% property tax hike and distributed $25 million of it throughout the entire county government, as well as its affiliated agencies and partner organizations.  While MCPS may have undergone seven straight years of austerity, most of the other agencies and departments had already received double-digit increases over their pre-recession peak amounts.  This new money was on top of those increases.

Council President Nancy Floreen was very honest about this, writing:

While this is an “education first” budget, it isn’t an “education only” budget. As much as many people care about our outstanding school system, we know that others have different priorities. This budget is very much about those people as well.

This budget provides a much-needed boost to police and fire and rescue services as we will be adding more police officers and firefighters and giving them the equipment they need to continue to make this one the safest counties in America. This budget is about libraries, recreation, parks, the safety net, Montgomery College, and transportation programs that help get people around this county better.

This budget means that no matter where you live in the county, if you call an ambulance, you can count on a life-saving response time. Our police force will now be equipped with body cameras. Potholes will be filled, snow will be plowed, grass in parks and on playing fields will be mowed and trees will get planted in the right-of-way. While our unemployment rate has fallen steadily over the past couple of years, our newly privatized program for economic development promises an even better job market in the future. We are going to help new businesses in their early stages and hope they will remain here once they become successful. We are going to aggressively seek to get established businesses to relocate here and we are going to fight to keep the great businesses of all sizes that already call Montgomery County home. Our avid readers and researchers will appreciate the interim Wheaton Library and extended hours at several branches. And students will have better access to after-school enrichment programs.

As Council President Floreen demonstrates above, this is not so much an Education First budget as it is an Everything First budget, with nearly every department and agency getting a piece of new tax revenues.

Let’s compare what happened this year to what occurred in 2010.  Back then, the county was suffering from the full effects of the Great Recession.  Its reserves were dwindling to zero, revenues were in freefall and its AAA bond rating was on the verge of being downgraded.  The County Council responded by passing a budget with furloughs, layoffs, no raises for employees, a cut in the county’s earned income tax credit, an absolute reduction in spending and a $110 million increase in the energy tax.  Given the dire economic emergency, all options were bad ones, but the council really had no choice.  The cuts and tax hike were forced upon them.

This year, there is a stagnant economy (which we will discuss in Part Six) but no Great Recession.  Reserves are substantial and have been on track to meet the county’s goal of ten percent of revenues.  There is no threat to the bond rating.  And yet, the council chose to pass a $140 million property tax increase – larger than the energy tax hike during the recession – when it could easily have reduced the tax increase, funded MCPS’s needs and not cut any other departments.  But it did not.

Like all big choices, this one will have consequences.  We will explore them in Part Six.

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