Tag Archives: budget

Council Nukes Elrich Over COVID Grants

By Adam Pagnucco.

Here are two things that almost everyone inside and outside of county government will agree on.

  1. The needs of residents and businesses for financial assistance to deal with the COVID crisis are immense.
  2. The $183 million in CARES Act grant money the county has been allocated by the federal government is helpful but is far from adequate to cover all the above needs.

With those two things said, representatives of the executive branch told the county council yesterday that they have not spent all the federal money appropriated by the council yet. And facing an end-of-year deadline to get the money out the door, there is now doubt as to whether the county will spend all of the federal money or forfeit some of it.

The council’s response to this was nothing short of nuclear.

The fissile material was prepared by council staff, whose memo to the council listed major appropriations of federal assistance and its actual expenditure by the executive branch. Six federal money appropriations mentioned in the memo and passed by the council months ago include:

Resolution 19-439: Emergency Assistance Relief Payment (EARP) Program
Adopted by council: 4/30/20
Funds appropriated by council: $5,000,000
Funds spent by executive branch: $0

Resolution 19-499: 3R Program (Reopen, Relaunch, Reimagine) – Economic Development
Adopted by council: 6/16/20
Funds appropriated by council: $500,000
Funds spent: $142,500 (Note: the county’s economic development corporation is responsible for spending this money.)

Resolution 19-506: Food Assistance/Security
Adopted by council: 6/23/20
Funds appropriated by council: $10,300,000
Funds spent by executive branch: $5,052,209

Resolution 19-523: Reopen Montgomery Initiative
Adopted by council: 7/7/20
Funds appropriated by council: $14,000,000
Funds spent by executive branch: $1,431,538

Resolution 19-535: Business Assistance for Medical and Dental Clinics
Adopted by council: 7/21/20
Funds appropriated by council: $3,000,000
Funds spent by executive branch: $0

Resolution 19-557: Rental Assistance and Eviction/Homelessness Prevention
Adopted by council: 7/28/20
Funds appropriated by council: $20,000,000
Funds spent by executive branch: $607,508

The above six appropriations total $52.8 million, of which the largest chunk ($20 million) is assistance to renters. Of that amount, the executive branch has spent $7,233,755. If the executive branch does not spend the remaining $45.6 million of federal money by December 31, it risks forfeiting the money.

That’s not all. Eight additional appropriations of federal money passed more recently by the council total $12.1 million, of which the executive branch has so far spent just $30,492. The two largest portions of this money are assistance to school age child care providers ($7.7 million) and assistance to distressed, affordable common ownership communities ($2 million). If this money is not spent by December 31, it might also be forfeited.

What’s the problem? First, the county just can’t spray checks around; it has to design the assistance programs, publicize them to potential recipients, process the applications and distribute the funds. Those things take staff and time. Second and more seriously, the county has had problems complying with FEMA paperwork requirements to get reimbursed. The process is nightmarish and time-consuming with FEMA changing the rules at least once (so far). County homeland security director Earl Stoddard told the council that the county had obtained just $20,000(!) in reimbursement from FEMA so far and that took more than two weeks and dozens of staff hours to process. Stoddard and Chief Administrative Officer Rich Madaleno made no defense of the feds and were clearly frustrated.

None of this mollified the council, who proceeded to nuke the executive branch from orbit. Here are just four quotes from MANY angry statements by council members.

Council Member Andrew Friedson
This is a really frustrating conversation and clearly there are a lot more questions than answers. Some of that is understandable when in the midst of a crisis and there are a lot more questions. We don’t know what the future will hold, we don’t know what this virus will do, we don’t know what the impact on our community will be, we can’t control what the federal government… and how they will respond. But the idea that our residents and our businesses are struggling more than they ever have and are more vulnerable than they’ve ever been, when the needs are as challenging as they currently are, with an economic crisis and a public health emergency, that our issue right now is not whether or not we will run out of money too quickly, but whether or not the clock will run out before these programs will have been able to help the businesses, help the residents, help the vulnerable members of our community who desperately need it. And I can’t tell you how frustrating that is for me. I believe it’s frustrating similarly for colleagues and I can’t imagine how frustrating that is for the 1.1 million residents who are desperately trying to get through the most challenging time in our lifetimes.

Council Member Nancy Navarro
For that list of special appropriations that we started, some of them, all the way back in April, the amount of money that has not been spent translates into residents not receiving that assistance. Residents who we interact with on a daily basis that I know I have said, “Oh no, we have this program, we have that program,” we all did, all these different places and interviews and social media, pushing all this out and I keep getting feedback that, “Well no, we have not really been able to access this and we have not received that,” thinking OK, we’ll keep working on it. So number one, I’m just super disappointed that so many of these amounts, these special appropriations, these funds that are specifically to address the needs of some of the most vulnerable people in the county, and when I see how little has been spent, I just don’t even know what to say…

There is no excuse for the fact that so much of this money has not been out there.

Council Member Gabe Albornoz
I’m not confident at all that a month from now, when we have another update, that things will be significantly improved from where we are right now. And we’re setting everybody up for failure right now. And it’s not fair. It’s not fair to the county employees who are working diligently and around the clock to address these issues. We need stronger strategic leadership to be able to provide them with the support that they need to be able to get their jobs done. And I’m not seeing that and I’m not hearing that right now.

Council Member Will Jawando
The thing that is totally unacceptable to me is that we can’t get money out of the door that we’ve appropriated for rent and for food and for emergency assistance. So we just have to do better on that.

Council Members also called out County Executive Marc Elrich directly.

Navarro
I apologize to you, Dr. Stoddard, because this is not directed at you, because you’re not the executive. And I will say, the executive should be here talking to us about what is happening because this is really, really critical.

Council Member Tom Hucker
[To Madaleno] Do you know where the county executive is? I would just expect the county executive to be coming in and making this presentation. This is not one, this is like five or six of the most important issues facing the county. It’s hard enough to tell our constituents, “We don’t have money to keep your business open, we don’t have money to keep you in your apartment,” but it’s heartbreaking to tell them, “We have the money, we appropriated it, and it’s in a bank account, we just haven’t given it to you yet. And we may not be able to.” And I would just think, if there would be one thing he’d be on top of, it’s this. I don’t want to be unfair to him, I’m happy to tell him that himself, but I’m a little shocked that he’s not here to make this presentation and that it also wasn’t made months ago.

Council Member Craig Rice
This lies firmly in the county executive’s lap. And look, I have been incredibly complimentary to the county executive in terms of how I think we’ve responded to the pandemic, and so now, I can also equally be critical of the fact that we failed. We dropped the ball. And it does rest in his court. That’s just the reality…

We cannot work as a county if we have a disconnect between the county executive and the county council on something that is so important as keeping people in their homes, putting food on their tables and making sure that they can continue to be employed. I mean, these are basics. And if it’s not happening, then there’s a serious problem ahead…

[To Stoddard] I just want to say I appreciate you falling on your sword, but sir, it’s not your sword to fall on.

Friedson
With all due respect, I heard earlier about the county executive and his frustration. We don’t need frustration from the county executive, we need leadership. And thus far on these issues, we have not seen it, and we need to.

On top of all that, Stoddard made this grim observation.

The FEMA reimbursement process is going to be incredibly difficult, not just for us, but also for FEMA. And as I think I have alluded to before, my experience with FEMA is generally that if they can find a reason not to reimburse you for something, they’re going to find it. And they’re going to utilize that as a rationale to not reimburse.

The county was counting on FEMA to reimburse it for tens of millions of dollars in extra pay County Executive Marc Elrich granted to the county employee unions. If the county doesn’t get federal money to finance that extra pay, it will blow a massive hole in its budget. In that case, the next nuke could be launched at Rockville from Wall Street with the county’s bond rating at ground zero.

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Time to Get Control of the Budget

By Adam Pagnucco.

Back in July, I wrote a post about the county budget titled “Crash!” The post discussed the county’s revenue writedown of $522 million for Fiscal Years 20-22, with more shortfalls to come later. That post was soon followed by another titled “MoCo is Praying for a Federal Bailout,” which described the county’s cream-puff savings plan and desperate desire for more federal money (which so far has not arrived). Three months later, an eye-opening memo from county council staff contains more details of what is becoming one of the most serious budget crises in recent county history.

Consider the following.

CARES Act Funding

The county has received $183 million in federal aid under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Of that amount, $100.6 million has been used for special appropriations, $82.2 million has been allocated for county operations (some as placeholders) and $10 million has been allocated for municipal and outside agency reimbursements. If the placeholders (totaling $85.9 million) are included, the county will have overspent its CARES Act money by $9.4 million.

COVID Pay

I have previously written that County Executive Marc Elrich agreed to distribute COVID pay of up to $10 per hour at a cost of $3.2 million per pay period indefinitely. According to the council staff, the initial cost estimate was low. The cost is now roughly $4 million per pay period. Through 9/26/20, $49.2 million has been paid out, far in excess of any savings the council achieved through canceling collectively bargained raises. The total cost of the extra pay is projected to total $72 million through the end of the calendar year and approximately $100 million if paid for an entire year.

The executive branch expects to get FEMA reimbursements for most of this pay but that is not assured. Council staff wrote:

Previously, the Executive Branch had indicated that the pay differential would likely be eligible for FEMA reimbursement – meaning that the County might only be required to cover 25% of the total cost. However, the County has yet to apply for or receive FEMA reimbursement for these costs. In preparation for this briefing, the Executive Branch provided the following update on the status of FEMA reimbursement for the pay differential: “These remain pending. There were changes in the FEMA reimbursement guidelines on September 15 and other reimbursement rulings that created significant questions about some personnel cost eligibility. We met with FEMA representatives on Monday, October 5 to clarify some of these questions and are proceeding with data collection for reimbursement. We have added a large number of staff to this effort to address the increasing data collection burden.” Based on the updated guidance from FEMA, even in the best-case scenario, it is likely that the County will need to cover much more than 25% of the total cost of the pay differential.

In other words, who knows whether the feds will come through, leaving the county stuck with tens of millions of dollars in liabilities.

Council staff also compared the extra pay negotiated by Elrich to other jurisdictions. Maximum payouts per pay period are $140 in D.C., $200 in Baltimore City, Baltimore County and Frederick, $250 in Anne Arundel and $350 in Prince George’s. Howard County paid one-time bonuses of $600 to $1,500 and Fairfax County does not have COVID pay at all. MoCo’s maximum payout is $800 per pay period, by far the highest in the region.

Spending from Reserve

This fact is not contained in the council staff memo but is nonetheless relevant to the county’s budget issues. Since the start of the calendar year, the council has appropriated amounts totaling $28 million from general fund reserves. This does not include another $28 million taken from reserves that were reimbursed with federal CARES Act money.

These appropriations might be understandable if the county had undertaken a deliberate strategy of dipping into its reserves to fight the recession. But no such strategy has been announced. The county has not officially diverged from its policy of setting aside 10% of its revenues into reserves, a policy originally devised ten years ago. What happens if we have a bad winter and the county must dip into reserves some more to pay snow removal costs, a common practice of the past?

During the Great Recession, County Executive Ike Leggett and the council of that era adopted very tough measures combining brutal spending cuts, an energy tax hike and a 10% reserve policy to save the county from financial disaster. Both the county employee unions and the business community were outraged at these tactics but they worked. When Leggett retired, he bequeathed a large reserve, a 96% pension funding ratio and a gold-plated AAA bond rating to his successor.

So far, the actions taken during the current recession bear no resemblance to the prudence of Leggett and the council during the Great Recession. We have seen a nothing-burger savings plan full of lapses, projected overspending of federal money, a new unending liability of COVID pay with no assurance of federal reimbursement, a drawdown of reserves and even hints of another raid on retiree health care money, a practice that has drawn a baleful eye from Wall Street.

The county’s elected officials are united in opposing Question B, the tax cap charter amendment from Robin Ficker that they say would endanger the county’s AAA bond rating. They’re right to oppose Question B. But the actions described above, occurring in the context of a huge revenue writedown, might be at least as big a threat to the bond rating as anything Ficker’s proposal would do. The council must heed the warnings of its staff and get control of the budget.

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Would Question B Harm Schools?

By Adam Pagnucco.

One of the key claims made by some opponents of Question B (Robin Ficker’s latest charter amendment on taxes) is that it will harm schools by limiting growth in property tax revenues. For example, former County Council Member Bruce Adams wrote on Maryland Matters: “Ficker’s amendment would not let even a unanimous council act to preserve our quality schools and services.” Former County Executive Ike Leggett also told MCM in an interview that it could “certainly impact schools.”

Is that true?

First, let’s remember what Question B would actually do. Right now, the county charter limits annual growth in property tax receipts to the rate of inflation (with a few exceptions) unless the county council unanimously votes to go over the limit. The last time that happened was in 2016, when the council voted to increase property taxes by 8.7%. Question B would remove the ability of the council to exceed the limit, thereby imposing an absolute cap on property tax revenue growth at the rate of inflation. (Question A, a competing tax limit charter amendment authored by Council Member Andrew Friedson, would raise far more revenue than Question B over time.) Because of Question B’s limit on revenue growth, some opponents criticize it for potentially damaging many different kinds of county services, including schools.

But school funding is different from most other kinds of funding when it comes to charter limits. The reason for that lies in a fight between the counties and the state back in 2012. At that time, the counties were struggling with the budgetary effects of the Great Recession and several of them had cut local per pupil school funding below the floor established by the state. The state responded by passing SB 848, which made a number of changes to the state’s maintenance of effort law on school funding. One of them allowed counties to circumvent their charter limits to fund school budgets. (State law preempts county charters.) The exact language of this part of the bill, which is now contained in Md. Education Code Ann. § 5-104(d)(1), reads:

Notwithstanding any provision of a county charter that places a limit on that county’s property tax rate or revenues and subject to paragraph (2) of this subsection, a county governing body may set a property tax rate that is higher than the rate authorized under the county’s charter or collect more property tax revenues than the revenues authorized under the county’s charter for the sole purpose of funding the approved budget of the county board.

That means that a county can exceed its charter limit for the purpose of funding its school budget. A majority of county council votes are all that is required to raise property taxes for MCPS’s operating budget regardless of what MoCo voters put in the charter.

Five counties in Maryland have charter limits on property taxes: Anne Arundel, Montgomery, Prince George’s, Talbot and Wicomico. Since the maintenance of effort law was changed in 2012, three of them – Anne Arundel, Prince George’s and Talbot – took advantage of their new authority under state law to circumvent their charter limits and raise taxes for schools. (Talbot did it three times.) Montgomery County Executive Marc Elrich proposed doing the same in his FY21 recommended budget, but the council rejected his tax hike. (It’s not a coincidence that then-budget director and current Chief Administrative Officer Rich Madaleno was one of the architects of the school funding exemption when he was in the State Senate.)

There are two ways in which Question B would indirectly affect MCPS. First, property taxes are a major source of revenue to pay off debt service, which is required to finance bonds issued for school construction. If reduced growth in property taxes impacts debt service, MCPS’s capital budget could become tighter. Property taxes also generate cash that goes into some school capital spending (like technology modernization). Second, county departments outside MCPS contribute ancillary services that benefit the schools. Examples include health and human services (school health nurses, health room technicians, childhood wellness, linkages to learning), police (crossing guards and school resource officers), libraries (research and internet resources) and recreation (sports academies). These services are not inside MCPS’s local appropriation and would be impacted by Question B.

Over time, Question B if passed would probably result in two pots of property tax money – one exclusively for the MCPS operating budget requiring a majority of council votes to increase, and another for everything else with growth capped at inflation. Smart people like Madaleno and the county’s budget analysts can figure out how to move money around to avoid the worst effects of this. Question B would still be a challenge to the county’s finances, a distortion to its budget process and an impediment to funding police, fire service, parks, libraries, road maintenance and more. That’s reason enough to vote against it. But the bottom line is that Question B would do far less to hurt MCPS than the rest of county government.

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How Will We Pay for This?

By Adam Pagnucco.

Confronting one of the worst recessions in its history, the MoCo government is projecting a loss of $190 million in revenue this fiscal year and over $1 billion over the next six fiscal years. With such dire financial projections, one would think that the county would be looking for ways to save money above and beyond the low-hanging fruit it has already plucked. Instead, the county has created a new spending stream with no obvious way to pay for it.

What is this new spending stream? On April 10, County Executive Marc Elrich announced that he had reached an agreement with the three county employee unions (MCGEO, the fire fighters and the police) to provide their members with COVID-19 differential pay. The extra pay applied to two categories of employees.

Front Facing Onsite: work that cannot be performed by telework, involves physical interaction with the public and cannot be performed with appropriate social distancing. These employees would get an extra $10 per hour.

Back Office Onsite: work that cannot be performed by telework and does not involve regular physical interaction with the public. These employees would get an extra $3 per hour.

The extra pay was retroactive to the March 29 pay period and was supposed to be in effect for six pay periods “or until the Maryland State of Emergency is lifted.” At the time, county council staff estimated that the extra pay would cost the county $3.2 million per pay period. As of this writing, I am told that the COVID pay continues. (Note: this pay arrangement does not apply to MCPS or other agencies legally separate from county government.)

My sources tell me that the county’s COVID pay program is one of the most generous in the United States. It is far more generous than the state’s COVID pay, which was an extra $3.13 per hour for some classifications of public safety, juvenile center and healthcare employees plus $2.00 more for those working in quarantine areas. (The $3.13 per hour ended on September 8 while the quarantine pay continues.) The generosity of the county’s program can further be seen by its cost: $3.2 million per pay period versus the state’s $3.3 million. MoCo has roughly 10,000 employees while the state has more than 80,000.

Elrich painted this extra pay as a financial win for the county. His press release stated, “The County Executive noted that under provisions of existing county bargaining agreements (which were negotiated years ago), the unions could have insisted on much larger benefits, but they understood the importance of the ongoing fiscal health of the county.” So according to Elrich, by giving the unions something less than what their agreements gave them, he was saving the county money.

In retrospect, that was a dubious claim. The unions are indeed entitled to double pay during emergencies under their agreements. However, a careful examination of the county’s collective bargaining agreements with MCGEO, the fire fighters and the police shows that their emergency pay provisions relate to weather emergencies. The emergency pay provision in the police agreement is actually labeled “Snow Emergency-General Emergency Pay.” All three agreements contain this language:

“General emergency” for the purpose of this agreement is defined as any period determined by the County Executive, Chief Administrative Officer, or designee to be a period of emergency, such as inclement weather conditions. Under such conditions, County offices are closed and services are discontinued; only emergency services shall be provided.

The county suspended some (but not all) services early during the COVID crisis but many of them are being provided now. The county even said as far back as March 13, “While schools and public facilities will be closed, Montgomery County offices remain open for business and operations are continuing.” This status does not qualify as a general emergency under the contract language.

MCGEO’s agreement contains this additional language:

Implementation of General Emergencies shall be in accordance with Administrative Procedure 4-21, dated July 12, 1991. In addition to the above, before making a determination whether to declare a General Emergency, the CAO or designee will consider recent weather reports regarding the amount of precipitation already accumulated, as well as the forecast for further accumulations during the succeeding 8-hour period. Other considerations that the CAO or designee will take into account include whether the major roadways of the County are passable and safe for travel and whether the County public schools have been closed for the day and what actions other public sector jurisdictions in the Washington Metropolitan Region take. The decision whether to declare a General Emergency shall be based on the cumulative of all these factors and no one factor shall be conclusive or determinative. The County Executive or CAO should attempt to give employees the earliest notice of whether a general emergency or liberal leave period will be declared.

Again, this clearly relates to a weather emergency.

Either Elrich knew all this and granted concessions anyway or he didn’t bother to read the union contracts and was out-negotiated by MCGEO’s shrewd president, Gino Renne. If the latter, he is not the first executive to be cleaned out at the bargaining table by Gino! The unions were quite upset to see the council cancel $28 million of compensation increases last spring, but they have already earned more than that in COVID pay.

It’s important to note that the county council had no role in this. Normally, the council would approve economic elements of a new collective bargaining agreement inside county government. But in this instance, a renegotiation occurred of an existing agreement. Elrich did not ask for council approval and the council did not bless it.

The issue here isn’t whether employees should get COVID pay. Of course they should. If you were a police officer, a fire fighter, a correctional officer, a Ride On bus driver or another employee interacting with the public for hours on end, you would want it too! The issue is whether the county has a way to pay for it, especially given its troubled financial condition. And that’s where the matter gets complicated.

One place where the county can turn for COVID expenses is federal grant funds, especially those disbursed under the CARES Act. To date, the county has received $223 million in federal grant funds during the COVID crisis. The status of those funds is a bit murky, but my quick and dirty math from examining the county council’s spending resolutions is that close to all of that money has already been appropriated. Last summer, the county was hoping a deal in Congress would produce more federal funds but it didn’t happen. Now there is talk of covering at least part of the COVID pay through a FEMA reimbursement but who knows if that will occur. Looming over all of this is the question of how long the payments will continue.

If federal funds are not available, the county’s options for financing its COVID pay program are difficult ones. It could make offsetting spending cuts although most county spending is tied to labor in one way or another. (How crazy would it be to pay employees more and then furlough them?) It could dip into reserves, which might impact its AAA bond rating. It could raid retiree health care funds yet again (something that was hinted at in July), which has already earned it a rebuke from Wall Street. Or it could raise taxes.

Readers, what would you do?

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How Not to Restructure Government

By Adam Pagnucco.

Dear readers, let’s consider the following sequence of events.

2018: County executive candidate Marc Elrich campaigns on a platform of restructuring government. Elrich writes in the Washington Post:

Far from saddling taxpayers with higher bills, I will streamline county government. Unions and their members, our county’s workforce, know and trust me. That is why we announced our plan to restructure county government together. Our county is facing difficult financial times; without thoughtful changes, employees will face across-the-board cuts.

August 2019: The three county employee unions, who expected to partner with Elrich to restructure government, blast Chief Administrative Officer Andrew Kleine in writing for “hindering progress” in labor relations. Kleine, the administrative head of county government, was supposed to be a key player in restructuring.

2019-2020: Instead of streamlining government, Elrich recommends two budgets that cumulatively add 271 full-time equivalent positions to county government at a combined cost of $58 million. After trims by the county council, the two approved budgets during Elrich’s tenure add a combined 184 full-time positions and 12 part-time positions.

March 2020: Elrich recommends a budget that adds positions and raises taxes despite repeated campaign pledges to not raise taxes. The county council immediately rejects the tax hike and later implements a same services budget.

April 2020: The county’s finance department estimates that the county could lose up to a combined $600 million in the current and next fiscal years. A later estimate in July is in the same ballpark.

June 2020: The county advertises and requests responses to informal solicitation #1118023, a consultant contract for “Cost Efficiency Study Group Consulting Services.”

July 2020: The county’s budget director informs the county council about the consulting contract and its relationship with a new “government efficiency work group.” This prompts a letter to Kleine by the three members of the council’s Government Operations Committee, Nancy Navarro (chair), Andrew Friedson and Sidney Katz, asking about the identity and compensation of the consultant, the membership of the work group and prior additions of positions in the budget.

July 2020: Kleine admits to two ethics violations and the county council erupts in outrage, putting the future of Elrich’s top manager in doubt.

August 6, 2020: Kleine’s deputy, Fariba Kassiri, replies to the council with the following information: the consultant, Matrix Consulting Group Ltd., will be paid $92,000 for a twelve-week period beginning this month to advise a “cost efficiency study group” containing county government officials and representatives of the county’s largest employee union (MCGEO). “The Consultant will assist the group abolish at minimum 100 vacant positions by identifying potential cost savings and/or efficiency enhancements. Additionally, the Consultant will provide a written report approximately 3 months after the project commences that will contain findings and recommendations. The report will be shared with the County Council once it has been finalized.”

So let’s summarize. After doing nothing to restructure government for a year and a half, the administration will be paying a consultant $92,000 to help it eliminate 100 or more vacant positions after it has already added almost 200 positions in the last two budgets.

By definition, vacant positions do not have a cash cost since no one earning salary and benefits occupies them. How does eliminating them save cash? And since the county’s budget office already tracks these positions, why is a consultant necessary for identifying them?

In reading the administration’s response, I am reminded of the Leggett administration’s elimination of nearly 1,000 positions from Fiscal Year 2009 through Fiscal Year 2012 during the Great Recession. That was done mostly through attrition since roughly 6% of the workforce, or 500-600 positions, turn over each year. I could be wrong, but I worked at the county council for part of that time and I don’t recall that process being driven by consultants.

The very concept of spending money on a consultant to save zero money by eliminating vacant positions – something the county can do and has done by itself – is totally banana cakes. If this is how county management intends to address the hundreds of millions of dollars in lost revenue which will soon come due, then the county council’s bloody meat axe awaits.

The council’s letter and the administration’s answer (mysteriously not signed by Kleine) appears below.

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MoCo is Praying for a Federal Bailout

By Adam Pagnucco.

The COVID cuts have begun. County Executive Marc Elrich has sent a mid-year savings plan to the county council, which has tweaked it and given it tentative approval through a straw vote. The ostensible cut numbers are $44 million from the operating budget and another $28 million from the capital budget. That compares to revenue writedowns of $48 million in FY20 and $192 million in FY21, meaning that the cuts are roughly a third of the revenue loss.

But let’s be clear. The county has not adopted a true fiscal strategy as it did ten years ago, at least not yet. Its real strategy – if you can call it that – is to pray for a bailout from Washington.

Let’s look at what exactly these cuts are.

The most common form of “cut” in the savings plan comes in the form of lapses. The county budget defines lapse as, “The reduction of budgeted gross personnel costs by an amount believed unnecessary because of turnover, vacancies, and normal delays in filling positions. The amount of lapse will differ among departments and from year to year.”

Lapses occur naturally because of churn in the workforce. Imagine an employee leaves a position that has a cost of $100,000 a year at the end of a fiscal year. Now imagine that the county takes six months to fill the position. That lapse has cut the county’s cost of filling that position to $50,000 in the current fiscal year. However, that cost will jump to $100,000 in the next fiscal year assuming that it remains occupied. These costs are common throughout published budgets. By keeping lapsed positions vacant for longer, county departments can produce “savings.” No one is getting laid off through such practices and they are equivalent to deferring planned future spending, not making actual cuts. Department managers may wish to fill these positions but extending lapses means they will have to wait longer.

Elrich’s savings plan included over 60 lapsed positions in the savings package. Many of them were lapsed for only part of the fiscal year. It’s hard to tell the exact number because not all individual positions were listed. Their total combined cost was $7.0 million, or about a fifth of the administration’s operating budget reductions. The council added another $3.5 million by converting Elrich’s proposed abolition of vacant positions in the police department into lapses. Even though no employees are actually getting cut through these lapses, the $10.5 million counts as a “cut” because it means the county will be spending $10.5 million less than it was planning to spend in FY21.

In Elrich’s plan, nine county offices and departments – the Community Engagement Cluster, Consumer Protection, the County Council, Environmental Protection, Finance, Housing and Community Affairs, Legislative Oversight, the Housing Opportunities Commission and Procurement – relied exclusively on lapses for their share of “cuts.” Seven more – the Circuit Court, County Attorney, Human Rights, Inspector General, Management and Budget, Public Information and Technology Services – used lapses for a majority of their “cuts.”

Another set of reductions relates to turnover, telework, shifting funding to state money and adjustments for service reductions already set in place (like transit and recreation facilities). Examples of these kinds of cuts are $4.2 million in previously reduced transit service, a $2.9 million reduction for Next Gen 911 “in anticipation of state aid,” $1.9 million in “utility savings due to continued telework” and $766,713 in savings from recreation facilities that have been closed for months. Much of this is booking savings the county was already going to receive. Little of this represents new actual service cuts.

Most of the impactful cuts are concentrated in health and human services, the police department, transportation and the parks department. Then there is Montgomery College, which has agreed to direct $4.4 million of county money to its fund balance rather than spend it this year. That money will be available for the next annual budget. MCPS has been spared – for now. There are also modest adjustments to the capital budget related to cost savings on certain projects, delays on the state’s Purple Line project (which is tied to three related county projects) and deferrals of Ride On bus purchases. These trims will pale in comparison to a likely bloody capital project adjustment season early next year.

The county government knows that plucking low hanging fruit is far from sufficient to survive the current budget crisis, so why is it not doing more? Elrich answered that question in his savings plan transmission memo to the council. Elrich wrote:

Across the country, states and local governments are struggling to deliver vital services to residents and help communities to recover, while adjusting to a significant decline in revenues. Unlike other recessions, however, it is unlikely we will be able to climb our way out of this fiscal crisis without additional Federal aid unless we decimate the services that are so desperately needed by County residents. Do not get me wrong, we are grateful for the aid that the Federal government has already provided to Maryland and Montgomery County to help us navigate these uncertain times, and I am greatly appreciative of our State’s Congressional delegation for their continued assistance and leadership. Simply put, however, without additional aid from the Federal government, deep and draconian spending reductions may well be needed in order for us to balance our budget. These reductions will have lasting impacts on County residents, businesses and employees.

There is enormous uncertainty on whether there will be substantial new amounts of federal aid coming from Washington. U.S. Senate Majority Leader Mitch McConnell has previously said that he would rather let states and local governments go bankrupt than engage in “revenue replacement.” While House Democrats have included nearly a trillion dollars for state and local governments in their COVID relief bill, Senate Republicans seem content to merely allow already-expended aid to be used for broader purposes. (Right now, it can’t be used to plug deficits.) The latter approach offers little to MoCo, which is rapidly spending the $183 million in federal aid it has already received on COVID-related programs. Federal aid may ultimately be used as a bargaining chip to resolve other issues like unemployment benefits, stimulus checks, COVID liability and school reopening aid, which is not a happy place for states and local governments to be.

The county would be in better shape if it had done what county executive candidate Marc Elrich said he was going to do two years ago: undertake a genuine restructuring program in cooperation with the county’s unions to save money starting in the first 90 days of the term. Instead, the executive has added positions through his recommended budgets – some of which were trimmed by the council and others now lapsed – and the county’s top manager has spent his time running a book club while getting blasted by labor. The county’s budget director has also said that the county is looking at eliminating at least 100 vacant positions. (How does that save actual cash?) Now the county is praying that Mitch McConnell – who wants us to go bankrupt! – will bail us out.

Prayer is a great thing for matters of faith. It is much less useful for matters of budget.

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Crash!

By Adam Pagnucco.

You heard that deafening noise, yeah? It came from Rockville, specifically from Monroe Street. It was the sound of the county budget being blown to smithereens. And it probably won’t be the last loud noise heard echoing from the county seat.

Why the explosion? That’s what it sounds like when the county writes down half a billion dollars over two years.

A dryly titled document known as “Update on County Tax Revenue Estimates” will be reviewed by the county council tomorrow. Budget writers tend not to be very dramatic people. That’s one reason why summer blockbusters tend not to be centered on budget analyses. But this blockbuster contains more exploding ordinance than a World War II battlefield. Ground zero is MoCo.

The COVID-19 crisis is now blowing up budget after budget all over the world and we are not immune. In FY21 (the current fiscal year), the county was supposed to receive roughly $4 billion in locally generated tax revenues. (The county gets another $2 billion in intergovernmental aid, grants and non-tax revenues). Of the $4 billion or so in local taxes, here are the projected writedowns as of last week.

FY20 (last year): $47.7 million
FY21 (this year): $192.0 million
FY22 (next year): $282.0 million
FY23: $275.9 million
FY24: $272.8 million
FY25: $225.2 million
FY26: $173.9 million

There is bound to be variation in the out years because economic forecasting is about as certain an art as selecting number one draft picks. But when combining last year, this year and next year, the total writedown is $522 million. That’s the biggest writedown since the Great Recession.

The biggest contributor by far to the shortfall is income taxes, which have been written down through FY22 by $357 million, or 68% of the total writedown. The county’s finance department reported that income tax receipts were down $19 million from their estimate in May and $20 million from their estimate in June. Finance expects personal income, wage and salary income and income from dividends, interest and rent to fall in calendar year 2020 and then rise by a fraction of their prior annual growth over the last decade in calendar year 2021. Finance also expects resident employment to fall by 1.82% in 2020 and a further 0.05% in 2021. All of these declines will hit income taxes.

Relative to their immense size, property taxes are not written down by very much (just $41 million from FY20 through FY22). The reason is because the county’s charter limit allows property tax collections (aside from new construction and a few other categories) to rise at the rate of inflation regardless of what happens to assessments. There are two wild cards here. First, what if the rate of inflation goes to zero or even goes negative because of the collapsing world economy? And second, what if massive failures to pay rent cause property owners to file more tax appeals? If the real estate market fails, that will just add to the wreckage.

Two other wild cards might be thrown the county’s way. First is Governor Larry Hogan’s plan to shift and shaft the counties, which was defeated at the Board of Public Works but may yet return at a later date. Second is the fate of additional federal aid for counties, which is backed by Democrats in Congress but draws a wary eye from Republicans (including U.S. Senate Majority Leader Mitch McConnell). The federal government has so far allocated $183 million of aid to MoCo, but it is targeted to expenses directly attributable to COVID-19. The county needs money to cover its plummeting local revenues. If Hogan and McConnell get their way, all MoCo will get is more shrapnel.

So what does all this mean? The loud noises might not be over, folks. Could we someday hear the wailing squeals of sacred cows, prodded by unforgiving steel as they are dragged away to slaughter?

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Hogan’s Shift and Shaft

By Adam Pagnucco.

In a long-expected move, Governor Larry Hogan has submitted a long list of state budget cuts to the Board of Public Works. Cuts to state employee salaries and positions are getting a lot of attention. So is a proposed $200 million trim in state aid to public schools, although that needs the consent of the General Assembly to pass. What is less discussed is Hogan’s resumption of a time-honored practice used by higher level governments to dump their problems on lower level governments: the shift and shaft.

Here is how it works. Over the years, state governments decide that they wish to provide certain services, like schools, libraries, colleges, transportation infrastructure, public safety and so on. They could decide to provide them directly through state employees, and sometimes they do in whole or in part. But for reasons of convenience and coordination, they often choose to fund those activities through grants to counties and cities and have them provide the services to residents. Over time, state budgets get in trouble due to economic downturns so cuts are needed. State leaders don’t want to cut services, of course – they don’t want to deal with the backlash and they are happy to have counties and cities continue to provide them. They just don’t want to pay for them anymore. So they cut their grants to lower levels of government and make city and county leaders clean up the mess. (In fairness, the feds do the same things to the states.) The whole process is called “shift and shaft federalism.”

Maryland is no stranger to this concept. The Great Recession of a decade ago hit the state budget HARD. Governor Martin O’Malley’s top priority was preserving state aid for public schools. He was able to accomplish that for the most part through a series of tax hikes, a reduction of hundreds of millions of dollars in highway user revenue funds that had gone to county and municipal transportation budgets and a partial shift of teacher pension payments to the counties. The latter shift was partly ameliorated by supplemental grants paid to the poorest counties to help them meet teacher pension obligations. The counties bitterly resisted these moves, but once the state imposed them, most responded by raising property taxes, income taxes or both.

Hogan is now going down the same road as O’Malley. His cut list includes two programs that steer money to county budgets. The first one is the state’s disparity grant program, which sends money to poorer counties in an effort to remedy local tax capacity inequities. The state’s FY21 budget includes a $12.4 million increase in disparity grants which Hogan would eliminate. The second program is the state’s teacher retirement supplemental grants, which are intended to help poorer counties pay for the teacher pension payments that the state mandated in 2012. Hogan would eliminate them too. Combining the two programs, Hogan would cut their funding by 21.5%, one of the biggest percentage cuts in his entire package and close to the 25% maximum cut that the Board of Public Works could impose.

Here is the total impact by county of Hogan’s cuts to disparity grants and teacher retirement supplemental grants.

Three things stand out. First, most of these cuts are regressive. Other than Baltimore County, these jurisdictions have low assessable bases per capita, low income per capita or both. The very reason why these programs exist is to boost poor counties, so cuts to them are bound to be regressive. Second, many of these jurisdictions are governed by Republican local officials. Hogan is cutting his own people. Third, these amounts were included in county budgets passed over the last two months. Each of these reductions blows a hole in county budgets that were already going to be subject to cuts because of declines in local revenues. The tough choices will now get even tougher.

These counties will be pleased to know that Hogan is proposing to eliminate the state’s $75 million supplemental retirement contribution. So while the counties will continue to be expected to pay for state pensions without the benefit of state assistance, the state will save money by cutting its own payments.

It is good to be at higher levels of government!

More cuts to local entities will probably be coming. Hogan proposed cutting $200 million in state aid for public schools (a move that needs General Assembly approval) and $36 million in state aid for community colleges. His package also contains another $130 million “unallocated reduction to local governments” that needs to be considered by the General Assembly. There may also be more mid-year cut packages.

Good luck to the counties. And good luck to the voters too.

Update: Comptroller Peter Franchot has come out against many of Hogan’s cuts, including the cuts to the counties. Assuming that the Board of Public Works sticks to its schedule and votes on the package tomorrow, Treasurer Nancy Kopp will decide the outcome.

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Elrich Asks MCPS for Cuts

By Adam Pagnucco.

In a memo to Montgomery County Public Schools (MCPS) Superintendent Jack Smith, County Executive Marc Elrich is asking MCPS to make operating budget cuts along with the rest of county government. Elrich also makes clear that the capital budget will have to be reduced. Elrich is not asking for a specific cut number yet but indicates that the county will have a clearer picture of its tax base by late August.

What is unclear is how any spending cuts to MCPS conform with state law. The county council recently funded MCPS at maintenance of effort, which is the minimum amount of local dollars allowed by the state. If the county wants to reduce MCPS below maintenance of effort, relevant state law will need to be addressed.

Elrich’s memo to Smith appears below.

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County Government Applying for Line of Credit

By Adam Pagnucco.

For the first time in its history, the Montgomery County Government will be applying for a line of credit. That’s a sign of how seriously county officials are taking the deep economic downturn caused by the COVID-19 crisis.

MoCo’s general obligation bonds have enjoyed a AAA rating since the 1970s. The county almost lost its credit rating in 2010 but avoided that fate through doubling the energy tax, implementing massive spending cuts and passing a plan to increase reserves to 10% of revenues in ten years. (The county has since met that target.) As bad as that year and others surrounding it were, the county never had to take out a credit line.

Now it will.

County budget director Rich Madaleno confirmed that the county planned to apply for a credit line in a conversation with the county council yesterday. The county’s Office of Legislative Oversight (OLO) has posted documentation on how a credit line would function in the context of county government. County governments, especially well-managed ones, hardly ever use debt to fund operating expenses. Indeed, section 312 of the county’s charter states, “No indebtedness for a term of more than one year shall be incurred by the County to meet current operating expenses.” So if MoCo borrows against the line, it would have to pay back the money pretty quickly.

When questioned about the purpose of the credit line by Council Member Andrew Friedson, Madaleno replied:

It’s to make sure in the extremely rare case that if there were a cash flow issue because of what you well know is the schedule of disbursements – we do not collect the income tax, the state does – we get them on set schedules. If we have to pay bills while two weeks before the February distribution or the November distribution you have in essence a credit card. And as any consumer knows, in these sorts of situations, you would want that credit card in hand and not be applying for it at the register because you don’t know if you’re going to get it and what the rates are going to be. This is a best practice. This is not at all, not at all and you can ask Mr. Coveyou [the county’s finance director] – this is not at all an action being taken because we are concerned about liquidity. This is a backup insurance plan as you would want a smart organization to have in its back pocket.

Let’s remember that the county has had to deal with state distribution schedules of income taxes for decades and never needed a line of credit until now. The difference between now and those other decades is the sheer havoc the COVID-19 crisis could wreak on county finances. Consider that the current worst case scenario estimates up to a $600 million revenue loss in FY20 and FY21 combined and that the current projection for ending reserves in FY21 is $554 million. No one should take comfort from those numbers, particularly given the possibility of their getting worse.

A sneak preview of a county budget briefing six months from now.

The amount of the county’s credit line has not been established but multiple sources suggest that it could be in the hundreds of millions of dollars. No information is available yet on which financial institution(s) would issue it.

Montgomery County is not alone. State and local governments around the country either have or are seeking lines of credit, including the State of New York ($3 billion), the State of Illinois ($1.2 billion), the City of Louisville in Kentucky ($240 million), the State of Rhode Island ($150 million), Cook County in Illinois ($100 million), the City of Portland in Oregon ($100 million), the City of New Orleans in Louisiana ($100 million), Fauquier County in Virginia ($50 million) and the City of Montgomery in Alabama ($35 million). By far the most cited reason for these credit lines is to hedge against the revenue impacts of COVID-19.

Madaleno could be right that this is a smart backup insurance plan. Even Friedson, who has been hammering the Elrich administration’s budgetary practices of late, called it a “prudent action.” But let’s not delude ourselves. Montgomery County Government is preparing for a serious recession.

This year’s budget is only the beginning.

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