The worst of the Great Recession may be over for many businesses, but it has been well known for decades that state revenues lag at least a year or two behind an economic recovery.
With the recovery limping along, job growth slow and the housing market in a slump, all the major sources of state revenue are barely rising — the income tax, sales tax, corporate spending and profits, real estate transfers and the lottery.
“States are facing the worst financial crisis since the Depression,” said Jon Shure of the Center for Budget & Tax Policy in Washington. The states are experiencing “the biggest drop in revenues that they’ve ever seen.”
Maryland is not as bad off as most states, and to borrow from area economist Anirban Basu, not so bad may be the new normal. For Howard County, Basu told the Chamber of Commerce “least worst” is “the new excellent.”
According to the official forecasts, state revenues will grow slightly this year, but that may slow in 2013.
Higher Demand for State Services
The problem with this picture is that a lagging economy with many jobless [citizens] increases demand for state services.
This is different than most businesses. When consumer spending drops, businesses generally need to spend less on personnel (hence layoffs), goods/inventory and new equipment. (There are always those counter-cyclical businesses which profit from bad times: foreclosure and bankruptcy attorneys, used car sales and so on.)
More unemployed (and lower incomes for the underemployed) means higher demand for Medicaid, unemployment insurance, welfare and food vouchers.
Because people continue to have sex in good times and in bad — and the five-year lag between birth and school age — the number of children entering school continues to rise (except when the economy is so bad that people leave town and use more birth control).
With revenues down but demand up, the state can’t always do what a business might: shutter some stores or close a plant. The state actually has trimmed back personnel in agencies, so some services have suffered due to staff shortages — largely for the needy, but also in back office support and areas such as environmental enforcement.
Closing Prisons Not an Option
It would be nice to close a prison or two, saving all those costs for correctional officers, food workers, health care and pharmacy services. But most citizens would object to having more criminals on the street. (That could be a real option for people in jail for non-violent, drug-related crime. But God forbid we let up on the war on drugs — it’s been so effective.)
You get the picture: Revenue grows slower than demand for entitlements and the promises for increased spending on education and other services. The gap between the lower revenues and higher demand is the structural deficit, which is estimated to be $1.1 billion next year.
One solution is more cuts in spending, which is typically what a business would do. Advocates for education and social services, public employee unions and progressive groups are calling for a “balanced approach.” They argue that cuts need to be balanced with tax increases on millionaires, corporations, Internet sales and a long list of consumer services, not to mention cigars and gasoline. That’s a pretty inflammatory mix, all told.
Balanced Approach Embraced
The legislature’s Spending Affordability Committee embraced this “balanced approach” last month, recommending that the governor halve the ongoing billion-dollar deficit using both unspecified spending cuts and possible tax hikes.
The committee, dominated by Democratic fiscal leaders from both houses, rejected Republican attempts to balance the projected $15.9 billion general fund budget without any tax hikes. Republicans also failed to put a lower cap on new debt as the committee encouraged Gov. Martin O’Malley to “accelerate job-producing investment in infrastructure construction.”
That’s exactly what the Capital Debt Affordability did four days later, increasing the amount of general obligation bonds to be issued next year by $150 million to almost $1.1 billion. That’s about average for the 15-year bonds the state has been issuing in recent years, but the debt committee had lowered the amount in September to reflect flat revenues.
As of June 30, the state had issued about $7 billion in general obligation bonds backed by the full faith and credit of the state. This does not include billions more in bonds backed by the transportation revenues, tolls, university fees and other revenues.
“We need job creation now,” said State Treasurer Nancy Kopp, who chairs the Capital Debt Affordability Committee, which makes recommendations to the governor and legislature. “The cost of money is very low now, and the cost of construction is low now.”
“I think we can get a bigger bang for the buck now,” Kopp said. These construction and renovation projects are going to be done at some point, she said.
The increase in bond debt is still “within the constraint of spending affordability guidelines,” Kopp said. General obligation bonds are supposed to stay under 4% of the personal income in the state, and the payments on the debt should be under 8% of general fund revenues.
Despite all this, Comptroller Peter Franchot vehemently objected to the increase in debt and all the talk of tax hikes. The once tax-friendly delegate from liberal Takoma Park has now become the state’s chief fiscal hawk, positioning himself as the fiscal conservative in the 2014 Democratic race for governor.
“One week we are taking in less money, and the next week we are spending more,” Franchot said in an interview, referring to a write down of estimated revenues. “We are doubling down with a vote on a failed economic model” — that higher taxes, more spending and more debt can reduce unemployment.
And, of course, and principal and interest on debt must be paid off down the road, possibly leading to higher state property taxes.
Audits Tell of Misspending
Undermining the arguments for increased taxes and spending are a long series of audits this year that showed agencies misspent money, hoarded funds or failed to collect money that was due.
The once vaunted State Highway Administration issued contracts for construction inspection on projects where earlier funding for the same purpose was still unspent by the same contractors. Medicaid paid millions in claims paid for people who had already died out of state. The Department of the Environment gave grants for septic system upgrades on vacant land. The Child Support Enforcement Administration failed to collect at least $168 million from deadbeat parents using the legal tools at its disposal, such as wage garnishment. State employees issued nursing licenses to unqualified people, likely part of a fraud scheme. State credit cards in several agencies were used for personal purchases.
And in the worse instance we wrote about last month, the Developmental Disabilities Administration failed to spend $25 million in state funds to care for the most serious disabled, and tried to hide the surplus.
For a full list of these audits go to MarylandReporter.com, go to the menu and click on News and Audits.
These audits don’t even count the waste, fraud or abuse that may be occurring with the $6 billion in aid going to local public schools and the state university system.
Legislators need to ask: Why pour more money into this leaky bucket?
In the legislative districting map that came out before Christmas, Howard County came away a winner, picking up a new delegate seat in single-member District 9A. This frequently-rumored new seat was reputedly designed for county council member Courtney Watson so she won’t challenge Del. Guy Guzzone for county executive in the Democratic primary in 2014. (Watson has said she’s not interested in state office.)
The new seat comes at the expense of a Republican seat in Carroll County that is now part of District 9, which is represented by Sen. Allan Kittleman, the West Friendship Republican. Republican Dels. Gail Bates and Warren Miller picked up Republican-leaning precincts in Fulton for the renamed District 9B.
The new District 9A is a swing district in an area that has elected both conservative Democrats and Republicans. It also happens to be the home not just of Watson, but of the two Democratic nominees who challenged Bates and Miller last year, Mary Ann Maher and Jonathan Weinstein.
Bobo’s West Columbia District Merged
The other major change for Howard County is that Del. Liz Bobo, one of the most liberal members of the House of Delegates, will no longer have her own single-member district in West Columbia, the most liberal voting area of Howard County. Instead, her District 12B now is joined with two-member District 12A represented by Dels. Steve DeBoy and Jimmy Malone from Catonsville-Arbutus, two of the more conservative-leaning Democrats in the House.
This creates a rather oddly-shaped, three-member district in which the liberal Columbians balance the more conservative voting areas in Southwest Baltimore County. Republican candidates there have mounted serious challenges to DeBoy.
Why does a section of Ellicott City get a single-member delegate district that could easily be part of a three-member district with adjacent territory, while the more geographically and politically distinct West Columbia gets attached to two-member district in another county?
Because they can. That’s how the Democratic leaders, including O’Malley’s staff, manipulated the maps this year. A three-member District 9 would likely elect three Republicans.
The current legislative map has 32 three-member delegate districts out of a total 47 districts, from which senators are elected. This year’s map has only 22 three-member districts, meaning there are 50 one- and two-member districts, 20 more than exist now. This allows the map-drawers to honor Maryland constitutional rules that districts be compact, contiguous and equal in population, observing geographic and jurisdictional lines for the senate districts, while carving out subdistricts for partisan purposes. Read the Anne Arundel column for more about the impact of redistricting.