By Barry Rascovar
Nov. 17, 2014–The outlook for the Maryland state government Larry Hogan Jr. starts running in January is grim: A sea of red ink far into the future.
Forget about major tax cuts or other campaign promises. That was a hope more than a firm commitment. Hogan said as much to voters. His first priority then and now: getting Maryland’s financial house in order.
How bad is it?
Spending is running roughly $400 million ahead of revenues this fiscal year – and the same gap is projected for next year and the following 12 months.
Maryland’s estimated structural deficit during that time is nearly $1.2 billion.
Over the next six years, the total structural deficit is projected at close to $4.3 billion.
No wonder Hogan announced that fiscal whiz Bobby Neall would be plotting a budget triage plan by year’s end. It will be a Herculean task.
Neall has the credentials.
He sensibly downsized Anne Arundel County government as county executive. He was a strong advocate of cautious, common sense spending as a leader of the House and Senate budget committees. He’s been a voice in the wilderness on the Spending Affordability Committee crying out for far-reaching fiscal reforms – usually rejected by legislative liberals and the “progressive” O’Malley-Brown administration.
Neall correctly pointed out last week that one of the main trouble spots is the soaring cost of debt payments. Too many state bonds were issued in recent years. The proverbial chickens are coming home to roost.
Unless something is changed, debt service will triple from two years ago — to $268 million. By 2019-2020, debt service will hit $559 million.
Even worse, there’s only one realistic way to curb that rising expense — a step Hogan definitely won’t take: Raise the state property tax rate.
Other big spending-growth areas also will be difficult, if not impossible, to cut.
Education aid to the counties is set to rise by $304 million next year, higher education by $225 million and public safety by $175 million. Most of this is due to mandated increases.
Unexpected expenses related to the expansion of Medical Assistance under Obamacare adds a whopping $410 million next year as well.
The overall problem is easy to identify.
Too much spending by liberal Gov. Martin O’Malley; a weakened state economy that isn’t recovering as expected.
Not enough coming in; too much going out.
Welcome to the New Normal.
O’Malley and other liberals always assumed that Maryland would rebound strongly from the Great Recession. It never happened.
Job creation has remained uneven. It’s been flat for the past six months. Republicans in Washington have stalled growth in the federal bureaucracy that employs so many Maryland residents. Contractors in Maryland who are dependent on the federal government are seeing a definite slowdown that will continue with the GOP taking full control of Congress.
Adapting to a smaller federal government could be painful for Maryland. Yet that is part of today’s reality.
The New Normal means Maryland government will have to shrink, too. It means less money flowing back to local governments as well.
Capital spending will be affected. In the past, a small state real estate tax was sufficient to pay debt service on general obligation bonds. But property values took a sharp plunge in 2008 and have yet to recover fully. That trend may persist for the rest of the decade.
This year, O’Malley for the first time dipped into the state’s general funds to pay for debt service. With housing prices stalled, Hogan is facing far larger debt service payments coming from the general fund starting next year.
Diverting Bond Proceeds
The situation was made worse by O’Malley’s decision to pay some on-going budget expenses with proceeds from state bonds. This diversion has taken nearly $2.5 billion out of the state’s construction program and has increased debt service markedly.
It’s an ugly aspect of the New Normal.
On the campaign trail, Hogan made cutting state spending sound easy. It’s not.
For starters, 58 percent of the growth in Maryland’s budget next year is required by law or by legislative mandates enacted in 2014. This is untouchable without assent from the liberal General Assembly.
Local aid will be hard to cut, too. Eight-six percent of that money goes to schools. Touching this ever-growing pot could be next to impossible given the popularity of education among voters.
Why not slash the bureaucracy? Amazingly, the size of the state’s work force is virtually the same as it was in 2002. There might not be as much “fat” on the bone as Hogan indicated during the campaign.
Hogan may have to settle for incremental reductions throughout government. He may have to take some distasteful steps, too, perhaps nudging up the state property tax slightly. He’ll almost surely have to lower aid to the counties – another unpleasant task that won’t win him friends in counties that supported him.
He won’t win fans by shrinking the school construction program, either. But it has to be done to restore a sense of fiscal equilibrium.
What a mess O’Malley is leaving behind. He let spending spin out of control. He ignored clear signs that growth in state revenue was slowing and that federal hiring and contracting were shrinking. These are long-term trends.
Budget issues will dominate Hogan’s first four months in the State House. He will need cooperation from Democratic legislators to get Maryland out of this fiscal bind.
Gridlock is not an option.