Taming MD’s Structural Deficit

By Barry Rascovar

April 27, 2015 —  Can Republican Gov. Larry Hogan Jr. tame Maryland’s long-standing structural budget deficit? Judging from his first stab at it, he’s more than halfway there.

But high hurdles lie ahead if he is to reach the point where the state’s ongoing revenues far exceed annual spending.

Taming MD's Structural Deficit

Hogan may grumble to appease conservative groups about the remaining $206 million structural imbalance in the budget that’s been approved for the fiscal year starting July 1.

Yet that is a sharp reduction from the deficit anticipated back in November of a $525 million shortfall under Democratic Gov. Martin O’Malley.

Not Too Shabby

The General Assembly’s Department of Legislative Services (DLS) says Hogan is 68 percent of the way toward wiping out the structural imbalance — and if he continues to hold firm in denying state workers a 2 percent pay raise starting July 1, he will reach 82 percent of his goal.

Not too shabby for a Republican governor facing an overwhelmingly Democratic legislature.

Those deficit numbers will grow somewhat if Hogan decides to give Democratic lawmakers some of the $202 million they asked him to restore to various education, health and wage programs.

Still, Hogan begins preparation for his second budget in remarkably good shape.

It’s no secret that the Big Three growth items in Maryland’s budget are: 1) soaring debt service payments; 2) continually rising education aid, and 3) ever-rising health-care costs.

Too Many Bonds

Debt service alone will jump by $167 million next year. Payments on general-obligation bonds has tripled in the last three years. Hogan needs to take a hard look at ways to reduce or slow Maryland’s issuance of those bonds, including the always popular school construction allocations, which in July’s budget hits a record $380 million.

Complicating matters for the governor is Maryland’s too-slow economic recovery from the Great Recession. DLS estimates state revenues in fiscal year 2017 will grow a modest 4 percent. Yet it will take a 5.7 percent growth rate to balance spending with revenue.

More economic development is the key. That’s a long-term proposition, though.

Hogan’s aggressive “Maryland is open for business” theme won’t result in major tax gains for the state any time soon. So the governor will have to continue cutting back on state agency spending while finding areas where deeper cuts can be made without creating a harsh backlash in the legislature.

Ratcheting down the structural imbalance is Hogan’s best course. The problem is that he’s also determined to deliver on his main campaign promise — lower taxes.

Thus, balancing the state’s books isn’t enough. He’s got to go further so he can justify a tax cut that does not create a new structural deficit.

More Daunting Problems

That’s where Hogan’s problems multiply. Aid to local governments is a likely target, until you start to pull the plug on specific spending programs, like money for schools, police, fire-fighting, the poor, libraries and parks.

MD's Structural Deficit

Indeed, almost every area of state government spending affects huge numbers of Maryland citizens. Hogan must take care not to antagonize too many of them. If he does, it could jeopardize his re-election

Looking down the road, Hogan faces even more daunting budget difficulties, Indeed, DLS puts the state’s combined deficit for fiscal years 2019 and 2020 at $1.165 billion .

As bad as this sounds, it is a huge improvement over what O’Malley left behind: a combined estimated deficit for those two years of nearly $2 billion. Hogan reduced that future imbalance by 41 percent in his first budget.

Fundamental spending changes won’t be possible with Maryland’s Democratic legislature acting as a brake on Hogan’s budget-cutting tendencies. That’s why the slow-but-steady approach makes so much sense.

It won’t please Hogan’s absolutist supporters, but gradualism could prove the most practical and politically astute path to follow.

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