The 90 Day Report

Part A Budget and State Aid Operating Budget Efforts to balance the budget over the past several years largely centered on a combination of budget reductions, one-time fund transfers, imposition of short-term revenue increases, and to a lesser extent ongoing revenue enhancements. These efforts ensured balance on a cash basis, but failed to address the underlying problem. Legislation to permit video lottery terminals at horse racing facilities, a key component of the newly elected Governor’s plan to fund education aid and address the structured budget deficit, failed at the 2003 session. Budget in Brief Governor Ehrlich introduced a fiscal 2005 spending plan that again relied upon one-time revenues, limited ongoing revenues, and contingent budget reductions. The Administration’s vision for fiscal equilibrium in subsequent years again relied upon the introduction of video lottery terminals, a position later endorsed by passage through the Senate. The House of Delegates developed an alternative concept built around a package of revenue enhancements offset by property tax relief and expansion of the refundable earned income tax credit. These issues were ultimately resolved by the failure to adopt any major ongoing revenue measures, and a flurry of activity in the final days of session to produce a balanced operating budget, budget reconciliation and revenue legislation, and a capital budget. As enacted, the Budget Bill, Senate Bill 125 (enacted), provides $23.6 billion in appropriations for fiscal 2005, an increase of $710.5 million (3.1%) over fiscal 2004. Exhibit A-1.1 illustrates funding by type of revenue. Slightly less than one-half of the budget is supported by general funds, with lesser proportions supported by dedicated special funds, federal aid, and higher education dollars. State agency operations constitute the largest area of spending, representing 47.8 percent of the total budget. Aid to local governments accounts for 22.4 percent of the budget, and 19.5 percent supports entitlement programs. A-1 A-2 The 90 Day Report Exhibit A-1.1 Maryland's $23.6 Billion Budget Where It Comes from: Budget by Fund Source Higher Education 11.0% General Federal 47.4% 24.1% Special 17.5% Where It Goes: Budget by Purpose Reserve Fund 0.5% Debt Service PA YGO Cap ital 3.1% 6.7% Local Government State Agencies 22.4% 47.8% Entitlements 19.5% Part A - Budget And State Aid A-3 Remaining appropriations fund PAYGO capital spending, pay debt service on State general obligation bonds, and set aside funds in accounts of the State’s Reserve Fund. General fund spending grows $887.6 million, or 8.6 percent above the fiscal 2004 level. Ongoing spending rises 7.7 percent, when appropriations to the State Reserve Fund and for PAYGO capital are excluded. General fund budget growth is driven mostly by spending on entitlements and aid to local jurisdictions, which grow 11.2 percent and 8.5 percent respectively. State aid increases primarily due to Chapter 288, Acts of 2002, the Bridge to Excellence in Public Schools Act, which mandates substantial annual increases in education aid through fiscal 2008. Entitlement spending is driven mostly by the Medicaid program and reflects the substitution of general funds for one-time federal and special funds received in fiscal 2004. Within State agencies, another $90 million is provided to substitute for one-time federal aid that was received in fiscal 2004 and used to fund the Department of State Police budget. Funding for a number of small enhancements was included for need-based scholarships, a second phase of personnel to reduce public defender caseloads, juvenile justice programs, and substance abuse treatment. Higher education fund appropriations increase by $118.9 million, or 4.8 percent in fiscal 2005. Most of this additional spending reflects tuition and other revenue growth. Federal and special fund appropriations both decrease in the budget. Special funds decrease by $133.4 million, or 3.1 percent due largely to project cash flow in the transportation capital program. Federal funds decline $162.7 million, or 2.8 percent due again to transportation capital cash flow but also due to the one-time federal aid that was received in fiscal 2004 that artificially boosted the appropriation. Actions related to State personnel provide for a $752 per employee general salary increase, salary increments, selected position reclassifications, and more generally for fringe benefit cost increases. A position cap was again adopted for fiscal 2005, with the modification that it now only applies to non-higher education positions in the Executive Branch. The cap was set at 52,834 regular authorized positions, which will require the abolition of another 351 positions by the Governor by June 15, 2004. Funding for the employee deferred compensation match program was again deleted from the budget as a cost savings measure. For a more detailed discussion of personnel issues see the subpart “Personnel” within this Part A. Framing the Session What Is Past Is Prologue The circumstances facing the General Assembly in 2004 were shaped by events and actions that were set in motion as early as 2001, as general fund revenues fell during the economic downturn that began in March 2001 and were exacerbated by terrorist action in September 2001. Legislation enacted in 2002 established annual funding mandates for local education aid, but contained a “trigger” provision that had to be acted upon in 2004. A-4 The 90 Day Report Revenue Decline: As indicated in Exhibit A-1.2, actual ongoing general fund revenue attainment fell 5 percent in fiscal 2002 and another 1 percent in 2003. Although efforts were undertaken to reduce spending, appropriations were not reduced to the level that revenues had fallen. So, even though economic activity has improved recently the growth is from a lower base. Exhibit A-1.2 Ongoing Revenue and Expenditure Trends Fiscal 1998 – 2003 $11,500 $10,500 $9,500 Millions $8,500 $7,500 1998 1999 2000 2001 2002 2003 Fiscal Years Ongoing Spending Ongoing Revenues Bridge to Excellence in Public Schools Act Developments: Chapter 288, Acts of 2002 mandated significant increases in primary and secondary education aid. The legislation required roughly 10 percent increases in education aid, which was expected to result in a cumulative increase of $1.3 billion by fiscal 2008. First year funding was provided by an increase in the cigarette tax, but revenue to fully fund complete implementation was not provided. A provision in the bill stipulated that full funding would remain in effect only if the legislature affirmed its affordability by joint resolution during the 2004 session. Otherwise, lesser increases of about 5 percent annually would go into effect. On July 2, 2003, the Attorney Part A - Budget And State Aid A-5 General issued an opinion that the joint resolution “trigger” could be an unconstitutional legislative veto. This new wrinkle complicated consideration of the “trigger” issue during the session. 2003 Interim Activity Significant federal and State actions during the 2003 interim impacted the general fund balance and required subsequent adjustments by the executive to ensure balance. The cumulative effect of vetoed legislation, one-time federal aid, budget reductions, revenue revisions, and the recommendations of the Spending Affordability Committee served to frame the 2004 session and the decisions required by the legislature. Corporate/Health Maintenance Organizations Tax Veto House Bill 753, passed during the 2003 session, would have contributed $135 million toward the general fund balance through changes in State corporate income tax law (principally to address use of Delaware Holding Companies), imposition of a 10 percent corporate income tax surcharge for three years, and application of the 2 percent insurance premium tax to health maintenance organizations and Medicaid managed care organizations. The Governor vetoed the legislation in May 2003, creating a roughly $100 million hole in the fiscal 2004 projected general fund end-of-year balance. One-time Federal Funds In May 2003 the President signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 into law, which implemented certain federal tax cuts over a 10-year period but also provided the states with one-time fiscal assistance. Maryland received approximately $350 million distributed between fiscal 2003 ($123 million) and 2004 ($127 million). This was comprised of general aid ($90 million each year) that was used to supplant general funds in the State Police budget each year, and increased reimbursements for the Medicaid program. This unexpected aid more than offset the revenue loss due to the veto of House Bill 753, and was the primary reason the State ended fiscal 2003 with a $122.7 million general fund balance. Reductions to the Fiscal 2004 Budget By June 2003 the administration began exploring options for reducing the budget as an incremental step toward reducing the long-term structural deficit. Provisions in the State Finance and Procurement Article permit the Governor to reduce certain appropriations by up to 25 percent. Based on an interpretation of budget bill language pertaining to the allotment of funds, the administration placed $655.1 million of agency general fund appropriations in contingency reserve. On July 30, 2003, the Governor proposed and the Board of Public Works (BPW) adopted $208.2 million in reductions ($204.3 million general funds and $3.0 million in special funds) to the fiscal 2004 appropriation, with the intent of reducing the long-term structural deficit. The reductions included the abolition of 82.5 filled and 879.58 vacant regular positions. The savings were achieved by curbing government services, substituting federal and A-6 The 90 Day Report special funds for general funds, reducing the bureaucracy, cutting grants to higher education institutions and local governments, and shifting costs to providers through rate reductions and program recipients through fees.

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