Part A Budget and State Aid Operating Budget Overview From a budgetary perspective, the summary of the 2005 legislative session resembles the previous two sessions in many respects. The fiscal 2006 spending plan again relies upon one- time revenues, limited ongoing revenues, and contingent budget reductions, in combination with legislation to provide mandate relief, improve tax compliance, and implement limited new and enhanced fee increases. The fiscal 2006 budget, as enacted, is balanced on a cash basis; however, a structural gap between ongoing revenues and spending continues to exist and is projected to persist through the foreseeable future. Budget in Brief The Fiscal Year 2006 Budget Bill, House Bill 150 (enacted) provides $25.8 billion in appropriations for fiscal 2006 – an increase of $1.6 billion (6.5 percent) over fiscal 2005. 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 45.7 percent of the total budget. Aid to local governments accounts for 22.9 percent of the budget, and 19.2 percent supports entitlement programs. Remaining appropriations provide funding for PAYGO capital spending, pay debt service on State general obligation (GO) bonds, and set aside funds in accounts of the State’s Reserve Fund. General fund spending grows $895.0 million, or 7.9 percent above fiscal 2005. Excluding appropriations to the State Reserve Fund and for PAYGO capital, ongoing spending rises 5.9 percent. General fund budget growth is driven mostly by spending on aid to local jurisdictions, which grows 9.7 percent. State aid continues to increase primarily due to A-1 A-2 The 90 Day Report Exhibit A-1.1 Maryland's $25.8 Billion Budget Where It Comes from: Budget by Fund Source Higher Education 10.4% Federal General 23.9% 47.2% Special 18.5% Where It Goes: Budget by Purpose PAYGO Capital Local 8% Government Reserve Fund 23% 1% Debt Service 3% Entitlements 19% State Agencies 46% Part A – Budget and State Aid A-3 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, due mostly to medical inflation and enrollment growth. Other enhancements include for additional personnel to reduce public defender caseloads, laptop computers for State Police vehicles, higher wages for community direct care workers providing services to the developmentally disabled, and more funding for higher education institutions and scholarships. Special funds increase by $338.6 million, or 7.7 percent mostly associated with growth in the transportation capital program following the revenue increase passed at the 2004 session, restoration of most of the statutory funding for highway user revenues, partial restoration of Program Open Space and agricultural land preservation funding that had been diverted to the general fund in fiscal 2005, water quality programs supported by the new Bay Restoration Fund, and transportation operating cost increases. Federal funds rise by $249.6 million, or 4.2 percent mostly in the areas of Medicaid, food stamps, and Section 8 housing. Higher education fund appropriations increase by $91.8 million, or 3.5 percent in fiscal 2006. Most of this additional spending reflects tuition and other revenue growth. Actions related to State personnel provide for a 1.5 percent cost-of-living adjustment (COLA), employee increments, a one-grade salary adjustment for the Deputy State Fire Marshal series, and fringe benefit cost increases. A position cap was again adopted for Executive Branch agencies for fiscal 2006, exclusive of higher education positions. The cap was set at 52,686 regular authorized positions, which will require the abolition of 179 positions by the Governor by July 1, 2005. Funding associated with most position abolitions and a portion of the budget that would have provided another 0.5 percent COLA will support the State’s share of employee and retiree health insurance. This action is expected to mitigate increases in prescription drug co-payments that are likely to be implemented in fiscal 2006. The employee deferred compensation match program, which had been recommended for deletion by the Governor, was funded at $400 per eligible employee. For a more detailed discussion of personnel issues see the subpart “Personnel” within this Part. Framing the Session: 2004 Interim Activity Faced with the prospect of a continuing and growing structural budget problem, the Administration chose to implement a strategic budgeting effort designed to reduce future spending by directing agencies to comprehensively evaluate and rank programs and services. While this exercise ensued, the revenue picture improved and led to spending affordability recommendations to permit growth in line with projected economic activity. Against this backdrop, rising medical malpractice insurance rates were addressed at an end-of-year special session. A-4 The 90 Day Report Strategic Budgeting In June 2004, along with the distribution of agency budget instructions, the Administration announced a strategic budgeting exercise which directed agencies to examine spending priorities and develop fiscal 2006 requests that reflected up to a 12 percent reduction in spending relative to fiscal 2005. Prior budgets had been reduced either on an across-the-board basis or incrementally based on employee attrition, so this proposal sought to frame the provision of State services on a more rational basis. Economic Activity Improves the Budget Picture In 2004 the economy showed better than expected performance, helped by strong consumer spending, construction, and continued low interest rates. General fund revenue in fiscal 2004 closed out $261 million higher than expected. In December, the Board of Revenue Estimates (BRE) revised its fiscal 2005 general fund estimate upward by $478 million, an increase of 4.5 percent over fiscal 2004 due to economic growth and higher than expected one- time receipts due to Delaware Holding Company settlements. The BRE estimate for fiscal 2006 projected 2.6 percent total revenue growth or 4.0 percent excluding the settlement money in fiscal 2005. In March the BRE revised upward the estimates for both fiscal 2005 ($102.9 million) and 2006 ($84.1 million) reflecting strong revenue attainment in the months since December. Spending Affordability Committee Recommendations The Spending Affordability Committee prepared its final report to the Governor in December 2004, which included a number of recommendations pertaining to the operating budget. They included: Spending Limit and Sustainability: Consistent with projected growth in personal income, the committee recommended limiting growth on a spending affordability basis to 5.7 percent over spending approved at the 2004 session, with the intent that the fiscal 2006 budget be developed in the context of out-year sustainability. To this end, the committee recommended that the imbalance between ongoing revenues and ongoing expenditures be resolved by fiscal 2007. During the session, the limit was increased to 6.7 percent. Personnel: The committee recommended continuation of a ceiling on regular positions in the Executive Branch, exclusive of higher education. It was further recommended that any new positions should be limited to those needed for public safety, homeland security, new facilities, and workload increases and essential services at 24-hour operated facilities, offset by abolitions elsewhere in the budget. State Reserve Fund: Because the balance in the Rainy Day Fund was projected to exceed the 5 percent level, the committee recommended the withdrawal of the excess balance to support the budget only after exhausting all other cash balances and options. Part A – Budget and State Aid A-5 The First Special Session of 2004 Through most of the interim the issue of looming increases in medical malpractice insurance rates was discussed, along with calls for a special session to address the problem. Efforts to convene a special session in the summer or fall were unsuccessful, partly due to lack of a consensus on how to reduce rates without exacerbating the condition of the general fund. Ultimately the Governor issued Executive Order 01.01.2004.70 which convened the First Special Session of 2004 on December 28, 2004. The Administration’s proposal to subsidize medical malpractice insurance rates and boost Medicaid provider rates with general funds was modified to substitute funding from a 2 percent premium tax on Health Maintenance Organizations (HMOs) and Medicaid Managed Care Organizations (MCOs). Although the Governor vetoed the measure, the legislature overrode the veto, and the legislation was enacted as Chapter 5, Acts of the 2004 Special Session. Governor's Spending Plan as Introduced Governor Ehrlich’s spending plan submitted during the 2005 session included the budget bill and two supplemental budgets, three budget reconciliation bills, and separate legislation pertaining to environmental fee increases and tax credits for veterans. The original fiscal 2006 budget totaled $26.2 billion, exclusive of reversions and $266 million in contingent reductions dependent on provisions in the budget reconciliation legislation. Based on these assumptions, the closing fiscal 2006 general fund