Analysts: Surplus Expected in 2020 Budget — But Good Fortune May Not Last

General Assembly budget builders will convene in Annapolis in January with a surplus and plenty of options for spending it.

The outlook for the 2020 fiscal year has improved by about $1 billion since the end of the last legislative session thanks to several factors: revenues increased after the closeout of the 2018 fiscal year, revenues for this year were revised upward, higher property tax revenues and bond premium revenues are expected, and Medicaid enrollment has leveled so that program’s costs are down, among other factors.

“It’s an extraordinarily good period for the state finances,” David C. Romans, fiscal & policy coordinator for the Department of Legislative Service’s Office of Policy Analysis, told the General Assembly’s Spending Affordability Committee in Annapolis on Thursday.

Thanks to the good fortune, lawmakers are mulling a fiscal year 2020 budget that includes a $168 million cash balance and a $2 million structural balance.

Analysts on Thursday provided the Spending Affordability Committee with a list of options for spending the excess revenue, including:

— leave extra money in the state’s Rainy Day Fund;

— approve a one-time infusion of infrastructure spending;

— increase funding for one-time costs associated with the recommendations of the Kirwan Commission on school funding; or

— address the $11.4 billion unfunded liability for post-employment benefits.

While the state’s budget process is largely driven by Gov. Lawrence J. Hogan Jr. (R), the Spending Affordability Committee is charged with making recommendations for state spending, new debt authorization and state personnel levels.

On Thursday, analysts explained the state’s strong current financial position but also warned against looming costs in future years.

The 2018 fiscal year closed out with a $44 million structural balance. It’s the first time since 2006 that the general fund has closed with a structural surplus, said David B. Juppe, a policy manager in the Department of Legislative Service’s budget analysis division.

New figures in September from the Board of Revenue Estimates are the basis for a projected $431 million structural balance at the end of the current 2019 fiscal year.

“This is not an invitation to cut taxes and spend more money,” Juppe joked.

The bump slows beginning in fiscal year 2020, the budget lawmakers will be finalizing this upcoming session. It still includes a cash balance and structural surplus, but not the big bumps that were realized in 2018 and projected in 2019.

“In the short term, the news is very good: there’s a lot of cash,” Juppe said.

However, the Maryland economy is not performing as robustly as could be hoped, federal spending is contracting and one of the state’s primary financial advisers is predicting an economic downturn in the next five years.

Current estimates show that the state’s projected structural balance of $2 million in fiscal year 2020 will drop to a $600 million deficit in 2021 and dig even deeper until it hits more than $1.3 billion in 2021.

Revenue growth is expected to stagnate, while spending is expected to increase for programs including education aid and Medicaid.

One factor in the projected revenue slowdown is the state’s economy. Maryland’s unemployment rate of 4.2 percent is higher than the U.S. rate of 3.7 percent.

“That’s really unusual. That puts Maryland’s unemployment rate firmly above the U.S. and that is not common at all in the history,” Policy Analyst Theresa M. Tuszynski said.

For eight straight months, Maryland’s unemployment rate has been higher than the U.S. rate, which has not happened in the entire history of the statistical series going back to the 1970s, Tuszynski said.

In September, Maryland had the 12^th highest unemployment rate in the country.

“We are seeing fairly weak employment growth,” Tuszynski said.

Analysts also talked to lawmakers about a shortage of state employees.

Analysts project a state employee workforce of about 80,932 positions in 2020, an increase of about 46 positions over the current year, Laura M. Vykol, a policy analyst said.

However, in October, there were 5,959 vacant positions in the executive branch. The largest number come from the Department of Public Safety and Correctional Services, where about 96 percent of the 2,253 vacancies are for correctional officers, a shortage the state has been trying to address for years.

“The department has had an ongoing issue with recruitment and retention,” Vykol said. The current vacancy rate is an increase of 500 vacant positions since this time last year.

“This is extraordinary, the level of vacancies in public safety,” Romans said. “…We normally wouldn’t see 21 percent of the positions being vacant.”

Only four state agencies have not seen increases in their vacancy rates since last year: the Department of Natural Resources, the Department of Labor, Licensing and Regulation, the Department of Education and the Department of Housing and Community Development.

The committee is also considering recommendations for the state’s capital building programs.

The cost to issue $100 million in general obligation bonds is generally about $148.4 million after debt service costs, analysts said. The Department of Legislative Services is recommending that the state use some of the excess fund balance to pay for capital needs with cash.

How to handle capital debt has been a sticking point between the Hogan administration and the Legislature for the last four years. The Capital Debt Affordability Committee — with a majority of members appointed by the administration — has recommended that capital debt authorizations never exceed $995 million; the Spending Affordability Committee recommendation is $90 million more for 2020, reflecting 1 percent annual growth. Neither of the authorization levels are sufficient to meet capital commitments already made, analysts said.

The committee is expected to finalize its recommendations on state employee levels and spending in December.

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