Meyers and Deschenaux: Md.’s Budget Should Be More Comprehensive and Understandable

Photo by William F. Zorzi.

We are now in “budget season,” or more accurately, in the first of two budget seasons.

The Department of Budget and Management, at the governor’s direction and with the executive branch departments, is preparing the governor’s budget request that is due to the General Assembly on Jan. 15. This work proceeds in relative secrecy, though advocates from outside government do attempt, usually in private meetings, to influence what the governor proposes. The General Assembly’s Spending Affordability Committee also does this publicly in December by suggesting that the governor’s budget adhere to a specific spending limit.

The second budget season is far more open to the public’s view and advocacy, as the General Assembly considers and amends the budget bill that appropriates operating funds to agencies. With the passage of Question 1 on this election’s ballot, beginning with the 2024 fiscal year, the General Assembly will be able to add spending to this bill as long as the total does not exceed the governor’s requested total.

The regular budget actions of the General Assembly also include passage of a separate capital budget bill that approves state spending, almost all of which is for physical facilities that will be financed by state borrowing. (Some physical facilities are paid for out of current revenues, and this “PAYGO” spending is included in the operating budget.)

In almost all years, after the governor’s request, the General Assembly also considers a “BRFA” — for Budget and Reconciliation Financing Act — that adjusts projected spending mandated in previous years. And in most years, the General Assembly passes separate bills that impose taxes and fees, each of which affects the state’s finances.

Given that the state is now spending roughly $48 billion a year, and must follow the prescriptions of numerous state and federal laws, these budget actions are understandably hard to follow — that’s the nature of the budget beast. And unlike in many countries, where citizens are given no relevant information about what their governments are spending, in Maryland the public can access voluminous relevant information from both the governor’s Department of Budget and Management and the General Assembly’s Department of Legislative Services.

However, Maryland still needs to improve its budget transparency, by which we mean providing timely and comprehensive budget information in a form that is understandable by its citizens. Lacking full transparency, citizens cannot be assured that the government is truly acting in their interests.

Here are some of the problems with the current system (later pieces will identify more), and proposals for improvement:

Too much focus on the general fund

Most of the time when people are discussing Maryland’s “budget,” they are referring to only the “general fund.” The general fund consists of any revenues received by the state that are not dedicated by law to a specific purpose.

Not included in the general fund are “special funds,” which spend revenues that are dedicated by law for specific purposes. A notable example is the Transportation Trust Fund, which combines many sources of transportation financing (farebox receipts, taxes, federal grants, and bond proceeds) to finance both operating and capital transportation spending.

While every dollar spent by the general fund should be scrutinized, it is also important to recognize that currently the general fund represents less than 41% of state spending. That share has been declining — in fiscal 2002 it represented 49% of state spending. Adoption of the Medicaid provider tax in the Great Recession, and creation of the Education Trust Fund and the so-called Blueprint Fund as essential “special funds” for elementary and secondary education contributed to this decline.

Notwithstanding this shift, our principal budget reporting events tend to focus largely on the general fund. A conspicuous example is that when the comptroller reports the fiscal results at the end of the fiscal year, the report addresses only the general fund and its balances. There is no such report at that time concerning the financial status of the Transportation Trust Fund or our institutions of higher education.

As an example of why this is inadequate, did you know that in fiscal year 2020 transportation revenues closed $1.5 billion (8%) below estimate? This fact was not available to the public until the Department of Legislative Services reported it to the budget committees in late October, and there is no requirement that it be reported at all.

In 2014, the state enacted a law (Chapter 436) that requires the comptroller to report in the income tax instructions booklet how general funds are allocated. Page 39 of the 2019 tax year instructions shows that prior year expenditures for health, public safety, and education constituted over 82% of the general fund.

But different numbers are presented in a “personal tax receipts calculator” on the comptroller’s web page. There a taxpayer can enter the income tax paid to the state and the calculator will apportion this amount to various sectors of the budget (education, health, transportation, etc.) — even though the income tax does not fund some of these sectors.

It is unfortunate that the state presents taxpayers with such inconsistent and inaccurate information. On the other hand, we would be surprised if many taxpayers used the calculator, and amazed if many looked carefully at the tax instructions display. Most taxpayers never see this booklet because they use online software to file.

Those taxpayers who do use the booklet are unlikely to see it as an opportunity to educate themselves about the state’s finances. They are more likely to be frustrated by the complexity of the tax system and want to fill out the forms with the least possible hassle.

The good news here is that the state has recently created a Transparency Portal, which is a start towards a comprehensive open data source on the state’s finances. On this website, citizens can generate different views of the operating budget (but not the capital budget), and display the identities of major recipients of state contracts, grants, and loans.

Most important for the topic discussed here, the portal includes all fund types; for example it shows that transportation spending in fiscal year 2020 was $5.5 billion, 13% of the operating budget. Only by including this amount in “the budget” can Marylanders know how much the state is spending to reduce traffic congestion and promote mobility. And only by combining this and other special funds with the general fund can the state match in practice the ideal that the budget should be a comprehensive and understandable plan for the use of the government’s financial resources.

Public education and its lockbox

Elementary and secondary education provides another example of how concentrating on the general fund reduces understanding of how much the state spends. The fiscal year 2020 budget shows that the schools were to receive $6.4 billion in general funds. However an additional $1.6 billion dollars in special and federal funds were also appropriated for this purpose. Looking only at state funded accounts (general and special funds) the special fund share was over 9%, most of which comes from the Education Trust Fund and the Blueprint Funds mentioned earlier.

Yet that forecast of special fund revenues was too high –because casinos were shut down during the early months of the pandemic, the Education Trust Fund under attained budgeted revenues by $155 million in fiscal year 2020. We only know this because the Department of Legislative Services provided the number in an October legislative briefing.

Whether a dollar in state aid comes from the general fund or one of these two special funds makes no difference to the student who is educated with that spending. And there should be no question that the state must spent substantial sums on education in order to produce a productive workforce and eliminate glaring disparities in opportunity.

Agreement on these goals generated support for the Education Trust Fund receiving dedicated funds (the so-called “lockbox”) from casino gambling taxes. The Blueprint Fund was created to collect what additional funds could be raised to at least partially address the additional costs associated with the Kirwan initiative. Neat. But at the same time our ability to fund education now relies on successfully forecasting the dedicated revenues. If we do not, because education formulas are mandated, the general fund will be required to make up the difference.

In addition to the risk of misestimating dedicated revenue in education, the lockboxes can reduce the ability to manage the budget in a crisis. While funding a “thorough and efficient” education is a constitutional obligation, when revenues on the general fund side fall short, education revenues from the Education Trust Fund are, by statutory design, unavailable to replace the missing general revenues. This is great for education, but not so great for everything else — health, public safety, environment and so on –requiring deeper cuts in this spending.

Show state funds for each sector of the budget, and balance state funds

In an article to come, we will discuss the pros and cons of special funds across all of the state’s responsibilities, and the related growth in mandated spending. For now, we will simply observe that the approach that is most accurate and the simplest to understand would be to highlight how much the state will be spending on elementary and secondary education from all of its own fund sources.

Because “state funds” (combining general and special funds) are now not the focus of budget deliberations, options for balancing the budget can be confusing. One method of balancing the general fund — transferring cash from special funds — is often criticized as a “raids” on those funds. That is true in the sense that unless the transferred funds are repaid, the spending capacities of those special funds are reduced.

On the other hand, this practice also has the effect of spreading the pain of budget cuts rather than perhaps unjustifiably insulating some spending from scrutiny. A comprehensive budget is not only transparent, but also more resilient.

Historically, a comprehensive state budget was recognized by the legislature’s Spending Affordability Committee, which set the spending ceiling for the forthcoming budget on a slightly modified state funds basis. However, in recent years the committee has been focused on reducing the chronic structural deficit in the general fund. It has declined setting a limit on the total state-funded budget, notwithstanding a statutory requirement to do so. Meeting that requirement would be consistent with the suggestion in our previous op-ed that the state should set a more ambitious target for precautionary savings, and stick to it.

Federal funds and budget amendments

In some areas of the budget, such as health and human services, the state also relies heavily on federal grants to finance spending. To accurately comprehend state spending, therefore, the state must show total funds, which combine the federal funds with all state funds. This is important for several reasons. First, while it might be thought that federal funding is free, often those grants require a financial match from the state. Second, when the state decides to cut funds that provide that match, which is most likely during a recession, it also will lose the associated federal funding, increasing the negative impact on service delivery.

In contrast, there are also times, such as now under the federal CARES Act, when federal funding can substitute for state funds. These fund swaps help the state, but to be transparent the governor needs to report them to the General Assembly as budget amendments.

Accountability along these lines has suffered of late as the governor has used his emergency power to ignore standard legislative review of budget amendments. Indeed, the Department of Legislative Services reported this spring that the administration made $833 million in expenditures received through the CARES Act, but that only $657 million actually had been amended into the budget.

This ignores a statutory provision requiring legislative review and comment on such budget amendments. While arguably justified under exigent circumstances early on, the legislature may wish to reexamine and possibly limit period over which emergency powers may exclude the legislative branch from the fiscal process.

Budget amendments move budgeted funds among programs in a department, and add to the budget newly available federal and special funds not recognized in the budget. While tardiness in updating appropriations from the CARES Act is a problem, there is a larger issue: neither amendments proposed by the governor, nor the legislative analyses of them are readily available to the public. Although they are public documents and probably available on request, the process is far from a model of transparency.

Tax expenditures

Another glaring transparency problem is the limited attention given to the state’s tax expenditures. These are revenue losses that result from special provisions in the tax laws. Maryland now only reports on these losses every other year (and failed to do so in 2008), in reports that are not linked to the budget.

While some tax expenditures result from the state’s piggybacking on the federal tax law, others are authorized by the state, and comparable to spending by state agencies. Evaluations by the Department of Legislative Services have shown that some of these tax expenditures may not be cost-effective. If the budget process is to be truly comprehensive, it should include these tax spending program in budget displays and compare them to regular spending programs.

Better connect operating and capital budgets

Except for the Transportation Trust Fund, the state now has separate capital and operating budgets. The two budgets use different types of revenues–the operating budget is funded by taxes and fees, while the capital budget, used to fund capital projects, is supported through the sale of bonds. However, the two budgets are also interconnected. Principal and interest on outstanding debt is funded through the operating budget. And PAYGO capital are also funded in the operating budget.

Nowhere in the documentation supporting the budget is a comprehensive summary of TOTAL appropriations provided. Custom has it that the capital and operating budgets are distinct. That is how both the executive and legislative branches deal with them.

On the governor’s side, separate units develop each budget. On the legislative side, separate subcommittees handle them. What is missing is a perspective that considers both operations and facility needs in areas like public schools, higher education, hospitals and prisons. To a degree capital and operating projects might be substitutes for each other, they should compete for funding; this logic is one justification for combining capital and operating in one Transportation Trust Fund.

Interaction between the two budgets will surely increase as a consequence of a change in accounting rules governing bond sales. Until now, premiums received at sale have been used to subsidize debt service. While this had the effect of reducing general fund expenses for debt service, it came at the cost of higher future interest payments — in essence shifting costs into the future. Under the new rules, use of this device will be limited to three years’ worth of interest.

Remaining premiums (which can reach $200 million) may be used for capital spending, substituting for projects in the capital budget or PAYGO.

Another reason to integrate these budgets is climate change. The state’s goals for reducing its carbon footprint are likely to become more ambitious as the public increasingly recognizes the risks of global warming. The state will need to increase the value it places on reducing energy consumption (funded in the operating budget) during the useful lives of its capital investments.

Well, that’s enough for now. Later.

— ROY T. MEYERS AND WARREN DESCHENAUX

Deschenaux ([email protected]) is a former executive director of the General Assembly’s Department of Legislative Services, and served as the legislature’s chief fiscal analyst. Meyers ([email protected]) is professor of Political Science and affiliate professor of Public Policy at UMBC; he is a Fellow of the National Academy of Public Administration and has won awards for his research on government budgeting. They plan to write additional commentaries on the budgeting process in the weeks ahead.