The state budget shell game

By Cathy Keim

Governor Hogan was elected because voters had had enough of the O’Malley spending spree. Before Hogan was sworn in, the budget shortfall of $1.2 billion over the next eighteen months was already public knowledge. Everybody knew that cuts were coming; only the particulars were uncertain.

Because Maryland has a strong executive branch, the General Assembly can only cut the budget or move money around. It cannot increase spending. The House is squandering many hours debating how to find the money to undo cuts that Hogan made, particularly to schools and the state employees’ COLAs.

Last July, Martin O’Malley gave the state employees a cost of living increase of 2% despite knowing that the budget was not in good shape. I would like to point out that employees in the private sector are not seeing cost of living increases. Why the state employees deserve a taxpayer-funded pay increase when the taxpayers are not getting their salaries increased is hard to justify. Governor Hogan rescinded that increase in his budget because the state did not have the funds to support it.

He also declined to fund the schools to the level they desired. Yet his budget gave a 1.3% increase to education over last year’s budget, so it is hard to make the case that he cut the budget drastically. One might have expected a 0% increase when we are facing a $1.2 billion deficit in the upcoming months. That sort of deficit on a smaller scale is what causes taxpayers to choose ground beef over steak. But then we have to actually balance our checkbooks rather than use creative accounting to get the job done.

Let’s take a moment for some background information. Despite our budget shortfall, Moody’s just gave Maryland an AAA rating once again.

Why is this AAA Bond rating so important? “Retention of the AAA ratings affirms the strength and stability of Maryland bonds during difficult and volatile times,” said state Treasurer Nancy Kopp. “This achievement allows us to continue to invest in our communities’ schools, libraries, and hospitals while saving taxpayers millions of dollars thanks to the lower interest rates that follow from these ratings.” (Emphasis mine.)

Maryland is one of only 10 states that has the AAA bond rating from all three firms that assign ratings, Moody’s Investors, Standard and Poor’s, and Fitch Ratings. Moody’s included the following warning when assigning the AAA rating:

WHAT COULD MAKE THE RATING GO DOWN

  • Economic and financial deterioration that results in deficits and continued draw downs of reserves without a plan for near-term replenishment
  • Failure to adhere to the state’s tradition of conservative fiscal management, including failure to take actions to reverse its negative fund balance
  • A state economy that does not rebound in tandem with the rest of the country
  • Failure to adhere to plans to address low pension funded ratios (emphasis mine)
  • Downgrade of the US government

Why does Maryland have low pension funded ratios? Because all that pension money just waiting there for the retired employees is too tempting for the politicians. They have dipped into the fund before. In 2011 as a corrective measure, Martin O’Malley reached an agreement with state employees that if they would increase their contributions to the retirement fund from 2% to 7%, then the state would put in $300 million annually to fund the pensions at an 80% level by 2023. That would still leave the pension fund $20 billion short, but that would be an improvement. The state employees have been putting in their extra 5%, but the state has not been putting in the entire $300 million. They find other ways to spend that money.

Now we are finished with the history and back to the present. The House debated for hours yesterday whether to fund the pension plan with the full $300 million or to take a portion of the money to continue the 2% increase in state employee’s wages and increase school funding. As I write, it is uncertain how the issue will be determined and whatever the House decides will still have to be reconciled with what the Senate produces.

Politicians seem to prefer to pay their supporters now and to let the future take care of itself since they will probably not still be in office when that bill comes due. It is a pleasing shell game. The politicians appropriate raises and perks for their constituents who then pay union dues, and then the unions donate money to the politicians –  lather, rinse, repeat.

According to the Washington Post, those public servants/union members might want to take note that:

In an effort to block relatively modest budget cuts proposed by Mr. Hogan, mainly to schools and public employees’ wages, Democratic lawmakers in Annapolis are pushing a plan to revamp the formula for scheduled contributions. According to Comptroller Peter Franchot, one of the few prominent Democrats who opposes the scheme, it would shift $2 billion into the general budget over the next decade, then cost the state $4.5 billion in the following dozen years — meaning Maryland would face a net $2.5 billion in additional costs over time in order to keep its pension promises.

Additionally, even if the state did put all the funds into the pension plan that they promised, the pension fund would still be underfunded by $20 billion in 2023. Since over 382,000 current and former employees are covered in this plan, it would seem to be a rather important item for the state to fully fund the pension program.

So our esteemed politicians in Annapolis are willing to risk our credit rating which could lead to increased interest payments when borrowing funds, underfund the pension program that thousands depend on, and incur $2.5 billion in additional costs to finally keep its pension promises, just so that they can override Governor Hogan’s budget.

While that may be a winning hand for the politicians, their constituents that get the 2% cost of living increase, and the unions, it is not a winner for the taxpayers.

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