Each year a committee made up of Maryland state legislators gets together to set a spending growth limit for Maryland’s general fund budget. The Spending Affordability Committee (SAC) has been in place for 30 years. Originally created to avoid instituting a Tax and Expenditure Limit (TEL), the SAC has proven unable to stop the persistent structural deficit which emerged in 2007. This year the SAC recommends a budget of $37 billion, one billion more than last year. That’s an increase in spending of 4 percent
In a paper for the Maryland Journal entitled, “The Appearance of Fiscal Prudence” Benjamin Van Metre and I detail the flaws of the SAC process based on our read of the official reports. The main problem with the process is that lawmakers have convinced themselves that the SAC imposes fiscal prudence on the legislature. We find while there is some formulaic guidance in the form of a limit based on the growth in personal income, it only applies to part of the budget. The SAC also involves policymakers deliberating over spending “needs” while referring to revenue estimates. The result is not a hard limit on spending but a recipe for a budget soufflé. To be fair, the SAC wasn’t designed to be a hard limit. It was built to be flexible.That’s fine if the SAC is clear about its own limitations in setting a spending limit.
What’s interesting is that over the years there’s been a bit of hand-wringing in the SAC reports about fast-growing areas of the budget – the Transportation Trust Fund, Medicaid, and a growing reliance on debt finance. Debt limits are covered by a separate legislative committee, the Capital Debt Affordability Committee (CDAC). But, the SAC’s warnings about debt tiered up with the CDAC’s increase in the debt cap. It leads one to conclude that these two committees are, at best, talking past one another.
Yesterday I did an interview with David Collins of WBAL-Baltimore on my recently published paper co-authored with Benjamin VanMetre in Maryland Journal on Maryland’s Spending and Affordability Committee (SAC). Set up in 1983, the SAC was put in place to help legislators control the growth of spending. Over the interim, spending has grown beyond the capacity of annual revenues to keep pace. Thus, the SAC, created to ensure spending discipline, has presided over the creation and continuation of a structural deficit in Maryland. In 2010, the effectiveness of the SAC was called into question by the SAC itself. In this TV report the reasons for the SAC’s poor performance are discussed as well as what a rule to control spending might look like.
In FY 2011 Maryland enters its third year of recession and fifth year of structural deficit, with ongoing revenues insufficient to cover ongoing spending. To address this year’s $2 billion shortfall, the state cut spending by $1 billion, and applied $1.27 billion in federal stimulus funds, one-time revenue fixes of $25 million, and $800 million in fund transfers. Budgetary balance in the coming year hinges on anticipated revenues from video lotteries and the assumption that Congress will extend the stimulus’s increased Medicaid matching provision to fill $389 million of the budget gap.
These tactics are not part of a one-time strategy prompted by the recession. Maryland has struggled to balance its budget for much of the last decade. The state’s structural deficit has continued to deepen since 2007, leading to the legalization of video lottery gaming to increase revenues. To date, these revenues have been insufficient to meet the gap. Budgetary balance has been achieved through fiscal maneuvers including fund sweeps, debt finance, federal aid, and the state’s Rainy Day Fund. In spite of these maneuvers, by 2015 the structural deficit is projected to grow to $1.65 billion.
That is Eileen, writing in the inaugural issue of TheMaryland Journal. Congratulations to Eileen and thanks to the Maryland Public Policy Institute for offering what looks to be an informative new venue for scholarly work on state issues.