In Maryland “Spending Affordability” Equals Structural Deficits

From my latest piece.

Maryland Democrats are having a jolly old time criticizing Bob Ehrlich’s budget record. They slam his FY 2005-2007 budgets proposals for exceeding the limits set by the Spending Affordability Committee, while claiming all four of Governor Martin O’Malley’s budgets came in under SAC limits. While a review of the data easily debunks this clever little Democratic trick, it also reveals a deeper deceit a our politicans to spend beyond the state’s means while pretending to be fiscally responsible.

As evidence the Democrats link to the 2006 Department of Legislative Services 90 Day Report. The 90 Day Report is an after action memo from DLS detailing the recently completed legislative session. They point to Exhibit A-1.2 on page A-9, a table, which shows a spending increase of 11.59% in Ehrlich’s 2007 general fund budget proposal, which was greater than the 9.60% limit set by the SAC.

Ok fine. However, the same table in the 2007 90 Day Report (O’Malley’s first as governor after his historic $1.4 billion tax increases) shows an 8.13% increase in O’Malley’s general fund proposal, which exceeded the SAC limit of 7.90%. The 2010 90 Day Report for the recently completed session shows O’Malley’s FY 2011 budget proposal with 1.24% growth in the general fund, which exceeded the 0% growth recommended by the SAC. The claim that all four O’Malley budgets were under SAC limits is patently false.

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Anyone can manipulate budget data and SAC limits to make all manner of dubious claims about “fiscal responsibility.”

What this really reveals is that Maryland’s budgeting process—especially the SAC—is greatly flawed.

There is a false assumption that governors abiding by SAC recommendations are a sign of their fiscal virtue. This assumption of course presumes that SAC recommendations are accurate representations of what the state can actually afford to spend. In fact, SAC recommendations are often divorced from realistic assessments of state finances.

Created in 1981 The SAC is a group comprised of the Senate President, Speaker of the House, budget committee chairmen, along with majority and minority leaders and a citizen advisory committee. State law says only that the goal of the SAC is to “limit the rate of growth of State spending to a level that does not exceed the rate of growth of the State’s economy.” SAC recommendations are voluntary and neither the Governor or the General Assembly are bound by it’s recommendations.

In a report for the Free State Foundation, Cecilia Januszkiewicz, a former budget director in the Ehrlich administration notes,

The concept of “spending affordability” suggests a mathematical process that would yield an objective spending limit. Yet, no statutory or regulatory formula exists to determine what is affordable other than the statutory reference to growth in the State economy. Nor has the Committee adopted a consistent approach to measuring affordability.

The SAC has instead resorted to various methods that have resulted in an unbroken string of recommendations for increasing State expenditures regardless of the fiscal circumstances of the State. In the absence of any formula, the method changes each year, in an ad hoc fashion, to validate the desired amount of increased spending.

As an example, Januszkiewicz cites the 7.90% increase in spending SAC deemed “affordable” for FY 2008. Yet both SAC and the Board of Revenue Estimates predicted only a 4.5% increase in general fund revenues.

For those keeping score: the rate of spending increase in O’Malley’s first budget was nearly double the increase in expected revenues, hardly a sign of fiscal discipline on the heels of increasing taxes by $1.4 billion.

In many cases SAC recommends spending increases even though it’s own reports conclude that state revenues and the economy are slowing. In some cases SAC has recommended spending increases even when it recognized expenditures outpaced revenues. SAC offers it’s recommendations in December but often revises them upwards after the Governor submits the budget. From 1984-2009 SAC has raised it’s initial spending recommendation. Raising the spending level allows the politicians to cut less from the budget and increase spending while hiding behind the political fig leaf of “affordability.”

In the end Januszkiewicz found that the spending affordability process creates and exacerbates structural deficits by providing a “false sense of fiscal restraint,” which allows politicians to spend beyond the state’s means.

There are several solutions to Maryland’s chronic structural deficits—some to be discussed here in the future—the first place to start should be reforming the spending affordability process to make it reflect a realistic assessment of revenues and expenditures.

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