Category Archives: budget

Adam Pagnucco, budget, Nancy Navarro

Navarro Claims Council Majority for Spending Restraint

By Adam Pagnucco.

Last night, Council Member Nancy Navarro, who chairs the council’s Government Operations Committee, wrote on my Facebook page that she intends to introduce a council resolution on Tuesday calling for major spending restraint in the county’s budget.  Specifically, the resolution calls for a same services budget for each department and agency; holding Montgomery College and MCPS to maintenance of effort (which is the state’s mandated minimum for local appropriations to those agencies); and providing flexibility to assist residents and businesses as well as to revisit spending after the coronavirus crisis ends.  Navarro claims that Council Members Andrew Friedson, Gabe Albornoz, Craig Rice and Hans Riemer are co-sponsoring her resolution.

It’s worth noting that Navarro is the only current council member who was on the council during the budget crisis of 2010.

The resolution does not yet appear on the council’s agenda for Tuesday, but the current text as shared by Navarro appears below.

SUBJECT:​ Options for the Approval of and Appropriation for the FY 2021 Operating Budget Background

1. ​As required by Section 303 of the County Charter, the County Executive sent to the County Council the FY 2021 Operating Budget on March 16, 2020.

2. ​As required by Section 304 of the County Charter, the Council must hold public hearings on the proposed operating budget.

3. ​A new coronavirus disease, called Covid-19, has spread extremely quickly, making its way to over 100 countries, including the United States.

4.​ On March 11, the World Health Organization officially declared the Covid-19 viral disease a pandemic.

5.​ The number of new cases in the United States is growing quickly and has spread to each of the 50 States, the District of Columbia, Puerto Rico, Guam and the US Virgin Islands.

6.​ To slow the spread of this communicable disease, Governor Hogan issued several emergency orders closing all non-essential businesses, restricting public transit, closing schools, prohibiting public gatherings of 10 persons or more, and postponing the Presidential Primary Election in Maryland.

7. ​Although County government operations are continuing during this pandemic, County employees are using situational teleworking wherever possible to perform their duties. Due to the need to limit person to person contact, many County residents have lost paychecks and many County businesses have lost revenue.

8. ​The Executive was required by the Charter to develop his recommended FY2021 Operating Budget before the most recent events clarified the full extent of the pandemic.

9. ​Considering this unprecedented global pandemic and national state of emergency, the Council must move expeditiously to provide continuity of operations in approving an operating budget for FY2021 that provides additional flexibility to help County residents and businesses recover.

Action​

The County Council for Montgomery County, Maryland approves the following resolution:

1. ​The Council directs staff to develop viable options to streamline our budget process, so that for FY 2021, the Council may adopt an aggregate operating budget for our departments and agencies that reflects a continuation of the services provided at the same level as FY2020.

2. ​These viable options must include funding the Operating Budgets of the County Board of Education and Montgomery College at the required Maintenance of Effort level and should avoid funding any new programs unrelated to relief for County residents and businesses from the Covid-19 viral disease pandemic.

3.​ These viable options should include flexibility for possible future appropriations:

a. ​to assist County residents and businesses to recover from the Covid-19 viral disease pandemic; and

b. ​to provide additional resources for other County programs and employee wage and benefit enhancements, if available, after the crisis is over.

This is a correct copy of Council action.

_________________________________

Selena Singleton

Clerk of the Council

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Adam Pagnucco, budget, Economy, Marc Elrich

The County Budget is in Crisis. What Now?

By Adam Pagnucco.

After arguably the worst communications debacle in county government history, the Elrich administration is now belatedly defending its recommended FY21 operating budget.  But we are waaaaaaay past that now.  Whatever one thinks of Elrich’s budget, it is obsolete.

That’s because it is based on revenue projections from an economy that no longer exists.

Virtually everyone paying any attention understands that the economy is in ruins.  That’s not just true for MoCo; it’s true for the entire country and beyond.  J.P. Morgan is now projecting that the nation’s second-quarter gross domestic product could decline at an annualized rate of 5-10%.  In Maryland, unemployment claims are at nearly five times their regular levels.  Here in MoCo, tens of thousands of employees are now enduring cuts in work hours – if not outright layoffs – in the industries most affected by the “social distancing” used to combat the coronavirus.  Consider 2018 Montgomery County employment in the following industries from the U.S. Bureau of Labor Statistics.

Restaurants and other eating places: 29,647

Services to buildings and dwellings: 13,585

Personal and laundry services: 5,852

Child day care services: 4,854

Fitness and recreational sports centers: 4,005

Accommodation: 3,416

Performing arts and spectator sports: 1,469

Motion picture theaters: 494

Wage losses in these industries are certain to show up in reduced income tax receipts.  Because of the nature of these kinds of jobs, the affected workers will likely never recover that income.  All of this is going to profoundly hit the county budget.  And it is coming in the middle of the county’s budget process, which normally concludes in mid-May.

As Fred Sanford used to say, this is the big one!

We haven’t seen anything quite like the coronavirus pandemic in a century, but we have seen economic crises before.  The last one MoCo encountered happened a decade ago.  The Great Recession had been underway since 2008 but did not truly destroy the county’s budget until the spring of 2010.  As required by the county’s charter, then-County Executive Ike Leggett released his recommended FY11 budget on March 15.  Just ten days later, Leggett sent a memo to the county council explaining that circumstances had changed since his budget was transmitted.  Leggett wrote:

I am sending this memorandum to recommend that we jointly take additional actions to strengthen the County’s financial position in the current fiscal year and for FY11.

There is no perfect time to formulate a budget. Since I recommended my budget earlier this month, we have already received more bad news that points to additional fiscal deterioration. This includes a dramatic increase in the County’s unemployment rate from 5.2% to 6.2% and may signal further erosion of income tax revenue. In addition, Anne Arundel County’s bond rating was recently downgraded from a AA+ to a AA rating due to several factors including the deteriorating condition of Anne Arundel’s reserves. At the same time, the Department of Finance has been in discussions with the bond rating agencies relative to an upcoming bond sale and is concerned about feedback they have received from the rating agencies on our fiscal position.

At that time, Leggett recommended increasing the energy tax and transferring money from non-tax supported funds into the general fund, which is the county’s main vehicle for funding most governmental functions.

On April 5, Leggett followed with a second memo explaining that the county’s March income tax distribution had fallen significantly and that Moody’s had placed the county on a watch list for a potential bond rating downgrade.  Things were getting worse.  Leggett wrote that he “asked the OMB and Finance Directors to meet with the department heads of all large County Government departments to identify outstanding, remaining purchases and reimbursements for FY10 or early FY11.”

On April 22, Leggett sent a third memo to the council outlining a $168 million writedown in income tax revenue and a resulting total fiscal gap of “approximately $200 million.”  Leggett forwarded a long list of recommended spending cuts along with a larger increase to the energy tax to close the gap.  By this point, Leggett had essentially re-written his recommended budget, which was released just 5 weeks earlier.

The resulting budget passed by the council in May was the ugliest budget in county history.  It broke collective bargaining agreements, furloughed county employees, doubled the energy tax and spent 4.5% less money than the prior year’s approved budget, the first actual dollar spending cut that anyone could remember.  But it did not resort to mass layoffs and the county kept its AAA bond rating.  For all its fiscal brutality, this budget saved the county from financial disaster.  It was Leggett’s greatest achievement and it was shared by a county council that did its job.

Today’s policy makers should heed the lessons of 2010.  (The only current elected officials who were in county office that year were Council Member Nancy Navarro and then-Council Member Marc Elrich, who is now the executive.)  Chief among them are that teamwork, honesty, speed, an absence of finger pointing and political courage were all crucial to success.  No one was trying to score points.  Everyone was trying to do their best.  Amazingly, it all happened in an election year.

Here is what must happen now.

1.  Elrich must stop defending his recommended budget.  It no longer matters whether it was a good budget or not.  It’s not going to happen now.  The actual revenues generated from the county’s emaciated economy will not support it.  And once the council starts making changes, he has to be constructively involved, as Leggett was.  Standing aside and taking potshots from the sidelines would be a failure of leadership.

2.  The finance department must revise its revenue estimates, especially for income taxes.  Leggett’s finance department was able to see a deterioration in income tax receipts within three weeks of the release of his recommended budget.  Today’s finance department must react with the same speed.

3.  The office of management and budget must prepare a menu of savings options for the council.  Everything – Elrich’s collective bargaining agreements (which now contain raises of up to 7-8%), hiring freezes, attrition and more – needs to be on the table.  The council must know what number it needs to hit and they need to have choices on how to get there.

4.  A discussion must take place about the county’s reserves.  As of FY20, the county’s reserves (including its agencies) were estimated to be more than $500 million, or 10.5% of revenues.  That’s a lot higher than the 6% reserve level possessed by the county in 2010 and is a direct result of Leggett’s long-term plan to bolster reserves and maintain the bond rating.  It’s a great goal to have a 10% reserve, but that money is kept available for emergencies – and that’s exactly what we have now.  County leaders should discuss whether we need to maintain reserves at that level or if they can be used to plug government spending holes and/or to fortify the economy.  Comptroller Peter Franchot has already recommended that $500 million be allocated from the state’s rainy day fund to assist small businesses.

5.  With public participation in the budget process limited by the coronavirus, the county must keep residents and businesses informed of the latest budgetary and economic developments.  The county has a large media apparatus that it can tap for doing so.

Ike Leggett proved that he was up to the task of dealing with a crisis.  Now it’s time for today’s elected officials to show that they are too.

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budget, Montgomery County Board of Education

Board President & School Superintendent Support Elrich Budget

Montgomery County Board of Education President Shebra Evans and Montgomery County Public Schools Superintendent Jack Smith released the following statement in response to County Executive Marc Elrich’s recommended Fiscal Year 2021 Operating Budget:

“We are in unique times facing an unprecedented challenge. We greatly appreciate County Executive Marc Elrich’s understanding of the need to face the challenges of today while planning for the future for our children and community. His recommend budget nearly equals the Board of Education’s requested budget and is more than $35 million over Maintenance of Effort. This investment is especially significant given the financial uncertainty our county and country face as we combat the COVID-19 pandemic. It is important to remember that investments in our students now will ensure a strong future economy for our county that will thrive in good times and can weather crises. The County Council has had enduring support for public education in our county. We look forward to working with the councilmembers in the coming weeks to discuss how our operating budget will continue to meet the unique needs of each of our 166,000-plus students.”

In February, The Board of Education voted unanimously to adopt a $2.805 billion budget for Fiscal Year (FY) 2021. This includes an increase of $124.1 million from FY 2020. The budget will allow Montgomery County Public Schools (MCPS) to manage significant enrollment growth and focus on strategic investments to address disparities in student achievement.

The budget includes funding to expand and implement strategic key bodies of work. This includes:

  • Additional English for Speakers of Other Languages teachers and counselors;
  • The expansion of prekindergarten seats;
  • Increasing exposure to language opportunities;
  • Creation of three new regional International Baccalaureate centers to provide more access to rigorous coursework;
  • Addition of mental health support staff to support student mental health and well-being;
  • Opening of upcounty career readiness hub at the new Seneca Valley High School;
  • Providing additional support for language and science, technology, engineering and mathematics programming;
  • Equity and innovation initiatives; and
  • An expansion and enhancement of teacher recruitment and retention efforts to ensure all classrooms have highly qualified teachers from a diversity of backgrounds.
  • Additional positions based on student enrollment adjustments;
  • Accelerators for Learning, Accountability and Results and Operational Excellence strategies;
  • Blueprint for Maryland’s Future legislation-directed grants; and
  • Additional identified savings.

The Montgomery County Council will hold public hearings on the county budget in April before passing a final budget on May 21, 2020. After the County Council’s action, the Board of Education will vote on June 11, 2020, for final adoption of the FY 2021 operating budget.

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budget, Montgomery County Executive

Marc Elrich’s Budget Message

The following is the overview from the $5.9 billion budget proposed by Montgomery County Executive Marc Elrich. You can find the full budget proposal below:

This budget is focused on providing our youngest residents with a great start to life. To that end, I have proposed funding of $2.8 billion for the Montgomery County Public Schools (MCPS). I am also proposing $10.4 million for our Early Care and Education Initiative so that we can continue to expand and improve early education services.

This budget contains a modest 0.8 percent increase in tax-supported spending for County Government, which is directed primarily at increasing affordable housing and addressing structural gaps in our fire service and transit budgets. This budget provides our residents with a great amount of detail about my entire $5.9 billion recommended budget.

This budget also ensures that we attain our fiscal policy goal of holding 10 percent of our adjusted gross revenues in reserve in FY20, and we maintain that level in FY21. This is of particular importance now as we face uncertain times.

As I finalize the details of my recommended budget, I am keenly aware of the public health emergency facing our community and the nation. I am proposing this budget with a focus on both the next few days and weeks, as well as the next year and beyond. As we respond to this global health emergency, the economic situation of our residents and our nation are changing rapidly. While this budget reflects my view of County Government on March 16, we all need to be flexible to respond to changing conditions and needs. These conditions may result in me submitting revisions, supplementals and amendments to alter this proposal as conditions warrant.

As we address the immediate needs of our residents and plan for the future, one thing has become abundantly clear to me – our County Government’s revenue structure has reached the breaking point and must be fundamentally altered.

Our County Charter includes a provision that limits the growth in property tax revenue – not property tax rates – to the growth in the Consumer Price Index (CPI) for all consumers in the Baltimore-Washington Region from the December 1 to November 30 of the preceding year. Since the Federal Government no longer publishes this index, we have been using the CPI for just the Washington Region. For the period of December 1, 2018, to November 30, 2019, the CPI for the Washington region was only 1.27 percent. No matter how much assessments increase, the total amount of property tax revenues cannot grow by more than 1.27 percent.

It is important to note that this revenue limit does not mean the average property tax bill will only increase by 1.27 percent. Quite the opposite. Most individual bills will increase (or decrease) by the change in one’s taxable assessment. Since County law limits growth in assessments to 10 percent in any given year, a property with such an increase in value will see its tax bill go up by roughly 10 percent. The Charter revenue limit only redistributes the tax burden from properties with little to no increased value to those properties with the greatest increase in value. This has meant that some residents in modestly priced homes have faced 10 percent increases while some high-value properties actually saw their tax bill cut.

When the County Council proposed to the voters our current Charter limit on property taxes in 1990, few people could have foreseen the dramatic changes that would take place in Montgomery County and around the globe. In the past 30 years, our school population has grown by 65 percent and our overall population has grown by 40 percent. The services we provide are now more complex and seek to address a range of challenges, from traffic congestion and climate change to health care disparities and linguistic diversity. And over the past four decades, our property tax rate has declined by 35 percent.

We have all witnessed other local governments regionally and nationally experience generational decline due to conflicting, irreconcilable fiscal policies. Montgomery County is at the precipice of such a decline if we cannot get ourselves out of this cycle of self-enforced structural deficits and inequitable, unpredictable revenue caps. Therefore, I will be sending the Council a proposal for a Charter amendment that will revise our revenue cap to provide certainty to homeowners. This proposal will eliminate our old, cumbersome revenue cap and replace it with a three percent cap on the increase in any homeowner’s taxable assessment. This will give our taxpayers real protection from unexpected increases in property values. It will also provide the County Government with a higher degree of predictable tax revenues like every other jurisdiction in our region.

Without such a change in the Charter, our community could be facing a situation in FY21 where a recession and deflation cripple our ability to provide emergency services and a quality public education system. This perfect storm would threaten lives and diminish the value of properties in our County. I will not stand by and let our community be harmed by the ghosts of voters from four decades ago.

In order to meet the challenge of our rapidly growing school system over the next year, this budget proposal also calls for the creation of a 3.1 cent supplemental property tax rate. State law provides each county with the authority to establish a supplemental property tax rate exclusively for its public schools. While this will be the first use of this State authority in our county, three other counties have already established a similar supplemental tax for their public schools. Even with this additional funding, we will still be providing the school system with less support per pupil than in 2010. A decade of slow growth nationally, unpredictable tax policy changes at the Federal level, and our severe Charter limit has left our schools playing catch-up on funding while absorbing an enrollment growth of more than 25,000 new students.

I am proposing this supplemental tax rate this year to partially offset an unexpected underperformance of the property tax for the last two years. In preparing the FY19 County budget, the taxable property base of the County was overvalued. As a result, the property tax rate needed to generate revenues at the Charter limit for the past two years was set too low. This resulted in lost revenues of $80 million, now permanently embedded in our revenue projections. Fortunately, the income tax has overperformed estimates during FY20 to offset this loss. However, even before the current COVID-19 crisis developed, we were forecasting income tax revenues to drop to a lower level. With this supplemental tax rate, we will be back to the rate set for FY17. We will remain significantly lower than other Maryland counties and in line with the residential rates in Northern Virginia. It is also important to note that the Northern Virginia counties charge higher rates for commercial properties with even higher rates for commercial properties in business districts like Tysons and Crystal City.

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Adam Pagnucco, budget, transportation

How is MoCo Doing on Pedestrian Safety?

By Adam Pagnucco.

Pedestrian safety is arguably THE hottest issue in MoCo government right now.  With several recent high profile pedestrian deaths and residents swarming a county council meeting on the subject, alarmed elected officials are terming pedestrian crashes a “public health crisis” and demanding action.  The county has responded by hiring a full-time pedestrian safety coordinator and is promising more to come.

Pedestrian safety has been a challenge in Montgomery County for decades.  How well is the county doing on this issue?

First, let’s look at MoCo’s rate of pedestrian involved crashes in comparison to the rest of the state.  The table below, sourced from data provided by the Maryland Department of Transportation, compares the average annual number of pedestrian crashes by county to county populations.

Three of the top four counties on a per capita basis – Baltimore City, Baltimore County and Prince George’s County – are among the most urbanized jurisdictions in the state.  The other county in the top four – Worcester – has an unusual amount of pedestrian activity on the Ocean City boardwalk.  MoCo ranks 7th of 24 counties on crash rate but its average annual crash rate per 1,000 residents (0.44) is below the state average (0.54).  Admittedly, the state average is skewed upwards by Baltimore City.

It’s interesting that MoCo’s pedestrian crash rate is similar to less urbanized jurisdictions like Wicomico, Dorchester and Washington Counties.  Urbanized counties should have greater volumes of pedestrian activity because of a greater abundance of walkable districts.  MoCo certainly has more of those than Wicomico, Dorchester and Washington Counties.  That suggests that MoCo isn’t a relatively bad performer on this measure given its substantial (and increasing) urbanization.

One thing MoCo does is spend significant amounts of capital money on pedestrian projects.  The table below compares capital budget spending on pedestrian and bikeway projects (the two are one category) to total capital spending excluding the Washington Suburban Sanitary Commission in the last 16 Capital Improvements Program (CIP) budgets. 

MoCo’s spending on pedestrian and bikeway projects steadily accelerated from $44 million in the FY7-12 CIP to $225 million in the FY19-24 CIP.  Major projects like the Metropolitan Branch Trail, the MD-355 BRAC crossing and the Capital Crescent Trail are partially responsible for these increases.  However, the FY21-26 executive recommended budget is a step back.  The six-year total pedestrian and bikeway spending of $181 million is the lowest since the FY13-18 amended budget.  So is the percentage of the total capital budget accounted for by pedestrian and bikeway projects.

All of this gives rise to two questions.

1.  MoCo spends a lot of money on pedestrian projects, but is the county getting a good return?  A 2007 county council press release states that the county averaged 430 pedestrian collisions per year from 2003 through 2006.  The Maryland Department of Transportation estimates that the county averaged 459 pedestrian crashes from 2014 through 2018.  Between the two periods, the county’s population rose by 13% while its pedestrian crashes rose by 7%.  Is that a sufficiently positive result from the enormous sums the county has spent in recent years?  Given the significant needs in this area and the limited resources in the capital budget, the county may wish to study the most cost-effective ways of promoting pedestrian safety and direct its funding accordingly.

2.  As noted above, the executive’s new recommended capital budget decreases pedestrian and bikeway spending to its lowest level in seven years.  One reason for that is that the overall level of capital spending is declining.  (That’s a subject for a future series.)  With all areas of the capital budget under stress and the looming possibility that school construction delays will trigger residential moratoriums, it’s extremely difficult to add or even maintain funding for any program, not just pedestrian and bikeway projects.  That said, county elected officials will look terrible if they declare pedestrian safety to be a “public health crisis” but then cut funding for pedestrian and bikeway capital projects.

Overall, MoCo’s record on pedestrian safety is not a bad one when compared to the rest of Maryland.  But funding constraints could hinder its prospects for improvement.

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Adam Pagnucco, budget, Economy, MCPS

MoCo’s Moratorium Madness

By Adam Pagnucco.

The Montgomery County government is currently plagued by a $100 million operating budget shortfall and a shrinking capital budget.  So what is the county doing to revitalize its economy and earn more revenue?

Potentially, imposing more moratoriums on housing construction!

County development rules require moratoriums on housing construction inside school clusters or individual school service areas when projected public school enrollment accounts for 120% or more of capacity five years into the future.  Additionally, elementary schools must be 110 students over capacity and middle schools must be 180 students over capacity to trigger moratoriums.  Projects that are already approved are not halted by moratoriums but new project approvals are not granted.

Last year, the county imposed moratoriums on four high school clusters and 13 individual elementary school service areas.  Those areas accounted for roughly 12% of the county and included high-profile markets in Downtown Silver Spring and North Bethesda, thereby directly thwarting the county’s transit-oriented development strategy.

The problem with stopping residential development is that school impact taxes collected from new units can be a major source of revenue for school construction.  As recently as the FY15-20 amended capital budget, school impact taxes accounted for 15% of MCPS’s school construction budget.  Unfortunately, that is no longer the case.

In a memo to the Montgomery County Planning Board, planning staff noted that the county executive’s new recommended FY21-26 capital budget underfunds MCPS’s construction request by $61 million in FY21, $93 million in FY22, $93 million in FY23 and $57 million in FY24.  One of the biggest reasons for the underfunding is that school impact tax receipts have fallen by more than half since FY14.  The planning staff indicates that if the underfunding results in delayed projects, nine elementary school service areas (Bethesda, Clarksburg, JoAnn Leleck, Rachel Carson, Strawberry Knoll, Summit Hall, McNair, Page and Burnt Mills), one middle school service area (Parkland) and seven high school clusters (Quince Orchard, Richard Montgomery, Albert Einstein, Montgomery Blair, Blake, Northwood, Walter Johnson) may be at risk of moratoriums.  For the Blake, Blair, Einstein and Walter Johnson clusters, this would be the second straight year of moratorium, threatening projects in North Bethesda and Downtown Silver Spring.

The cruel fact here is that reducing residential construction has historically had little if any impact on MCPS enrollment increases.  The chart below shows MCPS enrollment (red line and left axis) and residential units permitted in Montgomery County (blue line and right axis) from 1994 through 2018.  MCPS enrollment comes from the county executive’s recommended budget while permitted units comes from the U.S. Census Bureau.  Over this 24 year period, housing construction has been falling while MCPS enrollment has been rising.  The contrast between the two trends has been most pronounced in recent years.  Housing units permitted has fallen from 3,981 in 2012 to 1,947 in 2018 while MCPS enrollment has grown from 146,497 to 161,470.  It defies logic to blame school crowding on housing construction when homebuilding is in an era of decline.

And so here is the effect of MoCo’s moratorium policy.  Housing construction drops, causing school impact tax payments to plummet and depriving school construction of needed funding.  The county reacts by delaying school projects, triggering moratoriums.  That causes housing construction to decline further and the cycle continues.  None of this helps more schools get built but it definitely constrains housing supply, thereby driving up home prices and making the county even more unaffordable to live in than it already is.  Another effect is that it makes the county radioactive to the real estate and investment communities, thereby pushing them into competing jurisdictions.  It’s no wonder that Prince George’s County Executive Angela Alsobrooks is celebrating her county’s passing of Montgomery County in job creation.

Using residential moratoriums to prevent school crowding is like treating lung cancer by amputating the patient’s legs.  The treatment does nothing to solve the original problem but it definitely causes new problems to arise!

If you wanted to stop economic growth and make it harder for people to live here, it would be difficult to devise something more attuned to such goals than MoCo’s insane moratorium policy.  The county must bring it to an end.

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Adam Pagnucco, budget, Hans Riemer, Marc Elrich

Affordable Housing Spat: Who’s Right?

By Adam Pagnucco.

County Executive Marc Elrich and his biggest critic, Council Member Hans Riemer, are feuding once again.  This time, the subject is affordable housing.  Elrich says his new recommended capital budget includes a record sum for affordable housing.  Riemer says there are in fact no new resources.

Who is right?

Let’s consider the statements from each of them.  First, here is Elrich.

Affordable housing is one of my top priorities. It is vital to our County’s future success. We must maintain and expand our stock of affordable housing and we are taking this critical issue head on in the capital budget. That is why I am recommending we add $132 million for affordable housing to the capital budget over the next six years.

This is a record level of funding for affordable housing projects for our capital budget. These funds will be used by the Affordable Housing Acquisition and Preservation Project to facilitate efforts to preserve existing stock and increase the number of affordable housing units in the County. But that is not all.

In this Capital budget, I am proposing a new Affordable Housing Opportunity Fund to leverage funding from other partners that will support short-term financing while affordable housing developers arrange for permanent project financing.

Here is Riemer’s response.

On affordable housing, I was initially encouraged by the Executive’s speech about increasing funding levels. Indeed, I am intrigued by his proposal to create a new housing preservation fund. However, while he claims to have added more than $132 million in the affordable housing fund, after further examination it became clear that the annual amount is unchanged at $22 million. Under the last Executive, affordable housing funding was only programmed for the first two years of the six year budget, but additional funding was always added in the subsequent years. We need to increase our affordable housing fund to at least $100 million annually. This change in accounting will not result in increased resources. In combination with his resistance to the Council’s affordable housing goals, developed with and agreed upon by all the local governments in Washington region, the County Executive’s housing policy continues to be a matter of serious concern.

These two like each other about as much as Popeye and Bluto.  (Which one is Popeye depends on your point of view!)  But how can their statements be reconciled?

Since Fiscal Year 2001, the county’s primary affordable housing vehicle has been its Affordable Housing Acquisition and Preservation program, which appears in the county’s capital budget.  The program enables the county to buy or renovate, or assist other entities to buy or renovate, affordable housing.  It is financed by several sources including but not limited to loan repayments and the county’s Housing Investment Fund (which is mostly supported by recordation taxes).

The capital budget, which includes the Affordable Housing Acquisition and Preservation program, is a six-year budget.  In even years (like 2020), it is written anew and in odd years, it is amended.  Projects in the capital budget can have up to six different years of funding in them (with more scheduled outside of the budget’s six year horizon).  In the past, the affordable housing program has only shown funding for the first two years of the capital budget with zero money programmed in the last four years.  But since the capital budget is rewritten every two years with affordable housing money renewed in each successive budget, that has not mattered.

The table below shows funding for the Affordable Housing Acquisition and Preservation program in the last 16 capital budgets.  Each budget covers six years.  Budgets labeled with an “A” are amended budgets programmed in off years.

At first glance, Elrich appears to be right.  His new recommended capital budget includes $132 million for Affordable Housing Acquisition and Preservation, which is far higher than any previous capital budget.  But let’s remember what Riemer said about the annual amount of spending.  All the previous six-year budgets included funding during the first two years only.  Elrich’s new capital budget shows funding for the Affordable Housing Acquisition and Preservation program in all six years.  Riemer is correct: an accounting change caused the apparent increase in this program.

But the story doesn’t end there.  Elrich created a new program in the capital budget called the Affordable Housing Opportunity Fund.  This program is dedicated to acquiring affordable housing in areas at risk of rent escalation, such as those near the Purple Line and other transit corridors, and is intended to use public funds to leverage private funds in acquiring and preserving affordable housing.  This new program provides $10 million in each of the new capital budget’s first two years for this purpose.  That money comes from recordation tax premiums which are normally used to finance transportation projects, so it’s not “free” money.  But it is more money for affordable housing.

Combining the existing Affordable Housing Acquisition and Preservation program and Elrich’s new Affordable Housing Opportunity Fund, the table below shows the annual expenditures for affordable housing in the capital budget since FY05.  Annual expenditures are drawn from the first two years of every amended capital budget with FY21 and FY22 drawn from the executive’s new recommended capital budget.

Combining the two programs, Elrich recommends spending more capital money for affordable housing in FY21 and FY22 than any annual expenditure in the preceding published budgets.  When adjusting for inflation, Elrich’s FY21 and FY22 spending amounts are roughly equal to the Leggett administration’s peak affordable housing years of FY09 and FY10, so one can quibble about whether Elrich’s spending is truly a record.  But when Elrich’s new Affordable Housing Opportunity Fund is included, the first two years of his new budget definitely show an annual increase for affordable housing over the prior budget.

The county’s capital budget has been shrinking due to cutbacks in general obligation bond issuances and declining projected school impact tax receipts.  That’s a dire subject for another time.  But given the county’s budget difficulties, Elrich’s financial commitment to affordable housing is meaningful.  Friends and foes alike should give him credit for it.

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Adam Pagnucco, budget, Economy, education, transportation

How to Spend More on Education and Transportation Without Raising Taxes

By Adam Pagnucco.  

It’s election season and that means it’s time for lots of promises from politicians.  And boy are they promising a lot, especially on the county’s two big issues of education and transportation.  The mailbox’s “progressive leaders” have “plans” to guarantee every child a great school, invest in transportation – especially transit – and to do all of the above without raising taxes.  Sounds great, yeah?

Time to get real, folks!

Education and transportation each have two virtues.  First, each of them generates direct economic returns.  Education spending yields a return on human capital while transportation spending yields a return on physical infrastructure.  Both are important for attracting and retaining residents and jobs.  Second, each of them is popular with voters.  For as long as anyone can remember, education and transportation have been two of the top issues in our elections – and they might possibly be THE top two.  Happily, on these two issues, good policy and good politics come together!

Paying for them is another matter.  MCPS accounts for a greater percentage of the budget than any other agency with a $2.5 billion budget in FY18.  Montgomery College received more than $300 million.  The Department of Transportation’s operating budget was $56 million.  Funding increases with meaningful impacts on these agencies need to be in the tens of millions of dollars – at least.  That kind of money far exceeds a spreadsheet rounding error.

And yet, there is a way to increase spending on MCPS, the college and transportation without massive tax hikes.  The catch is that it’s not quick or easy.

Let’s do a simple (and yes, admittedly simplistic!) exercise with the operating budget.  First, let’s identify the combined local dollar spending on MCPS, the college and the Department of Transportation (DOT).  Next, let’s segregate out intergovernmental aid, which plays an important role in the budget but is not controlled by the county government.  Then let’s segregate debt service.  Yes, over long periods of time, the county can adjust debt service.  But much of the debt service is being paid on capital projects already completed, and furthermore, a huge chunk of it goes to school construction and transportation projects.  Boosting education and transportation operating budgets by cutting their capital budgets is not the best idea in the world!  Finally, let’s subtract out local dollar education and transportation spending, intergovernmental aid and debt service from total spending and what we get is a great big category that we shall creatively name “Everything Else.”

Here’s what happens when we do that for FY11, the trough budget year of the Great Recession, and FY18, the budget that ends on June 30 of this year.

What the above data shows is that the total county budget grew by 28% over this period.  Intergovernmental aid grew by 26% and debt service rose by a whopping 58%.  (We have previously written about the county’s rapidly growing debt.)  Now let’s contrast the two remaining broad categories: the local dollars spent on MCPS, the college and DOT and everything else.  The education and transportation budgets grew by a combined 18%.  Everything else grew by 37%.

That’s right folks – spending on everything else has been growing twice as fast as local dollar spending on education and transportation operating budgets.  That’s a strange fact in a county in which education and transportation are arguably the top two political issues.

Now what would have happened if the everything else side of the budget was restrained to grow at the same rate as inflation?  The average annual growth rate of the Washington-Baltimore CPI-U since 2011 has been 1.3%, meaning that prices have grown by 9.8% over that period.  When we hold the total budget, intergovernmental aid and debt service constant and assign a growth rate of 9.8% to the everything else category, here’s what happens to local dollars available for education and transportation.  For the purposes of discussion, let’s call this Scenario 1.

In Scenario 1, $2.4 billion is available for education and transportation because of spending restraint on everything else.  That’s $383 million more than the $2 billion that was actually available in the real world FY18 budget.

Holding a big chunk of county government to the rate of inflation for seven straight years is tough medicine and very unlikely.  So let’s create a Scenario 2 in which the everything else category is restrained to twice the rate of inflation, or 19.5% growth since FY11.

In Scenario 2, $2.2 billion is available for education and transportation, $244 million more than the real world FY18 budget.

For the sake of comparison to both of these scenarios, let’s recall that the 9 percent property tax hike was supposed to raise $140 million a year.  (It probably raised a little less than that.)  So under both scenarios, the county could have avoided the giant tax hike and still had lots of money left over for more education and transportation spending.

Yes folks, we understand the radical nature of what we are proposing – namely that liberal Democrats should deliberately and strategically restrain the growth in some forms of spending to boost growth in other spending.  This is likely to be an unpopular concept in a county that has multiple jam-packed budget hearings every year with groups of all kinds requesting money.  But here’s the benefit to concentrating on education and transportation: both forms of spending are investments that generate returns for the economy.  And when those returns boost economic growth, they generate tax revenue that bolsters the entire budget.

What is necessary to pull this off?  Simply put, this requires strategy, discipline, patience and leadership.  Without those traits, given the huge number of constituencies that want their piece of the budget, it would be impossible to focus it on education and transportation.  The natural outcome of a budget process without strategy is that everything gets funded, a tax hike follows, voters tire of it and then they pass restrictive charter amendments and vote for politicians like Larry Hogan.

So what are we going to get?  Spending on everything followed by tax hikes?  Or a budget that is strategically focused on generating economic returns from education and transportation?

Folks, that depends on your decisions in the voting booth.

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Adam Pagnucco, budget, Economy

Why Progressives Need Economic Growth

By Adam Pagnucco.

For progressives, few issues should be more important than the need for economic growth.  Why do we say that?  First, let’s see what happens when there is no growth.

We have previously written about what happened to the county budget during the Great Recession but we may not have done it justice.  During that time, the evaporation of revenue required the county to implement a series of huge cuts.  Consider what happened to this sample of programs during the recession’s three worst budget years.

These programs are the very essence of the best of progressivism: protecting people from discrimination, funding arts and humanities, paying for community grants to non-profits, helping those with special needs and creating affordable housing.  All were gutted during the recession.

Believe it or not, the above understates the impact of revenue absence.  Consider county employees.  Their collective bargaining agreements were broken and they went without raises for three straight years.  In FY11, they were furloughed.  In FY12, their benefits were cut.  MCPS employees were not immune as the county cut its local contribution per pupil for three straight years.

Perhaps cruelest of all was the county’s cut in its local earned income tax credit (EITC).  MoCo is one of the few counties in the U.S. that has its own EITC and it was once set to match the state’s credit under county law.  During the recession, the county changed its law to allow its EITC to vary and it was cut by almost a third.  How bad is it to cut a tax credit for the working poor during a recession?  Your author’s former employer, Council Member Hans Riemer, later introduced a bill to restore the EITC to its full amount.  After a tremendous fight, he passed it.

We don’t intend to criticize the County Executive or the County Council for making these cuts.  The economy went south and they didn’t have any money.  That’s the whole point here: without economic growth there is no money.

We are no longer in a recession but revenue growth is not as strong as it once was.  Consider the history of county revenue growth, excluding intergovernmental aid, since FY98.  Red bars in the chart below refer to years in which tax increases were levied.

From FY98 through FY09, revenue growth excluding intergovernmental aid rose by an annual average of 6.1%.  In the years since, it has grown by just 2.7% a year – and that includes the year in which the county implemented a 9% property tax hike.  The County Executive’s recommended FY19 budget includes a scant 1.3% growth in revenue excluding intergovernmental aid.  How much more spending on progressive programs can be financed with that?

It’s not a coincidence that the slow years for revenue overlap with the years in which county employment has barely grown, higher-paying wage and salary jobs are being replaced by lower-paying self-employment, business formation has flat-lined and taxpayer income outmigration has hit record levels.  Stagnant revenues are a result of a stagnant economy.

This dynamic is playing out right now.  Some on the County Council would like to expand pre-k education, a huge progressive priority and a great idea.  The problem is that it would cost – at minimum – tens of millions of dollars to be meaningful.  And when the county is already relying on tens of millions of dollars in employee and retiree health insurance money just to fund its current budget, there is no way that’s going to happen.

Tax revenue is the fuel in the engine of progressivism.  That’s because nearly everything that progressives want to do costs money, like funding schools, colleges, youth programs, senior services, social workers, support for vulnerable people, affordable housing and the like.  Conservatives don’t have this problem.  They think government is incompetent at best or evil at worst, so in their view, money given to government is bound to be wasted.  Progressives actually need tax revenue from economic growth MORE than conservatives do because it is essential to the success of their policy agenda.

Here’s the bottom line: you can’t say you’re a progressive and then oppose the growth in tax base needed to pay for a progressive agenda.  Any candidate with that position will be unable to implement progressive priorities if elected.

Progressives need economic growth.  Because without it, they can’t be very progressive at all.

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Adam Pagnucco, budget

This Has to Change

By Adam Pagnucco.

Going into this year’s budget deliberations, the County Council was told two important things.

First, county budget director Jennifer Hughes wrote the following on April 5.

The County Executive’s recommended budget, released on March 15, 2018, closed a $208 million budget gap, raising the cumulative amount of budgetary shortfalls resolved in County Executive Leggett’s proposed budgets to more than $3.7 billion. Due to many economic pressures, the shortfalls between projected budget demands and projected revenues will likely continue into the foreseeable future. Our income tax revenues are projected to grow only modestly and the economic recovery continues to be modest and fitful. Additionally, we have not yet adjusted our revenue projections to reflect the effects of H.R. 1, the Tax Cuts and Jobs Act of 2017 (TCJA). There will be an impact on our revenues due to TCJA although the magnitude of the impact is uncertain at this time.

Second, the council’s own senior legislative analysts wrote this on April 27.

FY18 tax revenue is now estimated to be $106.1 million below the FY18 approved budget, and $11.1 million below the estimate from December’s estimate. FY19 tax revenue projections are $76.8 million below the FY19 projections made less than one year ago.

So shortfalls “will likely continue into the foreseeable future” because the economic recovery is “modest and fitful.”  The GOP’s federal tax law could be a problem.  And next year is already projected to see a $76.8 million shortfall after this year’s shortfall, which was over $100 million.

Suppose you were an elected official reading that information.  What would you do?  Perhaps you might say, “Wow, things are kind of tight.  We need to cut back a little because if there is a downturn, we are going to have a problem.”

That’s not what happened.  Instead, the council tapped a total of $77.7 million in one-time fund transfers to finance ongoing spending both this year and next year.  Here are the one-shot revenue sources we know about:

$62.4 million in retiree health fund money (for FY18)

$4 million from the Public Election Fund (FY19)

$10.5 million from the Employee Health Benefit Self Insurance Fund (FY19)

$800,000 inter-fund from Park and Planning (FY19)

$77.7 million total

Believe it or not, there could have been more.  There were serious discussions of financing additional spending by tapping into retiree health money a second time.

The council was justified in taking money out of the Public Election Fund since its balance ($11 million) far exceeds the likely total cost of public financing this cycle.  But the $10.5 million transfer out of the county employees’ health insurance fund is problematic since it contains premiums paid by employees in addition to taxpayer money.  A group of employees has already sued to stop such transfers although both the Circuit Court for Montgomery County and the Court of Special Appeals have ruled against them.

This continues a pattern we have written about before: the council’s practice of using one-shot revenues to pay for ongoing spending on top of the Executive’s budget.  The council has used such methods to add many millions to the budget over the years, though it’s hard to tell exactly how much came from one-time sources because their financing methods are not posted along with the items that are added.  As a result, this is all rather opaque even for someone such as your author who used to participate in the council’s budget process.  (Yes, that makes me part of the problem!)

The council might reply by citing the fact that the county has enjoyed a triple-A bond rating for a long time.  That’s true.  There is much to recommend about the county’s financial practices, including its top-notch pension plan funding ratio (currently 92%) and its reserve ratio, now close to ten percent of revenues.  But the bond rating agencies care primarily about one thing: can bond issuers repay their debt?   Because the county contains a subset of very wealthy neighborhoods and has demonstrated a repeated willingness to raise taxes on them (along with the rest of us), we have a pretty low risk of default.  That probably allows us to get away with using band-aids a little more than some other triple-A jurisdictions that have less resources , like Prince George’s.

Ultimately, the bond ratings agencies’ interests are not identical to county residents.  The ratings agencies are perfectly happy to see more tax hikes that go to debt service.  They are less concerned with whether residents get better services to go along with higher taxes.  That’s our business.  And here is what is happening, folks.  The economy is not as great as our elected officials say it is.  Even Ike Leggett’s own budget director says, “the economic recovery continues to be modest and fitful.”  The county is resorting to band-aids, transfers and using money that is supposed to go to health insurance to add more ongoing spending.  Eventually, if it keeps doing such things, those options are going to dry up when the next recession comes.  And if the next downturn is bad enough, there will be three options on the table.

Raise taxes – again

Lay off county employees

Lose the bond rating

This has to change.  We need elected officials who can prioritize spending and exercise restraint now to head off problems later.  If you agree, remember that on Election Day.

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