Flush with cash, new authority, Democrats take control of state budget process

Sen. Jim Rosapepe, D-Anne Arundel and Prince George’s, is co-chair of the joining Spending Affordability Committee. (File Photo)

Democrats who regain control of the executive and legislative branches of state government for the first time in nearly a decade will do so in perhaps the best budget situation in state history.

Lawmakers return to Annapolis in January flush with cash and new budgetary authority.

Legislative fiscal leaders say they have a plan that targets surpluses, which are projected to decrease over the next five years, on one-time rather than ongoing expenses. Additionally, they plan to leave a cash reserve that exceeds the legal requirement as worries about a recession loom in the background.

“When you wrap all these things together, there’s a strategy here to be very fiscally prudent for the state,” said Sen. Jim Rosapepe, D-Prince George’s and Anne Arundel and co-chair of the joint Spending Affordability Committee.

After eight years of divided government, Democrats are poised to again control both the executive and legislative branches. At the same time, they start the session with new budget powers that reduce a governor’s overall control of the budget — once bill as one of the most powerful among the nation’s governors.

Incoming Gov. Wes Moore and the legislature find themselves in a far better position than when Republican Gov. Larry Hogan first took office in 2015.

At that time, the state and the nation were in the grip of the Great Recession. Then Gov. Martin O’Malley, a Democrat, battled billions in annual budget deficits.

Between 2008 and 2010, he and the Board of Public Works approved cutting spending by nearly $1.3 billion.

One of O’Malley’s officials presided over the board when it cut nearly $400 million just days before Hogan was sworn in.

Hogan preaches fiscal responsibility

Hogan exits office leaving a projected reserve of nearly $3 billion — a shock absorber against a future downturn. The rainy day fund as it stands is more than 10% of projected state revenues and more than double the statutorily required 5% level.

The state is also projected to end the current fiscal year with a $2.5 billion surplus.

“I would just caution them not to return, when you have a monopoly and everyone is in one direction, you don’t have the balance that we’ve had for the past eight years,” said Hogan. “I would just caution the legislature, who has given themselves much more budgetary power, and the incoming governor to keep in mind that we’re in great shape and the people of Maryland are very pleased with the direction the state is heading. So, I wouldn’t suggest slamming on the brakes or returning to the pre-2014 budget.”

Hogan on Thursday released his proposed budget for the coming year. The outgoing governor will, at least initially, have a say in proposed spending as then Gov. Martin O’Malley had on Hogan’s first year in office.

Moore will be sworn into office on Jan. 18. By law, he has to deliver a budget to the General Assembly two days later. The timeline limits his input on the initial document. He’ll have more than two months to work with lawmakers to reshape the spending plan more to his — and their — goals.

Lawmakers have already staked out an early position. On Thursday, the joint Spending Affordability Committee recommended keeping more than $2 billion in cash in reserve. Surplus revenue would be spent on a number of priorities to support transportation, education, workforce support and behavioral health.

Rosapepe said the forecasts “make very clear that this is a fiscally responsible approach that’s designed to take the good times and be prudent and when we have less good times we have money in the bank and don’t get into problems.”

The panel also voted to ignore a recommendation by the Capital Debt Affordability Committee to limit borrowing to $600 million — an aggressively low figure. Instead, lawmakers want to approve $1.2 billion in borrowing — a figure contemplated in a spending plan passed last year.

Moore has yet to outline specifics regarding his budget or policy priorities.

Economic warning signs

The new governor comes into office at a time when the state is flush with cash — a side effect of a flood of federal COVID-19 pandemic spending over the last two years.

“We know that the billions of dollars in revenue surpluses triggered by federal COVID spending will come to an end,” said outgoing Comptroller Peter Franchot, who leads the Board of Revenue Estimates.

The most recent revenue forecasts show “that time has come,” Franchot said.

A revenue forecast for the state updated on Thursday is relatively stable compared to September.

The Board of Revenue Estimates projects that the state will end the current fiscal year with about $23.7 billion in revenues. That’s an increase of nearly $56 million compared to projections three months ago.

For the coming fiscal year, the panel projects about $25.1 billion in collections. The forecast is nearly $170 million lower than the September picture.

Decreases in capital gains tax collections drive the lower projects. 

Still, there are causes for concern.

Analysts for the Board of Revenue Estimates Thursday noted a cloudy labor market picture that included layoffs and new jobs as well as a reversal in what had been improved consumer finances including increased car loan delinquencies. High inflation also remained a concern.

Outgoing Budget Secretary David Brinkley urged caution and to avoid passing expensive legislation.

“Despite what some advocates may be telling you, full coffers in the state bank is not necessarily the time for a spending free for all and we have to be mindful of the forest, the state’s forest — and by that I mean the state’s fiscal forest— and not just an individual tree,” he said.

Franchot similarly expressed concerns about a “soft recession” in the near future.

“If we’re able as a country to talk ourselves into a recession we’re going to do it because we keep hearing about it: inflation, recession,” said Franchot. “I think we’ve got strong economic bones in Maryland and we’re going to see, whatever happens, it is something that is going to affect us less than some other states perhaps.”

A tough balancing act

State Treasurer Dereck Davis said an economic recession would be “fed-induced.” (File photo)

Inflation increased over the last year to near 40-year records. This triggered the Federal Reserve to increase interest rates.

Officials with the policy-making body told state and local leaders over the summer that the goal was to use rate hikes to drive inflation down to about 2% even if those moves triggered a recession.

Currently, it remains over 7%.

“These rising inflation costs are squeezing the budgets of thousands of Marylanders with many being forced to dip into their savings or take on more debt to make ends meet,” said Franchot.

“It’s time to prepare for what will hopefully be a temporary, more austere fiscal future,” said Franchot.

The latest hike came earlier this month with more expected in the future.

Treasurer Dereck Davis, a former Prince George’s County legislator who is now one of three votes on the Board of Revenue Estimates, said a recession in the near future would be “fed-induced.”

“We do have to get inflation under control, don’t get me wrong,” said Davis. “I’m not saying that. But when we’re talking about what’s hurting our fellow Marylanders, what’s hurting our fellow Americans, I think it’s the interest rate to the point that what’s going to happen even further is that when we raise it to a certain point we start getting layoffs. Is that a good thing?”

And while Davis said “belt tightening” was a good idea, the possibility of a recession doesn’t mean closing the checkbook completely.

 “We’re spending other people’s money but we’re spending it on them, to their benefit, on the things they want,” said Davis.