By Adam Pagnucco.
News of County Executive Marc Elrich’s ten percent property tax hike has shocked county residents. But a more shocking thing awaits anyone who dives deeply into his recommended budget book. It turns out that instead of stabilizing county finances, Elrich’s budget actually sets the stage for another tax hike down the road. Yes folks, today’s events are only the beginning.
To understand the enormity of what the county faces, let’s start with the Great Recession. In 2010, the county government faced a shattered economy and its reserves were dwindling to zero. County Executive Ike Leggett and that era’s county council responded with a tough package of taxes and cuts, narrowly saving the county from fiscal disaster. One of their measures was a plan to increase reserves to ten percent of revenues over ten years, which was intended to protect the county’s AAA bond rating. As part of that plan, if the county were to get an unexpected revenue windfall, that money would be used for one-time expenditures.
The modern reserve policy is laid out in Resolution 19-753, passed by the county council in March 2021. Here is what the policy says about one-time revenues:
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Use of One-Time Revenues
One-time revenues and revenues greater than projections must be prioritized to meet the County’s fiscal policy goals or budgeted as required by law. One-time revenues and revenues greater than projected that remain after any contributions required by law will be applied in the following order until the policy goal is met, or the resources are fully utilized:
a) Reserves to policy goal.
b) OPEB more than the annual actuarial prefunding contribution and/or Pension prefunding more than the annual actuarial goal, if unfunded liabilities exist.
c) Other unfunded liabilities and/or Other non-recurring expenditures and/or PAYGO for the CIP more than the County’s target goal.
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What the council is saying is that one-time revenues should be used for one-time spending. That’s just common sense. It’s a way to keep the county out of the kind of fiscal trouble it experienced during the Great Recession.
Now we get to the present day. As bad as the COVID pandemic was, it was tempered by two things. First, the county received hundreds of millions of dollars in federal aid, far more than it received during the Great Recession. Second, while the Great Recession was broad-based, the pandemic recession primarily afflicted low-income workers like those employed in the restaurant industry. That’s terrible for those workers but not so bad for the county’s budget because low-income people pay less income taxes than wealthy people. Accordingly, the county’s revenue loss estimates were more grim than they actually turned out to be.
The net result of the above is that the county’s reserves have now hit 14% in FY23, four points above target. That’s great news for the county, but let’s remember – excess reserves are one-time revenues, and the county’s fiscal policy limits their use to one-time spending. Some of my sources would like to use that money for transportation projects. Lord knows we could use them given Elrich’s massive transportation cuts in the capital budget. But that’s not what Elrich has in mind. Here is what he says in his budget message:
Largely because revenues have outperformed expectations in recent years, we are projecting that the County will end FY23 with reserves of $842.0 million, or $238.8 million more than needed to meet the County’s policy of maintaining ten percent of adjusted government revenues in reserve. To continue to provide vital services for County residents, address inflationary pressures on County government, and help provide a bridge over a projected 2023 recession, I am recommending that we use $159.3 million in surplus reserves to meet these demands. Even with this use of surplus reserves, we estimate that the County will end FY24 with $715.4 million in reserves, or $86.0 million more than required to meet the County’s fund balance policy.
He says more in his section on fiscal policy:
In order to mitigate the short-term impact of the recession, the FY24 budget assumes the one-time use of $159.3 million in surplus tax-supported reserves, beyond the County’s 10% policy level, to provide needed services and to remain competitive in the local labor market.
Let’s translate this to plain English. Elrich wants to use one-time surplus reserves to pay for ongoing spending – specifically, the creation of hundreds of new positions across county agencies, generous collective bargaining agreements and significant spending increases in most county departments.
Now let’s remember what led to Elrich’s current recommended 10% property tax hike: the creation of thousands of positions during a period of one-time federal aid. The tax hike is being used as a revenue source to pay for jobs he has already established after breaking his campaign promise to save money through restructuring government.
And so by using one-time money to initiate ongoing spending, Elrich is setting a trap for the county council and the taxpayers – AGAIN. If the council approves anything close to his budget, they will inevitably face a circumstance when reserves trend down and the need to pay for Elrich’s new spending remains.
The result: another tax hike. How big might that be? The council staff estimates that Elrich’s structural deficit for next year is $145 million. If the executive recommends another generous compensation package – this year’s totals $100 million in annualized cost – the structural deficit would be much more. Since each penny of the property tax raises roughly $22 million, next year’s property tax hike could be 7 percent or much, much higher.
Is this any way to run a government?