By Adam Pagnucco.
When the county council discusses the county’s operating budget, they often refer to reserves and structural deficits. At times, those topics sound like gobbledy-gook from pointy-headed budget geeks. But they’re actually really important and county leaders just demonstrated why.
First, let’s talk about structural deficits. The county’s charter requires the county to have balanced operating budgets in each fiscal year. The county has accomplished this for as long as I can remember, but occasionally, it uses one-time revenues for ongoing expenses. (The council did this again in its recently passed Kicking the Can budget.) Structural deficits arise when ongoing revenues fall short of ongoing expenses in future years. That looks like it is going to happen again next year, and the current projection is that the gap will be $293 million.
Reserves became a huge issue during the Great Recession, when the county started to run out of money and its AAA bond rating was threatened. County Executive Ike Leggett and the council of that time worked together to implement a host of tough measures to save the budget and establish a reserve policy which set the foundation for the county’s policy today.
The reserve policy is complicated but I’ll boil it down to two elements. First, the county has a goal of setting aside 10 percent of adjusted governmental revenues annually as reserves. Those reserves are stored in the General Fund, a Revenue Stabilization Fund and a series of smaller funds. County policy contains exceptions to this goal for recessions and national emergencies.
Second, one-time revenues should be used for one-time spending. Examples of the latter include building reserves, setting aside money for pension and retiree healthcare funding, cash for the county’s capital budget, “other unfunded liabilities” and “other non-recurring expenditures.”
At the start of this year’s budget process, the council staff noted that County Executive Marc Elrich was using $182 million in “one-time reserves in FY27 for ongoing expenditures,” a clear violation of county policy. The council was unhappy about that, but they made it worse by diverting cash in the capital budget to fund ongoing operating expenses in MCPS.
What good is a smart policy when no one is willing to enforce it?
That brings us to why we have that policy in the first place. Recently, the executive branch sent over two appropriation requests from reserves: a $16 million supplemental appropriation for overspending in the fire department (mostly on overtime) and a $44 million supplemental appropriation for snow removal related to the Snowcrete storm. (Previously, the council had passed an $8.5 million appropriation from MCPS’s fund balance to help pay its share of the Snowcrete costs.) This is real money, folks!
Now look – overtime in the fire department has been a problem for as long as I have been writing about the county. But as of this moment, the county has to pay these outstanding costs. The same goes for the one-time Snowcrete expenditures. We paid to deal with the Snowcrete and now we’re recognizing that by drawing on reserves.
That’s what reserves are for.
The problem now is that the county is getting addicted to using reserves for ongoing expenditures. We can get away with that provided that a) county revenues don’t tank and b) Wall Street credit ratings agencies look the other way. But what happens when we’re in a recession? And what happens when the analysts at Moody’s, Standard and Poor’s and Fitch start catching on to our systemic use of one-time resources for ongoing spending?
Every one of you can predict what that road will look like.
So the next executive and council should get real about enforcing our wisely-drafted reserve policy. If they don’t, they will be gambling with the bond rating and creating a mess that will ultimately be cleaned up by the taxpayers. That means you, me and our wallets.