Northwood News ♦ April 2011

Buddy, Can You Spare a Billion?

Dealing with Montgomery County’s Budget Problems

By Jim Zepp

Just like many other state and local governments, Montgomery County has coped with ongoing budget shortfalls for the last two years.  This has meant repeatedly reducing expenditures and drawing on reserve funds as declining revenues have failed to meet previous projections.  Consequently, the County Council directed its Office of Legislative Oversight (OLO) to study the structural budget deficit as this situation is not expected to substantially change in the near future.  The staff was asked to examine the expenditure and revenue patterns of the last ten years and to project what is likely to happen in the next five years, assuming no significant changes in spending and other sources of income for the County, such as funds received from the Federal and State governments.

This analysis included operations by all County agencies (e.g., Transportation, Public Works, Police, Fire, Health and Human Services, Recreation, Libraries, Housing and Community Affairs, Environmental Protection, Consumer Protection, Corrections, Elections, etc.), Montgomery County Public Schools (MCPS), Montgomery College, and the Maryland-National Capital Park and Planning Commission (MNCPPC).  It covered tax-supported activities, which are those funded through general taxes like income and property taxes and fees that are not earmarked for specific purposes, such as solid waste disposal fees.  For Fiscal Year 2011, this amount was about $3.4 billion.  The total FY2011 operating budget, including all revenue sources, is about $4.3 billion.

On 19 Nov. 2010, OLO issued its Part I report on past expenditures and revenue trends and on 7 Dec. 2010 submitted its Part II report on options for achieving a long-term fiscal balance.  (These documents, among other related materials, are available online here.  [Please note that URLs have changed since article was printed.]  This article includes some of the graphs from a Powerpoint slideshow summarizing the OLO staff findings.  The complete set of slides can be accessed online here.  Also a video of the OLO staff presentation and question/answer session with Council members at a public forum on the budget can be viewed at www.youtube.com/user/100marylandave#p/search/0/GfAvDiLUdvk.

The OLO staff characterizes the County’s budget issues in the following manner:

The main points of the OLO staff reports are that:

• The County’s tax-supported expenditures went from $2.1 billion in FY2002 to a high of $3.5 billion in FY2009, which was a 64% increase.  Because of recent revenue shortfalls, spending has been reduced to $3.4 billion in FY2011.  Even adjusting for inflation and population growth, the County’s spending has grown substantially over time.

• In FY2011, spending is divided among the four major agency groups in the following proportions, which have been relatively constant over the years:

  MCPS	57%
  County Government	34%
  Montgomery College	6%
  MNCPPC	3%

  
  
  
  
  
  
  
  
  
• Personnel costs (salaries and benefits) account for 82% of the County budget expenditures; other expenses (e.g., utilities, supplies, travel, training, etc.) are 18% of the budget.

• Personnel costs have increased from $1.7 billion in FY2002 to a high of $2.8 billion in FY2010, which is a 66% change.

• The overall number of employees have increased by a much smaller proportion of only 15% at its maximum between FY2002 and FY2008.  [NOTE:  Workyears are used to simplify calculations and comparisons by deriving full-time equivalents across any part-time employees, e.g., two half-time (50%) employees equals one full-time (100%) employee.]

• 
  The “Average Cost per Employee” chart (right) displays the effect of these two trends on the average cost per employee, a 49% increase over the ten-year period.  This growth would have been even larger except for the moderation in the last two years because of the budget shortfalls.

• However, personnel cost increases have varied by agency group between FY2002 and FY2011.  The County Government agencies include public safety employees, who have special provisions for earlier retirement ages and compensation and benefits that affect this category’s personnel costs and were not separately reported in most of this analysis.

• Due to the recent revenue shortfalls, the agencies have reduced their staffs by about 1,200 employees through buyouts, retirements, and not filling vacant positions.  However, these have not uniformly impacted all agencies.  MCPS and Montgomery College still have substantially more employees than they did in FY2002, while County government has had a minimal increase, and MNCPPC had its staff reduced (see “Tax Supported Workyears” table, below).

  Tax Supported Workyears
  	FY 2002	FY 2011	% Change
  All Agencies	26,702	29,400	+10%
  MCPS	17,085	19,439	+14%
  County Government	7,347	7,374	+0.4%
  Montgomery College	1,363	1,773	+30%
  MNCPPC	907	814	-10%

• 
  Growth in the costs of employee benefits as relative to salaries has also driven up the County’s expenses (see “Benefits as Percent of Salary by Agency,” right).

• Another major cost that is expected to grow substantially in the next five years is the County’s debt service.  This is the annual payment of principal, interest, and issuance costs for bonds sold by the County, mainly for capital improvements (e.g., building new schools, park and recreational facilities, roads, etc.).  Under the current obligations, this expense will go from $259 million in FY2011 to $391 million in FY2016, a 51% increase in five years.

Projected Tax Revenues

The Bottom Line

This may be considered optimistic since it requires other sources of funding to remain constant.  For FY2011, the County received about $610 million in funding from the State and Federal governments.  For example, it has been estimated that some of the Federal budget cuts being considered could result in as much as another $90 million loss in revenues to the County because of the many Federal agencies and contractors and their employees located here.

It Gets Worse

As was reported in the 21 March 2011 Washington Post, Montgomery County’s pension and retiree health accounts are underfunded by more than $4.8 billion.  It would require about $20,300 from every family in the County to make up these shortfalls.

Some Alternatives to Solving the Shortfalls

Because of the scale of the looming and continuing deficits, no single solution will close the fiscal gaps facing the County.  The choices involve which expenditures to cut and by how much and which taxes and fees to raise and by how much.  All of these will require substantial changes in order to meet the multimillion dollar deficits:

• Cut staff/programs.  Because of the large financial numbers involved, cutting staff
  
  is essentially eliminating whole programs or services.  The OLO staff produced these examples to illustrate what a $10 million expense reduction could mean (see “Examples of What $10 Million in Workyears Represents,” right).

• Reducing employee salaries and benefits.  This has been a controversial topic involving negotiated labor contracts.  However, if the costs per employee are not reduced, then the County will have to further reduce the number of staff and cut services to the public.  A subset of this issue is that benefits are not uniform across all of the agencies.  There are proposals to change this situation so that all employees receive equal treatment in terms of employee contributions and pension plans.  However, this also will involve changing labor agreements.

• Consolidating agencies and services.  This could eliminate redundant administrative costs and duplicative services provided by multiple agencies.  The County appointed a special Organizational Reform Commission to investigate ideas for savings through possible mergers.  An example is the Commission’s recommendation to fold the MNCPPC Park Police into the County Police.  This has met with considerable opposition, so it has been dropped.  Other recommendations face arguments about actual savings and the cost of merging responsibilities and staffs.  The Commission’s report is available online here.

• Raising taxes and fees.  In FY2011, the County’s tax revenues come from the following sources:

  Property taxes (subject to charter limit)	39%
  Income taxes	28%
  State and Federal government aids	16%
  Other taxes	12%
  Program fees	5%

In the current economic conditions, many may argue that raising taxes and charging higher or more fees for public services is not appropriate solution.  While some of the increased revenue may be made progressive (based on the ability to pay), the large deficits involved would probably cost all taxpayers more in order to close the sizeable financial gaps.

So What Can We Do?

I have tried to summarize a large amount of published information and have condensed some extensive discussions on these issues.  I encourage readers to further examine the provided references to get a more comprehensive view on these issues that will affect our future quality of life as well as personal income and expenses.

County Executive Ike Leggett recently submitted his FY2012 operating budget to the County Council.  Between now and May, the Council will be deliberating on this and other fiscal options.  You can express your opinions on the solutions to these budgetary problems online here.  However, saving any programs, services, facilities, or staff requires finding other expenses to cut or revenue sources that can be increased since the County is living beyond our means.   ■