Report: Achieving a Structurally Balanced Budget in Montgomery County

“Everyone is entitled to his own opinion, but not his own facts,” according to my favorite quote from Daniel Patrick Moynihan. That’s why I commissioned the Office of Legislative Oversight’s report on the County’s structural deficit. There have been many assumptions about the structural deficit and what drives it. The first part of OLO’s report supplies us with the facts we need to consider as we plan for long-term fiscal balance. The second part of the report, to be released December 7, will lay out options for new ways of doing business.

Achieving a Structurally Balanced Budget in Montgomery County examines the County’s tax-supported revenue and spending trends over the past 10 years and projected spending for the next six. It includes the budgets of Montgomery County Government, Montgomery County Public Schools, Montgomery College, and the Maryland-National Capital Park and Planning Commission. The report states: “The traditional scenario for making annual budget decisions no longer works when a jurisdiction faces a structural budget problem… Looking ahead, the County’s budget decisions will increasingly be dominated by costs that are resistant to change.”

The report reveals that quick fixes are not going to resolve this long-term built-in problem. The facts in the report will give all of the decision makers a meaningful starting place for the conversation about where we go from here.

The report shows that from FY02 to FY11, the tax-supported agency budgets in the County collectively increased 59 percent from $2.1 billion to $3.4 billion. The macro-cost curve shows annual increases of 7-9 percent between FY02 and FY08. Total tax-supported spending leveled off in FY09 and posted actual declines in FY10 and FY11. During the same 10-year period, inflation was 29 percent, the County’s population grew 12 percent, median household income increased 21 percent, and the County’s assessable property tax base increased 114 percent.

Trends in costs identified in the report show that personnel costs (pay and benefits) account for 82 percent of all tax-supported spending. Between FY02 and FY11, personnel costs increased 64 percent while the total number of work years increased 10 percent. The report states: “Between FY02 and FY11, the primary driver behind higher personnel costs was not an increase in the size of the workforce but rather the increase in the average cost per employee.” I find this to be a particularly interesting finding.

The report notes that “across the four agencies, employee salaries grew by 50 percent in the aggregate and by higher amounts (up to 80 percent) for individual employees, while the costs of health and retirement/pension benefits increased upwards of 120 percent… As one example, for County Government, the aggregate cost of employee benefits as a percent of salary increased from 35 percent in FY02 to 52 percent in FY11. This means that for every $1 the County spends on salary, it now pays 52 cents for benefits. The drivers behind these rising costs are the overall rise in health care costs, and major increases in annual pension/retirement plan contributions.”

There is a lot more important information in the report that will provide a backdrop to the ongoing negations with our labor unions in the four agencies, so check out the full report. I’m confident that part two will give us even more insight.

While it is true that jurisdictions across the nation are grappling with similar problems, I feel good that we are taking such a proactive and data-driven approach to our budget challenges. The County Executive will transmit his proposed FY12 budget to us on March 15, and we will pass a final budget at the end of May. I expect this report to inform these decisions as well as those that extend well into the future.

Six-Year Balanced Fiscal Plan and Reserve Policy

We signed off on a six-year balanced fiscal plan which I recommended in April. We also enacted a new reserve policy that will take us to a 10 percent reserve in nine years.

Although the County Charter does reference it, this is the first time the Council has instituted a six-year projection designed to reduce annual budget gaps and lessen the impact of severe economic downturns. The plan will not constrain future Councils in their year-to-year decision making, but it will provide valuable information and guidance for sustainability over the long term. The plan not only will guide Councilmembers but also will give communities and the County's four agencies--Montgomery County Public Schools, Montgomery College, the Maryland-National Capital Park and Planning Commission, and County Government--a realistic view of what they can expect in the upcoming years. The plan will be updated annually as conditions change. I see it as a great tool for everyone.

Under the new reserve policy, we will gradually increase our reserve to 10 percent of adjusted governmental revenue over a nine-year period. The current reserve target is 6 percent of total resources. We will have to be very thoughtful about spending to meet our goals, but this plan will put us on more solid footing for future economic downturns. It is important to note that a 10 percent reserve is fairly modest according to our financial advisers who recommend a reserve equivalent to 60 days of operating expenses.

In April the bond rating agency Moody's placed the County on "watchlist negative." Moody's listed both our recent history of structural deficits and our low reserve fund policy as factors in the warning. We covet our AAA bond rating, which reflects the County's excellent financial management over time. Maintaining the top-notch rating allows us to borrow at a low interest rate, which means we can invest in infrastructure at a lower cost.

This is a new era in Montgomery County, and it means we're going to have to be more disciplined. This comprehensive fiscal management package is a big step in the right direction.

Addressing our Structural Deficit

I’m asking my fellow Councilmembers to initiate a legislative branch assessment of the structural deficit that has created large annual operating budget gaps in recent years—gaps that are projected to persist in future years.

The County Executive’s recommended FY11 budget includes significant service reductions, no pay increases for County government employees, elimination of more than 450 positions including more than 230 that are currently filled, 10 days of furloughs for many employees and a withdrawal of about $102 million from the County’s “Rainy Day Fund.” This was necessary to close a $779 million gap to achieve a balanced budget.

That’s just next year. Budget gaps projected for FY12-16, respectively, are currently estimated to exceed $212, $303, $417, $464 and $514 million. I, along with other Councilmembers, believe we need to address the County’s structural budget deficit.

Besides resolving the acute FY11 budget challenge that is now before us we need to address the chronic budget challenges that lie ahead. I believe that we must address at least three central questions.
What are the assumptions behind the Executive’s future year gap projections?
What are the cost drivers associated with the structural deficit in future years?
What policy and budget options are available going forward to address the structural deficit?”

I want to start the process by asking the County’s Office of Legislative Oversight to develop a recommended scope of work to address those questions with a completion date of early December. I believe that this project has the potential to produce not only useful information but real results.