May 22, 2020

Key Takeaways from the Budget and Taxation Committee: May 21, 2020

Maryland’s Budget and Taxation Committee shared a briefing on May 21, 2020 to share budgetary updates in light of the COVID-19 pandemic. Find updates from representatives from the Comptroller of Maryland, the Department of Legislative Services, and the Department of Budget and Management below.

Click here for an additional Q&A on the presentations from David Romans and Secretary Brinkley.

Andrew Schaufele
Director, Bureau of Revenue Estimates, Comptroller of Maryland

Covid-19: General Fund Guidance Applying Moody’s Scenarios

Q&A  

Senator Jim Rosapepe:
What do the projections say about international trade and the relationship with demand and trade with Europe and China? International travel?

Andrew Schaufele:
I am unsure if they forecast the travel metrics. That may be a bit micro for what they do, but there has been a slow down in international trade.

Senator Sarah Elfreth:
Do you have any policy recommendations that we should spend the next 6 months thinking about before we go back into session?

Andrew Schaufele: The only one that sticks out to me is skills based training. I think that is key. Too much of our tax strategy is tied to wage earners, whereas much more of the economy is shifting to capital. To the extent that we could focus more of our tax structure from labor to value added and production.

Senator Melony Griffith: Has anyone been looking at residential real estate and the potential impact? Are there projections?

Andrew Schaufele: Our general fund is not impacted by real estate. It impacts counties and individuals in a huge way. I think they are uncertain about how the real estate market is going to play out through all of this.


David C. Romans
Fiscal and Policy Coordinator, Department of Legislative Services

End of session budget outlook was favorable:

Expected General Fund Closing Balance

FY2020

$346 million

FY2021

$324 million

Rainy Day Fund Balance

$1.15 billion (with authorization for Governor to spend $150 million for Covid-19 response)

Covid-19 Impacts are Three Fold:

  1. Revenue impact: 
    1. Fiscal 2020 general fund revenues expected to fall $900 million to $1.1 billion short of estimate. 
    2. This equates to about a 5% reduction in general fund revenues. 
    3. Fiscal 2021 revenues are expected to fall $2.1 – $2.6 billion short of estimate.
    4. Casino closure through June would cost the Education Trust Fund $165 million.
    5. Transportation Trust Fund expected to see substantial revenue losses.
    6. University System of Maryland estimates revenue losses through June of about $235 million.
  2. Increased State spending on direct response to Covid-19: 
    1. All aspects of public health response, small business assistance, pay increases for essential workers, overtime, etc.
  3. Expected uptick in entitlement caseloads: 
    1. March was the first time the Temporary Cash Assistance caseload increased over the same month in the prior year since the Great Recession. 
    2. The April caseload grew more than 30% over the same month in 2019. 
    3. No disenrollment is currently allowed from Medicaid or Temporary Cash Assistance which, combined with the recession, will push caseloads higher.

Federal Assistance will Cover Expenses Associated with Covid-19 Response

Maryland will receive an estimated $6 billion in federal aid to respond to the virus. This figure does not include direct federal assistance to individuals ( up to $1,200 per adult and $500 for each dependent child under 17, unemployment insurance enhancements, small business assistance of nearly $10 billion, and relaxed eligibility and payment rules for Supplemental Nutrition Assistance Program).

Most of the federal money is to respond to Covid-19 costs and cannot be used to offset revenue losses. Exceptions are transit assistance and a portion of the money for higher education institutions.

Only the enhanced federal Medicaid match (56.2% rather than the usual 50%) will generate savings that will help offset revenue losses.

Q&A

Senator Jim Rosapepe: Do we have any sense at this point how much additional costs the local government are taking on or is it too soon to know?

David Romans:
We don’t have specifics. We know DBM has asked each local to submit a plan on how they plan to spend the money they receive. We hope to have something in the near future.

Senator Jim Rosapepe:
Do we have a sense on what the administration is spending the money on?

David Romans:
We have not been given a specific accounting. There are around $300 million in emergency contracts. We are aware of potentially $500 million of costs we may incur. I am sure there are others but I have not seen a number. I can send a list of emergency contracts the state has entered into.

Senator Jim Rosapepe:
Any clarification on the $1.3 billion? How can it be spent? Will it cover education investments to help teachers teach virtually?

David Romans:
We have the authority to use the $1.3 billion through the end of the calendar year. I think that would include any distance learning cost. The counties have gotten some of that money. The school systems have gotten roughly $180 million directly from the federal government.


David R. Brinkley
Secretary, Department of Budget and Management

In the wake of new data on the impact of Covid-19 on our economy, the board of revenue estimates last week projected that we could lose up to upwards of $1.1 billion in the current year of revenues. On top of that come even costlier revenue losses in FY 2021 and 2022.

Reductions proposed represent the next necessary step in the administration’s plan to protect our state’s finances. The general strategy is to harness general funds that have been set aside for capital projects and that have not been spent or allocated to specific projects or that are not needed at this time. The state can use the unallocated funding to help cover this year’s shortfall.

Most savings come from the Dedicated Purpose Account. Two reductions total $97 million dollars, we are also reducing the MD State Department of Education’s Capital Appropriation grant program by $7.6 million dollars that has gone unallocated through this year.

We are bringing the Heritage Structure Rehabilitation Tax Credit in line with our projected cashflow, freeing up $7 million dollars. Our grand total recognized more than $120 million dollars in general fund agency reductions. 

Q&A

Senator Guy Guzzone:
Can you provide insight regarding when you might be making additional cuts to 2021?

David Brinkley:
It is entirely probable. Were looking to see what the number come in with May because that will dictate what if any we need to take from the Rainy Day Fund. That will then dictate the starting balance on 2021. We will prepare several different options.

Senator Guy Guzzone:
The CARES Act has specified programs that get money. When can we expect budget amendments?

David Brinkley:
Were preparing some now. You will start to see them soon. We have a team that meets three times a week to deal with these things in an expedited manner.

Senator Cory McCray:
Could you elaborate on the rubric that was put into making the budget cut decisions?

David Brinkley:
We had conversations with the secretaries and our capital team. The question was what do we have available that have not been spoken for in 2021. This is how the money amount came from that.

Senator Craig Zucker:
What if anything is being done to reach out to the community colleges, the school safety grant programs, or other beneficiaries?

David Brinkley:
The community college portion of this is that recently there was added language from the general fund we had to provide maintenance upgrades. They utilized a vast majority of that. All we harvested here was money that had not been allocated.

Senator Jim Rosapepe:
Has the administration identified how much money you think we need to spend over the next 9-12 months on the testing, tracing, and isolation?

David Brinkley:
Right now we are just trying to insure we have the protective equipment out. I don’t have knowledge of a direct number.


Q&A from the Appropriations Committee

Questions on David Roman’s Presentation

Delegate Keith Haynes:
In regard to the Rainy Day Fund balance. If we tap into this fund, as outlined in FY 2021, what would be the balance after tapping into it if we had to? How will this effect bond rating?

David Romans:
The scenario we showed here would take all of the money out of the Rainy Day Fund balance in FY 2021. State law does require repayment, but it would take many years to build it back up. It will not help us with our bond rating, but given the magnitude of the budget problem it may help us take time to plan on how to address the long term challenge.

Delegate Keith Haynes:
Could you tell us how much savings we will have in state dollars if we were able to use the federal funding?

David Romans:
There is at least $50 million in fiscal funding.

Delegate Trent Kittleman:
Could you explain the Covid-19 revenue impact, does it mean that the revenue that will be coming into the state is going to decrease that much each year?

David Romans:
The Board of Revenues came up with a range of how much the revenues would be less than they forecast.

Delegate Geraldine Valentino-Smith:
Follow up on Delegate Kittleman’s question. Does that big drop in revenue impact more attributable to loss in sales or loss in income tax? What is the biggest financial hit?

David Romans:
It is pretty evenly divided between withholding on the income tax and on the sales tax.

 

Questions on Secretary Brinkley’s Presentation

Delegate Maggie McIntosh:
In regard to recession. What has the discussion been around cuts and the capital budget?

Secretary Brinkley: Right now we have an operating crisis in trying to move forward on what’s going on. Construction industry seems to be moving forward without much interruption. The capital budget is an opportunity to keep a lot of people in work and at work.

Delegate Maggie McIntosh:
What are the top 3 areas that you believe the administration will focus on trying to protect?

Secretary Brinkley:
We are all united in trying to ensure that we have the capacity in our healthcare environment and that we get the supplies that are needed. The whole government has supply chain issues. We need to buy time for the healthcare field to not only treat those that are sick but to develop a vaccine so we can work towards a sense of normalcy. We are trying to focus on getting people back to work.

Delegate Kirill Reznik:
Regarding IT systems. What effect do you think the future cuts will have on all of these new systems the administration is undertaking?

Secretary Brinkley: I don’t think I have a direct answer on all of the systems. We need to move forward on all of the systems, but the question is are we able to move as fast. We may have to dedicate some sources to it.

Deputy Secretary Marc Nicole:
We continue to move forward with current projects. Maybe we look to make savings is not starting some new projects and those get put on hold for a year or two.

Delegate Kirill Reznik:
Regarding Blue Flame Medical. How does a company with no experience, no corporate capability, and no history got a $12.5 million dollar contract with the state and received 50% of the payment up front? Do we not have checks and controls on these types of procurements?

Secretary Brinkley:
This is a reason why we went after them. I’m anxious to hear about what the chief procurement officer feeds back to you as well.

Delegate Jared Solomon:
When will you have a sense of what the state will have spent in terms of the federal money through the CARES Act? Any updates on toll projects?

Secretary Brinkley:
Most of our conversations have been about reopening the state in certain capacities and what models to use. I haven’t been involved in the toll structure. We know there will be a significant hit there. We are getting updated information on the money almost every 24-48 hours.

Deputy Secretary Marc Nicole:
In the upcoming weeks you will start to see some budget amendments as agencies start allocating the funds.

Delegate Shaneka Henson:
Can you help me understand the thought behind the budget cuts made to housing programs?

Secretary Brinkley:
Those funds had not been allocated and do not have a project behind them for the balance of this year.

Delegate Pat Young:
Has the increased need for PPE, testing, and tracing been factored into the projections?

Secretary Brinkley:
We have been dealing with the supply chains and then ensuring the supply get out where it needs to go which has been our main focus.

Delegate Michael Jackson:
Where do we stand in the last quarter of this FY regarding vacancies? Concerns regarding the digital education gap. How do we handle distance hiring?

Secretary Brinkley:
We are bringing on two new budget analysts through this same format. We are learning to navigate through it as I suspect many will. I don’t have an answer regarding vacancies. There are two issues as far as the digital education gap. It is making sure children have the right hardware and equipment, the other one is making sure they have access to the internet.

If you have questions or concerns, or to discuss how these updates impact your business, please feel free to reach out to us directly at 410-321-8200.

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