AGA Today
MD,
VA Approach Surpluses Gingerly
Economic Slump Bound to
Return, Some Argue
By Ann E. Marimow and
Michael D. Shear
Washington Post Staff Writers
Monday, January 9, 2006;
Page B01
Lawmakers are returning
to Annapolis and Richmond this week, where they will enjoy the fruits of
hot economies that have turned shortfalls into surpluses. Even so,
leaders in both states are vowing to avoid a spending spree.
Finances in Maryland and
Virginia, like states throughout the nation, have rebounded after tax
revenue plummeted when the high-tech industry collapsed.
Virginia Gov. Mark R.
Warner is leaving a $1 billion surplus to his successor and the
legislature. Warner recently released a two-year, $72 billion budget
proposal.
Virginia Gov. Mark R.
Warner is leaving a $1 billion surplus to his successor and the
legislature. Warner recently released a two-year, $72 billion budget
proposal. (By Steve Helber -- Associated Press)
But the question facing
budget writers is: How long will the good times last?
Although Maryland's
surplus is expected to top $1 billion, Gov. Robert L. Ehrlich Jr. (R)
will submit a budget wish list to the General Assembly next week that
promises to be more "measured" than the feel-good figures would allow,
Ehrlich said.
"We don't want to go
pedal-to-the-metal. There's going to be another recession at some
point," he said in an interview last week. "It's a more measured
approach to a surplus year than maybe you have seen in the past. There's
less of a function of trying to buy votes than doing what needs to be
done."
In Virginia, Gov. Mark R.
Warner (D) is leaving a $1 billion surplus to his successor, Timothy M.
Kaine (D), and the Republican-controlled legislature.
Kaine and the lawmakers
have said they intend to spend much of that money on one-time projects
that will not create permanent spending obligations that would be
difficult to fulfill should the economy falter. Members of both parties
have talked about road construction and cleaning up the Chesapeake Bay.
Virginia's top Republican
senator, Finance Committee Chairman John H. Chichester
(R-Northumberland), has called for the surplus to be used for
"non-habit-forming expenditures."
The hope in both states
is to avoid the roller-coaster ride that created a sense of crisis in
the 1990s. Budgets swelled during the Internet boom of the late 1990s,
when taxes on new companies and capital gains from wealthy investors
poured into state coffers. But it all ended -- quickly -- in the early
part of this decade, when the dot-com boom turned to bust and the Sept.
11, 2001, terrorist attacks slowed the national economy. Governments
were forced to slash spending to balance budgets.
A strong housing market
has helped things turn around. But economists caution that might be
changing. As interest rates rise and home sales cool in the Washington
area, tax revenue from new mortgages and refinancings is dropping, they
say. And they predict that record corporate tax receipts are not likely
to continue.
Across the nation, states
are struggling to keep up with growing commitments to Medicaid, the
health care program for the poor. Virginia's House lawmakers are
proposing a series of initiatives -- including medical savings accounts
-- aimed at slowing the growth of the massive health care program. And
in Maryland, there is the added pressure of meeting long-term school
financial needs, as dictated by a new state formula.
In Virginia, the call for
restraint is likely to be met with pressure to spend more on services
now that times are good.
In one of his last
official acts, Warner proposed a two-year, $72 billion budget last month
that includes new spending on college research, mental health,
environmental cleanup and roads. It also would push the state's rainy
day fund to its maximum level of about $1.2 billion.
Transportation advocates
in Virginia, including many of the state's leading business
organizations, have begun a major lobbying effort to raise money to
confront congestion in Northern Virginia and other urban areas. Kaine
has spent weeks holding town hall meetings about transportation.
In Maryland, the state is
flush with cash generated largely by a robust housing and job market.
The state is expected to end the 2006 budget year in June with a balance
of at least $1.2 billion, in addition to a reserve of $747 million.
The infusion of cash
gives the Republican governor an opportunity this election year to build
up popular programs that languished in lean times.
A combination of ongoing
budget commitments and the loss of capital gains revenue in Maryland led
to the shortfall Ehrlich confronted after his 2002 election. In early
2003, he approved higher property tax rates -- a nearly 5-cent increase
for every $100 of assessed value -- and cuts to higher education, which
led to double-digit increases in college tuition for Maryland students.
In the run-up to this
year's 90-day session, Ehrlich has held events from Bethesda to the
Eastern Shore to announce millions in new spending for the state's
college and universities, crowded public schools and people with
disabilities. Also, if the governor has his way, homeowners will see a
2-cent drop in the state's property tax rate of 13.2 cents on every $100
of assessed value.
Democrats, who control
both chambers of the General Assembly, have limited power to shape state
spending. Lawmakers can cut from the governor's budget but cannot add or
shift money between programs.
To Democrats, the timing
of Ehrlich's plan to increase spending for higher education and school
construction is suspect. "They are all things we've been screaming about
for the last three years," said Sen. P.J. Hogan (D-Montgomery), vice
chairman of the Budget and Taxation Committee. "I'd question why he
didn't do it earlier."
The two leading
Democratic candidates for governor want to earmark $400 million for
school renovations -- $119 million more than Ehrlich suggested last
week.
And Comptroller William
Donald Schaefer (D) -- often an Ehrlich ally -- has his own ideas for
the surplus: He wants to restore millions cut from health care for
pregnant legal immigrants and their children, nursing homes for
low-income seniors and prescription drug coverage for state employees.
How much of the surplus
the state can afford to spend in the budget year beginning July 1 is up
for debate. Last month, a bipartisan committee that makes annual budget
recommendations to the governor suggested that he increase spending by
no more than 8.9 percent in the 2007 budget year. The panel suggested
creating a more robust reserve account of at least 7.5 percent of the
budget, or an additional $300 million.
Frederick W. Puddester, a
committee member who was budget director for Gov. Parris N. Glendening
(D), said 2002's downturn demonstrated the need to build up the rainy
day fund and use the surplus for one-time expenses. During the last
economic boom, legislators cut the income tax rate by 10 percent and
signed off on a multiyear education initiative.
"A lot of people complain
and ask, 'What happened to the surplus?' " Puddester said. "I don't
think anyone complained when they got a tax cut or more money for
schools. But they forget."
Spending on Medicaid is
projected to grow 7 percent, compared with a 5.2 percent increase in
overall state revenue. For schools, the state is on track to increase
funding by 12 percent, or more than $450 million.
On top of that,
policymakers must decide whether to begin paying down future
commitments. A report last month urged the state to start setting aside
money to cover the long-term cost of health benefits for retired state
workers. The recommendations are in response to new government
accounting standards, and putting off such a liability could affect the
state's bond rating.
Public school teachers
also are pressing for better retirement benefits, which educators say
are among the least generous in the nation. One proposal for both
teachers and state employees carries an annual price tag of $480
million.
With so many demands on
the budget, Warren G. Deschenaux, chief fiscal analyst for the
legislature, said: "The trick is not to give it away prematurely. Two
billion dollars becomes not very much money in short order."
Staff writer John
Wagner contributed to this report.
