O’Malley, Md. lawmakers use debt to lube state’s path through recession

Stacked into the budget that Maryland’s House of Delegates will debate Wednesday is a grim look at the state’s fiscal future:

To cover mounting debt, Maryland will have to raise property taxes after next year or begin eating into operating funds for schools, social services and public safety.

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By 2014 — Gov. Martin O’Malley’s last full year in office — the state will have to curtail spending even further to begin repaying money used to close budget shortfalls during his first term. And by 2017, the state is projected to break through one of its debt ceilings.

Maryland’s debt costs are trending toward 30-year highs, even without factoring in billions in unfunded retiree health-care and pension costs. Maryland is far from alone. Almost every state has ramped up borrowing and gone deeper in debt to try to spur job growth while balancing expenses during the recession.

But in Maryland, O’Malley (D) has sought to use bonds and other borrowing to continue to fund initiatives that have been gutted by this point in the downturn by politicians in most states.

Once again in this year’s budget, and backed by lawmakers, O’Malley has spread out over several years the cost of tens of millions of dollars in open-space land purchases and has sought to issue bonds for efforts to clean up the Chesapeake Bay.

The governor and his budget team have cast the borrowing as a bridge to get the state to better economic times without throwing aside wholesale O’Malley’s environmental agenda and other state initiatives he sees as important.

But the state’s fiscal trajectory has also begun to splinter Maryland Democrats, with more conservative ones arguing that the state has gone too far in leveraging its future.

“We’re basically spending every cent we have and maxing out the state’s credit cards to the nth degree,” said state Comptroller Peter Franchot, a Montgomery County Democrat. “If something goes wrong in the economy again, we could be very vulnerable. We have no reserve capacity.”

But compared with the way worries about debt have paralyzed budget discussions in a split Congress in Washington and in many state capitals, O’Malley and the legislature’s Democratic leadership remain largely on the same page and comfortable with pushing Maryland’s debt load to the max long after their current terms end.

“When you govern, you are making choices, and these choices often times span multiple years, multiple administrations and, in some cases, multiple generations,” said O’Malley chief of staff Matthew Gallagher. “You can’t live year to year. Your capital budget and your use of debt, you have to use in a strategic way to get big, significant projects done.”

“You don’t,” Gallagher added, “pay for college with one check, and you don’t buy your house with one check.”

Del. John L. Bohanan Jr. (D-St. Mary’s), House chairman of a joint committee that sets the state’s spending limit each year, echoed that rationale. He also stressed that his committee for the first time in nearly a decade shrunk the amount of new bond debt the legislature would approve this year to less than $1 billion to try to keep Maryland just inside its debt cap in 2017.

“We have made the conscious decision to not scale in or rein it in further for two reasons,” Bohanan said. “One, it’s an investment that we can make that puts our worst-hit sector back to work, the construction industry. . . . And two, we’re getting a much better bargain for the taxpayer at this point than we have been able to get in well over a decade.

“Every project that we put out is coming back in under budget because firms are idled right now.”

Politically, Democrats have had ample cover to make such arguments because, by the relative rankings of Wall Street, Maryland has a top-flight bond rating and is considered in a tier with a handful of other states as having among the best fiscal management in the country.

Franchot and other fiscal conservatives counter that Maryland’s AAA bond rating has less to do with the state’s fiscal management than its propensity to raise taxes when needed.

“The rating agencies in New York assume Maryland will raise taxes or expand gambling wherever needed, whenever. And as a result, there’s less pressure on controlling debt and controlling spending,” Franchot said.

But the bond rating has led to a culture of almost giddy celebration at times in Annapolis.

At a meeting this month to issue nearly $500 million in new Maryland bonds, state officials held a public countdown, and some applauded when the state got a lower-than-expected interest rate.

In the General Assembly, the fervor continued last week. Democratic lawmakers finished introducing 252 bills totaling more than $80 million in requested earmarks for pet projects.

And beyond O’Malley’s budget, the bills for two of his signature legislative initiatives would not come due until after he leaves office.

O’Malley wants to raise $100 million from insurance companies to increase venture capital spending in the state by auctioning off up to $142 million in tax breaks.

The state will start to lose the incoming revenue the year O’Malley leaves office.

The governor’s proposal to subsidize offshore wind development would also begin to cost the state and municipalities millions more annually in electric costs beginning in 2016.

“This governor seems to be punching his political ticket by writing checks that won’t be cashed until later,” said House Minority Leader Anthony J. O’Donnell (R-Calvert). “In many ways, it’s similar to what [Gov. Parris Glendening] did. In the last year of his tenure, he signed in the Thornton [education] bill without any mechanism to fund it, and we’re still dealing with the unfortunate consequences of that.”

Del. Guy J. Guzzone (D-Howard), a member of the House Appropriations Committee, countered that O’Malley’s agenda wouldn’t add up to nearly the $1.3 billion annual price tag of Thornton.

“There’s probably not a case, to any governor, that when they leave, the programs they created didn’t have some effect on future years,” Guzzone said. “Thornton is the classic example of that . . . but I don’t think there’s anything in [O’Malley’s] agenda that rises to that level. It’s much more in the realm of reasonableness.”

 
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