November 22, 2010

County Council’s Oversight Report Identifies Structural Budget Challenge On Tuesday, Nov. 23

The steadily rising costs of the County’s commitments, including employee pensions, health care benefits, and debt service, have created a structural budget challenge that must be addressed in order for the County to achieve long-term fiscal sustainability. Those items are identified in a report from the County Council’s Office of Legislative Oversight (OLO) that will be presented to the Council at 2:15 p.m. on Tuesday, Nov. 23, in Rockville.

Council President Nancy Floreen initiated the OLO report earlier this year, during the Council’s deliberations on the FY11 operating budget. The Council requested examination of the County’s tax-supported revenue and spending trends over the past 10 years and projected spending for the next six years. The OLO review 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.” Further, OLO finds that, “Looking ahead, the County’s budget decisions will increasingly be dominated by costs that are resistant to change.”

On Dec. 7, OLO will deliver the second part of its report that will outline options for changes that could help achieve long-term fiscal balance in the County. In May 2010, in an austere year caused by the deep recession, the Council approved a $4.3 billion total County operating budget for Fiscal Year 2011 that was 4.5 percent less than the approved budget for FY10. It marked the first decrease in a total budget since the adoption of the current County Charter in 1968. To balance the budget, the County had to close a gap of nearly $1 billion.

“The old way of doing things no longer works,” said Council President Floreen. “In June, for the first time in this County’s history, we adopted a six-year fiscal plan that outlines the spending limits needed to achieve balanced annual budgets. But that plan gave us clear warning that there were structural problems we were going to have to address or it would never work. There have been many assumptions of what the problems were and what was broken. The report reveals that quick fixes are not going to resolve this long-term built-in problem. The facts in this report will allow us to start a really meaningful conversation about where we go from here.”

Part 1 of the report concludes that the County faces a serious structural budget challenge and that to achieve long-term fiscal sustainability, major changes must be made. “The steadily rising costs of the County’s legal and policy commitments, many of which are resistant to change, are projected to exceed the growth in anticipated revenues for the foreseeable future,” the report states. “The magnitude and recurring nature of these costs means that one-time solutions are insufficient to resolve the problem. In sum, to achieve long-term fiscal balance, the County must consider reforms that either raise more revenue or lower the projected cost curves associated with ongoing government operations and future promises.”

“We just came through a major mid-term election. The message from the voters was loud and clear, and we are listening,” said Council Vice President Valerie Ervin. “While families across Montgomery County struggle to balance their own shrinking budgets, it is the responsibility of County government to do the same. We can no longer afford to kick the can down the road. Hundreds of governments across the nation are going through this same exercise. Now we need to act. This report will give us options on where we must start making further changes.”

The report shows that from FY02 to FY11, the tax-supported agency budgets in Montgomery 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.

The 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 workyears 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 average costs per employee.”

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.”

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