September 16, 2015: “Smash the Charter Limit on Property Taxes? Or Decelerate Spending?”

Questions sent to the speakers and their responses at the meeting of September 16, 2015
The meeting was held September 16, 2015, as scheduled with a total of 20 attendees including the speakers.

Topic:   “Smash the Charter Limit on Property Taxes? Or Decelerate Spending?”

Speakers:  Steve Farber, Council Administrator, Montgomery County Council
Joseph Beach, Director of Finance, Montgomery County Government

The speakers were given the questions several days before the meeting so they could provide detailed, thoughtful responses. Because their responses frequently touched on several of the questions, we are providing our notes in general rather than their responses to the specific questions. They also provided links to the handouts they passed around

(JB = Joe Beach; SF = Steve Farber).

JB: The Council has reduced the budget by $54 million; in 2009 the workforce of the county government was reduced by 10%; bus routes were cut; the Conservation Corps was reduced while the Office of Peoples Counsel was eliminated. The philosophy is to first reduce costs before eliminating positions.

A question was asked about why the Council retained the Commission on Women rather than transferred to the human resources group. SF responded that it has been reduced but still exists but it has the support of many in the community.

The growth rate of the budget over the last 25 years has been great. Now the workforce levels have returned to about what they were pre-recession. But revenues are increasing only slightly.

There was a question about tax expenditures and tax exemptions. Exemptions such as those for fire stations and houses of worship are credits allowed—but not required—by state law. Tax expenditures are ordinary taxes which are not collected. These would be income tax offset , which costs the county $168 million of the total $176 tax expenditure. The state does not keep track of tax expenditures by individual county. Page 35 of the document below summarizes tax expenditures for the County.

“TAX EXPENDITURE REPORT – Property Tax Credits, Tax Deferral, and Tax
Exemptions” – June 2015; 37 pages; pdf format ( ). This Tax Expenditure Report lists the major reductions to the County’s property tax revenue stream pertaining to Tax Credits, Tax Deferral, and Tax Exemptions. Although the authority to extend these programs to eligible taxpayers is provided for in State Law, where applicable, County Law is listed as well. The report lists each tax credit and tax deferral program separately and provides for a detailed description, legal reference that authorizes the County to issue the program, the effective date of each program, contact information, and fiscal impact showing the amount and, where possible, the number of recipients (i.e., property tax accounts). The annual impact is shown by levy year, which covers the period July 1st through June 30th.

A question was asked about the taxing of privately owned cell-phone towers on public school property. Tax is levied on the towers.

SF: The 2009 budget squeeze caused labor contracts to be renegotiated. The unions gave up pay increases in return for receiving a “phantom” COLA (cost-of-living allowance). For pension purposes that COLA was based on an employee’s salary base not on his actual (lower) salary but on the (higher) salary the employee would have received under the original contract. However, the Council rescinded the phantom COLA when actuarial calculations showed it would cost the county $300 million over 40 years.

Eighty percent of the budget for the county (excluding the schools) is for personnel costs; for Montgomery County Public Schools the figure is 91%. During the recent recession the County asked employees to give up their cost-of-living increases (4 years) and step increase (3 years). Employees were also required to increase their contribution to their health insurance and pension plans. During that time employees in private industry had experienced severe salary cuts and little recovery afterward while County employees have received some recovery from cuts.

Currently labor agreements are being negotiated and will be completed in February. Labor agreements for Montgomery College and the Park & Planning Commission are negotiated separately and submitted to the Council. The County Executive is limited in negotiating by various rules and agreements. The courts have said that the County cannot break labor agreements.

When negotiations are at an impasse it goes to arbitration, and the County Executive must include the financial impact of the decision in his budget. However, the County Council does not have to accept the results of arbitration decisions and can therefore delete the added cost.

A question was asked about how many organizations received grants from the county. Page 35 of the following document summarizes tax expenditures for the county.

“Approval of and Appropriation for the FY2016 Operating Budget of the Montgomery County Government” – May 21, 2015; 61 pages; pdf format.
( The official approval of the County’s operating budget containing 3 parts: The letter of approval (pages 1- 20); the budget in detail (pages 21 – 32). Pages 33-61 of the link below list the grants.

The May 18 2015 Supreme Court decision in the Wynne case will have a major financial impact. [That decision requires that the county reimburse county residents whose “piggy-back” tax was based not on their Maryland income only but on their total income regardless of any amount earned outside the state.]

SF: Effects bargaining was eliminated from the contract with the police union by Council vote and public referendum. Taxpayer representation at contract negotiations with the various labor unions has been discussed but not yet acted upon.

JB: The financial impact of the Wynne case will be updated in November. The current prediction is that it will cost the County $254 million through FY2018 but it could be higher although for FY2017 alone there could be a reduction of 2-3%.

SF: The Executive and the Council will always do whatever it takes to balance the budget. As a result the County has achieved a AAA bond rating for over 40 straight years. The County Executive has said that tax increases will be necessary. The problem is that the Executive can’t reduce the budgets of the Montgomery County Public Schools, Montgomery College nor of the debt service so any necessary reductions must be taken from what’s left in the budget, which is basically public safety and health and human services.

JB: Although employment in the county has increased the resulting tax revenue has increased very little because the job increases have been mostly in low-paid jobs.

JB: Metropolitan Washington ranks low among cities in increases in employment. The county’s economic development plan will be published at the end of September.

A question was asked about how the average citizen could provide input to the budget, especially people who are not too knowledgeable about the budget process. The response was that the Council has hearings on the budget every year. JB also noted that Fairfax County, VA, has an online budget tool for use by the public. Tom Klaussen, budget director of MCPS, noted that the Board of Education is considering something similar.

SF: The Council is looking at ways to give the Council a greater oversight role of the proposed Independent Transit Authority, of which a draft report has just been published. A savings plan was issued soon after the budget went into effect, and revised revenue estimates are due early next year.

MCPS has detailed records on all students who are not citizens.

As to the question relating to the cost of migrant services, the handout of Steve Farber lists them

1.  There is a widely held belief that Montgomery County has been an ardent follower of Parkinson’s Law:  “expenditure rises to meet income”.  Now that the income situation is bleak, what are the approaches being used by the County Executive and the County Council to cut expenditures.  Are there any analyses of programs that have outlived their original intent but continue to linger on?  Are most budget reductions just a nibbling around the edges?  What are some of the criteria used to analyzing existing programs?  How many programs have actually been cut by more than 50%?  How many exist despite those cuts?

2(a) Personnel costs are growing faster than inflation.  The savings plan proposed by the Executive and the plan adopted by the County Council provide little relief from ever climbing  personnel costs and have focused instead on non-recurring costs like the Capital Improvement Plan projects funded with current revenues, new programs and special project costs.  How should the 2016 budget process and contract negotiations address out of control personnel costs to avoid the need for bigger cuts to services or possible furloughs?

2(b) Most retiree taxpayers will likely not receive any increase in 2016 retirement annuities due to a negative or flat Consumer Price Index (CPI).  Most working taxpayers will not receive generous salary increases.  The current system of contract negotiations with unions is tilted heavily in favor of the unions as there is no representation by the taxpaying public.  Collective bargaining has an enormous impact on the County’s fiscal situation.  How open is the County Executive and the County Council to making these negotiations more transparent and to including a few taxpayers in the negotiations process?

3. Income tax revenue increases are driven largely by capital gains, which have been in a slump since the 30% run up in the S&P index in 2013.  Recent stock market indications point to even lower results for 2016, creating a need for further spending cuts or property tax increases above the charter limit.  How much in further spending cuts are needed in FY 2016 to avoid busting the charter limit, assuming Wynne case projections are correct and income tax shortfalls are the same as last year?  Regarding the Wynne decision, where Maryland was found to be double-taxing business owners, does the political leadership find it ironic that this ill-conceived decision to double tax might lead to even greater taxation of all taxpayers to fill the gap?

4. Taxpayers have suffered from slow economic growth and reductions in their investments and are aging, which reduces their ability to pay higher property taxes.  We have seen our county grow dependent on income tax revenues, bloated by non-recurring capital gains not economic development, to annually increase operating budget and CIP expansion driven debt service costs.  Now that the income tax revenue strategy has collapsed, the County Executive is talking about a 10% property tax increase, and even creating a new Transit Authority that would circumvent the charter limit.  Taxpayers are losing confidence in the budget process and spending controls.  How can the budget process for FY 2016 be changed to cut inefficient and ineffective spending and to make these allocation decisions more transparent?

5. County taxpayers are providing funding for migrant support services for education, affordable housing, food stamps and medical services.  While these are seen as legitimate needs and the County has stepped up to this responsibility, how much of the county budget goes towards funding these needs?  How much does the County get reimbursed by the Federal Government?  By the State?

Next meeting: October 21, 2015