Compensation Costs Report Paints Dark Picture for County’s Future Economic Prospects

Compensation Costs Report Paints Dark Picture for County’s Future Economic Prospects

2016 property tax hike two years ago helped avoid a budget shortfall

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Despite incoming Montgomery County Executive Marc Elrich’s repeated pledge to not raise taxes, doing so may be necessary in order to avoid a budget shortfall during the next six years, according to a new report from the Montgomery County Office of Legislative Oversight.

The County Council is scheduled to discuss the report at its meeting Tuesday.

The report, which was sent to the council last week from county legislative analysts Craig Howard and Aron Trombka, states that 88 percent of county tax revenue comes from property and income tax. Income taxes can’t be raised unless state law is changed, and property taxes can only be raised above the charter limit if the nine-member council votes to do so unanimously.

“The County is experiencing significant revenue pressures and has few options to address these pressures within the current tax structure,” the report states.

According to the report, the county would be dealing with a budget shortfall of more than $100 million in the current fiscal year—if not for a significant tax rate increase passed by the council two years ago.

The council approved an 8.7 percent property tax hike in the spring of 2016 for the next fiscal year. According to the report, revenue growth from fiscal 2014 to fiscal 2019 averaged 3.5 percent, which exceeded the average increase in compensation costs of 2.7 percent. Compensation costs depend on five factors: projected revenue growth, pay adjustments, group insurance costs, retirement costs and changes in workforce size.

The report also notes that wages, Social Security and group insurance grew at rates higher than the 3.5 percent revenue growth. At the same time, retirement costs decreased by an average rate of 7.4 percent. The report attributes the drop in retirement costs to low inflation rates, a strong stock market and changes in demographic trends.

The report projects that without the 2016 tax increase, the county’s average revenue growth rate would have been 2.6 percent, or one-tenth of a percentage point below the average increase in annual compensation costs. This accounts for the retirement cost reduction.

According to the report, revenues are expected to maintain a consistent 2.7 percent growth rate through 2024. The report also projects the average annual growth rate for compensation costs will be 3.8 percent if wages, Social Security and group insurance costs grow at the same rates and retirement costs remain constant during that period. This would lead to a $200 million budget shortfall over the course of five years, according to the report.

During the spring, the county executive must submit an operating budget to the council by March 15, with the council taking action on the budget by June 1.

Dan Schere can be reached at Daniel.schere@bethesdamagazine.com

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