County tax revenue estimates decrease $522M for three years

County tax revenue estimates decrease $522M for three years

Officials expect a long economic recovery

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This story was updated at 11:17 a.m. on July 16, 2020, to include additional information about county tax revenue estimates.

Montgomery County officials have lowered their tax-revenue expectations for last year, this year, and next year. The loss? $522 million for the three years combined — so far.

The county previously estimated that about $12.1 billion would be gathered in tax revenues for the three years before the impact of the pandemic. Now they’re expecting roughly $11.6 billion.

On Tuesday, they said revenue estimates are down by $47.7 million for FY20, which ended June 30, and $192 million for FY21, which began July 1.

For FY22, revenue is expected to decrease $282 million, for a total of $521.7 million over the three fiscal years.

Because of the Great Recession in 2007, tax revenues decreased a combined $188.2 million in FY10 and FY11, according to a staff report.

Staff members previously predicted that the county could lose up to $600 million in tax revenues combined just for fiscal years 2020 and 2021 combined.

About 62% of the estimated reduction for FY21 is because of decreases in income taxes, staff members told the council.

The impact to FY21 property-tax estimates won’t be known until mid-October. The property-tax revenue is about 40% of the county’s tax revenues.

In addition, the finance department estimated that $31.8 million could be lost in hotel/motel taxes from the combined FY20 and FY21.

An estimated reduction of $16.1 million is expected for fuel-energy taxes in the current fiscal year.

Michael Coveyou, the county’s finance director, told the council on Tuesday that he expects that the county’s economy will rebound in a “swoosh.”

The “swoosh” recovery model first predicts an “initial deep reduction to economic activity,” followed by a “moderate bounce” as the economy picks up, according to the staff report. These would precede a long recovery.

“These revenue estimates have nothing to do with what the state of Maryland might decide to do later on in the year or early next year,” Coveyou said.

The main issue is income-tax revenues, he said.

“We all expected that,” he said. “November will be probably the most important distribution of the year. It will tell us whether we’re on track or not on track for this particular revenue estimate.

“By mid-October, we’ll have a really good idea of whether property-tax collections are holding steady or not.”

Property assessment appeals are lagging compared to last year, Coveyou said, adding that he doesn’t expect that to continue.

“We expect commercial appeals to pick up and exceed the norm for the year,” he said. “That is where most of the slight reduction in property taxes resides.”

Property-tax revenues will be mainly kept lower in the future because of the current charter inflation limit, according to Coveyou.

“We expect inflation to be very low for a long time and that will serve to suppress property taxes. We expect inflation to be lower than we expected it to be in March,” he said.

On June 12, county departments were asked to find cuts of up to 6% in their budgets. On May 21, the council approved a $5.8 billion operating budget and $4.4 billion capital budget for fiscal year 2021.

On July 7, County Executive Marc Elrich proposed cutting $66 million from the budget. Rich Madaleno, the county’s budget director, said the recommendation did not include all of the potential cuts that departments submitted.

By the end of the week, every department will submit a list of expenses that they expect to be reimbursed by the Federal Emergency Management Agency, or FEMA, Madaleno said.

Around $23 million has been spent in hazard pay for county employees.

The county is seeking reimbursement from FEMA for the hazard pay, but if the federal agency declines to reimburse it, the county would have to meet with the unions to discuss how to proceed while recognizing employees’ effort and risk, as well as the need to conserve money, Madaleno said.

In Elrich’s revised spending plan, he noted that staff members are working on a cost efficiency study to identify at least 100 vacant positions in the executive branch that can be eliminated during the first quarter.

Madaleno said the county has $87 million worth of contributions to the Other Post-Employment Benefits, or OPEB, trust fund. It’s difficult to imagine that the county could make the first distribution on March 1, he said.

The OPEB funds could be used as an additional reduction of funding to increase financial resources for other needs, Madaleno said. County reserves would be a fallback, as well.

Council Members Hans Riemer said that although he understood why OPEB funds would be a financial fallback, he didn’t think the county should rely on them.

“If this was the first time, that might be one thing. But unfortunately, we’ve done this now for three or four times in a row,” he said. “It’s going from being an emergency manager to being a habit. If [in] the next four or five years, we don’t make our annual contributions for our retiree benefit funds, we’re really loading up a big problem for the future.”

Council Member Andrew Friedson said he is frustrated that a funding gap would be solved with underfunding OPEB.

“Every new employee that we bring on carries debt for the future,” he said. “That’s OK. … It’s not OK if we don’t reflect that in the decision that we make and understand the fiscal reality of every position we have and every employee that we commit to.”

The county should focus on cutting more vacant positions instead, Riemer said.

“One hundred positions is a very modest goal,” he said. “We had to lose almost 1,000 positions during the Great Recession.”

Friedson also said more positions need to be eliminated. Elrich already planned to eliminate the 100 vacancies before the pandemic, so in light of the pandemic, the county needs to do more, he said.

“It would be good if we didn’t just go back to what would have been good before the crisis, but if we actually go beyond what we had heard before and meet this moment that we’re in and be prepared from a fiscal standpoint, to meet our obligations and support our priorities and make the tough decision,” he said. “Ultimately, the numbers we’re talking about here are not going to be easy decisions where everybody is going to be happy with where things end up.”

Executive leadership is “desperately needed,” he said.

Madaleno said at least 100 vacant positions could realistically be identified for elimination over the next two months, but if more could be found, then they would be eliminated, too.

Briana Adhikusuma can be reached at briana.adhikusuma@bethesdamagazine.com.

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