Who's to Blame?

Who’s to Blame?

Cue music for a disaster movie: We're talking about Montgomery County's budget here.

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Last September, Montgomery County officials were looking at a $370-million budget gap. By Dec. 1, it was $608 million. The worst-case scenario drawn up by the county’s budget-meisters in March—a $779-million gap—looked like the good old days in April. Can you say one billion dollars? That’s the amount of spending cuts needed to balance a $4.3-billion budget.

Affluent Montgomery County, seemingly sheltered by the federal government and by its own perhaps over-inflated sense of self-worth, has been hit by a fiscal catastrophe of epic proportions.

If this were a disaster movie, you’d hear the deafening sound of the economy crashing.

On April 6, in a fifth-floor conference room at the Stella B. Werner Council Office Building in Rockville, County Executive Isiah “Ike” Leggett somberly delivered the bad news to the county council. The worst case had gotten worse. Income tax receipts were $24 million less than expected. More cuts were coming.

Leggett spoke of “liquidating encumbrances” and accelerating an energy tax he had proposed, pushing up its effective date by two months. “We have to hit this moving target,” Leggett said at the time.

On April 13, another shoe dropped. Nearly $168 million more would have to be carved from the budget. A week later the number was revised to $197 million. “This is the continued saga of bad news,” council member Mike Knapp noted.

For two years, as the downturn took hold, the county government managed to mask the severity of the situation, picking at the low-hanging fruit not readily apparent to taxpayers. There were wage freezes and unfilled positions, but no severe service cuts. This year, the charade of normalcy ended.

In the new budget adopted in May, there would be energy and cell phone tax hikes and an ambulance fee. Teen centers hours and programs for seniors would be cut. Bus routes reduced. Library spending cut by 24 percent; transportation slashed 25 percent; parks, 16 percent; health and human services, 11 percent. Class sizes would increase. Potholes would go unfilled. And for county workers: 232 layoffs. For those remaining: no raises, plus two weeks of furloughs, amounting to a 3.8 percent pay cut.

This was the spring of our discontent. Unhappy citizens. Unhappy unions. Unhappy politicians. Businesses fuming. Library patrons wailing. Reality kicking in.

So how did we get here? Over coffee at the Silver Diner on Rockville Pike, Council President Nancy Floreen of Garrett Park offers the short answer: “Economic markets we can’t control are to blame,” she says. “What’s our problem? It’s income,” or, more precisely, the lack thereof. And there is no deficit spending here. “The feds have a printing press,” she says. “We don’t.”

Numbers tell the larger story. In the 10 years leading up to the crash, the county’s population rose by 15 percent; school enrollment, 7 percent; and the cost of living, 27 percent. At the same time, nonteacher county salaries soared 81 percent, and overall spending rose 85 percent; county government staffing grew 28 percent; public safety, 36 percent; health and human services, 29 percent; school jobs, 31 percent. Per-pupil expenditures shot up 78 percent, from $8,093 to $14,370 a year. These increases were funded from income tax revenues, which rose 87 percent; from property tax collections, up 53 percent; from other taxes, such as those on energy, hotels and telephones, which shot up 164 percent; and from federal and state funds, up 74 percent.

The party ended abruptly as the recession took hold in the fiscal year ending June 30, 2008. Tax receipts fell, leaving a $200 million budget gap, followed by gaps of $401 million in 2009 and $529 million in the fiscal year that ended June 30. Revenue declines were dramatic: $239 million less from income taxes and $47 million less from property taxes in 2009 versus 2008 alone. Both sources had risen just as dramatically during the boom years.

“Certainly it’s the most challenging budget the county has ever had to deal with,” says Phil Andrews, a three-term council veteran and budget hawk from Gaithersburg. In fact, this is the first year since the current council and executive form of government was adopted in 1968 that the proposed budget is lower than the previous one.

The good news: Montgomery County has been blessed with a lot of rich people. That’s also the bad news. Unlike, say, Fairfax County, which is largely dependent on property taxes, Montgomery has relied heavily on income taxes. Capital gains yield huge revenues for the county in good years. But when the economy tanks, capital gains become losses—with income tax receipts plummeting 35 percent after having risen 40.3 percent from fiscal years 2005 to 2007.

To make matters worse, Gov. Martin O’Malley pushed through the General Assembly the so-called “millionaire’s tax” in 2008, raising taxes on the top 1 percent of earners. Leggett, anticipating its impact here, opposed the measure, but the tax passed and some wealthy residents moved out of state. According to the Comptroller of Maryland’s Board of Revenue estimates, the county saw a 27 percent decline in returns from persons with taxable incomes of $1 million or more in 2008, compared with 2007, inspiring the Wall Street Journal to editorialize about “Maryland’s Mobile Millionaires.” Overall, lower incomes meant $150 million less revenue to the county in 2008 compared to the previous year.

Here’s the paradox: This affluent county, with its high-end shops and high-priced homes, has a growing underclass comprised of immigrants and kids who must be educated and otherwise accommodated with a range of social services. In the schools, English is the second language of more than 10 percent of all students, while nearly 30 percent of all those enrolled qualify for free or reduced meals.

Amid the wreckage, blame-throwers are out in force: If the problem isn’t illegal immigrants, it’s the county employee unions reaping fat contracts for their members in return for flexing their political muscle at election time. Regardless of whether that’s true, “by law we’re not in the [negotiating] room,” Floreen says. “At the end of the day, we vote to fund, but we do not negotiate. We look at the resulting contract and vote up or down” on the budget based on those agreements.

Others blame tax-and-spend politicians. Among the accused: former County Executive Doug Duncan, who served three terms during the boom years, expanding government and agreeing to generous union contracts.

Duncan has his own list. “When this [recession] was coming on, people still had their heads in the sand,” he says. “When I left office, the county had hundreds of millions in surplus. What wiped that out? The economy did.”

Now “it’s typical Montgomery County,” he says, “where we debate issues to death and never come up with solutions. The executive and county council are playing the blame game, but they are not telling us how to get out of it.”

Then again, maybe we’re the culprits, a citizenry flush with a sense of entitlement demanding and receiving services from a county where soaring revenues made all things possible—until they weren’t.

“The lesson here is that the laws of gravity have not been repealed,” says Steve Farber, county council staff director since 1991 and previously executive director of the National Governors Association. Of course, it’s worse elsewhere. San Francisco, with a population of about 850,000—smaller than Montgomery County’s—was facing 15,000 layoffs unless its workforce accepted a 6.25 percent pay cut; New York City was projecting 11,000 layoffs.

Here, as elsewhere, there’s a rainy day fund, though not enough for a downpour of this magnitude. Nor is it enough to satisfy Fitch, Standard & Poor’s or Moody’s, whose fiscal analyses of the county determine whether its bonds continue to be rated AAA or get a lower grade. The rating matters because it determines what the county and, ultimately, the taxpayers pay to borrow money. The reserve was 5 percent of the most recent budget; the money mavens were saying it should be 6—a figure the county recently adopted for its 2011 budget, and a difference equal to 10 days of furloughs for county workers.

“One thing I tried to do the council rejected,” Duncan says. “That was to set aside $25 million as a dedicated reserve. The council looked at it and spent every penny. In 11 of my 12 years, the council spent more than I recommended in my budget.” Or the council would cut to balance the budget in May, he says, then add $100 million in new spending in July. “Any discussion of setting money aside for the future was ignored.”

What Duncan doesn’t mention from his tenure is a provision to allow police and firefighters to retire early on full pension, then be rehired on contract to do the same work. “I didn’t negotiate the contracts,” Duncan says. “We had a negotiating team.” Which is not the same as rejecting the deals his negotiators made. Regardless, Duncan defends those deals and his relationship with county workers. “I believe in a labor-management partnership,” he says. “I spent 12 years doing that. Now there’s a bad economy and you have people blaming the county employees, and that’s not right.”

Sixty-six percent of the county’s budget goes to wages and benefits, compared with 90 percent of the schools’ budget, says Tim Firestine, Leggett’s chief administrative officer and a 31-year county employee who was finance director under Duncan. “This is pretty consistent with
other places,” he says.

As he was gearing up to run for governor during his third term, Duncan was much more accommodating to the unions” whose support he needed, Phil Andrews says. “He made agreements that proved very expensive and unsustainable,” including pay hikes amounting to 24 percent over three years. In the four years after Leggett left the council he had served on for 16 years and before he took office as executive, the budget increased by 31 percent. In 2006, when he ran for county executive, Leggett campaigned against such spending, which he’d come to view as unsustainable.

In his new position, he brought change, exemplified by a Dec. 6, 2007, headline in the Montgomery County Sentinel: “Leggett: Cut Spending Now.” In anticipation of hard times, Leggett slowed the rate of budget growth by consolidating agencies and leaving vacancies unfilled. “I’ve been talking about our need to get ahead of the curve [almost] since I’ve been in office,” Leggett says.

Last year, he reneged on the firefighters’ negotiated cost-of-living raise. “No one had ever taken the unions on,” Leggett says. The union appealed, but an arbitrator ruled that the county’s lack of funds trumped the union contract. Leggett’s team later agreed to a “phantom COLA” that would factor into employees’ pensions the cost-of-living hike they’d forgone, at a cost of $7 million a year. Faced with a new economic reality, Leggett reversed himself on that, as well.

Gino Renne, the longtime president of the 8,000-member county employees’ union—the United Food and Commercial Workers Local 1994 / Municipal & County Government Employees Organization (commonly called MCGEO)—backed Leggett for years. Now he says he feels betrayed by him. “Over the years he voted [on the council] for just about every initiative the county executive proffered up in terms of expanding county government. He was also willing to collaborate with the unions and workforce. Now, as county executive, his approach has changed.”

Leggett does not dispute Renne’s characterization of his shifting position. But, “people have expectations that need to be tempered in relation to the economic realities of today,” he says.

A longtime professor at the Howard University School of Law, Leggett has been consistent in his support for education, even in hard times. Though he has slashed the budgets of other county departments, he has treaded lightly on school finances. Indeed, Leggett and Superintendent of Schools Jerry D. Weast have generally worked well together on funding programs they believe are needed to preserve the county schools’ reputation for excellence.

Especially in the last decade under Weast, the county has lavished big bucks on schools, making teacher salaries and benefits the best in the region. This largesse has paralleled measurable achievement by the system’s increasingly diverse population.

When the money was flowing, the educators’ unions, school system leaders and county officials got along fine. “We always supported Doug Duncan,” says Doug Prouty, president of the Montgomery County Education Association, which represents the county’s 12,000 teachers. “He was responsive to the needs of the school system and our membership.” During Duncan’s 12 years in office, average teacher salaries increased 46 percent, from $48,719 to $71,030. In three years under Leggett, salaries have risen 7.7 percent, to an average of $76,496. Top teacher pay is now in six figures.

Often, the County Council—the ultimate funding authority—has heaped even more money on the schools than Weast and the county executive have requested. Perhaps that’s why it was such a shock when the council sought to reduce the proposed school budget this spring by $33 million; Leggett already had proposed $137 million less than what the school system had sought (a “reduction” more than offset by increases in state aid, which ironically is tied to the county’s rising poverty levels).

“It’s not like we’re trying not to be team players,” Weast says. “But we have to consider not just dollars. It’s the results we’re messing with. You can’t do more with less.” This divide has revealed heretofore hidden fissures in how Montgomery County and its schools do business. Montgomery County Public Schools is more like an autonomous commonwealth than a government agency. The county executive can propose, the council can appropriate, but nobody can tell Weast and his board how to slice their piece of the pie. And it’s a huge slice, accounting for nearly half of the entire county budget, with school system employees accounting for two-thirds of the 33,000 workers on the public payroll. Thus, Weast and the board thumbed their noses recently when Leggett said budget-balancing cuts would require two weeks of furloughs for 8,000 non-public safety county workers, and the council sought to spread the pain to the school system.

When the council threatened to further reduce the education budget to force the furlough issue, school unions predicted hundreds of layoffs, and the board and Weast threatened court action to block any reductions. At the last minute, Weast and the board agreed to accept more cuts, though not as much as the council wanted, and the threat of a lawsuit was withdrawn. But there would still be no furloughs for school employees.

The school system was in a budget bind in part because of a 1984 state law requiring each district to at least sustain per pupil spending of past years. This penalized the county for setting a high bar when tax revenues were flowing. Failing to make this “maintenance of effort,” the county was penalized $26 million last year, a move voided only by a special act of the Maryland General Assembly. The county avoided a penalty this year, as well, when the state granted a last-minute waiver.

What does the future hold for Montgomery County’s beleaguered government, workforce and taxpayers? The outlook, despite a recent uptick in the national economy, remains dicey. The county appears headed for a new normal. Even with a recovery, there will be a lag in income tax receipts. Lower property assessments also will kick in over time, reducing property taxes for homeowners and income for the county.

“We’re already looking at a significant deficit next year of at least $200 million,” Andrews, the councilman, says. And that figure could be higher if the state shifts teacher pensions to the county, as it threatened to do earlier this year—a shift that could represent up to $175million a year in further expenditures. The state Senate approved a gradual shift during its last session, but the House of Delegates balked. After the fall election, however, the shift is more likely to gain approval.

On top of that, federal stimulus money that has shored up state and local governments and schools since last July is ending, with little appetite in Congress for approving more.

Is there light at the end of the tunnel? “In about four years,” Duncan predicts. “But it’s going to be a totally different county government. You are going to see fewer employees, fewer services, more fees for services, because we can’t afford it.”

Leggett agrees. “We probably have at least one more year of serious challenges,” he says. And then? “We won’t get back to the [former] spending ways—not…if I have anything to do with it.”

Eugene L. Meyer, a former Washington Post reporter and editor, is a contributing editor for Bethesda Magazine.

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