Friday, September 26, 2014

$405 Million Shortfall

The Baltimore Sun reported yesterday that Maryland is facing a $405 million shortfall over the next two years.  The Bureau of Revenue lowered revenue projections for this year by $177 million and next year by $228 million.  However, as the article also notes, the Board of Public Works cut $84 million in July and the Budget Secretary notes that the state will be able to absorb the rest of the shortfall without further cuts, presumably with over-budgeted items elsewhere in the budget, projects that were budgeted but not executed, and other planned expenses that never manifested themselves.

Nevertheless, next year's budget will require serious review and revision with the bulk of the structural deficit being found there.

The director of the Bureau of Revenue notes that this shortfall is directly related to federal cutbacks and the uncertainty among private companies that depend on federal contracts.  Live by the government contractor, die by the government contractor.  While Republicans may jump on any bad news as evidence of mismanagement, it is worth noting that Virginia, our much more conservative neighbors to the south, faces a $2.4 billion shortfall also due to federal cuts.

The core problem is easy to identify, but hard to address - Maryland needs to diversify its economy.  If we were to can the rhetoric and talk honestly, we can say that every state faces this dilemma or will face it in the near future.  Those states with economies centered around booming industries will boom.  Those states reliant on industries in retreat will see their bottom line do the same.  But who is going to tell Texas and Alaska not to rely on oil and natural gas?  Who is going to tell Iowa not to rely on agriculture or New York not to rely on the finance sector?

This is most likely due to the fact that the catalysts for growth are often outside of the hands of government.  Maryland didn't choose to be next to the Capital, but it certainly is not going to reject the benefits of the same.  Maryland didn't create the exponential increase of private companies doing public work with the expansion of government contractors, but the revenue derived from the same protected our state from large parts of the recession that weighed heavily on the rest of the Country.

While this shortfall will be painful in the short term, Maryland faces a great opportunity to transition to a new economic focus.  And it won't be up to Maryland lawmakers to decide what that new focus will be.  Rather, our lawmakers should recognize the opportunity and do what it can to make Maryland a better place to start and grow a business, make connections across sectors, and innovate.  It does not necessarily mean drastic tax cuts are necessary.  Business leaders want predictability.  "If this is the tax burden, so be it, but don't change it on me."  More importantly, Maryland needs to leverage the tools of the 21st Century to streamline and decrease the regulatory burden.  Imagine a single interface, a single website, that business owners could access and complete that would populate the numerous paper forms and filing they are otherwise expected to complete on a rolling basis.  Imagine business owners having the opportunity to track the approval process online in the same way they track a package.  Imagine public and private entities talking to one another as business partners instead of ruler and subject.

We have a lot to improve, but don't let anyone tell you it is as simple as "cutting taxes".  Our state's core economic engine is shrinking and we are facing the expected result of that.  Now the question will be - how do we respond?

Have a great Friday doing what you love!