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Montgomery County could face a shortfall between revenues and expenses of $143.4 million in the current fiscal year.
Adding to the bleak outlook, another gap of up to $399.3 million is estimated for fiscal year 2022 if the county fully funds its reserves and spending increases at a typical level. If the county doesn’t fully fund reserves and does not increase its spending, there could be a gap of $90.7 million for the next fiscal year instead.
The County Council heard the fiscal update on Tuesday afternoon. It also was an opportunity for the council to discuss any potential changes in fiscal policy for the upcoming budget.
Although council staff members mentioned tax increases as one of several options to increase revenues, no one — including staff members, council members and County Executive Marc Elrich — has recommended a tax increase.
The council has other potential options for improving the shortfall , such as reducing the scope of county services, employee compensation and benefits, or workforce size.
The county did not raise taxes for fiscal year 2021, which began on July 1.
With increased spending related to the pandemic and financial assistance to residents and businesses, the county has been left with $101.5 million in tax revenue less than initial projections and with spending $194 million higher than in the approved budget.
Tax revenues for fiscal year 2022, which begins on July 1, are estimated to be $163.8 million lower.
Reserves are estimated to be at 7.6%, instead of the target of 10% — or $156.1 million — estimated in the FY21 budget.
But the fiscal situation continues to change. The factors include increased aid to residents or businesses, potential reimbursements for costs associated with the pandemic from the Federal Emergency Management Agency (FEMA), and Elrich’s second proposed $25 million savings plan, which was submitted to the council on Friday.
The council approved the first savings plan in July, cutting $72 million from the budget.
Elrich’s second recommendation would cut $16.4 million from the operating budget and $8.6 million from the capital budget.
Council members said they hope the new administration with Joe Biden as president would translate into more federal relief for local governments to respond to the health crisis.
If the $143.4 million fiscal gap remains through FY21, reserves will be used to close it, staff members told the council.
To reduce the gap and save reserves, the county would need to receive more federal or state aid, increase taxes or reduce expenses.
If the gaps stay as projected, the council will need options and strategies to address short- and long-term fiscal challenges, staff members said.
Staff members laid out several ideas to help address budget gaps.
Short-term options for cuts:
● Savings plan
● End pay differential (COVID-19 hazard pay)
● Furloughs
Long-term options for cuts:
● Salaries/wages
● Retirement/pensions
● Active employee health insurance
● Retiree health insurance
● Workforce size
Council staff members are doing more research and analysis on estimates for short- and long-term savings options.
Craig Howard, the deputy director of the council, said employee compensation costs make up 80% of all agency expenditures.
The council was told last week that it could expect more information in the savings plan on how the COVID-19 hazard pay would change. Hazard pay is additional compensation given to employees who work directly with the public or have to work onsite, and have a greater risk of exposure to the coronavirus.
The county has spent $77.7 million on hazard pay since Elrich negotiated with three unions for the agreements in early April.
Council President Tom Hucker told the council that a closed meeting would soon be scheduled to discuss potential changes in the agreements. The changes are expected to lower spending.
Council Member Hans Riemer said he Elrich and the council should work together around principles for the upcoming budget. He said he was surprised that the savings plan did not include the expected change in hazard pay.
“We have been hearing for months, literally months, that the executive branch is renegotiating that,” Riemer said. “It’s never been authorized by the council. … I sense that there’s an effort to run the clock out and keep that $4 million going out the door every week. I think that’s the real agenda, to keep that money going out the door.
“That is the biggest fiscal issue that we’ve got right now. We have to get this situation resolved because it is profoundly problematic.”
Council Member Andrew Friedson said the council is getting mixed messages.
“On the one hand, every time we hear something, we get told that there’s going to be a deadline,” he said. “We get told we’re going to get information at a certain date and then it changes or never happens. Or what we get is completely different from what we get.”
Friedson said Elrich’s first savings plan did not cut enough from the budget, and the second savings plan is far less than the first plan.
“To me, it’s frustrating. It’s mind-boggling,” he said. “I can’t imagine, as a county resident, when you hear these types of mixed messages and want to find out what the county strategy is to get through this crisis, to be able to protect services to keep the county in a sustainable path moving forward — we don’t have a very good answer up to this point. We are not meeting the moment that we’re in. … Hope is not a fiscal strategy.”
Waiting for the Federal Emergency Management Agency to reimburse costs and for the state and federal administration to provide more financial relief is not helping the county get through the crisis, Friedson said.
Friedson said there are more questions than answers about where the county is heading.
“I have no idea how you put together a fiscal year 2022 budget when you haven’t come up with a plan of how we’re going to address the fiscal year 2021 fiscal challenges that we’re in,” he said. “This is a real serious problem. We’re 10 months in and there’s still no plan for how to pay for differential pay.”
Rich Madaleno, the county’s chief administrative officer, defended the county’s strategy to cover costs and some differential pay. The strategy has focused on covering costs by submitting reimbursement requests to FEMA.
When asked whether Elrich will propose a tax increase, Madaleno said he has not talked to Elrich about that.
“I want to be careful never to say never because five months from now, we don’t know what we’re facing,” he said. “But at this moment, that’s not been part of any conversation internally about revenues. … What’s affordable now and the future is the challenge we face at the moment.”
Council Member Craig Rice said he was concerned about Elrich’s proposed cuts to the Department of Health and Human Services budget in his latest savings plan, such as to the Street Outreach Network (Gang Prevention) program.
“There are some things we shouldn’t touch. … At the end of the day, what I do care about is making sure there’s fairness and equity and social justice in terms of the decisions we make and this savings plan doesn’t represent that,” Rice said.
Council Member Nancy Navarro agreed and said the proposed cut to HHS was a “major misstep.”
She also said reserves exist for an emergency. The conversation should be about how to replenish the reserves, she said.
Council Member Evan Glass said the savings plan was not good enough. He said the council wants to see more recommended cuts to the budget, considering the $143.4 million expected to be the gap for the fiscal year.
Madaleno said the $143 million is in a “policy gap” and is the difference between getting reserves to 10%, health care reserves, retiree health care reserves and is not a difference between revenues and expenditures.
But council staff members disputed Madaleno’s statement and said the gap is indeed a difference between revenues and expenditures.
Gene Smith, a legislative analyst for the council, said the gap is not a fiscal policy gap.
“The fiscal policy issue is $156 million is needed to make a 10% reserve, but a gap is a gap,” he said.
Briana Adhikusuma can be reached at briana.adhikusuma@bethesdamagazine.com.
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