By Amanda Costikyan Jones
WASHINGTON – Maryland’s “rainy day fund” is already too small to keep the state afloat through an economic recession and it is being shrunk further to pay for an income tax cut, according to a report released Thursday.
The non-partisan Center on Budget and Policy Priorities found that most states, including Maryland, “are ill-prepared to weather an economic recession similar to the one that occurred earlier this decade.” It said a recession would likely force major tax increases, cuts in programs or both in those states.
“If Maryland hadn’t enacted the tax cut, it might just get by,” said Iris Lav, deputy director of the center and co-author of the report. “With the tax cut, it has a very large problem.”
But Maryland Budget Secretary Frederick W. Puddester said the report found a problem where none exists.
“I think we are in great shape,” he said. “I’m not at all concerned.”
Maryland House Minority Leader Robert H. Kittleman, R-Howard, agreed with Lav that Maryland might have trouble in a recession. But, he said, “It’s not because of the tax cut. It’s because we spend too much.”
The center said only eight states — Delaware, Indiana, Iowa, Maine, Massachusetts, Michigan, Minnesota and North Dakota — have saved enough money to make it through a recession without major tax hikes or cuts in services.
That was based on a hypothetical recession that would begin next year, last through 2003 and be of the same length and severity as the recession that hit in the early 1990s.
Maryland, like many other states, has tried to prepare. The state has a budget stabilization fund — sometimes called a rainy day fund — intended to help cover losses in a future economic downturn.
But the center’s report said that fund is too small.
“We’ve targeted our rainy day fund at 5 percent of the state budget, and right now we’re above that,” said Steve Bartolomei-Hill, director of the Maryland Budget and Tax Policy Institute. But “this new report is questioning whether 5 percent is really an appropriate target.
“Basically, it would allow the state to withstand a drizzle, but it wouldn’t allow us to withstand an average rainfall or even a downpour,” he said.
“We believe that Maryland’s surpluses and reserves are sufficient to help us handle a downturn,” he said. “The bond rating agencies who review our financial status believe that 5 percent is an adequate level. We are (at) more than 7 percent.”
But the report claims the 5-percent criterion that has been adopted by many states has been “inappropriately interpreted as the entire reserve a state needs” for a recession. It is really only enough “to carry states through normal economic contingencies,” the report said.
Maryland would actually need close to 17 percent of the state budget to get through a recession like the one in the early ’90s, according to the report.
But Puddester said that using one recession “as an example of how we might do in the next recession is not a totally accurate picture.”
The last recession, he said, “involved a lot of defense contractors being downsized,” which affected Maryland disproportionately. Welfare reform has also made the state less vulnerable, he said.
But another national recession is inevitable, said Bartolomei-Hill.
“I’m not going to be the one who says it’s going to happen next year or the year after that, but it is going to happen,” he said.
Making matters worse, he said, “Much of the current rainy day fund is going to be used for the tax cuts that were enacted recently.”
Lav agreed. “The stabilization fund is not big enough, and it should not be robbed to pay for a tax cut,” she said.
Puddester challenged this idea as well. “We built up the reserve to fund our tax cut,” he said. “That’s what it was there for.”
Kittleman disputed the notion that the rainy day fund needs to be tapped for the tax cut.
“Cut back $100 million on spending, and you don’t have to take any out of the rainy day fund,” he said.
Kittleman called state government spending “totally irresponsible.” One major culprit, he said, is Gov. Parris Glendening, a Democrat.
“The governor’s budget came out at 7.3 percent over last year’s budget,” Kittleman said. “The governor was very irresponsible …. The important thing is to get spending under control.
“That’s the Republican caucus recommendation. However, we don’t run the place,” he said.