ANNAPOLIS – Gov. Parris N. Glendening may be using an improper fund transfer to balance the state’s 2003 budget, and draining it could mean an increase in car insurance rates for every driver in Maryland.
The governor’s budget proposal targets $70 million in surplus funds from the Maryland Automobile Insurance Fund, a state agency that insures individuals who can’t get car insurance from private companies and that assists pedestrians hit by uninsured drivers.
Although the surplus now is around $125 million, rates increase for everyone when it dips below the level required to guarantee payment of accident claims, said James L. Stoop, a budget analyst studying the matter for the General Assembly.
That level could be reached as soon as the end of this year, Stoop said. Although the trigger amount is about $55 million – derived from a fraction of the average of three year’s premiums – agency losses and increased applicants could mean the floor is reached quickly.
When it is reached, Stoop said the state insurance company taps two revenue sources: It charges private insurers a fee that is passed to regular policyholders, and its own insurance rates go up.
“It’s a tax increase,” said Delegate John R. Leopold, R-Anne Arundel, a member of the Appropriations Committee.
“It puts us in the position of a tax collector,” said Lars Kristiansen, a Nationwide Insurance lobbyist. Past assessments to replenish the fund ranged from $3 to $5 tacked onto drivers’ insurance bills. Assessments occurred often during the 1970s and 1980s, with the last one in 1989.
MAIF policy holders — the poor, young, and individuals with bad driving records, those least able to afford an increase – would face even greater premium increases, Kristiansen said. Estimates put those hikes at $20 to $30 to help cover the cost of losing the surplus.
The agency’s annual rates now range from $533 for an Eastern Shore driver with a clean driving record to $3,377 for a Baltimore driver with a very bad driving record.
The surplus has helped rates remain steady since officials used its investment income to cover costs.
Using the fund is poor public policy, Kristiansen said. MAIF is working well — there has been no assessment for 12 years and it doesn’t cost anyone or the state money — and, he said, “we’re cutting its throat.”
Money had to come from somewhere, the administration said.
“Any amount of minor discomfort will pale in comparison to what it would have meant to find alternative cuts in this austere budget,” said Neil Bergsman, Glendening budget director.
MAIF’s was one of $461.5 million in program surpluses targeted by Glendening to plug a nearly $1 billion spending gap in his 2003 budget proposal. His budget would transfer $20 million from MAIF’s uninsured driver fund and $50 million from its insured fund into a general account available to pay a wide range of government bills.
The propriety of the transfer is also in question. Since the insured fund money comes from Maryland drivers, not state revenue, it can’t be used for state purposes, according to a 1973 attorney general opinion. It’s not the state’s money, said Stoop.
But Bergsman said the administration’s principal counsel and MAIF attorneys worked together to assure the transfer was legal. The transfer would actually be a loan from the fund of $50 million to be repaid at a rate of $10 million a year from 2004 to 2008.
MAIF officials weren’t happy, Bergsman said, but the lawyers had come to an agreement.
MAIF Executive Director David Trageser declined to comment.
Critics of the plan say there is no requirement for the next governor – Glendening is in the last of his term-limited eight years — to add the repayment to his or her future budget proposals, and there is no stipulation to pay back the lost investment income.
“It is not a borrowing. It is a taking,” Kristiansen said. He estimated MAIF would lose $11.75 million in potential income from the swap. Insurance companies could consider legal action if the proposal was adopted, he added.
Some legislators also worry that the reliance on fund transfers such as MAIF could jeopardize the state’s AAA bond rating, which saves Maryland taxpayers millions of dollars a year by allowing the state to get lower bond rates.
“When you look at the budget in its totality and you have so many requests to borrow money from so many different programs, it could very easily raise concerns from the bond funds,” Leopold said.
Bond rating experts couldn’t gauge reaction to Maryland’s 2003 budget since it hasn’t been adopted. However, they did offer their guidelines for granting such ratings.
Kenneth Gear, director of public finance ratings at Standard & Poor’s, said his company typically doesn’t penalize states for meeting revenue shortfalls with reserve funds set aside for that purpose as long as the budget is structurally balanced, meaning it matches recurring expenditures with recurring revenues.
Sen. Robert R. Neall, D-Anne Arundel, of the Budget and Taxation Committee, said lawmakers would be examining the MAIF proposal soon.