Montgomery County Faces Possible Budget Shortfall

Mid-year report shows stagnating property, income-tax revenues

By Kate Masters

The Montgomery County Council receives a mid-year briefing on county revenues

This story was updated on Dec. 11, 2019 at 1:40 p.m. to clarify a comment by Council Member Hans Riemer.

Montgomery County could be facing a revenue shortfall of $99.8 million for fiscal year 2021, driven by stagnating property and income tax revenues along with slower-than-expected wage growth.

The news, delivered at a briefing on Tuesday by the county’s Department of Finance and Office of Management and Budget, appeared to frustrate County Council members, who receive an update on revenues every December.

The numbers are still preliminary, driven mostly by data collected in the first few months of 2019. But they could forecast a difficult budget process for fiscal year 2021 as the county juggles significant expenses — including a budget request from Montgomery County Public Schools that’s expected to be notably larger than this year’s — with declining revenues.

“Council staff have reiterated — which maybe wasn’t crystal clear in the previous discussion — that the projected FY ’21 revenue growth is zero,” Council Member Hans Riemer said after the briefing. “That is really bad. Council staff said there has never been a budget with such poor revenue growth before when we weren’t also in a recession.”

What’s still unclear is whether projections for the coming budget year will remain as dismal in February, when the county receives its share of quarterly income tax returns from the state.

The December briefing is a “unique understanding” of the county’s fiscal conditions at a “specific moment in time,” legislative analysts wrote in a report to the council. Mid-year budget projections are based on income tax revenues from the state — which trickle down to the county several times a year — coupled with predictions based on property tax assessments, employment numbers and other economic indicators from the first few months of the year.

The December update shows that the county received a one-time boost of $17.7 million in income tax revenue, driven by late tax filers who requested an extension in April. But county analysts projected that the short-term gain would be outweighed by otherwise sluggish indicators, including a lower-than-expected inflation rate that brought down property tax assessments.

“It’s just not growing at the rate we anticipated,” Budget Director Rich Madaleno told council members at the briefing on Tuesday. “And that change in the growth rate is bringing the numbers down.”

When budget analysts draft a mid-year report, they extrapolate those indicators over the next six years. It prepares the county for the worst, but isn’t always borne out if the numbers change, or the state’s revenues are better than expected.

Council Member Nancy Navarro said there was a sense of “déjà vu” from previous years, when mid-year forecasts seemed to “miraculously” shift by the time the county approved its budget. In a voicemail on Tuesday, County Executive Marc Elrich told Bethesda Beat he was also disappointed by the mid-year report, but was still waiting on revenue projections from the state to determine how they would affect his budget for the coming year.

But the state’s income tax revenues for February — distributed back to counties through a disposition formula — don’t always change things for the better. Last year, revenues went down by 32%, forcing the county to cover a roughly $41 million shortfall.

If this year’s projections are borne out, county agencies would need to reduce their spending by $130.1 million, according to council analysts. Riemer said it would force both the county executive and council to make tough budgetary decisions, especially given an expected rise in compensation costs.

Council members also tied the projections to what they’ve described as an increasingly urgent need to boost economic development in the county.

“This is a clear indication that we have a real problem in the economy,” said Council Member Andrew Friedson. “We’re not attracting enough new workers to Montgomery County. We’re not attracting enough people who want to live here. We need to go into overdrive to figure this out.”

Both he and Navarro also said that the council’s Government Operations and Fiscal Policy Committee would continue to review the county’s process of revenue forecasting and consider changes to make the projections more consistent.

Ultimately, Friedson said after the meeting, it was unsustainable for the county to predict financial outcomes based off a few months of economic data.

“Ultimately, it’s a schizophrenic process,” he said. “We react to a very small amount of data, then we extrapolate it out over six years. We do that with good news and we do that with bad news and it creates a level of volatility that I think results in a tremendous amount of disruption for county services.”