Montgomery County could lose up to $600 million in tax revenue from pandemic

Council ‘disappointed’ that Elrich hasn’t provided savings plan

On Thursday, the Montgomery County Council discussed potential changes that would need to be made in next year's budget. File photo

Montgomery County could lose up to $600 million in tax revenue for this year and next year because of effects from the coronavirus pandemic. Several county council members criticized County Executive Marc Elrich on Thursday for failing to come back with new budget plans that acknowledge the economic downturn.

The County Council on Thursday heard revenue projections for fiscal years 2020 and 2021 as council staff members discussed Elrich’s proposed $5.9 billion budget for the coming year.

Council officials talked about three scenarios for the combined fiscal years:

• a short recession and quick recovery (until the end of FY21), with a loss of $150 million to $250 million

• a short recession and a long recovery (until FY24), with a loss of $260 million to $500 million

• a deep recession and a long recovery (until FY25 or FY26), with a loss of $360 million to $600 million.

None of the projections considers changes in spending or the possibility of additional federal or state aid.

Craig Howard, deputy director of the council, said the first scenario is the least likely.

Several council members said they were disappointed and unsure why Elrich had not sent any savings plans or revisions to his proposed budget.

Council Member Hans Riemer said he was frustrated Elrich was not being clear about what he wanted.

“All we’ve gotten from this county executive so far is he’s continuing to advocate for his property tax increase in the midst of this recession,” he said. “And he’s leaving it to us, so far, to have to make the tough decisions. I don’t think that’s the way this is supposed to work.”

In a proposed budget Elrich sent to the council on March 16, he proposed a nearly 5-cent tax hike — the majority of which, 3.2 cents, would be solely for the county’s public schools.

The weighted average of the current property tax rate is 97.9 cents per $100 of assessed value. Elrich proposed a new rate of $1.03.

Council members objected to the tax hike and have said this month that it won’t happen.

The council is required by the County Charter to adopt a budget by June 1. It is currently scheduled for a vote on May 21.

Puzzle pieces

Several factors will affect the revenue changes, including reductions in wage and salary income, capital gains income, property sales, and property taxes because of appealed assessments and a decrease in new construction.

Factors that are not included in the estimates and could change them include the impact of the federal stimulus package benefits on unemployed and furloughed workers and the recovery period when social distancing measures are lifted. Other factors are future stock market corrections and fluctuations this year and repositioning by businesses and industries after the health crisis ends.

Marlene Michaelson, executive director of the council, said the council’s review of the budget is like putting together a complex puzzle with many pieces. But this year, the council will most likely have to adopt a “same services” budget and then come back to it during the summer, she said. “Same services” refers to services carrying over at the same level from one year to the next.

“This year is a little bit different in that we’re missing some of the key pieces of the puzzle,” she said. “There is so much that we don’t know yet and you’re going to have to adopt the budget without all the critical information you need.”

Michaelson said the council’s considerations for the budget include two options : proceeding with a “same services” budget or ordering county employees to develop alternative budget scenarios.

Council staff members also presented an overview of the proposed fiscal year 2021 budget and changes that could be made to it during the meeting.

The recommendations were prompted by the council’s March 24 request for staff members to come up with different scenarios for how the current and next fiscal years could look with revenue and same-service levels.

Besides the tax increase in his Fiscal Year 2021 budget plan, Elrich also proposed to increase the income tax offset credit from $692 to $800 for eligible properties.

In the proposed budget, Elrich recommended a 2.4% increase, or 775 positions, in the county’s workforce — 607 of which would be for Montgomery County Public Schools. It also includes resources to maintain 10% reserves.

Council officials recommended funding Montgomery College and MCPS at “maintenance of effort” levels and leaving out certain budget changes, including raises and benefit adjustments, new staff members or programs, restoration of items not included in the FY20 budget, and other costs. “Maintenance of effort” refers to a minimal level of funding required by law — at least the same per-pupil funding from one year to the next.

The proposed supplemental tax increase would add about $65.5 million in property tax revenues and would exceed the inflation rate threshold in the county charter.

According to the proposed budget, the county charter includes a provision that limits the growth in property tax revenue – not property tax rates – to the growth in the Consumer Price Index for the Washington region, which was 1.27% between December 2018 and November 2019.

Elrich wrote in his recommendation that he would send the council a proposal for a charter amendment to revise the county’s revenue cap to 3% on the increase of homeowners’ taxable assessments.

Under a “same services” approach for the budget, about $70 million could be reduced from agency uses, Howard said.

Money has already been saved in the FY20 budget from Elrich’s temporary freeze on non-essential hiring and procurements about a month ago, according to Richard Madaleno, the county’s budget director.

Council Member Craig Rice said Montgomery College and MCPS have been working on containing costs.

“When I had a very frank conversation with the superintendent (Dr. Jack Smith), it was one that encompassed us talking about a maintenance-of-effort budget,” Rice said. “He’s not advocating for that, of course, as superintendent of schools, nor would I expect that. But he certainly understands that that’s where this council is. That’s where this county is.”

Richard Madaleno, the county’s budget director, told the County Council that Elrich “continues to stand by his approach” of funding the school system through a tax increase and the county has not received any revised budget requests from MCPS.

Council Member Nancy Navarro said it wasn’t the council’s job to form a savings plan.

“It is up to the executive to do that,” she said. “We should not be in a position to identify these cuts. We need to work collaboratively.”

Council Member Andrew Friedson said it was “staggering” that Elrich had not sent revised budget requests or a savings plan yet. He said he wasn’t sure a “same service” budget would be likely.

“We have yet to get significant information or even broad signaling of where the executive is on these issues,” he said.

Madaleno told Friedson that county staff members expected to provide an update on expenses and revenues in early May. To have a savings plan, he said, the county will need more accurate information on expenses and revenues.

The county will also need to receive clarification from the federal government on how $183.2 million in federal aid from a federal stimulus package to the county can be spent, he said. The funds are required to be only used on coronavirus-related expenses from March 1 to December.

“It feels like we’re sort of stuck here where the executive is continuing to advocate for his proposed budget rather than putting into motion the executive branch figuring out how to deal with the crisis from a budget and fiscal perspective,” Riemer said.

Several council members noted the inclusion of the proposed budget’s assumption of $10 million in savings without a detailed explanation of where those savings would come from. In the budget, Elrich wrote that the savings would be produced from identifying cuts, such as not filling vacant or contracted positions that are no longer necessary.

Howard said the county attorney advised that the council cannot approve the budget with the $10 million savings estimate unless the money is found in resources or reductions.

Friedson referred to the figure as a “phantom negative appropriation.”

“Hoping for cuts is not a strategy. Asking for cuts to be made at a later date or for efficiencies to be found at a future time is not an appropriate way to pass a budget,” he said. “It is not an appropriate or legal way to move forward as we have to make these tough decisions.”

Riemer said the $10 million item doesn’t balance the budget and a future savings plan with specific details needed to be provided instead.

“Normally for a $10 million item, you would expect some specifics. … This doesn’t seem consistent with the tradition of budgeting in this county,” he said.

Council Member Will Jawando said that if a “same service” budget is maintained, many people will not get the services or help they need.

“We should do everything we can to keep services at the maximum level possible while we’re trying to recover, while being careful, while being fiscally prudent,” he said. “This is the time to use a rainy day fund. This is the time to use reserves.”

Changes that have been made to the current budget include $38.5 million in additional funds, nearly all for coronavirus emergency needs.

Howard said the additional funds could affect the year-end reserves, including the $183.2 million in federal aid.

Another large change was hazard pay for frontline employees negotiated with three unions: the International Association of Fire Fighters (Local 1664), the Fraternal Order of Police (Lodge 35) and the United Food and Commercial Workers (Local 1994) or MCGEO.

The hazard pay will provide an additional $10 per hour for employees who physically interact with the public and cannot work from home because of the nature of their jobs. Employees who do not regularly have physical interaction with the public will receive an additional $3 per hour. Non-union employees will receive hazard pay, as well.

Any employees who are teleworking or on paid administrative leave will not receive additional pay.

During two public hearings on the budget Thursday afternoon and evening, more than 40 residents advocated or commented on items in the proposed budget.

Those included asking the council to preserve funding for nonprofit organizations and parks, and provide more funding for schools and educational programs.

Briana Adhikusuma can be reached at briana.adhikusuma@bethesdamagazine.com.