Friday, January 21, 2011

In Maryland, Budget Proposal Shows Why O'Malley Won Re-election

I openly admit that I was shocked by Maryland Governor Martin O'Malley's margin of victory in his re-election bid against former Governor Bob Ehrlich. I argued on this blog and in the pages of the Baltimore Sun and the Maryland Gazette that the race would be close. In the closing days of the campaign, the Washington Post and the Baltimore Sun released polls showing O'Malley ahead by 11 to 16 points - I dismissed both polls. I had no doubt that O'Malley was ahead, but double digits?  In one interview, in an unguarded moment, I pledged to eat my Blackberry if O'Malley won by 14 points... he won by 14.45 (at least I now have an excuse to get the new Verizon iPhone).

In the waning days of the race, as Ehrlich was losing momentum, I explained that Ehrlich had a very tough case to make. Martin O'Malley, a progressive Democrat by admission, had very much governed as a fiscal conservative. O'Malley's single flourish of progressive budgeting was evident in the 2007 special session of the Maryland General Assembly when taxes on businesses and individuals were raised resulting in $800 million in new revenue in FY 2009 - but even those tax increases were coupled with $500 million in spending reductions that same year - rather than a "tax and spend" liberal O'Malley was a "tax and cut spending" moderate.

Then came the Great Recession and a collapse in state revenue - since December of 2007 the state has realized $8 billion less in revenue than forecast. As revenue declined the state's budget deficits ballooned and O'Malley became a "cut spending" conservative. Since assuming office in 2007, O'Malley had presided over $5.6 billion in cuts to the state's General Fund budget - with the FY 2012 budget released today the record of spending cuts will jump to $6.6 billion. Those cuts, coupled with the 2007 tax increases, and roughly $1.3 billion in federal bailout dollars allowed the state to balance its budget every year (coupled with a multitude of additional cuts imposed by the Board of Public Works).

But current forecasts show Maryland $1.4 billion shy of a balanced budget in FY 2012, and with a newly elected Republican House of Representatives in Washington there will be no more federal bailout dollars. In the budget submitted today, Governor O'Malley doubles down on his record of spending cuts as he closes the deficit relying almost entirely on them. Fully $1 billion in savings comes from reduced spending, another $300 million comes from fund transfers, and only $150 million from projected increases in revenue. The budget also begins the process of dealing with the state's unfunded pension obligations and introduces a new, optional pension system for new employees.  It will now take longer for employees to be vested in the pension, early retirement age increased from 55 to 60, and benefit calculated on highest 5 years of salary rather than highest 3 years. Substantial savings will also be achieved by shift future retirees to the Medicare Prescription Drug Benefit - eventually I believe the state will have to abandon its defined benefit pension system, but O'Malley found a way to protect it at least for a few more years.

The 2010 midterm election was an election driven by concerns over the economy and concerns over seemingly irresponsible government spending. Martin O'Malley not only weathered the GOP tide that swept across statehouses in November, he generated a tide of his own. He was able to accomplish this not simply because Maryland is an overwhelmingly Democratic state, but because he has made some very difficult choices as governor. And, despite his progressive leanings, has presided over an era of very conservative budgeting.

With that record of fiscal management, what did Bob Ehrlich have to run against? What reason would Maryland voters have to defeat O'Malley? If you were a progressive voter seeking an expansion of government you may not have been happy with O'Malley - but Ehrlich was not an alternative. If you were a moderate seeking responsible budgeting, O'Malley was delivering. And if you were a conservative, you may have preferred even less spending and lower taxes - but here you would have been challenged by the fact that general fund spending increased dramatically under Ehrlich. Under O'Malley, the state has eliminated 4,200 positions and the ratio of state employees to state residents is at its lowest level in 40 years.

I will temper my praise for O'Malley's 2012 budget by making clear that I think more needs to be done to reform the state's pension system - namely it should be eliminated and replaced by a defined contribution system with no future state obligations. I also think that the Governor has already cut too much from Medicaid reimbursements and hospitals in the state - but on balance, I have a hard time imagining a more responsible and reasonable budget.

So yes, I was shocked that O'Malley won by 14 points... but on reflection, I shouldn't have been.