Turn Out the Lights

The current state administration likes to boast of its economic development record, but the best test of economic development is provided by the way that people behave in fact. For many years, Maryland was one of the fastest-growing states in the East. Its growth was spurred not only by the growth of the national government and the settlement in the Washington suburbs of new migrants associated with it, as officials, contractors and lobbyists, but by a parallel growth of both defense and bio-technology industries.

In recent years however, notwithstanding the continued growth of the federal government, Maryland’s growth has slackened. In addition, a sorting process appears to have been taking place. Federal employees continue to migrate to Maryland, particularly those previously resident in the District of Columbia. Contractors, particularly defense contractors, tend to migrate to Virginia. Maryland’s Washington suburbs and Southern Maryland attract increasing numbers of immigrants from abroad, particularly Hispanic immigrants. These are a future source of economic strength, but impose burdens on education and welfare systems. An increasing portion of native-born and Asian newcomers settle in Virginia rather than Maryland. There is also a political sorting: Democrats to Maryland, Republicans to Virginia. Let us examine some of the numbers:

The Tax Foundation publishes state-to-state migration data, derived from Internal Revenue Service returns. See http://interactive.taxfoundation.org/migration/ In the most recent available five-year period, 2003-08, 404,173 taxpayers, representing 750,885 exemptions and $24.658 billion 2009 dollars left Maryland. 372,487 taxpayers, representing 666,140 exemptions and $20.155 billion 2009 dollars entered Maryland. Maryland’s net loss to out-migration to other states was 31,686 taxpayers, 84,745 exemptions and $4.503 billion 2009 dollars in adjusted gross income.

In the five-year period, Maryland suffered net losses of taxpayers as follows:13,897 to Florida, 9,791 to Pennsylvania, 9,647 to North Carolina 5,350 to Virginia, 5,098 to West Virginia, 4,251 to South Carolina, 4,246 to Georgia and 4,112 to Delaware. Only 3 jurisdictions supplied net gains of more than 4,000 taxpayers: the District of Columbia 13,879, New York 7,824 and New Jersey 5,150. The average taxpayer departing to Virginia took with him $83,551 in adjusted gross income, to Florida $126,619, to Pennsylvania $94,899, to North Carolina $72,606, to West Virginia $59,048, to South Carolina $76,839, to Georgia $55, 259 and to Delaware $86,545. ; the average in-migrant from the District of Columbia brought with him $62,660 in adjusted gross income, from New York $46,956 and from New Jersey $58,596 1

In the most recent reported one-year period, 2007-08, these tendencies have accelerated. Maryland had a net loss of 10,306 taxpayers, 23,434 exemptions and $1.026 billion in adjusted growth income. Its net loss to North Carolina was 2,513 ($70,420 each), to Virginia 2,289 ($71,749), to Pennsylvania 1,668 ($95,604), to Florida 1,242 ($212,200), to South Carolina 980 ($268,931), to Texas 935 ($92,750), to Georgia 921 ($41,525), to West Virginia 906 ($20,198), and to Delaware 729 ($85,836).

As before, Maryland lost net taxpayers to each of its neighboring jurisdictions save for the District of Columbia. Its net gain from the District of Columbia was 1,655 ($74,442); from New Jersey 739 ($66,028) from Michigan 685 ($46,842), from New York 657 ($78,360) and from Ohio 404 ($42,497).

The results of the 2010 census, available on the census bureau website, http://2010.census.gov/2010census/data/, are also revealing.

The most startling statistic is that in the period 2000-2010, despite new births and foreign immigration, Maryland’s white population actually decreased, by .9%. The corresponding figure for Virginia showed a 7.2% increase. Minority populations increased in both states as follows:

Blacks: Maryland +15.1%, Virginia +11.6%; Hispanics :Maryland +106.5%, Virginia +91.7%; Asians: Maryland +51.2%. Virginia +68.5%.

Those accustomed to thinking of Montgomery County as a domain of Washington lawyers, fox-hunters and limousine liberals, save for the areas nearest to the District of Columbia, may be startled to learn that among the majority-minority census tracts are Gaithersburg, Germantown, Rockville, Tacoma Park and Wheaton, and that 31% of the county’s population is now of either Asian or Hispanic origin. See http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.

Few also realize that the white share of the population in Baltimore City (30.2%) is one and a half times that in Prince George’s County (19.9%)

These figures do not merely reflect natural increase and family reunification. They are in part a reflection of differences in political culture. Changes in demographics and in political culture in some degree feed upon each other. At the least, the net emigration statistics, a new phenomenon for Maryland, should disabuse Maryland politicians of the notion that the Washington suburbs are a dependable ‘cash cow’, with modest social problems and predictably rising tax yields. While the ‘millionaire’s tax’, and the decoupling from federal treatment of capital gains, qualified dividends, and now estate taxes may, viewed separately, appear as defensible policies, in combination they drive wealthier taxpayers to accelerate their migration to retirement homes in the South and affect where newcomers settle.


The Unbearable Lightness. . .

Maryland Governors frequently have sent to the General Assembly substantial legislative programs. Governor Ritchie reformed the state’s budget system; Governor Mandel its cabinet system, lower courts and hospital rate regulation; Governor Hughes its property tax and pension systems and land use control around the Chesapeake Bay. Of what does the current Governor’s program consist?

First, there are three measures to implement ‘Obamacare,’ unexceptionable in themselves, but which do nothing to improve it or curb its excesses. You will not find here a plan, contingent on federal legislation, for a single-payer system for primary-care physicians, even though the predictability of demands for primary care would insure that such a system is not accompanied by the shortages and queues afflicting foreign efforts to use a single-payer system for specialists and hospitals. You will not find here any proposal to reduce the several dozen provider-sought, state-mandated coverages driving up Maryland’s medicaid and private insurance costs, though even the Obama administration has suggested that states should take another look at these.

Second, there is the much-vaunted centerpiece of the ‘program’, a proposal for a $120 million state venture capital fund, characteristically funded in the O’Malley way, by borrowing against future tax receipts, in this case insurance tax receipts. The precedent for this exercise in state capitalism, which we are assured will not involve cronyism or favoritism, is a pre-existing $25 million Venture Capital fund, which we are told has returned $61 million to the State. This achievement is less impressive when closely inspected. In 2005, the fund claimed to have “invested $48 million in more than 100 companies. . . it has returned $59 million in cash from more than a dozen exits. . It last reported the market value of its venture investments, in June 2004, at $120.6 million. MVF’s returns are largely attributable to a relatively few big payoffs. The fund cleared more than $16 million in profit from the sale of Gene Logic Inc in 2000 and more than $27 million from the initial public offering of Visual Networks, Inc. in 1999. From 2000 to 2004, the fund had no big-money exits. Five exits since 2000 lost money and two of these were nearly total losses.” However, between June 2004 and October 2005, the fund recovered $11 million, $3.3 million from Sourcefire, $1.8 million from Platform Logic, $1.0 million from Advertising.com and $1.35 million from Panacos Pharmaceuticals. T. O’Hara, “State-Run Venture Fund Succeeds with Native Firms,” Washington Post, October 24, 2005.

By 2009, there was a less pretty picture. The Enterprise Fund as of fiscal 2007 claimed to have “made $57 million on $9 million in investments since its 1994 founding.” In fiscal 2008, it “made $3.8 million off venture fund investments. . . $3.5 million through Sourcefire Inc’s $86 million IPO. . . But there have been few noteworthy returns since then. . . officials expect $950,000 in fund income in fiscal year 2009, which ends June 30. Projections for the next fiscal year call for $1.2 million in returns, but predictions are difficult given the economic uncertainty.” “In recent fiscal years, the fund has kept a balance of as much as $5 million. But for fiscal year 2010, which ends June 30, 2010, that level in expected to drop to $36,000.” S. Dance, “Maryland Venture Fund nearly depleted as returns dwindle,” 4 Baltimore Business Journal, February 2, 2009. In short, at least $49.8 million of the fund’s profits came from three deals, Gene Logic, Visual Networks and Sourcefire, and $43 million of that was realized before 2000. The fund has six full-time state employees.

It has also been reported that The Enterprise Fund’s largest single investment was $5 million in MMG Ventures, a minority fund run by Stanley Tucker. See Maryland Venture Fund, Annual Report, June 2005, 67, Tucker’s Meridian Management Group in turn billed MMG Ventures for $367,500 in management fees in 1997 and the same amount in 1998, gradually escalating to $631,117 in 2002. DBED’s annual statement of June 30, 2004 shows the fair market value of this investment as $929,166; the June 30, 2005 statement shows it as having no value. E. Ericson, “Something Ventured. . . but what is gained when Meridian Management Group invests state money in minority businesses?” Baltimore City Paper, May 3, 2006. Section 5-511(b)(1) of the Economic Development article allows and all but directs DBED to engage Meridian Management Group, a corporation made up of former staff members of the Maryland Small Business Development Financing Authority including Stanley Tucker to run that Authority’s program, at a cost of $1.3 million per year. A fiscal note attached to the 2005 version of this statute is said to have noted that as of December 31,2003, MMG Ventures had turned $42 million in mostly state and federal money (including $5 million from the Venture Capital fund) into “a portfolio of assets and investments worth $600,000.” See E. Erickson, “Lone Loaner Challenged: Bill in House Would End Local Company’s Monopoly on Minority Business Aid,” Baltimore City Paper, March 21, 2007. One of its investments was the troubled Harbor Bank, in which it owns 13,234 shares. The three largest shareholders in Harbor Bank, Joseph Haskins Jr. (97,720 shares), John Paterakis (64,826 shares), and Louis J. Grasmick (25,309 shares) are not unfamiliar names in Maryland politics .See www.theharborbank.com/harbor-bankshares-2010-proxy-statement.asp It is not clear what MMG Ventures paid for its Harbor Bank shares, or who it acquired them from. The bank’s stock traded for $31.00 in 2006, and now fluctuates below $3.00 per share. Meridian Management Group has received other benefits from the O’Malley administration. On June 10,2008 it was awarded a five-year $23 million renewable contract as leasing, cleaning and security manager of Baltimore’s state-owned World Trade Center, which the O’Malley Administration refused to sell, despite its escalating annual losses. A Rosen, “Leasing agent for WTC seen as big step in making Inner Harbor”, Baltimore Daily Record, May 21, 2008. In 2005, the Venture Fund’s Managing Director, Elizabeth Good observed that “one reason the fund may avoid political interference is its relatively small size: “if we got more money from Annapolis, they would probably want us to spread the wealth around a little.” O’Hara, supra. Judging from the $5 million MMC investment, there has already been ‘political interference.’ The centerpiece of the Governor’s program is thus not only casino capitalism, but crony capitalism.

Third, there are a basket of modish ‘clean energy’ initiatives: subsidies, small in amount, to wind energy, solar energy, and electric car charging units. The wind energy subsidies do not reckon with the energy consumed by the aluminum used to build windmills. This makes the payback period for wind projects very long indeed. Solar subsidies of one sort or another have been provided since the Carter administration; the technology has yet to 5 catch up with the subsidies. The state has owned some electric cars ever since the Hughes administration; they are short-range vehicles and the battery technology has not progressed much in thirty years. One of the Governor’s proposals would encourage utilities to adopt time-of-day pricing for electrical consumers charging their cars at night. This is a fine, if trivial idea; it would be impressive if it extended to all electrical pricing, which might avoid much spending for new plants; and to much road and bridge pricing also, an idea opposed by the Glendening and O’Malley administrations; the only time-of-day pricing in Maryland is that on Governor Ehrlich’s Intercounty Connector. A serious state-level approach to control of energy consumption, air pollution, and sprawl development would focus on two measures and two only: 1) a small state tax credit for purchase of, or reduced registration fees for, hybrid cars, a viable technology that is here already and 2) an ever-rising gasoline tax, escalating quarterly for five or ten years, with some income tax credits in the early years for low-income auto users and independent truckers.

Fourth, there is the Governor’s annual ‘tough on crime’ initiative, extending mandatory minimum sentences to crimes committed with rifles and shotguns, not merely with handguns as at present. This sort of demagoguery is a gift that keeps on giving. It leaves room for another bill in the following year extending the penalties to crimes committed with knives and knuckle-dusters. Strychnine and catapults can follow that. The trouble with mandatory minimums is that they frequently bear with undue severity on defendants who are accessories to crime as well as principals, and on young or feeble-minded offenders over-borne by the will of their accomplices. Most judges know this, but as with parole policy, the Governor is not squeamish about expanding the state’s jail population. At this point, the portion of the Maryland population confined roughly equals that in the Russian Federation.

Fifth, there is a bow to feminists in the form of legislation criminalizing child neglect. This runs counter to a trend in favor of de-criminalization of family law offenses such as bastardy and non-support. Though none can favor child neglect, the availability of criminal offenses complicates the use of more effective civil remedies, by impairing the state’s ability both to search and to question.

Sixth, there is the Governor’s belated attempt at pension and retiree health benefit reform, delayed by two years in the hope of a renewed ‘stimulus’ bailout. Notwithstanding the recommendation of former Delegate Casper Taylor’s task force, the retirement age for pensions is only slightly raised, by requiring a combination of 95 rather than 98 years of age and state service. Thus persons joining state service after high school at age 18 can retire on full pensions at age 57. Those already in state service must contribute an additional 2% per year to maintain their extravagant pensions. The state’s systemic under-funding through the ‘corridor system’ introduced by Budget Director Eloise Foster during her tenure during the Glendening administration is to be phased out only slowly. ‘Funny accounting’ is to continue, by projecting future returns on the pension fund of 7.75% rather than a more realistic number. The pension board has not withdrawn its proposal to ‘smooth’ FY 2009 losses over a ten-year rather than five-year period. See as to these and other pension accounting gimmicks, J.Barro,”Unmasking Hidden Costs:Best Practices for6 Public Pension Transparency,” www.manhattan-institute.org/html/cr_63.htm. The proposals contain no defined contribution component at all, the State having abolished its match of employee contributions to the state’s deferred compensation plan. The notion of any sort of individual responsibility for retirement income is anathema to the unions. In a recently published letter to the Baltimore Sun, Budget Secretary Foster, a member of the retirement systems board during the Glendening administration when the retirement fund’s yield was the worst in the country, creating a shortfall of $2.5 billion below that which would have obtained had the fund earned the yields of the average fund during that period, acclaims the expertise of State Treasurer Nancy Kopp, who was not involved in the Glendening administration’s mismanagement of pensions, and who now, like Winston Churchill during the Chamberlain government, is being used as a bomb shelter for her colleagues. At a Calvert Institute symposium seven years ago, in January 2004, Treasurer Kopp, while defending the defined benefit system, declared:

“I do agree with Mr. [former federal Office of Personnel Management Director Donald] Devine that I think it’s unfortunate that we cut the employer match for employee contributions to the deferred compensation plan, the contributory plan, because it was an incentive to save.

On the other hand, the employee savings and contributions have not gone down despite the fact that the match wasn’t there. So I don’t know where that leaves you. And that may be just for that snapshot of time. We’ll see. Obviously I disagree. This is a major ideological battle between defined contribution and defined benefit, and there are pros and cons for both, and that’s why we and the feds have a mixed system. I believe, because particularly if you’re a public entity, if you go completely to defined contribution and the market tanks, as it did, and you have people out on the street, as they will be, you still have a price to pay.

So it seems to me that a thoughtful, moderate approach, bringing in aspects of both, which is what we’re aiming for in the State, is a good system.” (Calvert Report, January 6, 2004, “The Maryland Budget: The Experts Speak,” at 19.

The Federal Thrift Savings Plan in the most recent fiscal year received $16.4 billion in employee contributions and $6.3 billion in federal matching contributions, and has invested assets of $243.6 billion. The federal matching contributions were equal to about one-fourth the total retirement costs for employees in the Federal Employees Retirement System, i.e. the system is about 25% a defined contribution system in terms of federal appropriations. The Maryland system now has no meaningful defined contribution component at all so far as state contributions are concerned.

As for retiree health benefits, which the Attorney General has repeatedly ruled are in no way constitutionally vested, no change is proposed for present retirees, though annual costs are in the hundreds of millions. For active employees, major cuts are contingent on disappearance of the ‘donut hole’ in Medicaid Part D, which is being phased in until 2020 and which will almost certainly never take place because of its inordinate costs and inducement to extravagance in the prescribing of drugs. The Governor does not explain 7 why middle-class retirees cannot be required to join Medicare Part D now

Seventh, the Governor, in another gift to the public employee unions, proposes to extend collective bargaining to home health workers. These customarily work in de-centralized work settings in which grievance procedures are not important. The chief effect of this proposal will be to limit contracting out of these services, generating unnecessary future costs to state government. The collateral effect will be to generate more dues and agency shop exactions for the Governor’s political allies.

While the Governor has been thus fiddling, the state retains a retrograde drug policy generating thousands of arrests per year for nonviolent marijuana-related offenses, overly crowded criminal courts, jails and booking centers, an unduly high incarceration rate , and a condition in which 25% of black male youth are in one way or another under the tutelage of the criminal justice system. In a period of 40% black youth unemployment, the Governor has no useful proposals. Nor does his program propose to do anything about the state’s chronic shortage of high school math and science teachers, documented in report upon report for the last twenty years.

“A complete plan of proposed expenditures and estimated revenues” ?

Article III, Section 52 of the state Constitution requires the Governor by the third Wednesday in January in each year to submit a Budget which “shall contain a complete plan of proposed expenditures and estimated revenues for the next ensuing fiscal year…the figure for total proposed appropriations shall not exceed the figure for total estimated revenues.” The Governor has purported to comply with this ‘balanced budget’ mandate by proposing no added transportation taxes, fees, or tolls; raiding the Transportation Trust Fund; providing for no new road construction in rapidly growing (and Republican) areas of the State, and by withholding from local subdivisions several hundred millions of dollars customarily allocated for local road maintenance. In effect, the constitutional responsibility has been transferred to the leaders of the General Assembly, Senate President Miller and Speaker Busch. It will be interesting to see how they discharge it. Like former Alaska Governor Sarah Palin, Governor O’Malley is the sort of politician who does not like heavy lifting. He has followed her example of resignation, de facto, though not (at least as yet) de jure.

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