The O’Malley Fiscal Record

The O’Malley Fiscal Record


After five years, it is time to take stock of Governor O’Malley’s fiscal record. This may be done under several headings:


1. New Spending Initiatives


A. Employment Tax Credit


This $20 million “Job Creation and Recovery Act” credit was initially claimed with respect to only 1000 jobs, most of which would have been created anyway. See “1000 workers hired under tax credit plan, but questions raised,”. Maryland Daily Record, November 25, 2010. By chapter 128 of the Acts of 2012, the life of the program was extended for more than a decade, the benefit being reduced to $1000 per worker and cumbersome bureaucratic requirements being added. In its present form, the legislation is almost satirical in flavor.


B. Electric Car Tax Credit


This credit for the creation of electric car fueling stations involved less than $1 million per year. Since hybrid cars are competitive and electric cars are not, it appears to be a peculiar choice of priorities. But a credit for hybrid cars would have produced real energy savings, though without highly visible symbols of the Governor’s virtue in the form of fueling stations.


C. Minority and Womens Grant Program


1 ½ % of lottery proceeds are to be dedicated to a program of grants to investment advisors who in turn are to make grants to small minority and women-owned businesses. This will ultimately involve sums in the tens of millions of dollars; more than $10 million per year based on the $700 million in annual slots receipts once estimated.. No standards for selection are provided. See “Maryland Yet to Distribute $3.6 million for Small Businesses”, Baltimore Sun, June 4, 2012. It is as certain as such things can be that the program will prove to be a source of embarrassment, if not of corruption


D. Agency Shop for State Employees


This legislation has more than doubled the number of employees from whom unions receive dues. Though agency shop fees are ostensibly only for representational services, several lawsuits have demonstrated that they are usually diverted in large measure to political activities. See R. Reed, “Revolution Ahead: Communication Workers v. Beck“, 13 Harvard Journal of Law and Public Policy 635, 645 (1990) (81% of fees diverted). To the extent that the net pay of state workers is reduced by tens of millions of dollars by these mandatory exactions, understandable demands arise for pay increases. The Governor’s latest budget provides a 2% pay increase in a period of no inflation and widespread unemployment–in effect, a direct transfer to union political funds


E. Extension of Prevailing Wage Law


This measure was enacted during the Glendening administration and applies to schools more than 50% of the funding for which is supplied by the State. Since the effect is to increase construction costs by 10 to 15% (see A. Thieblot, Prevailing Wage Laws (1986), 93-113; D. Bernstein, “The Shameful Wasteful History of New York’s Prevailing Wage Law,” 7 George Mason University Civil Rights Law Journal 1 (1997)), the result is to divert $30 to $50 million per year from the state school construction program to a narrow group of construction workers in firms with “double-breasted” work forces.


F. ‘Living Wage’ for State Contractors


The purpose of this new legislation is less to raise private sector wages than to protect public unionized workers from ‘contracting out’ due to private competition. Its principal impact is on the acquisition of janitorial and food services, traditionally badly performed in state buildings


G. Extensions of Collective Bargaining


New legislation extends bargaining rights to part-time home health care and day care workers and other personnel, thus requiring the state to pay higher than market wages in what would otherwise be a highly competitive labor market


H. Third Party Arbitration in place of negotiation of impasses


This is provided for in a new ‘fairness in negotiations’ act obtained by the teachers’ unions and signed by the Governor.


I. Lottery Equipment Leases


Because the State insisted on leasing slot machines instead of casting responsibility for their provision on operators, it was saddled with $43.5 million in unanticipated costs in the most recent year. See “Maryland faces millions in costs after paying more for slots devices than anticipated”, Washington Post, March 15, 2012; “Maryland Pays $10,000 Per Slot Machine; Maryland is Paying More Than Double for Each Machine”,, March 16,2012.

2. Transfers of Obligations to Local Subdivisions


A. Reduction of Highway Aid Funds


Highway user revenues diverted from local governments to the General Fund have averaged $350 million per year in recent years, See the Report of the Blue Ribbon Commission on Transportation Funding (August 25, 2011) available in the “Blog” section of the Calvert Institute website,


B. Transfer of School Pension Obligations


Including social security payments, this transfer amounted to $239. 3 million annually.


C. ‘Maintenance of Effort’ Requirements


The dimensions of this ‘unfunded mandate’ are difficult to quantify; local subdivisions losing road and police funds have their priorities distorted by having education funds held sacrosanct.


D. Reductions in Program Open Space


$60 million in new state debt replaced $96.9 million in dedicated transfer taxes transferred to the General Fund


E. Reduction in local police aid


This amounted to $21.4 million


3. Commitments of Future State Funds


A. The administration continues to rely on projections of a 7.75% rate of return on state pension funds in projecting funding needs, even though the rate of return in the year ending 3/31/12 was 3.18% and the rate of return over the previous ten-year period was 5.40%. New York City’s actuaries have urged a reduction to 7%; New York ,California and Rhode Island have lowered their projected rates of return to a still-extravagant 7.5%. See M. Walsh, “Public Pensions Faulted for Bets on Rosy Returns,” New York Times, May 28, 2012, A1. The State’s pension manager, Dean Kenderdine, has justified this with the contention that over a 25 year period in the past, an 8.10% return was achieved. The best rejoinder to this reasoning is that supplied by Mayor Michael Bloomberg: “If I can give you one piece of financial advice, if somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.” M. Walsh, “Public Pensions Faulted for Bets on Rosy Returns,” New York Times, May 28, 2012, A1.


New proposals for governmental accounting would require application of 3% to 4% rates of return in discounting the portions of pension obligations that are not fully funded. “GASB Releases Exposure Drafts,” Bond Buyer, July 8, 2011. Since Maryland’s obligations are only about 65% funded, application of the proposals will drastically escalate both the calculated deficit and required annual contributions.


Nor has the management of the pension fund inspired confidence. The O’Malley administration sponsored legislation to remove the former 1.2% cap on the compensation of investment advisors (Chapter 506 of the Acts of 2008). This coincided with increased resort to ‘alternative investments’ in quest of high returns. While most of the equity portfolio is managed by advisors compensated at the ½ of 1% level, and most of the fixed income portfolio advisors receive `1/3 of 1% or less, the fund incurred $106.5 million in advisor fees in its most recently reported year in addition to $16 million in brokerage commissions. The single largest fee deserves more attention than it has received. The fund paid roughly $14 million to the London-based Record Currency Management for a currency management program commenced in early 2009 designed to hedge against possible declines in the value of international investments due to depreciation of the euro and other currencies. The proprietor of the firm entered a Wolfson Prize competition with a thesis predicting the imminent demise of the euro. When the dollar weakened rather than strengthened as a result of the Europeans’ robust defense of their institutions. Record’s currency hedging cost the Maryland State Retirement Systems $362.7 million in one year. See page 61 of the most recent annual; report: “The cost to the system’s portfolio as a result of using this systematic currency overlay policy was $362.7 million.” Numerous other funds abandoned use of Record’s services; Maryland has remained faithful. See “Spotlight on Neil Record,” FX Week, May 2, 2012; “Currency manager Record loses a quarter of clients in three months,” www.efinancialnews, October 15, 2010; “Global market falls hit currency manager,” Id. November 18, 2011. Since one purpose of international investing is to spread risk, it is hard to understand the rationale for expending and risking large sums to offset the benefits of this risk-spreading.


Nor is this the only evidence of imprudence in fund management. According to the June 30,2011 report, the Fund’s asset allocation targets are 36% public equity, 10% fixed income, 2% cash, and 52% “alternative investments” (private equity, “credit/debt strategies”, real estate, “real return”, and “absolute return’). By June 30, 2011, 30.7% of the fund was invested in these alternative investments. (2011 Report,60). If the targets were achieved, the Maryland fund would have the second highest allocation to alternative investments of any fund in the country, being surpassed only by the Dallas Police and Fire Fund. The ten large pension funds with the highest reliance on alternative investments attained average five-year returns that were 1.2% less than the ten large funds with the lowest share of alternative investments. See New York Times, April 2, 2012, “Pensions Find Riskier Investments Fail to Pay Off (at A3), see also New York Times, “Why Are States Gorging on Expensive Investments? Just Ask South Carolina,” June 10, 2012. Page BU1. The “Absolute Return”, private equity, and real estate portfolios, amounting in total to $4.4 billion, threw off managers’ fees of about $80 million, or about $30 million more than would have been legally permissible prior to the O’Malley administration’s 2008 legislation, without counting the equally impermissible $14 million “currency management” fee. In the three years after 2008, the private equity portfolio generated a 3.37% return, and the real estate portfolio a 4.40% loss, no results being given for the other exotic investments. After the tender ministrations of Record Currency Management, the International Equity portfolio generated a .51% loss. Had the fund confined itself to the boring investments–domestic equity and fixed income–that were the staple investments of the 40s and 50s, a larger part of its portfolio would have yielded 4.19% (domestic equity) or 7.60% (fixed income). State Retirement System, June 30, 2011 Report, 53, 68-70.


In addition, the administration supported legislation setting up an affirmative action program for investment bankers (Senate Bill 601 of 2008) distributing approximately $10 million in fees each year to managers securing results no better than, and sometimes worse than, those of the fund generally. It also supported legislation (Chapter 342 of the Acts of 2008) purporting to require divestiture of multi-national companies doing business in Iran and the Sudan, administration of which has consumed much staff time.




4. Looting of Reserve Funds


Among the funds suffering raids in recent budgets in order to balance the General Fund budget are the Injured Workers’ Insurance Fund ($56 million), the Cigarette Restitution fund ($14.7 million), the Chesapeake Bay Fund ($90 million), the Lottery Commission ($8 million), the Unclaimed Property fund ($8 million), a dedicated fund for land records improvement ($25 million), the State Insurance Fund reserve ($6 million), moving violation fines in the Transportation Fund ($2 million), Stadium Authority rents ($2 million), revenues from a tax amnesty ($11 million), and one time taxes from the Constellation Energy transaction ($140 million)


5. New Taxes and Fees


In addition to the obvious–increases in sales, income, corporation, tobacco, and alcoholic beverage taxes, there have been some subtler increases, intended to pass unnoticed. Thus the 2010 budget reduced medicaid reimbursements to hospitals by $21 million, drug assistance for seniors by $15 million, and private college aid by $7 million. The latest budget reduces medicaid hospital reimbursements by $63 million, nursing home reimbursements by $24 million, and medical day care reimbursements by $3.4 million; the effect is to transfer these costs to the privately insured and uninsured. The local recordation tax is extended to indemnity deeds of trust, producing an additional $40 million exaction on routine commercial real estate transactions There is a $9.5 million increase in admissions and amusement taxes.


6. New Capital Spending


This includes a record $351 million for the state school construction program with its limited impact on educational results, $50 million of which is earmarked for ‘green’ projects. Authorized general obligation bonds increase $163.8 million over the preceding year. This does not include the bonds issued or proposed to be issued by governor-controlled ‘independent’ corporations for such central functions of state government as a state health laboratory, a transportation headquarters building, and the proposed State Center project, all supported by general fund lease payments at rates not determined by market forces. See J. Hooke and G. Michael, “State Center, Phase I: The $127 Million Taxpayer Handout,” 2 Maryland Journal 19 (2012).The revenue bond debt of state agencies is now at least $18.964 billion

(in millions,Stadium Authority, 234; MTA, 3,254; MIDFA, 433; MEDCO, 2,471; MHHE 8,656; DOT, 2,787; USM 1,129) as against general obligation bond debt of $6.982 billion.



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