Most of the time, a budget office is working on three budgets: closing out last year, monitoring this year, and planning for next year.  For the budget office, the planning for next year begins in August, fully ten months before the start of the next fiscal year.  Step one is to update our ten-year forecast of revenues versus the cost of maintaining the current level of service (CLS for short).  When revenues exceed the predicted CLS, we call that a budget surplus.  When revenues fall short of the CLS, it’s known alternately as a shortfall, gap, deficit, nut, or “bogey” (my personal favorite).

Since humans have a hard time predicting what is going to happen tomorrow, what good is a ten-year budget forecast?  A whole lot of good, actually.  Our watchword here is sustainability.  We want to build budgets that put the city on track to achieve its financial goals of balanced budgets, lower taxes, more infrastructure investment, and fully-funded pensions and health benefits.  Long-term forecasts allow us to see how the decisions we make today will play out in the future.  They are not the prophecies of Nostradamus, but they get the job done.

Because Baltimore appropriates funding one year at a time, our projection for the upcoming fiscal year is all most people care about.  It is the starting point for the budget planning process.  In my eight years as budget director, I have yet to experience the joy of projecting a surplus budget.  The years of the Great Recession and its aftermath were brutal, with $100 million-plus budget shortfalls in Fiscals 2010 and 2011.  For the last two fiscal years, a recovering economy and savings from the Mayor’s ten-year financial plan have made the budget gap more manageable, and most agencies have been funded at the CLS level or better.

Fiscal 2017, which starts next July, is looking like a throwback to budgets I’d like to forget.  BBMR’s initial projection back in September showed a $75 million shortfall, and most of the revenue and expenditure data we’ve received since then has confirmed this projection or pointed to an even larger bogey.  

Seventy-five million dollars is four percent of the city’s $1.8 billion General Fund revenues, but that’s not the right way to think about it.  First of all, nearly $800 million of that $1.8 billion is tied up in what we call “fixed costs” that are more or less off-limits in the near-term.  These include pension payments, retiree health benefits, debt service on bonds and other borrowings, the mandated public school contribution, insurance, etc.  If we can’t touch this part of the pie, we have to balance the budget by taking from the other part – the $1 billion that funds the city’s day-to-day service delivery.  
So now we’re looking at a 7.5% cut from $1 billion of agency budgets.  More than half of this $1 billion is for public safety – police, fire, prosecutors, and courts.  More than 75% is for personnel costs, paying the people who run recreation centers, collect the trash, prevent disease, fill potholes, shelter the homeless, revitalize neighborhoods, and more.  Keep in mind that many of these services were reduced in those Great Recession budgets and haven’t been fully restored.  Only seven percent of the budget is for the support functions like finance, IT, building maintenance, and human resources.

Can’t we just raise taxes to make up the difference?  Baltimore’s taxes are far and away the highest in the state – by one measure, they are 64% higher than the statewide average.  The city raised several taxes when our backs were to the wall during the Great Recession, but we have made progress since then in lowering the property tax rate for homeowners.  High taxes get in the way of growing the city’s population and economy.  Raising them even higher might help us over the Fiscal 2017 hump, but is not the sustainable solution.

If you want to understand the Fiscal 2017 budget projection a little better, we have put together a nifty infographic.  In a nutshell:

• Revenues will grow, but slowly.  Housing prices are down as foreclosures reach the market, Millenials choose to rent, and perhaps in part due to the April unrest, which has also impacted tourism.  Employment and wage growth will continue their incremental pace of recovery.
• The expenditure projection includes cost-of-living adjustments for employees, higher debt service costs, and general inflation.
• Pension and health benefit costs are way up.  With the stock market flat, pension fund investment returns are below expectations, forcing the city to kick in more money.  Prescription drug costs are exploding as new specialty drugs for cancer and Hepatitis C come on the market.
• Service improvements have increased CLS costs.  These include the Charm City Circulator, police body cameras, the municipal trash can program, and new health and recreation facilities.

The bottom line is that we see revenues growing by $25 million and costs by $100 million.
As the new year starts, we will be reviewing agency budget proposals and considering a variety of options for balancing the budget.  You will see the results of our work in late March, when we release the Preliminary Budget Plan, but we need you to get involved.  We count on citizens to help us prioritize city spending and make the best possible decisions about how to allocate limited resources.  Please come to our Your, City, Your Budget workshop on January 9 and visit our Budget Live! page, where you can try your hand at balancing the budget and tell us your top priorities for funding.