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Timing of Special Session Questioned

State Comptroller Peter Franchot has already made perfectly clear how he feels about Gov. Martin O'Malley's plan to legalize slot machine gambling.

Today he let loose with a broad criticism of O'Malley's plan for a special General Assembly session next week, questioning the timing and the necessity of the tax-raising discussion in a four-page letter to the Senate president and House speaker.

"In my view, the volatility of the U.S. and Maryland economies, the absence of an immediate fiscal "crisis" and the lack of detail about the plan could all combine to create a perfect storm of unintended consequences," Franchot wrote to Senate President Thomas V. Mike Miller Jr. (D-Calvert) and House Speaker Michael E. Busch (D-Anne Arundel). (full letter below)

Franchot noted the collapse of the subprime mortgage industry and increase in foreclosures as contributing to "exceptional economic instability" right now and urged O'Malley to wait until the regular legislative session commence in January. The budget, he noted, will be balanced through June.

O'Malley has said he needs his tax proposals--an increase in the sales tax, a restructuring of the income tax and a reduction in the property tax--to take effect by January so the state can start addressing the $1.7 billion budget gap for the following year sooner.

At a news conference today, the governor will discuss what sort of budget cuts would be necessary if the tax measures are not approved this fall.

Full text of letter:

Dear President Miller and Speaker Busch:

As you know, Governor O'Malley has signed an Executive Order convening the Maryland General Assembly to consider his proposed remedies for the State of Maryland's $1.7 billion structural budget deficit. The Governor's proposal includes, but is not limited to, an increase in the State's sales tax, cigarette tax and corporate income tax rates, an extension of the sales tax levy to service transactions that are currently exempt, a fundamental realignment of our State's personal income tax structure, and a plan to legalize slot machines in Maryland.

Having served two decades in the General Assembly, including several years as Chairman of a House budget subcommittee, I have been through similar fiscal challenges and appreciate the Governor's desire to address our State's looming budget shortfall in an aggressive manner. As Maryland's chief fiscal officer, however, I must question the timing and necessity of this approach. Mindful of the reservations each of you has expressed about a special session, I must underscore the profound - and perhaps unintended - consequences of this undertaking on Maryland's economy, business climate and quality of life, and to caution against acting in haste.

THE TIMING

The special session that will convene on October 29 will take place against a backdrop of exceptional economic instability. The collapse of the subprime mortgage industry has effectively ended the most sustained housing boom of this generation. The recent, dramatic spike in foreclosures has created a national surge in housing inventory just as stricter lending standards have compressed the pool of potential buyers. These well-documented national trends have also been experienced in Maryland. For example,

The foreclosure rate has increased by 57 percent in Maryland from the first quarter of 2006 through the second quarter of 2007, compared to 41 percent nationally;
· The foreclosure rate for subprime Adjustable Rate Mortgages (ARMs) has increased 200 percent in Maryland, compared to 115 percent nationally;
· The median price of existing homes sold in Maryland declined by 0.6% in August, compared to August 2006. This was the second decline in just four months, coming not long after 54 consecutive months of double-digit growth;
· Existing home sales in August dropped by 25 percent compared to August 2006, and were 44 percent lower than 2004 and 2005 levels;
· Today, Maryland's housing inventory is at the highest levels of this decade, and has increased threefold in just three years.

The collapse of the housing market, in turn, has inspired a ripple effect throughout the entire U.S. economy. Just last week, Federal Reserve Chairman Ben Bernanke warned that the troubles in the housing market could be a "significant drag" on the economy.

The Dow Jones Industrial Average and other U.S. financial markets are in the midst of a period of high volatility. Consumer confidence has plunged, as evidenced locally by the sluggish growth in state sales tax receipts that led to last month's $130 million writedown of FY 2008 revenues. The dollar has dropped to an all-time low against the Euro, compounding concerns of higher oil prices and inflation. The Labor Department reported last week that applications for unemployment benefits are far exceeding expectations, raising concerns that the housing collapse will finally destabilize the nation's job market. As a result of these and other, similar developments, many national economists have elevated the odds that we will enter a period of recession.

It is in a spirit of concern over the general direction of our economy that I have recommended a more cautious and deliberative approach to addressing Maryland's structural budget deficit. In recent weeks, I have suggested that our December presentation of revenue estimates would offer a much clearer sense of Maryland's long-term economic outlook, as well as the dependability of the funding streams that the Governor is counting on in his package. The availability of this crucial data, coupled with traditional economic indicators that are duly reported by the media, argues in favor of taking up the Governor's proposal during the regular 90-day session. The politics of the day might argue in favor of a more dramatic gesture. From a budgetary and fiscal standpoint, however, the current state of affairs makes this special session - and its purpose - a high-risk proposition.

THE NECESSITY

In recent weeks, the media has reported warnings from senior O'Malley Administration officials that, without a special session, the State's structural budget deficit will mushroom. Please allow me to take this opportunity to set the record straight. There is no relationship whatsoever between the timing of the next General Assembly session and the magnitude of Maryland's structural budget deficit. As you know, the structural deficit is loosely defined as the negative balance between the sum of the State's ongoing spending obligations and its ongoing revenues. Unless we are required to revise State revenue estimates downward, or unless the State makes any unfunded spending commitments between now and January (which is highly unlikely), the structural budget deficit will remain at $1.7 billion.

At the risk of restating the obvious, it is also worth noting that through June 30, 2008, the State of Maryland has a balanced budget. That, too, is irrespective of the timing or outcome of the next General Assembly session. It has been suggested, by key lawmakers from both parties, that it would be more appropriate to take up the Governor's package during the regular legislative session, where it can be considered within the context of his FY 2009 budget proposal. Aside from affirming the basic logic of considering new revenues, spending commitments and budget cuts at the same time, I will further substantiate this approach by restating that there are no permanent costs associated with proceeding in that manner.

THE CONSEQUENCES

The Governor's revenue package includes the most dramatic reform of Maryland's tax structure in well over a generation and, in slot machines, a proven catalyst for a broad range of social and economic ills. It would directly affect all Maryland residents, workers and tourists, as well as every small business and corporation that has chosen to invest in our state. Mindful of its enormous ramifications, I must note that Governor O'Malley's plan was constructed in private, introduced gradually by press release, and the details have yet to be made available. This makes review and evaluation of the plan next to impossible, and further risks actions being taken that may have unintended consequences.

For example, according to press releases that have been made available by the Governor's office, the plan includes a proposal to extend the sales tax levy to property management services. Although the details on this particular provision are unclear, concerns about its impact on the State's affordable housing stock have already been raised. In meeting with citizens and business leaders throughout Maryland, I have heard numerous complaints that the costs of this tax will simply be "passed through" to renters, many of whom are families with low and moderate incomes who cannot afford further strain on their fixed budgets. My intent is not to render a personal opinion on this specific piece of the plan, or any others. Rather, it is to underscore the importance of sharing this plan with the public in open, inclusive and unscripted public forums. I am afraid that the current timetable allows virtually no opportunity for such stakeholder input, which could ultimately diminish public confidence in the process and result in a product that negatively impacts the Maryland economy and the taxpayers we represent.

In my view, the volatility of the U.S. and Maryland economies, the absence of an immediate fiscal "crisis" and the lack of detail about the plan could all combine to create a perfect storm of unintended consequences. Rather than act in haste, the fiscally prudent and practically wise thing to do would be to move cautiously and deliberatively throughout this process.

Should you have any questions, or if I can be of assistance to either of you, please do not hesitate to call. Thank you in advance for your consideration of these points.

Sincerely,

Peter Franchot
Comptroller


By Phyllis Jordan  |  October 23, 2007; 9:48 AM ET
Categories:  John Wagner  
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Comments

Well done Franchot. This is more than an appeal to reconsider the need for a special session. Moreover, this is an indictment against O'Malley and his closed door meetings where he and his tax and spend thugs are licking their chops over ideas to raise everyone's taxes. O'Malley, on the other hand is telling the media that MD Republicans have not shown any interest in working with him on the issue. Well, according to Franchot, a loyal Democrat, O'Malley's not taking suggestions from ANYONE.

This letter gives some good insight into what we can expect in the months to come-taxes and more taxes. In fact, there will even be taxes on the fees that O'Malley criticized Ehrlich for raising. Franchot has offered a taste of what's to come and he's right by implying that taxes, even directed at businesses or higher income earners, will only trickle down to the "working people" that O'Malley duped into voting for him.

Everyone is about to get what they asked for with one Party rule.

Posted by: BG from PG | October 23, 2007 1:09 PM | Report abuse

I did the legal research, looked at all the Court decisions including Delaware etc. and couldn't find one case where a Court upheld a challenge to the calling of a special session. There is no statute in Maryland which limits the Governor's call. He is to be judged solely in a Court of Public Opinion. And right now, he does not look good. Why the wait? Why right before a regular session? Why didn't he mention his tax increase plan in his campaign? His plans wouldn't pass if the legislators were up for re-election in 2008. Only four states: Alabama, Louisiana, Mississippi and Maryland do not elect at least one house of their state legislature every two years. O'Malley knows his regressive 20% sales tax hike is a bad idea which the voters do not like. He thinks the voters will forget by 2010. He is putting in with Putin by having perfunctory public hearings in a special session.

Posted by: Robin Ficker of Robin Realty | October 23, 2007 2:15 PM | Report abuse

Translation of Franchot letter: Hey everyone, look at me! I need your attention! I am very mad that O'Malley isn't letting me be part of his special session. He didn't let me participate in his press events around the state where he unveiled his plan. But I showed him. I held my own press conference where I got to blast him and his plan. I said he wasn't allowing public imput, even though major parts of the plan have been reported on for the past couple weeks and the package will be introduced and debated in the General Assembly just as it would during the regular session. It's good political theater to accuse an elected official of hiding something from the public.

And even though I was for slots before I was against them, I need to speak out against them now because it gives me a good platform and a ready made base of advocates who use that issue as a litmus test unlike people who support slots. But I won't weigh in on any of the tax proposals, even though I am the state's tax collector, because I don't know if voters will take out their anger about tax increases come election time. I can play it both ways. I won't be on record in favor of them and can even sound like I opposed them. But I will still talk about the importance of schools, healthcare and the environment so the progressive commmunity will think I was for maintaining funding for those causes. Finally, I don't really understand the budget process or the economy but if I ramble on and on and on with some economic jargon and talk about the Euro, the housing inventory, and the Dow Jones Industrial Average people will think I know what I am talking about. Thanks for listening - but not too closely. Sincerely, Peter Franchot

Posted by: True Blue | October 23, 2007 9:14 PM | Report abuse

I hate slots. And hate it when politicians think that they can hold the quality services I value hostage to a vote for slots.

No one who votes for slots will get a vote of mine.

Posted by: prince george's voter | October 23, 2007 10:23 PM | Report abuse

This is what I summarize of the letter (and I quote verbatim):

"Please allow me to take this opportunity to set the record straight. There is no relationship whatsoever between the timing of the next General Assembly session and the magnitude of Maryland's structural budget deficit. As you know, the structural deficit is loosely defined as the negative balance between the sum of the State's ongoing spending obligations and its ongoing revenues. Unless we are required to revise State revenue estimates downward, or unless the State makes any unfunded spending commitments between now and January (which is highly unlikely), the structural budget deficit will remain at $1.7 billion.

At the risk of restating the obvious, it is also worth noting that through June 30, 2008, the State of Maryland has a balanced budget."

Actually Peter, it's not so obvious to most. O'Malley and the media keep that to themselves. They want everyone to keep thinking that it was left over from Ehrlich's term.

Every Governor has their challenges to face. O'Malley faces them with finger pointing. He has no plans to curb out of control spending, only clever ways for us to finance it.

Posted by: BG from PG | October 23, 2007 10:54 PM | Report abuse

The section of the letter quoted by BG seems to support O'Malley's argument that it would be better to address the problem now rather than pushing it off as has been done for years. Yes, it is true that the state budget is not in a deficient at this moment. But spending is rising faster than revenues. And as Franchot himself admits, the fiscal outlook changes if revenue estimates go down, which would seem likely if one believes the gloom and doom Franchot spells out. He even goes so far to suggest that we are likely to face a recession. It makes sense to increase revenues sooner rather than later. By delaying increased revenues for 1/2 year, the revenue hill is that much steeper that must be climbed to prevent a deficient. And why isn't Franchot advising legislators and the governor about which revenue increases make the most sense? Instead Franchot choose to grandstand about the special session. The alternative to increasing revenues, of course, is to cut spending and there isn't a lot of meat on that bone if we want to fund education, healthcare, mass transit, roads, and other pressing needs. That's the debate that should be happening, not whether we need a special session or not.

Posted by: True Blue | October 24, 2007 12:34 AM | Report abuse

Legislators: If you vote for slots, you loose my support.

It's that simple.

Posted by: PG'er | October 24, 2007 1:18 AM | Report abuse

What's amazing is the number of people who buy O'Malley's bullcrap. Think about Franchot's point for a second-- it doesn't matter when we go back because we have the same deficit to deal with. O'Malley keeps saying it will "cost more," but that doesn't make any sense. What O'Malley means is we'll either start paying January 1st or pay the same amount in July. Aka, there is no difference. O'Malley is just afraid of his plan getting squandered in the legislature and he should be.

Posted by: James | October 25, 2007 9:20 PM | Report abuse

I would think the people of this state would have learned there lesson when Glendening was in office, but I guess I was wrong. Leave it up to the people in the counties with the lowest per capita of the state to elect this lunatic. Well when these tax hikes are implemented those people that voted him in will definitely feel the crunch with the $2 cigarette tax and 12 cent hike gas tax. I'm glad I decided to move to the Eastern Shore of this state, it's only a 25 min drive for me to shop in Delaware. Going "over to Dover" from now on !

Posted by: Missing Ehrlich on The Shore | November 2, 2007 1:15 PM | Report abuse

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