Tuesday, March 24, 2009

We Know Times Are Tight, But …

There were constant references to the sorry economy we're living in as the Appropriations Committee of the Maryland House of Delegates completed its preliminary work on the proposed state budget, cutting over $700 million.

The bad habits of the past persisted, both in substance and process. The lawmakers continue to envision increased spending in future years, and the decisions, while taken in public, were for the most part worked out in private. The full report of their work did not go online until late Monday. One has to be well versed in the intricacies of state budget to make sense of the more than 40 mandate reductions and swaps from special to general funds. It was complicated this year by the infusion of federal stimulus dollars.

Some of these structural and procedural problems have been identified in 2008 policy papers by Free State Foundation Senior Fellow Cecilia Januskiewicz, who formerly served as Maryland Budget Secretary.

"In these fiscal times, we can't do all the things we would like," said one delegate, in the repeated refrain. Yet, they were persistently looking for ways to do half of what they would like to do, or a third of what they wanted to do, despite a write-down of $700 million in expected state revenues just two weeks ago. The lawmakers had spent literally hundreds of hours in subcommittee hearings combing the budget for cuts, yet we're unable to achieve their goal of increasing the fund balance (surplus) to $250 million. It is now only $50 million, leaving little wiggle room if there is more bad revenue news in the months ahead. The legislature's top fiscal expert had suggested a $400 million fund balance as a cushion.

Lawmakers did wind up cutting over $700 million from Gov. Martin O'Malley's proposed $ 32 billion budget, with more cuts still to come. Yet they rejected hundreds of millions of other potential cuts proposed by the analysts from Department of Legislative Services, such as cutting the funds that would allow a fourth year of tuition freezes at state universities. In Maryland, the legislature can only cut the governor's budget.

Ultimately, many of the "cuts" were simply reductions in proposed spending increases. Sometimes they "level funded" them -- kept a spending program at the same level as last year.

There were indeed actual reductions from this fiscal year's spending, but seldom is a program taken completely off the books. A rare exception was the "Principal Fellowship Program" in the state Department of Education. Passed in 2005, the program was designed to give incentives to effective school principals to move to troubled schools in other jurisdictions. The money was not spent in fiscal 2007 and 2008, and no principals had been nominated this budget year. The savings? A measly $159,745.

The Sellinger program for public aid to private higher education did suffer a real $5 million cutback from this year. But as the education subcommittee did several times, the budget language restores the funding in subsequent years, and even includes modest increases. Sellinger aid is based on a percentage of what the public colleges and universities receive, and the committee chairman, Del. John Bohanan, who headed a commission on higher education funding, said there is "gentleman's agreement" that the $45 million will go to financial aid for Maryland students at these private schools such as Johns Hopkins University.

Technically the legislators cannot restore cuts the governor has made. But more than half of state spending is mandated in law, and the legislature must approve any reductions in these formulas in the Budget Reconciliation Act. It is there that some of O'Malley's "cuts" in growth can actually be put back. This is what legislators did with the formula for the Maryland State Arts Council which O'Malley was going to cut by $6 million. Powerful and well-organized lobbying by myriad arts organizations in every legislative district got $3 million of that restored.

Who's representing the interest of the average taxpayer in this process? Reporters are about the closest thing to average taxpayers observing the process, leaving it up to the legislators to represent their constituents. For the most part they don't hear from their constituents except those who want to increase the budget or stave off a cut for programs they support.

The hearing rooms where the decisions are actually made are filled with lobbyists for programs, many of them paid by state tax dollars. At the education subcommittee, not only was the University System represented (by a former senator who was once vice chair of the Senate's budget committee), but each major state university had their own lobbyist on hand.

Even for experienced hands, the process is difficult to follow, as the proposed budget revisions were found in four different documents, suggesting options and budget language. Legislative analysts would jump around from one document to the other. These documents were placed on a table as the work session began, producing a feeding frenzy of lobbyists struggling to get copies. There were not enough copies of one key legal sized document outlining alternative budget choices.

In addition to the public meetings, there had also been unannounced private meetings of key committee members. There will always be private discussions among lawmakers, but when key decisions are made behind closed doors, then the public process becomes theater with the lines rehearsed, as the rapid proposal and passage of budget amendments showed.

All told, it is a troubling drama for anyone concerned about growth in state spending and transparency in government.

Monday, March 16, 2009

Meat and Potatoes on the Budget Table

In Wednesday’s (March 11) latest round of revenue write-downs, Maryland tax officials predicted the state will have $716 million less to spend in fiscal 2010 than they had forecast just three months ago. Budget Secretary Eloise Foster summed up the bleak prospects for a new round of budget cuts:

“Everything that was easy was done a long time ago,” Foster told reporters. “We’re now down to meat and potatoes.”

The advanced word on the revenue estimates was so dire – pegging the next year’s general fund revenues at $500 million below the actual take in fiscal 2008 – that the House Appropriations Committee put off its budget cutting decisions until later this week (March 18-20). The committee’s target for what needs to be cut is now more than $700 million, and legislators are looking for even more than that to provide at least a $400 million fund balance (surplus) to cushion against even worse news as the year progresses.

Even before the revenue estimates that serve as the benchmark for its constitutionally mandated balanced budget were officially released, the leaders of the General Assembly were announcing the formation of a legislative task force to look at many of the mandates, formulas and entitlements that I discussed in my March 9 op-ed in the Baltimore Sun.

This not-yet-appointed task force of seven senators and seven delegates – presumably the fiscal committee leaders along with a few token Republicans – will not get to work till this legislative session is over April 13.

Senate President Thomas V. Mike Miller Jr. summed up the stark issues.

“We have to be prepared to make some tough decisions …. in terms of our sustainability and the structural problems that we have in our budget,” Miller said a news conference. “A comprehensive review of state aid to local government will help us prepare for the necessary structural reforms that will benefits of the citizens of Maryland.”

Miller noted that 40 percent of the state budget is spent on aid to counties and municipalities. “We have to make some adjustment about how our money is allocated,” Miller said.

Tax hikes and layoffs of state workers are “off the table,” said House Speaker Michael Busch, who noted that he knew of only one county (Prince George’s) that had furloughed its workers the way the state had done already.

Here’s some of what’s on the table for this meat-and-potatoes work group: state subsidies of county pension costs (up 22% this year); calculation of education funding formulas; revenue structures and capacity in the counties; and tax limitations imposed in some jurisdictions.

There are several significant things about this task force. First, it recognizes that there is long-term “structural” spending problem that was not fixed by the 2007 tax hikes. Two, it plans to tackle some of the spending that has generally been off limits for Gov. Martin O’Malley, the former Baltimore mayor: aid to local subdivisions, teacher pensions and the like. Three, it is not some grand blue-ribbon commission created to produce a fat report, but as Miller referred to it, “a work group” of politicians familiar with the issues and having the power ultimately to propose politically workable solutions.

Lawmakers and governors created this problem by enacting and signing laws that required this spending, and they have the power to fix it.

The severe economic downturn has forced these legislators to face the day of reckoning that the federal stimulus has partially delayed. “Tough times require tough decisions,” Miller said, “and we in the General Assembly are prepared to make them.”

This fiscal mess appears to be a window of opportunity for true budget restraint that will make Maryland government live within its means every year – not just when times are good. “This truly is” such an opportunity for structural reform, the legislature’s chief fiscal analyst, Warren Deschenaux agreed with me in an interview. “I hope we don’t squander it.”

Raising taxes in 2007 was consistently described as “making tough choices.” Now, we’ll have to see if the same legislators are capable of making the “tough decisions” to permanently lower spending to which many interest groups are so fondly attached.

Tuesday, March 10, 2009

A Look Back at the Sirius-XM Merger

It has been interesting to watch the recent struggles of Sirius XM Radio and look back at the concerns raised when the Sirius – XM merger was originally announced. Just last month, Sirius XM seemed destined to file for bankruptcy before being saved, at least temporarily, by Liberty Media. What happened to what merger opponents claimed would be a competition-killing media giant?

The National Association of Broadcasters were among the first who cried foul of the merger, claiming that the consolidation of Sirius' and XM's market shares in the satellite radio market would be a “merger to monopoly” that would result in disaster for terrestrial radio broadcasters. The NAB argued that satellite radio represented a discrete product market, which, if this merger were approved, would be controlled entirely by a single company that could impose monopoly prices upon consumers.

This argument seemed flawed then, and now seems even more so in retrospect. In a CNET article written in April 2007 by FSF President Randolph J. May, May rightfully predicted that even if the merger were approved, a consolidated Sirius XM would still likely face strong competitive pressures from other forms of audio entertainment. May noted that the audio services marketplace offered a wide range of distribution technologies (including terrestrial broadcast stations, wireless audio services, iPods, MP3 players and similar devices, and the Internet), none of which appeared to be threatened into obsolescence by a merger between the two satellite radio providers.

According to a recent Wall Street Journal article, this is precisely what happened:
When Sirius and XM completed their merger last July, it was supposed to represent a strong new beginning, with the two fledgling companies becoming an entertainment force. Instead, a 17-month approval process diverted valuable executive attention from the underlying business, and consumers grew more enamored with their iPods, mobile phones and other alternatives to satellite radio.
The result after all this controversy? Way back on February 20, 2007, when the proposed merger was first announced, Sirius shares closed at $3.92. Upon the announcement of DOJ approval on March 24, 2008 and FCC approval on July 25th, 2008, Sirius XM closed at $3.15 and $2.25, respectively. Today, Sirius XM shares are valued at a measly $0.124.

Of course there are always those who will see any potential merger as problematic without really trying to examine the actual competitive effect of the transaction in light of today's dynamic communications and information market. The marketplace – and industry players – change so rapidly that it is difficult to grasp its true state by simply looking at a current snapshot. In fact, business models in the media industry actually seem to be trending towards deconsolidation. Clear Channel, once the poster boy of consolidation, has been selling off its assets the last couple of years in order to stay afloat. The FCC also recently approved Time Warner's request to spin-off of its cable services.

These examples have shown that, in the fast-changing transitory telecommunications market space, it is nearly impossible to make an ex ante prediction of the business model that will ultimately prove most successful – and regulators, in an appropriate show of humility, should err on the side of caution in trying to do so.