The League of Women Voters of Maryland
A Study of Maryland’s Budget Process
April 2004

As the economy lagged and revenues failed to meet expectations at the beginning of the 21st century, attention throughout the country turned to state budgets. In Maryland concern has been expressed that certain entitlement program needs are chronically underestimated in the budget. Increasingly, supplemental budgets (as many as ten per session) are used as negotiating tools by the Governor with members of the General Assembly. Bills introduced in the Senate in the 2001 and 2002 General Assembly proposed constitutional amendments to allow the legislature to add to the budget and transfer funds between programs, powers they do not have now. Both bills failed in the Senate, by two votes in 2002.

In response to this increased interest in modifying the state budget process, the delegates to the 2003 LWVMD Convention adopted “a study to determine the principles that would promote fiscal responsibility and timeliness in Maryland’s budget process.”

The Operating Budget Process

Maryland’s budget process is unique. Maryland is the only state that operates on an executive-dominated model of budgeting which allows the legislature only to reduce or restrict funding.

How did this happen? In 1915 the legislature controlled the purse strings, and the state faced a deficit of $1.3 million. The old methods of running the government were inefficient and often corrupt. There was no oversight of the total budget; each agency’s appropriation bill was handled separately and without thought to the amount of revenue available. As a result of the debt burden, a commission was appointed and an accounting firm retained to examine the State’s budget. The executive-dominated budget, which had been recently approved by the City of Baltimore, served as the model for the state and was adopted as a constitutional amendment by the voters in 1916 and implemented in 1918.

Because of the budget process, the Governor of Maryland is the most powerful state executive in the U.S. Maryland’s Governor is required to submit a balanced budget to the General Assembly in January and the legislature is required to enact a balanced budget. After submission, the Governor may change proposed appropriations by submitting one or more supplemental budgets, but they may only be attached to the budget with the consent of the legislature. Under the constitution, the budget bill is introduced in both houses. The Governor is mandated to include the following appropriations in the budget: judicial branch, legislative branch, principal and interest on debt, public schools as provided by law, salaries of public officers, and any appropriation the amount of which is provided by law. All other appropriations are included in the budget at the discretion of the Governor.

The legislature cannot increase the amounts allocated to executive branch departments or agencies nor can it transfer funds from one department to another or from one program to another within a department or agency. However, the legislature can increase funding for the legislative and
judicial branch agencies. The legislature may reduce or delete some appropriations proposed in the budget bill. It may not reduce appropriations for debt service, constitutional and statutorily mandated support for public schools, and salaries of constitutional officers.

State agencies and departments usually begin preparing their budgets in June, even though the
state’s budget is not adopted until early April of the following year. Two phases lead to the adoption of the budget: formulation and enactment. The implementation phase of the budget lasts the full 12 months of each fiscal year.
Formulation

Development of the executive budget is supervised by the Department of Budget and Management (DBM). First the agencies and departments are provided with guidance with respect to the amount of funds that may be included in the budget requests that are due September 1st. Agencies and departments may include requests for additional funds or new programs in separate documents. In the fall DBM reviews the budget requests and recommends to the Governor enhancements, reductions, or no changes to the requests.

There is no formal process for citizen input in the formulation of the budget, but during the summer and into the fall interested citizens, lobbyists and other advocates meet with or write to agency secretaries or the Governor to urge additions to existing programs and services or to suggest new budget initiatives.

The Board of Revenue Estimates (BRE), established in 1945, is composed of the state Treasurer, state Comptroller, and Secretary of DBM, and supported by the Bureau of Revenue Estimates within the Office of the Comptroller. The Bureau is required to develop an estimate of state revenues for the Board, and in mid-December the Board must submit its report to the Governor, who must share it with the legislature. An updated estimate is prepared in early March before the budget is passed. The BRE at times provides an informal estimate of revenues in September to assist the Governor in formulation of the budget.

The legislature’s statutory Spending Affordability Committee (SAC) meets each fall to consider revenue projections and expenditures to ensure funds will be available to meet the budget requests. The SAC is required to have an equal number of Senators and Delegates and may include public members; by tradition the SAC has nine Senators, nine Delegates and four public members. The goal of SAC has been to keep the growth of spending for operating programs consistent with the rate of growth in the personal income in the state. In December SAC submits its report to the Governor, recommending the level of state spending growth. While the Governor is not bound by law to this limit, if the proposed budget exceeds the suggested limit, the Governor must provide an explanation in the budget message why plans exceed the SAC recommendations.

After experiencing the 1982 recession, Maryland established a “Rainy Day Fund” (officially, the Revenue Stabilization Fund) in 1986 to increase the state’s flexibility in the budget process and for use in bad economic years. Initially the state maintained the fund with two percent of the operating budget revenues until the fund was depleted during the recession in the early 1990’s. Since then, the fund has contained at least five percent of the operating budget revenues.

The nonpartisan Department of Legislative Services (DLS) is responsible to the legislature for the oversight of the operating budget. From April to October, DLS analysts monitor both the current year’s appropriations and the budget formulation process for the future year’s budget. From November to early February their focus is on budget analysis and development of recommended actions for the budget committees to consider.

The Governor’s final budget decisions are made in late December. The role of the Governor in the budget formulation process has varied by administrations. Some Governors have held extensive meetings with agencies and departments and have been involved in details of formulating the budget. Other Governors have focused on broad budget goals and policies and DBM has implemented the goals and policies.

Enactment

During the session the House Appropriations Committee and the Senate Budget and Taxation Committee review the budget bill, hold public hearings and make decisions regarding all budget items, including appropriations, supplemental budgets, budget reductions and language. Programs and services are reviewed for their impact, efficiency and sustainability, thus providing an opportunity for legislators to eliminate inefficiency and waste and to improve or eliminate ineffective programs.

During and after six weeks of hearings at which the public may testify, the committees receive budget recommendations, including deficiency appropriation requests, from staff of the DLS’s Office of Policy Analysis (OPA) and the various agencies and departments. Deficiency appropriations are required to correct current fiscal year budget shortfalls created by an unexpected increase in enrollment to an entitlement program, a miscalculation of federal funding reimbursement for program costs, or a budget undercount of program participants. An example of the need for a deficiency appropriation is the State's Foster Care Program. Budget estimates of the number of children who will need this service are historically trend-based and often are undercalculated at the time of budget adoption.

The Governor may submit supplemental budgets to amend or supplement the budget bill “to correct an oversight, provide funds contingent on passage of pending legislation or, in case of an emergency, by delivering such an amendment or supplement to the presiding officers of both Houses . . . .” (Article III Section 52.5) In fact the Governor usually submits supplemental budgets to negotiate the interest of the Governor and respond to the concerns of the legislators.

By prearranged schedule the Senate passes the budget bill first in one year and the House passes it first the next year. Once the budget committee in the first chamber has completed deliberations, made decisions and prepared their report, the bill is brought to the floor of that chamber for the second reading. This occurs around the end of the ninth week of the session. Current practice stipulates that the budget bill will be laid over for several days to allow members to review it in order to be prepared to ask questions during floor discussion. Although many amendments are proposed, only those coming from the respective budget committee are generally adopted.

After the budget bill passes the originating chamber, it goes to the second chamber, where it is referred to the respective budget committee for review. The DLS explains the amendments passed in the first house. The second chamber's budget committee, which has also held hearings on the budget throughout the session, also amends the bill and sends it to the floor sometime during the eleventh week of the session. Once again the bill is laid over so the members can review the bill and be prepared to ask questions during the floor discussion. After the bill is passed as amended, it is returned to the first chamber for concurrence. If the first chamber refuses to concur with the changes, a conference committee is appointed to resolve the differences.

Because the two chambers do not pass identical budget legislation, a conference committee must be appointed. It is generally composed of five members from each house and is, by House rule, restricted to dealing only with amendments in disagreement. The conference committee usually meets in the twelfth week of the session. Sometimes the Governor has submitted supplemental budgets while the conference committee is meeting.

The Maryland Constitution requires that the legislature complete action on the budget by the 83rd day of the 90-day session. If this is not accomplished, the Governor must issue a proclamation extending the session if the budget is not passed by the 90th day. The budget becomes law upon enactment without the Governor’s signature. The budget is not subject to veto nor does the Governor have the right to a line-item veto.

After the operating budget bill is passed by both Houses, passage of supplementary appropriation bills may be considered. These are single purpose bills which must include a designated revenue source to cover the appropriation. The supplementary appropriation bill is a way for the General Assembly to add an appropriation to the state’s budget, but it is rarely done—only eight such bills have been passed since 1974. The Governor may veto supplementary appropriation bills.

The budget must be balanced when it is passed.

Implementation

Once the budget bill has passed both chambers in identical form, the budget bill becomes law. Appropriations become available July 1 of the new fiscal year, with the exception of any deficiency appropriations for the current fiscal year that are contained in the bill. They become immediately available to the agencies. Funds to correct budget deficiencies in the current fiscal year are requested by individual agencies. During the formulation phase, DBM assumes that there will be some unknown level of deficiency. The entitlement programs and programs with major federal reimbursement or federal matching funds are the most likely to incur such deficiencies. Many of the major health and social programs require deficiency appropriations to avoid deficits. An agency’s requests for deficiencies compete with other agencies. DBM recommends to the Governor the deficiency appropriations to be submitted in the next budget.

The Governor may change appropriations by the budget amendment process during the budget year. By budget amendment the Governor may reduce executive branch appropriations up to 25 percent with the approval of the Board of Public Works (BPW), composed of the Governor, the state Comptroller and state Treasurer. Funds may be reduced under this provision only when the Governor finds an appropriation is unnecessary or when the reduction results from legislative action on the budget bill. The Governor may not reduce legislative or judicial branch appropriations, appropriations for payment of the principal or interest on state debt, or appropriations for public schools. There is no public hearing, but the meeting notice and agenda are published, and the decision meeting is open to the public. Citizens can submit their concerns to the officials prior to the meeting.

Budget amendments are also used in individual agencies to move appropriations from one program to another so that underspending in one program will offset over-spending in another. Generally budget amendments cannot be used to move appropriations from one department to another department. Budget amendments are also used to appropriate additional special funds and federal funds that become available during the fiscal year. Copies of budget amendments are provided by DBM to the budget committees and to the DLS for review and comments. After 45 days DBM may submit the budget amendment to the Governor for approval.

The budget contains a contingency fund for the operation of state government. In recent budgets the contingency fund has been $750,000. The fund is appropriated to the BPW and used for emergencies and to offset small shortfalls in agency budgets. After approval by the BPW, transfers to the agency or department are made by the budget amendment process.

The Capital Budget Process

Maryland does not have a separate bill that contains all of the capital budget projects and programs. Most state capital projects and capital programs are funded by debt financing and they are included in the Capital Budget Bond Bill. However, in Maryland appropriations for capital projects funded by the general fund, the transportation trust fund, and agency special funds are included in the operating budget.

The Capital Budget Bond Bill is in fact a supplementary appropriation bill. That means that it can only be passed after the operating budget is enacted and must include designated revenue sources to cover the appropriations. The Capital Budget Bond Bill cycle has the same phases as the operating budget: formulation, enactment and implementation. However, the powers of the General Assembly are notably different in this case.

Formulation begins with the departments and agencies preparing capital budget requests for the DBM. During the summer the Capital Debt Affordability Committee prepares for the Governor and General Assembly recommendations for the maximum amount of new debt that should be authorized. The Committee, established in 1978, is chaired by the state Treasurer; the other members are the state Comptroller, the Secretary of DBM, the Secretary of Transportation and one public member appointed by the Governor. In the fall the Governor prepares a preliminary recommendation, and the DLS provides an analysis of debt affordability to the SAC, which recommends the level of new debt in a report to the Governor and General Assembly.
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Enactment begins when the Capital Budget Bond Bill is introduced in the General Assembly by the 20th day of the session and is assigned to the budget committees. The legislators may modify the Capital Budget Bond Bill within broad parameters. Proposed capital projects may be increased, decreased or deleted. Legislators may also add projects with specific funding.

The powers of the Governor are somewhat different. The Governor must sign the Capital Budget Bond Bill for it to be enacted, or may veto the bill, or exercise a line-item veto of the bill. It’s noteworthy that the last time a line-item veto on the Capital Budget Bond Bill was exercised was in 1991.

Other supplementary appropriation bills can be individual bond bills submitted by legislators for specific capital projects, usually in their district, but each bill requires matching funds equal to available state funds.

The BPW is responsible for implementation of the state’s capital program except for state highway projects. The Department of General Services administers the construction of state facilities other than higher education. The Department of Transportation administers the transportation capital programs. Other capital programs that provide construction grants to local governments or to other entities are administered by various state agencies.

Other States’ Budget Processes

How does the budget process in other states differ from Maryland’s? Are the differences major or merely technical and procedural? The answer is: both. The most important difference between Maryland and virtually every other state is the way in which the executive budget process dominates the legislative budgeting process in Maryland. In all but three states the legislature has unlimited authority to change the executive’s budget; only in Maryland does the legislature have no authority to increase or to reallocate funds among programs. Nebraska’s limits on increases can be overridden by a 3/5 majority, and West Virginia is restricted only from reducing the judiciary budget or creating a deficit. At the other extreme, Arizona, Texas and Colorado have strong legislative budget authority and often ignore the executive budget.

In all but four states the Fiscal Year begins on July 1, as it does in Maryland. Although the majority of states budget annually, 20 states use some form of biennial budgeting. Conclusions of the authors of the National Conference of State Legislatures’ (NCSL) document Legislative Budget Procedures match those of Maryland officials, that neither system has any great advantage over the other. Budget calendars are similar in all 50 states: budget guidelines are sent to agencies during the summer with a due-back date and hearings are scheduled for the fall during the formulation process. The governors submit their budgets to their legislatures in December through February for legislative adoption, theoretically in the spring.
Ten states, including Maryland, use a combination of incremental, performance and program-based budgeting, and 10 other states use program-based or performance-based budgeting exclusively. Maryland has two budget bills—one for the operating budget and one for the capital budget, but this pattern is far from universal. Eighteen states submit only one budget bill, and 12 others use up to 4 bills. Twenty states submit numerous appropriation bills, topped by Arkansas with a 500 bill limit.

In 32 states the legislature receives agency budget requests before the executive budget is prepared. Eight states’ legislatures, including Maryland’s, never see agency requests before the budget is prepared, and the other 10 submit their requests after the budget is prepared but before, and even after, it is submitted to the legislature. The length of time for the legislatures to consider the budget varies, related somewhat to the length of their legislative session, and at least 9 states have no provision for public input during these legislative budget deliberations. Unlike Maryland, 25 states require a minimum time that their legislators must have to review the proposed final legislative budget before they vote, usually 24 to 72 hours, although the Rhode Island House requires 10 days. In 32 states a majority of those voting is required to pass the budget. Three states mandate a super-majority, and the remainder require support from a majority of elected legislators, as does Maryland.

Forty-three states allow a gubernatorial line-item veto after the legislature passes the budget, and 35 of those permit the governor to veto funding for an entire agency or program. Only 12 states authorize the governor to cut an enacted budget without restriction; the others impose conditions, such as a maximum percentage or required consultation with the legislature, as does Maryland.

How the Maryland Legislature Influences the Budget Process

Since the legislature is prohibited from transferring funds from one program to another within the proposed budget, Maryland’s legislators have developed ways of influencing state spending.

Budget Language: During consideration of the budget, legislators may place conditions in the budget on spending items, which have the force of law for that fiscal year. Example: Legislators have described parameters in the budget for the textbook funding program for private schools.

Budget Mandates: Legislators often impose mandates for future funding in the budget. As a generic example, legislation passed in the 2003 General Assembly that provided for spending a specific amount or a spending formula on a certain program would require the Governor to include the program’s financing in the FY 2005 budget—two years later. The Governor can veto a legislative bill.

Reports and Legislative Hearings: The legislature can influence how an agency expends appropriations or manages programs by requiring a report, usually through the Joint Chairmen’s Report (JCR), followed by a hearing on the issue during the legislative interim. Although reports and hearings only result in comments and recommendations, agencies are responsive to the concerns of the budget committees or subcommittees. Frequently the concerns expressed by the committees are used by an agency when seeking additional funding in a subsequent budget.

Special Funds: The legislature may pass legislation (and the Governor may sign or veto) directing new or existing revenues into special fund accounts; this is frequently done and has resulted in over 1000 separate special accounts, with as many as 27 in the Department of Natural Resources. According to the DLS, over 30 percent of the budget is drawn from dedicated sources. The shift to special funds by many agencies actually gives the agencies greater budget independence from both the Governor and the General Assembly because the funds are earmarked solely for the agency or for a special program within the agency.
Spending Affordability Exclusions: The legislature uses this process to set a limit on spending. However, for FY 2003 a number of appropriations were excluded from the spending limit total and in that way influenced the allocation of resources. They were homeland defense costs, payment of fiscal 2001 Medicaid and mental health bills, and enterprise activities at Baltimore-Washington International Airport, the Port Administration, and the State Lottery Agency.

Supplemental Budgets: Governors have used the Supplemental Budget process for many purposes, often to promote their legislation. Supplemental Budgets give the legislature the opportunity to negotiate with the Governor to direct those funds to programs they favor. These deliberations are not open to the public, although advocates can have input through legislators.

Relevant LWV Positions

From LWVUS Principles
The LWV believes that
● democratic government depends upon the informed and active participation of its citizens and requires that governmental bodies protect the citizen’s right to know by giving adequate notice of proposed actions, holding open meetings and making public records accessible;
● efficient and economical government requires competent personnel, the clear assignment of responsibility, adequate financing, and coordination among the different agencies and levels of government.

Relevant LWVMD Positions

Fiscal Policy: Action to promote an equitable and efficient fiscal structure for Maryland and to improve the fiscal relationships between the state and its political subdivisions. (1981)
Support for:
● the distribution of state funds to local governments in a variety of ways, based on factors such as population, need, wealth, and tax effort.
● reduction of the number and complexity of equalization formulas used by the state to distribute money to local governments.
● statements of intent and periodic review by the legislature of all state-funded programs.
● the executive budget concept with opportunity for public and legislative participation during budget formulation.
● fiscal restraints which promote good fiscal planning and allow for proper budget procedures.
Opposition to:
● any constitutional amendment proposed to limit state taxes and spending.
● tax or spending limits imposed by the state on local governments.

State Constitution: Action to secure a constitution that is clear, concise and confined to fundamentals. (1962)

Education—Financing Education: Action to support measures which recognize the primary responsibility for funding public elementary and secondary education lies with the state. (1972, 1975)







Characteristics for Maryland’s Operating Budget Process

1. The Budget Process: What characteristics are important for Maryland’s operating budget process?

    a. Transparency: A budget process that is clear and readily understood.
    b. Public Access: Opportunity for substantive public input during the entire budget process, including the formulation, enactment and implementation phases.
    c. Reliable, current and objective information: E.g., revenue estimates, expenditure forecasts, independent analysis.
    d. Accountability: A systematic review process of expenditures, programs and services to determine their impact, efficiency and sustainability.
    e. Sufficient time to deliberate.
    f. Flexibility: The ability to adjust to changing needs.
    g. Budget literacy: All legislators engaged in the budget process.
    h. Efficiency: Concentration of decision-making.
    i. Balanced budget requirement.
    j. Potential for deficit budgets.
    h. Other:

2. How should the balance of power be distributed between the Governor and the Legislature in the Operating Budget Process?
    ● Maintain the current balance of power in the operating budget process.
    ● Permit legislative reallocation of expenditures within the revenue estimate or the Governor’s proposal.
    ● Permit the Legislature to initiate new programs in the budget within the revenue estimate.
    ● Adopt the powers granted to the Governor and Legislature in the Capital Budget process; i.e., initiation, identification of revenue resources, and a gubernatorial line-item veto, etc.
    ● Other

Bibliography

● Assessment of the Maryland Budget Process. Office of Policy Analysis, Maryland Department of Legislative Services, 2003.
● Fundamentals of Sound State Budgeting Practices. National Conference of State Legislatures, 1995.
● Legislative Budget Procedures: A Guide to Appropriations and Budget Processes in the States, Commonwealths and Territories. National Conference of State Legislatures, 1998.
● Maryland’s Budget Process. Legislative Handbook Series, Volume IV. Maryland Department of Legislative Services, 2002.

The Budget Process Study Committee: Barbara M. Coit, Chair (LWVMD & Talbot), Barbara Black (Talbot), Mary Ann Draut (Talbot), Carol Filipczak (LWVMD & Howard), Betsy Grater (Howard), Grace Kubofcik (Howard), Janet Peters (Allegany), Dorothy Ruyak (Baltimore County), Barbara Steckel (LWVMD & Montgomery), Lois Stoner (Montgomery) Jule Sugarman (Calvert).

© League of Women Voters of Maryland, Inc.