So, Where Did That $402 Million State Surplus Go? WHEN GOVERNMENTS DON'T HAVE MONEY

January 05, 1992|By JOHN W. FRECE | JOHN W. FRECE,John W. Frece is chief of The Sun's State House bureau.

ANNAPOLIS — Annapolis. -- In addition to performing his duties as Gov. William Donald Schaefer's deputy budget secretary, Frederick W. Puddester also is a pretty good guy.

He endures numbskull questions from reporters who cannot understand the intricacies of multi-billion-dollar budgets; he returns phone calls; and he can take a joke.

The line that usually gets the biggest rise out of him, a question usually asked only after he has patiently gone through yet another briefing to explain how the governor intends to eliminate this deficit or trim that program, is this:

"But Fred, whatever happened to that $402 million surplus the governor had?"

It has become an insiders' joke only because the governor and his aides believe they have answered the question so many times before, because they believe their answer is perfectly defensible, and because they know that despite all their efforts, the public either does not believe them or does not understand.

They say people believe Governor Schaefer simply spent the money on the new Camden Yards stadium, or on furnishings for his brick mansion, or on some other pet project, and that is why the state is in such desperate financial trouble now.

The next time another budget deficit develops, the governor's aides know critics will come out of the woodwork chiming: "He's the fellow who turned the state from a $402 million surplus into a $400 million [or whatever the number is at the time] deficit."

Mr. Schaefer was so convinced the public does not understand how the state went from a surplus to a deficit that he went on statewide television two weeks ago just to explain how it happened.

But the story of how Maryland has gone from black ink to red is not as simple as explaining how a surplus in a particular budget year was spent. Rather, it also involves an unexpectedly steep plunge in the economy, an embarrassing series of overly optimistic revenue estimates, and an uncontrollable expansion of government social services and prison costs, much of that brought on by the prolonged recession.

It is true, though, that Maryland's budgetary good times began to draw to a close with the introduction nearly three years ago of Mr. Schaefer's Fiscal Year 1990 state budget. Maryland was still enjoying the final windfall of the federal tax reform act of 1986, and by the end of FY 1989 had built up a surplus (that is, revenue in excess of what had been expected and appropriated) estimated at $402 million.

But state legislators, who had watched Mr. Schaefer push through the new stadium project and a costly light rail line during his first two years in office, candidly said they were worried about the governor's propensity for spending. They also were convinced the FY '89 surplus was unlikely to repeat itself the following year. They recommended the money be used mostly for one-time-only capital expenses, and perhaps for some modest tax relief.

Mr. Schaefer responded with the largest capital construction program in the state's history, proposing that $466 million be spent on new prisons, schools, office buildings and campus facilities. He proposed paying for more than half of those projects -- $257 million worth -- with cash from the surplus, a move that would save the state millions in interest payments associated with borrowing. The balance was to be paid for by sale of bonds, which generally finance most state capital projects.

Times were good, the state was on a roll, all things seemed possible. Only those who had been in the legislature for more than two terms could remember a time when the state's economy was not booming along. Using the surplus for long-delayed construction, or for often-deferred projects such as maintaining boilers and roofs, seemed the safe and perhaps wise thing to do.

Mr. Schaefer also used another $100 million of the surplus to close the books on a large debt the state had assumed and which his administration had inherited: the final payoff for depositors whose savings and loan associations collapsed in 1985. This, too, was a one-time only expense, but one that was unavoidable.

The General Assembly also insisted on giving some of the money back to the citizenry through some targeted tax relief for the poor and an additional $100 personal exemption for all individual taxpayers. But the $30 million diverted for tax relief provided such a paltry break per taxpayer (Mr. Schaefer sneered that each taxpayer would get back no more than $7.50) that the governor stubbornly opposed it, though to no avail.

Another $10 million of the surplus was put into the "Sunny Day Fund," an economic development incentive fund Mr. Schaefer considered particularly important. The final $5 million was added to an existing an emergency fund known as the "Rainy Day Fund." It was established largely at the insistence of New York bond rating agencies, which argued that triple-A states such as Maryland should have a financial cushion as a hedge against bad times.

It proved to be pretty good advice.

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