Baltimore's recent audit disclosure of $39.7 million in improperly recorded tax receipts has prompted cries to spend this money and tap the city's financial reserves - including a $13.4 million surplus fund - to avoid tough budget choices for the coming fiscal year.
Unfortunately, much of the discussion about these dollars has missed or ignored some important facts. The Baltimore City Charter is crystal clear that the $39.7 million can be used for one purpose only: to reduce the city's borrowing. The $13.4 million, which is the 1 percent reserve allowed by the charter, is designed to cover unforeseen expenses, but using it as some City Council members suggest would risk compounding Baltimore's financial problems in the future.
The primary purpose of this reserve is to deal with problems that surface in the course of a fiscal year, such as overtime spending by the police and fire departments, unanticipated and immediate capital needs, or a drop in budgeted revenues that cannot be offset by reasonable belt-tightening measures. This year, for example, Mayor Sheila Dixon's administration extended an 18-month hiring freeze and cut expenditures by $37 million to offset declining revenues. This surplus is the primary resource available to help weather any additional shortfalls.
Baltimore also has a "rainy day fund" designed to protect basic city services during a major crisis. The fund was created in 1992 during another nasty recession, when the state cut funding to local jurisdictions midyear. Baltimore was completely unprepared for the sudden loss of revenue and had to resort to layoffs and service reductions to prevent a budget deficit. Later, in fiscal year 2004, the fund was used to rescue the public school system from a cash-flow crisis.
Why all the calls for using reserves to ease the pain of next year's budget? Baltimore has a structural budget deficit. Using one-time revenue sources like reserves to support ongoing expenses is fiscally irresponsible.
Baltimore enjoyed five years of strong revenue growth during the housing bubble - which, in addition to building up the city's reserves, probably built unrealistic expectations about the budget.
The fiscal outlook for the next few years is bleak. Revenues are flat, and the city faces daunting growth in pension, health care and debt service costs. And continued state budget woes may mean additional cuts in aid.
The service reductions proposed in the fiscal year 2010 budget currently before the City Council are tough but unavoidable. City leaders must reject stopgap solutions that deplete resources and defer difficult choices. They should focus instead on defining long-term priorities and making city government as cost-effective as it can be.
Edward Gallagher is director of finance for the city of Baltimore. His e-mail is edward.gallagher@baltimorecity.gov.
