Commission on

Fiscal Sustainability
Interim Report

Submitted to County Executive Johnny Olszewski

and the Baltimore County Council
February 2019
 BALTIMORE COUNTY COMMISSION ON FISCAL SUSTAINABILITY
Donald I. Mohler III, Commission Chair
Former Baltimore County Executive

Carolyn Colvin
Former Acting Commissioner for the Social Security Administration

Edwin S. Crawford
Former Managing Partner Lyons Investment Group

Lester Davis
Deputy Chief of Staff and Director of Policy and Communications for
Baltimore City Council President Bernard C. “Jack” Young

Warren Deschenaux
Former Director of the Department of Legislative Services, State of Maryland

Elizabeth J. Irwin
Deputy County Auditor and Director of Fiscal and Policy Analysis
Baltimore County Government – Legislative Branch

Edward N. Walters
Vice President, Senior Project Manager, T. Rowe Price

Baltimore County Government Staff to Commission

Keith Dorsey, Acting County Administrative Office/Director of Budget and Finance

Elisabeth Sachs, Director of Government Reform and Strategic Initiatives
Ed Blades, Deputy Director of Budget and Finance
Tucker Cavanagh, Deputy Director, Government Reform and Strategic Initiatives
Kevin Loeb, Deputy Director of Budget and Finance
Elizabeth Miller, Budget Analyst

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 EXECUTIVE SUMMARY

Baltimore County’s budget process is highly centralized and has traditionally vested
disproportionate power in the hands of the County’s administrative officer and a small
staff in the budget office. The existing system lacks transparency, stifles innovation, and
discourages accountability, while underplaying the County Executive’s role in budget
preparation. By design, the structure is confusing to all but a few staff members
involved in the process on a day-by-day basis, rewarding those who understand past
practices and frustrating those who prize efficiency, precision and openness. The
administration has an obligation to modernize the process to promote trust between the
government and the governed, and engagement within the government itself.

The administration faces a short-term challenge and a long-term challenge. The short-
term challenge is to develop the FY2020 budget using a process the administration
inherited. This must be completed by April 15, 2019. The long-term challenge is to
restructure the process itself. This will require the administration to change the
underlying culture of County government by moving towards outcome-based
budgeting and management practices that focus on fiscal sustainability. Culture change
takes time, and it would be unreasonable to expect the administration to complete this
work by April 15. To the contrary, the administration must remain focused on the long
term challenges after it submits its FY2020 budget.

This is an interim report, which outlines the Commission’s process, and its findings on
the County’s current fiscal situation, budget formulation process, financial management
system, and capital and operating budgets. The Commission will continue to meet and
will issue subsequent findings for the administration, the County Council and the
public to review on or before May 15, 2019. While the public can find additional
background in the body of the full interim report, listed below the reader will find the
major issues and the Commission’s recommendations in response to those issues:

Current Fiscal Situation

Revenue Stabilization Reserve Account (RSRA) Will Fall Below Targeted and
Required Limits By June 30, 2020 Under Current Budget Forecast.
Recommendation: While the Commission has not been tasked with identifying the specifics of
balancing the FY 2020 budget, it would be remiss not to emphasize the importance of adhering to
legal RSRA limits under § 10-8-101 of the Baltimore County Code; accordingly, the
Commission recommends that the administration consider inter-fund transfers, if necessary, to
ensure such compliance. Further, the Commission recommends that the administration be
cognizant of any financial decisions that would have a negative impact as identified by the major
credit rating agencies, including any deviation from the 10% target level.

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The County Faces Revenue Constraints that are both Self-Imposed and Related to
School Construction Aid
Recommendation: The Commission will conduct a more detailed review of the County’s
revenue structure and potential for revenue enhancements in the future, but strongly
recommends in the short-term that the administration recognize its current limits with regard to
revenue capacity under the current tax rates and fee structures. This reality affects not only the
operating budget, but also the County’s capital program capacity, since the level of General Fund
revenues serves as the denominator in the County’s debt service affordability ratio (used by bond
rating agencies), and since non-County revenues to the County’s capital budget reduce the
pressure on the General Fund debt service budget. For these reasons, the revenues discussion is
directly related to the County’s future school construction timetable as well as its ability to
maintain the level of services demanded by county residents.
Financial Policies and Procedures Should Be Strengthened To Ensure Future Budget
Sustainability
Recommendation: The Commission recommends that policy makers and budget managers
adhere to adopted financial guidelines, and that they identify, clearly, when there may be
deviations from those guidelines or policies under certain circumstances. The Commission also
recommends that the County develop formal and meaningful 5-year forecasts for operating and
capital budget revenues and expenditures, accompanied by detailed justifications for those
forecasts. The Commission believes it is important for the executive and legislative branches to
come to an understanding of each other’s forecasts to help decision makers understand the basis
for any forecast differences.
Long-Term Obligations Require In-Depth Review
Recommendation: The Commission will be requesting additional information regarding
funding for retirement, debt service, and OPEB prior to making formal recommendations on this
matter.
Options for Short-Term Budget Balancing Exist but are Not Fiscally Sustainable
Recommendation: The Commission will be requesting additional materials related to the
current PAYGO funding status, current debt projections, OPEB and pensions. While this is
occurring, the Commission advises that the administration review all current funds with cash
available, but also that it strongly consider whether shifting of those funds is a fiscally
sustainable action.

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Budget Formulation

There Has Been Limited Public Engagement in Past Budget Processes

Recommendation: After having reviewed the process for public engagement, the Commission
commends the County Executive and attending County Council Members for pro-actively
engaging the public in budget discussions and urges the administration to continue this process
and to find additional and innovative methods for receiving residents’ feedback on the budget
throughout the year.
Departments Lack Strategic Plans and Performance Metrics to Determine Efficacy of
Expenditures
Recommendation: The Commission recommends, that in order to develop a more focused and
goal-oriented budget, and to assist OBF and Department Heads in budget formulation, that the
County develop strategic plans for each agency and specific performance metrics which they can
use in determining the effectiveness of program and operational expenditures.
Department Head Role in the Budget Formulation Process Could be Strengthened
Recommendation: The Commission recommends that the Maximum Allowable Ceiling
Requests (MARC) process be reviewed in depth. The Commission believes the administration
could consider using budgets directly connected to strategic plans and performance metrics as
opposed to a single, across-the-board increase or decrease in the total budget.
Presentation of Budget Information for Decision-Makers Should be Improved
Recommendation: The Commission recommends that the Office of Budget and Finance begin
to develop a function similar to that of the County Council and the Maryland Department of
Legislative Services that provides detailed narrative explanations of budget and financial trends
in the County on a regular basis.
Process and Transparency of Revenue Forecasting Should be Improved
Recommendation: After review, the Commission recommends that the County develop a
process similar to the State’s revenue monitoring group and begin to collaborate on revenue
projections in future years. A consensus projection would be very helpful to the entire process.

Financial Management System (Process and Technology)

Lack of Executive-Level Analytical Capability
Recommendation: The Commission recommends that the administration consider exploring
new and modern information systems to improve County budget and financial analysis,
including those used by local governments in the State of Maryland. The Commission

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recommends that any proposals for pursuing new systems be presented with a cost-benefit
analysis to justify consideration of such a procurement. Additionally, in the short-term, the
Commission recommends that the administration identify specific, substantive training for
analysts and budget managers to improve their system and data analysis skills under the current
system constraints. The Commission also recognizes that there is a fiscal impact to the above
recommendation adding additional pressure on the FY2020 Budget.
The Systems Lack Connection to Outcome Metrics
Recommendation: The Commission’s recommendation is similar to prior recommendations
that the County explore a modern performance management system that is integrated with
county budget and financial management systems and adds clear performance/outcome metrics
to whatever system is created.

The Systems are Outdated and in Need of Upgrade

Recommendation: After reviewing the current systems and considering the timeline and costs
associated with moving toward a modern system, the Commission recommends that the
administration begin a process toward modernizing its budget, financial, and human resources
information systems as soon as possible, keeping in mind system transparency and efficiency.
With this in mind, the Commission also recommends that the County perform a cost-benefit
analysis of procuring a new system that reflects the one-time and ongoing costs of the new
system, as well as its value, including the reclaimed value of the required staff time presently
being used to create the same level of analyses.

Capital Budget
Changes in School Construction Funding Policies Over the Past Decade has Led to
Significant Budget Challenges
Recommendation: The Commission will request additional review of the impact of this decision
on current debt projections and project timelines in upcoming meetings. A revised and accurate
debt analysis is imperative for the Commission to complete its work.
Lack of Modern Asset Management Tools Appears to be a Critical Issue for Asset-
Dependent Agencies
Recommendation: The Commission recommends that the administration explore a modern
asset management system to better identify the condition of current capital assets.

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The Capital Budget Lacks Project Specificity and Year-to-Year Reporting of
Anticipated and Actual Revenues and Expenditures
Recommendation: The Commission recommends that the administration review the potential
for modern planning systems to more clearly project financial details as they pertain to Capital
Projects with analytical capability and transparency in mind. Additionally, the system should
allow for year-to-year capital expenditure projections and planning so that cash-flow as a result
of the Capital Program can be regularly reviewed and analyzed. For its final report, the
Commission expects to probe further into the desired improvements for the Capital Budget

OPERATING BUDGET

Analysis of Operating Budget by Agency is Labor Intensive and Lacks Transparency

Recommendation: The Commission recommends that the administration identify new and
more transparent ways to present Operating Budget data and to provide clear analysis of budget
trends at a government-wide level as well as at the agency level.
Current Operating Budget Development and Analysis Appears to Limit Innovative
Thinking

Recommendation: While the Commission recognizes that MARCs are important, it

recommends that the administration look to guide budget development through strategic
planning and performance metrics.
Budget Analyst Training Appears Limited
Recommendation: The administration is encouraged to explore training and educational
opportunities for budget and financial analysts both inside the Office of Budget and Finance and
within the agencies. A specific, strategic training and education budget should be considered to
aid in this goal.
While Position Control is Critical in Containing Operating Costs the Process Appears
Cumbersome and Lacks Appropriate Collaboration with the Executive’s Office

Recommendation: The Commission recommends that Department heads be able to reach the
Executive’s Office if there is a disagreement with OBF on personnel decisions.

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INTRODUCTION

On December 3, 2018 County Executive John Olszewski Jr. signed Executive Order
2018-005 creating the Commission on Fiscal Sustainability. The Commission consists of
seven members, four identified by the administration and three identified by the
County Council. The Commission is an all-volunteer body with Commission members
serving one-year terms at the pleasure of the County Executive. Per the Executive
Order, the Commission was charged with studying the County’s budget in detail and
identifying deficiencies and improvements, suggesting changes to significantly improve
transparency and boost community engagement in the budgeting process and to assist
the County Executive and his administration in developing practices and strategies for
building a long-term, sustainable budget.

As the Lincoln Institute of Land Policy recently indicated in reference to the impact of
the Great Recession on local governments in its 2017 report entitled “A Framework for a
Financial Sustainability Index”:

“Looking back at that difficult period, we can see that some localities were better able
than others to address the crisis. In those communities, local leaders approached their
finances with creative and innovative ideas. Some attempted to coordinate efforts
among multiple actors to more efficiently and affordably provide services. Others
refashioned institutions, core assumptions, and existing financial decision-making
processes to meet pressing public service needs. These leaders possessed not only
financial skills but also the insight to recognize the need to adopt leadership strategies
and new institutional design principles to meet the new financial realities facing their
communities.”

This paragraph encapsulates this Commission’s view of its mission. The full Lincoln
Institute of Land Policy report can be found at
http://www.gfoa.org/sites/default/files/pisano_wp17mp1_0_0.pdf

Commission Process

During the first meeting, the Commission set forth a formalized process to review the
budget to include weekly meetings each Wednesday following Commission
establishment on January 8, 2019, with a planned interim date of February 15, 2019 to
report initial findings, followed by a Final Report due date of May 15, 2019. All
meetings are staffed by the Office of Budget and Finance as well as the Office of
Government Reform and Strategic Initiatives. Additionally, all meetings were, and
continue to be, open to the public, and observers are encouraged to ask questions and

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submit feedback on the meetings to [email protected]. Prior to its first
meeting, Commission members reviewed several key reports as background. The
reports are extensive and warrant careful attention. They include the Public Resources
Advisory Group (PRAG) 2018 Debt Capacity and Control Analysis as well as rating
agency reports from Moody’s, Fitch and Standard & Poor’s. Additionally, all referenced
topics in this report have accompanying documents that the Commission reviewed,
which can be found on the Commission’s website at
www.baltimorecountymd.gov/Agencies/executive/fiscalcommission.html.

The Commission notes that, for the final report, a detailed Appendix will be added with
a comprehensive list of documents used for analysis. At the initial meeting, County
Executive Olszewski addressed the group and communicated clearly that there were to
be no “sacred cows” and that every issue should be viewed as “on the table” for
consideration.

Per the Commission, meetings were organized into themes for the purpose of providing
Commission members and the public significant time to study each issue. Each meeting
had accompanying materials all of which are posted online and some of which are
included within this report. As a result of the first set of meetings, the Commission
categorized its review and recommendations for the Interim Report into the five
following areas:

1. Current Fiscal Situation

2. Budget Formulation Process
3. Financial Information Systems - Process and Technology
4. Capital Budget
5. Operating Budget

The Commission also recognized that the first set of meetings would provide a macro-
view of the County’s budget, but that subsequent meetings both on the topics above as
well as new and more micro-level topics would be required to provide the County
Executive with the Commission’s final report on or before May 15, 2019. Future topics
and additional meetings on the topics above will be identified during the February 20,
2019 Commission meeting.

Current Fiscal Situation

As part of the Commission’s review, members studied and reviewed current budget
projections to assist the administration as it develops the FY 2020 budget. OBF is

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projecting an $81 million gap between General Fund revenues and expenditures for the
FY 2020 budget cycle, with expenditures projected to be $2.207 billion and revenues to
be $2.126 billion. The gap is driven by the “built-in” costs of maintaining current
services, and it reflects expenses presently funded within the budget, planned
contributions to critical funds, and anticipated resources to be generated by the existing
revenue structure.

More specifically, “built-in” estimates consider all contractually determined raises and
steps, inflation, required expenditures, maintenance-of-effort funding levels necessary
for the BCPS, Community College, and Library budgets, as well as planned
contributions to the capital budget (PAYGO) and to the Other Post-Employment
Benefits (OPEB) Trust Fund (which provides retiree health care and life insurance
benefits).

In addition to being required by Charter to submit a balanced budget, the

administration is expected by policy to limit ongoing spending growth to no more than
the personal income growth for the County and to meet the 10% target level for its
Revenue Stabilization Reserve Account (RSRA) balance as a percentage of its General
Fund revenues (the legal minimum level for this account is 7%, a level which may be
utilized for no more than two consecutive years before returning to the 10% level). After
review of the current fiscal situation and consideration of the County’s fiscal policies,
guidelines, and best practices, the Commission identifies the following findings:

Revenue Stabilization Reserve Account (RSRA) Will Fall Below Targeted and
Required Limits By June 30, 2020 Under Current Budget Forecast

The Commission is concerned that under the current General Fund budget forecast for
FY 2020, the RSRA is projected to have a year-end FY 2020 balance (as of June 30, 2020)
of $139.4 million, or 6.6% of revenues, which is below the required 7% minimum and
considerably below the 10% target provided by law. Based on this forecast, the
Commission notes that some Administrative action, such as a significant inter-fund
transfer (in the absence of changes to spending and/or revenue-generating policies and
practices), will be necessary to restore General Fund balance in order to meet the 7%
RSRA requirement.

Recommendation: While the Commission has not been tasked with identifying the specifics of
balancing the FY 2020 budget, it would be remiss not to emphasize the importance of adhering to
legal RSRA limits under § 10-8-101 of the Baltimore County Code; accordingly, the
Commission recommends that the administration consider inter-fund transfers, if necessary, to
ensure such compliance. Further, the Commission recommends that the administration be

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cognizant of any financial decisions that would have a negative impact as identified by the major
credit rating agencies, including any deviation from the 10% target level.

The County Faces Revenue Constraints that are both Self-Imposed and Related to
School Construction Aid

The Commission requested information on all sources of current revenue, as well as

foregone revenues (such as tax credit programs), as it deliberated on potential sources
of funding to support projected expenditures. Currently, the County relies on property
and income taxes as its primary revenue sources, as well as property-related transaction
taxes (recordation and transfer taxes), service fees, fines, and unrestricted State aid to
support its annual General Funded operations. Of note to the Commission was that
despite having the authority to do so under State law, Baltimore County has not
adjusted its property tax rate ($1.10 per $100 of assessed real property value) in 30 years
nor its income tax rate (2.83% of taxable income) in 26 years, while the County
population has increased both in size (by approximately 20% since 1990) and in its
depth of needs (reflected in the increased and more complex workload of County
agencies).

The Commission also noted that the County’s Homestead Property Tax Credit Program
caps the growth in taxable assessment for homeowners at 4%, which is more generous
than the 10% cap required under State law. The Commission is aware that while the
County makes periodic adjustments to its fee structure, it typically does so with the goal
of recovering the cost of providing specific services (e.g., inspection fees are aligned to
the cost to the County of performing such inspections). In terms of the capital budget,
the commitment of the State to the County’s school construction program can be
expected to have a direct effect on the County’s ability to commence new projects,
because the County’s ability to issue new debt for consolidated public improvements
has become constrained by debt affordability considerations.

Recommendation: The Commission will conduct a more detailed review of the County’s
revenue structure and potential for revenue enhancements in the future, but strongly
recommends in the short-term that the administration recognize its current limits with regard to
revenue capacity under the current tax rates and fee structures. This reality affects not only the
operating budget, but also the County’s capital program capacity, since the level of General Fund
revenues serves as the denominator in the County’s debt service affordability ratio (used by bond
rating agencies), and since non-County revenues to the County’s capital budget reduce the
pressure on the General Fund debt service budget. For these reasons, the revenues discussion is

10
directly related to the County’s future school construction timetable as well as its ability to
maintain the level of services demanded by county residents.

Financial Policies and Procedures Should Be Strengthened To Ensure Future Budget

Sustainability

Baltimore County has had longstanding financial ratio targets and goals, fund balance
requirements, and other rules for the purpose of keeping a stable, balanced budget. It
appears, however, that in the past few years these ratios have deteriorated. An example
of this is the forward funding of the state’s share of school construction project as well
as significant increases in education funding without revenues to support such actions.
The Commission is concerned that there is little in the way of policy or guidelines with
regard to reducing certain funds such as PAYGO or OPEB and other longer-term
financial obligations. Additionally, without deeper collaboration regarding revenue
forecasting and some adherence to agreed upon forecasts, the County could once again
find itself in a position where it has significantly overestimated revenues.

Recommendation: The Commission recommends that policy makers and budget managers
adhere to adopted financial guidelines, and that they identify, clearly, when there may be
deviations from those guidelines or policies under certain circumstances. The Commission also
recommends that the County develop formal and meaningful 5-year forecasts for operating and
capital budget revenues and expenditures, accompanied by detailed justifications for those
forecasts. The Commission believes it is important for the executive and legislative branches to
come to an understanding of each other’s forecasts to help decision makers understand the basis
for any forecast differences.

Long-Term Obligations Require In-Depth Review

Some of the County’s current structural deficit relates to the funding of long-term
liabilities. The Commission is aware that over the past decade, the portion of the
County’s General Fund operating budget dedicated to funding the legally binding long-
term liabilities of debt and pensions has grown dramatically. During this period, the
County implemented some strategies to control these expenses in the short term,
including the continued use of significant debt premiums to offset a portion of
budgeted debt service expenditures, as well as a required increase in employee
retirement system contribution rates in FY 2011-FY 2012 (which also yielded long-term
benefits).

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At the same time, the County continued to make new capital budget commitments and
salary enhancements that placed additional long-term pressure on the County’s debt
and retirement liabilities. The retirement actuarial liability also grew due to the
County’s prudent measures to reduce the actuarial assumed rate of return on
investments in order to lessen the chances that the retirement system would be at risk of
being under-funded over the long term. However, the actuarial method used was
changed to amortize the retirement liability over a longer period, almost entirely
offsetting the associated upward pressure on the annual required contribution. The
Commission plans to do a deeper dive on these long-term liabilities to inform its final
report.

Recommendation: The Commission will be requesting additional information regarding

funding for retirement, debt service, and OPEB prior to making formal recommendations on this
matter.

Options for Short-Term Budget Balancing Exist but are Not Fiscally Sustainable
After reviewing the current financial forecasts, inclusive of base-level expenditures,
built-in increases (i.e. scheduled salary increases, life insurance, debt service) it appears
that options for balancing the budget in the short-run are limited to the use of short
term fund transfers. The administration took a significant step in the beginning of this
calendar year to reduce outgoing cash by stopping the prior administration policy of
forward funding the state share of school construction projects. This will reduce some
short and longer-term debt service expenditures, but does not balance the current year’s
budget in itself.

The Commission will explore this issue in more depth in the coming months prior to
submission of the budget but notes that outside of reducing post-employment benefit
funds, reducing PAYGO contributions significantly, and emptying healthcare reserve
funds, the administration has few options for balancing the current budget with current
revenue and expenditure forecasts. The Commission notes that while short-term
contribution reductions to some of these areas may have some cushioning effect, it is
not clear at this point whether those actions would be financially sustainable decisions
for the medium and long-run.

Recommendation: The Commission will be requesting additional materials related to the

current PAYGO funding status, current debt projections, OPEB and pensions. While this is
occurring, the Commission advises that the administration review all current funds with cash
available, but also that it strongly consider whether shifting of those funds is a fiscally
sustainable action.

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Budget Formulation

The commission was interested in several key components of the budget formulation
process: the financial management system, compilation of revenue estimates and
expenditure projections. It also reviewed efforts to engage the public in the budget
preparation process.
Background
As described by Baltimore County´s Director of Budget and Finance Keith Dorsey, the
County’s budget preparation process is ongoing with key milestones along the way. Mr.
Dorsey indicated that in a typical year, projections would be made regarding revenues,
expenditures from the prior year and any expected circumstances that might impact
those projections in the coming year. The Office of Budget and Finance (OBF) also
reviews unspent funds and shortfalls in the prior year’s budget which must be
reconciled.

After expectations for the forthcoming budget are developed, OBF sends the
departments their Maximum Allowable Ceiling Requests or MARCs. These MARCs
identify the amount of funding the agency will have in formulating the next fiscal year
budget. After receiving the MARCs, agencies interact with their assigned budget
analysts to make final recommendations to OBF and the County Administrative Officer,
and finally to the County Executive. It appears as if the County Executive has little
input into this preliminary process under current practice.

The County Executive then presents the budget to the County Council, the County’s
final budget authority. The County Council does not have the ability to add to the
budget but can reduce expenditures if it deems necessary. After receiving basic
information on the development of the budget, the Commission requested the
attendance of three Department Heads to get a better understanding of the budget
process from their perspective. The Commission also requested information about how
projections are made, how revenue estimates are developed, how the formulation of the
budget is tied to performance metrics and goals, and what the role of the public is in
budget formulation. After this review, the Commission’s key findings are as follows:

There Has Been Limited Public Engagement in Past Budget Processes

Per direction in the Executive Order, the Commission took a particularly detailed look
at opportunities for public engagement as well as methods for pro-active discussion on
the budget throughout the year and during its formulation with residents and

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stakeholders. OBF indicated that in prior years, budget officials scheduled a meeting
between the County Executive and key stakeholders several months prior to the
submission of the administration’s budget. Upon review, this meeting does not appear
to have been particularly detailed regarding possible budget options.

Additionally, the Baltimore County Code requires the government to have an open
forum for the public to discuss the budget which has been conducted in the County
Council’s chambers in recent years. OBF noted that participation in this forum has been
limited and that the stakeholder meeting did not typically provide substantive input
that could shape budget formulation. OBF also indicated that prior administrations
have not pro-actively presented the budget to the public in a deliberate and substantive
way.

Regarding the capital budget, the process has also historically been limited in terms of
public engagement. A public input meeting is held in October before the Planning
Board, but that meeting usually has fairly limited attendance and rarely leads to
revision in the proposed projects.

It is of note that the current administration appears to be the first administration to hold
public town halls specifically to discuss the budget with Baltimore County residents.
These meetings, according to numerous articles and feedback from County staff, have
been well attended.

Recommendation: After having reviewed the process for public engagement, the Commission
commends the County Executive and attending County Council Members for pro-actively
engaging the public in budget discussions and urges the administration to continue this process
and to find additional and innovative methods for receiving residents’ feedback on the budget
throughout the year.

Departments Lack Strategic Plans and Performance Metrics to Determine Efficacy of

Expenditures

After detailed questioning, it appears that Department Heads have not been required to
develop high-quality strategic plans coupled with performance metrics to drive budget
strategy. Commission members were concerned about how departments could
advocate for programs or changes to operations without plans and metrics. While the
County does use Managing for Results metrics, they appear limited in scope and at a
minimum, lack specificity.

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Recommendation: The Commission recommends, that in order to develop a more focused and
goal-oriented budget, and to assist OBF and Department Heads in budget formulation, that the
County develop strategic plans for each agency and specific performance metrics which they can
use in determining the effectiveness of program and operational expenditures.

Department Head Role in the Budget Formulation Process Could be Strengthened

The Commission engaged with department heads directly to better understand their
roles in developing MARCs and formulating the budget. The participating department
heads indicated that they were in touch with the budget office throughout the year and
that their assigned budget analysts were regularly involved in agency financial and
operational decision-making. However, they also indicated that they had little
involvement in the internal budget development process. Department heads indicated
that they received their MARCs each year and felt that it was important to deliver a
budget that came within the MARC. OBF Director Dorsey indicated that OBF meets
with department heads throughout the year and that they are able to come to OBF
anytime to discuss initiatives and budget challenges. While department heads did
indicate that they could meet with OBF staff, in reality they were reluctant to advocate
for additional programs.

Recommendation: The Commission recommends that the MARC process be reviewed in

depth. The Commission believes the administration could consider using budgets directly
connected to strategic plans and performance metrics as opposed to a single, across-the-board
increase or decrease in the total budget.

Presentation of Budget Information for Decision-Makers Should be Improved

Over the course of the first five-weeks of the Commission’s work, hundreds of pages of
budget and financial materials were presented to Commission members including a
significant volume of detailed spreadsheets and graphical representations of financial
information. While the Commission appreciated OBF’s work in developing materials, it
found that there is significant room for improvement with respect to developing
narrative analyses to go hand-in-hand with financial documents. For example, when the
Commission members requested information on revenue projections they received
spreadsheets with limited verbiage. There was little explanation of the process or
underlying formulas used to develop forecasts and why such data were used.
Providing coherent analyses of financial trends, data, and processes would serve the

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public and the administration well as non-financial experts and would go a long way
toward a more transparent view into Baltimore County’s revenues and expenditures.

Recommendation: The Commission recommends that the Office of Budget and Finance begin
to develop a function similar to that of the County Council and the Maryland Department of
Legislative Services that provides detailed narrative explanations of budget and financial trends
in the County on a regular basis.

Process and Transparency of Revenue Forecasting Should be Improved

The revenue forecasting process was discussed during two of the Commission’s
meetings leading to significant conversation about how these forecasts are developed.
OBF Director Dorsey indicated that the process involves the compilation of County fees
and taxes, as well as investment revenues into a single revenue projection. Director
Dorsey also appeared to indicate that while most revenue sources are relatively
predictable, income tax has more variability than most, as the variables impacting
income tax revenues are in many ways out of the County’s control. Swings in income
tax revenues, therefore, can have a major impact on County revenues on an annual
basis.

While this conclusion was generally agreed upon by Commission members, there is a
belief that a more open and transparent approach to revenue projections would increase
public trust in the process and be a valuable tool for the administration. While OBF
indicated that revenues can be projected based on prior-year actuals, State and local
expected growth rates, and a variety of other variables, additional information could be
provided to clarify these important assumptions. In one specific case, there was a
significant shortfall in forecasting income tax revenue, which has become a key
challenge for the current administration as it tries to balance the FY2019 budget.

Commission members discussed solutions to avoid such a large discrepancy between

forecasted and actual revenue in the future. The County’s process currently includes
two separate projections, one by the County Council’s staff (via periodic Fiscal Digest
reports and the annual Spending Affordability Committee report each February), and
the other by the administration (released once annually via the April budget
submission). It was noted that there is little collaboration in determining revenues by
the two branches of government, which at budget adoption this past fiscal year led to a
difference in FY2019 revenue projections of more than $57 million.

Recommendation: After review, the Commission recommends that the County develop a
process similar to the State’s revenue monitoring group and begin to collaborate on revenue
projections in future years. A consensus projection would be very helpful to the entire process.

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Financial Management System (Process and Technology)

During the January 30, 2019 meeting, the Commission received an overview of the
County’s major financial and budget information systems as well as a demonstration of
the architecture of the systems and their ability to analyze and extract data for
management purposes.

Background

Baltimore County Government uses three primary systems for financial and budget
management: 1) Performance Budgeting (PB), which stores budgeted amounts for
programs, projects and a multitude of funds; 2) FIN, which stores all of the County’s
financial transactions; and 3) Human Resources Management, which stores all
personnel information. These systems are used to formulate the budget, to access data
for budget and financial analysis, and to record transactions for financial reporting and
County record-keeping purposes. After reviewing the systems, the Commission finds
the following:
Lack of Executive-Level Analytical Capability
The systems appeared to lack modern analytical capabilities, especially for executive
decision-making purposes. Currently, analysts must extract information from systems
to Excel/other formats and analyze the information themselves. Additionally, without a
detailed knowledge of the architecture of the system, extracting data in a meaningful
way is cumbersome. Finally, due to the cumbersome nature of the system and the lack
of proliferated knowledge on how to use the system, it is difficult for the administration
to analyze budget information quickly and in an easy-to-digest format.

Recommendation: The Commission recommends that the administration consider exploring

new and modern information systems to improve County budget and financial analysis,
including those used by local governments in the State of Maryland. The Commission
recommends that any proposals for pursuing new systems be presented with a cost-benefit
analysis to justify consideration of such a procurement. Additionally, in the short-term, the
Commission recommends that the administration identify specific, substantive training for
analysts and budget managers to improve their system and data analysis skills under the current
system constraints. The Commission also recognizes that there is a fiscal impact to the above
recommendation adding additional pressure on the FY2020 Budget.
The Systems Lack Connection to Outcome Metrics

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At this point, Baltimore County’s budget and financial information systems lack
performance measurement capabilities. This lack of capacity creates a challenge with
respect to connecting monies spent with any specific policy outcomes or goals.

Recommendation: The Commission’s recommendation is similar to prior recommendation that

the County explore a modern performance management system that is integrated with county
budget and financial management systems and add clear performance/outcome metrics to
whatever system is created.

The Systems are Outdated and in Need of Upgrade

The Office of Information Technology and OBF staff indicated that most of the financial
and human resources information systems were initially procured in the late 1990s with
some still running on a 1980s mainframe. While staff indicate that the systems could be
customized at some level, these antiquated systems lack some modern capabilities, are
not easy to use, and lack certain interoperability capabilities with other, modern
systems. Staff also noted that the County has been identifying options to update the
system but wanted to be clear that this process will take several years and likely cost
between $10-12 million.

Recommendation: After reviewing the current systems and considering the timeline and costs
associated with moving toward a modern system, the Commission recommends that the
administration begin a process toward modernizing its budget, financial, and human resources
information systems as soon as possible, keeping in mind system transparency and efficiency.
With this in mind, the Commission also recommends that the County perform a cost-benefit
analysis of procuring a new system that reflects the one-time and ongoing costs of the new
system, as well as its value, including the reclaimed value of the required staff time presently
being used to create the same level of analyses.

Capital Budget

During the Commission’s January 30, 2019 meeting, OBF presented an overview of the
County’s capital budget formulation process, an overview of major revenue sources and
expenditures in relation to the capital budget, as well as a brief overview of County
bond referenda and PAYGO histories. OBF also spent additional time discussing
significant policy changes and events in the County’s capital budget history, such as the
recent and historic levels of school construction funding.
Background

The County’s capital budget is separated into two distinct capital funds: 1) The

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Consolidated Public Improvements Fund (CPI) and 2) The Metropolitan District Fund.
The CPI Fund is the primary source of capital improvement for education, roads and
storm drains, recreational facilities, community improvements, and environmental
projects. This fund is generally sourced from general obligation bonds (78%) with some
additional funding provided by the federal government and General Fund revenues
redirected to the CPI. The Metropolitan District Fund is the primary source of capital
improvement for the County’s water distribution and sewer systems. It functions
separately from the County’s CPI Fund, having its own revenue and issuance powers,
but the stability of its finances are critical to the County’s bond rating as its existence as
an enterprise fund requires that it be self-sustaining.

Currently, the County’s Capital Program (FY2019-2024) in its entirety is approximately

$2.852 billion, with the Metropolitan District Fund making up $1.372 billion of that
funding and the remaining capital expenditures for the County being $1.480 billion. It
is of note that significant increases in water and sewer rates were put in place through
Executive Order in 2018 to ensure Metropolitan District Fund revenues could meet
expenses. This rate increase was also a critical step to ensure bond-rating agencies that
the MDF could continue to behave as an enterprise fund (i.e., not requiring the County
to support it in any way with General Funds or other County revenue sources). With
respect to the CPI Fund, it was noted that school construction funding has increased
significantly as a percentage of capital expenditures, rising from 35.8% of for the
FY2011-FY2016 CPI program to 56.5% of the FY2019-FY2024 program. More
information on this budget increase can be found below. After a review of the Capital
Budget, the Commission found the following:

Changes in School Construction Funding Policies Over the Past Decade has Led to
Significant Budget Challenges

The Commission received a briefing from OBF on school construction projects under
the Schools for Our Future initiative as well as associated project-by-project funding and
biennial referenda amounts to fund the initiative over the years. It was clear that under
the prior administration, funding and planned funding for school construction
increased significantly. For comparison purposes, the FY 2011-FY 2016 Capital Program
for schools was $327.9 million compared to the Capital Program for FY 2019-FY 2024,
which totals $835.5 million. As indicated above, in FY 2011, school construction funding
made up 35.8% of the capital program and made up 56.5% in the FY 2019 budget, an
increase of approximately 58%.

During this time period the County decided to not only make significant capital

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investments in school construction, as well as forward fund the State share of certain
projects, but it did so without any new revenue sources. As can be expected, this effort
put pressure on the capital program and increased the County’s debt position. It is of
note that the new administration has stopped the practice of forward funding the
State’s share of these projects, which will have two significant effects: 1) it will reduce
debt projections for future years, improving the County’s debt position, and 2) it will
reduce the number of schools that can be built under current proposed capital planning
timelines.

Recommendation: The Commission will request additional review of the impact of this decision
on current debt projections and project timelines in upcoming meetings. A revised and accurate
debt analysis is imperative for the Commission to complete its work.
Lack of Modern Asset Management Tools Appears to be a Critical Issue for Asset-
Dependent Agencies

During the department head interviews, a discussion was had about how departments
make strategic capital investments. Questions were asked about how the Capital
Program is prioritized and how agencies prioritize their needs. Within capital-intensive
agencies such as the Department of Public Works, there appears to be a need for a better
way to inventory and manage assets. While department heads were able to identify
common sense projects as priorities, they did not appear to have a fully assessed asset
inventory or a detailed capital needs lists for making critical investments in their area.
For example, the Director of Public Works indicated that he had a significant
understanding of pipe miles and pump station numbers, but could not accurately
identify the condition of each. He indicated that this lack of information can make
prioritizing investments difficult.

Recommendation: The Commission recommends that the administration explore a modern

asset management system to better identify the condition of current capital assets.

The Capital Budget Lacks Project Specificity and Year-to-Year Reporting of

Anticipated and Actual Revenues and Expenditures
The Commission received a briefing from OBF staff on the County’s process for
developing its Capital Budget and Program. This presentation included a discussion of
historical and projected bond referenda, which the Commission notes would be useful
to view alongside actual debt issuances, which have lagged these voter authorizations.

The OBF presentation also included a cash flow accounting for recent months, leading
into cash flow projections for future years. While the Commission thanks OBF for

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providing this information, the Commission expressed concern that the cash flow
projections reflect programmed appropriation amounts rather than realistic predictions
of cash needs to align with planned project expenditures. Understandably, as the OBF
revises its planned Capital Program to align with the County Executive’s decision to
stop forward-funding school construction work awaiting State approval, the cash flow
projections will change; however, these changes alone will not result in a realistic
presentation of future cash flow needs, because there is a natural lag to the timing of
issuances following the appropriation of funds.

The Commission noted that presently (prior to the upcoming $277 million CPI bond
issuance), issuances appear to lag appropriations by more than $1 billion; the debt
capacity and control analysis provided by the County’s consultant therefore appears to
overstate significantly the County’s future CPI debt needs by reflecting planned
issuance of more than 90% of prior authorized and programmed bond funds. The
Commission respectfully requests that OBF provide a more realistic cash flow analysis
for future years to align with the County’s cash management process, which wisely
seeks to draw upon available cash within and outside the Capital Projects Fund before
turning to the market to borrow.

The Commission agreed that improved Capital Budget transparency regarding specific
projects planned, and the associated costs and revenues expected and experienced, is
highly desirable. Also noted was a lack of information available on predicted cash flow
for the Capital Program by project. One Commission member noted that the Maryland
Department of Transportation uses a planning system that may be useful to explore
when considering how to accomplish this goal, which would increase transparency for
the administration, the County Council and community stakeholders.

Recommendation: The Commission recommends that the administration review the potential
for modern planning systems to more clearly project financial details as they pertain to Capital
Projects with analytical capability and transparency in mind. Additionally, the system should
allow for year-to-year capital expenditure projections and planning so that cash-flow as a result
of the Capital Program can be regularly reviewed and analyzed. For its final report, the
Commission expects to probe further into the desired improvements for the Capital Budget

OPERATING BUDGET

During the Commission’s February 13, 2019 meeting, OBF presented an overview of the
County’s Operating budget as well as an overview of its major revenue sources and
expenditures. The Commission approached its review of the Operating Budget similar
to its review of the Capital Budget, analyzing key macro-trends and concerns for the

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initial meeting, with the plan to review specific areas of concern and interest in
forthcoming meetings.

Background

The Government Wide Operating Budget, as adopted for FY 2019, totaled $3.613 billion.
This number represents a combination of all funds accessible to the County for
operations, including the General Fund, Special Funds, and Non-County Funds. It is of
note that the largest recipient of this funding by far is the Department of Education,
with a budget of $1.729 billion, $871 million of which is purely County funds. Other
significant recipients of Operating Budget funds are the Police Department at $224
million, the Fire Department at $104 million and the Department of Public Works at
$388 million (including $280 million in Metropolitan District funds). Revenue sources
include the property tax, local income taxes, Federal and state aid, local sales and
services taxes, and fees.

While specific agencies will receive additional attention in future meetings, the
Commission, similar to its process for reviewing the Capital Budget, first focused on the
development of the Operating Budget, general principles of transparency and high-
level analysis for decision makers, as well as basic control principles for containing
costs. After reviewing the Operating Budget development process and a brief overview
of high-level budget figures and analysis, the Commission identified the following
issues:

Analysis of Operating Budget by Agency is Labor Intensive and Lacks Transparency

During its February 13, 2019 meeting, the Commission asked if it was possible to view
individual agency budget details. OBF staff indicated that the Operating Budget is
broken up by program throughout the budget book, with executive summary level data
appearing in overview sections, supporting detail in other sections, and additional data
appearing in personnel/other sections. This level of disaggregated information results
in limited ability for the public to process budget information. The Commission is
aware that the legislative branch provides budget analyses that seek to inform budget
decision makers and stakeholders as to how the various components of each agency’s
budget tie together. This legislative analysis was especially helpful to the Commission
in understanding the County’s OPEB funding history, and it will be a useful tool in the
coming weeks as the Commission seeks to do a “deeper dive” on other agency budget
issues.

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Recommendation: The Commission recommends that the administration identify new and
more transparent ways to present Operating Budget data and to provide clear analysis of budget
trends at a government-wide level as well as at the agency level.

Current Operating Budget Development and Analysis Appears to Limit Innovative

Thinking

The Current Operating Budget development process appears to limit a culture of

innovative thinking due to agency and OBF staff being ultra-focused on MARCs versus
any sort of strategic planning or performance goals. While OBF has indicated that
analysts and Departments are tightly connected, the discussion on meeting MARCs
dominates the budget development process.

Recommendation: While the Commission recognizes that MARCs are important, it

recommends that the administration look to guide budget development through strategic
planning and performance metrics.

Budget Analyst Training Appears Limited

The Commission would like to state that analysts presenting budget issues throughout
the process have been exceptional and clearly have excelled at the micro-level in the
budget development process in spite of the enormous challenges posed by the County’s
outdated information systems. That being said, with the Commission’s focus on next-
level budget analysis and the use of performance metrics as new methods for budget
formulation, it asked a series of questions regarding analyst training and their
opportunities to receive budget-related education. Director Dorsey indicated that
generally, attendance at budget conferences and analyst continuing education is
somewhat limited. Staff and management level analysts appear only rarely to attend
trainings and educational opportunities with County support. The Commission believes
continuing education opportunities might go a long why to providing more in-depth
and forward thinking presentation of the County budget, both operating and capital.
Further, the Commission noted that as long as the current financial system has the
capability of producing data downloads, with proper training, analysts should be able
to use currently-available software capabilities to generate the information needed to
inform decision makers.

Recommendation: The administration is encouraged to explore training and educational

opportunities for budget and financial analysts both inside the Office of Budget and Finance and
within the agencies. A specific, strategic training and education budget should be considered to
aid in this goal.

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While Position Control is Critical in Containing Operating Costs the Process Appears
Cumbersome and Lacks Appropriate Collaboration with the Executive’s Office

Given the significant impact of personnel budgets on any operating budget, the
Commission asked a series of questions with respect to position control. OBF staff
indicated that the personnel process was centralized at OBF, and analyst and budget
management staff had a very significant role in the process. Staff indicated that agencies
request to shift personnel or request new personnel through their analysts and lack
internal flexibility in moving staff to meet operational needs. It was clear that agencies
looked at OBF as the final decision maker on personnel decisions and that appeals were
rarely if ever brought to the County Executive’s office but instead stopped at OBF and
sometimes the County Administrative Officer’s (CAO) office.

Recommendation: The Commission recommends that Department heads be able to reach the
Executive’s Office if there is a disagreement with OBF on personnel decisions.

Critical Note on Education Spending

After reviewing the County’s Operating and Capital Budgets, it is clear that
commitments to the Baltimore County Public Schools and the Community College of
Baltimore County are significant. In the operating budget, funding for these two
educational entities comprises 55% of the county’s overall budget or $1.990 billion. The
Commission also recognizes that many of the key drivers of costs in the school system
are only likely to increase given rising enrollment, aging high schools, and a significant
increase in Special Education and ESOL students. Per the recent BCPS proposed budget:

“Five-year growth rates for students identified with disabilities including autism
(+27.8%), developmental delay (+46.1%), and multiple disabilities (+50.1%) increased
much faster than overall enrollment growth. The number of English learners grew
112.7% over the ten years through FY2019.”

In addition, the strains on the County’s Capital Budget are also driven by the school
system’s capital program request approved by the Board of Education and submitted to
the state. The reality is that ongoing school maintenance, completion of the Schools for
our Future program, and a plan to address aging high schools will continue to put a
strain on the county’s debt capacity, total debt payments on an annual basis, and
potentially on General Fund PAYGO contributions to the Capital Budget.

The Commission notes that the administration’s decision to stop the practice of forward

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funding the State’s portion of school construction projects, delaying projects until that
funding is awarded, is a prudent financial decision. Each of these issues alone mandate
a careful review of the County’s revenue forecasts versus expenditures. It also makes it
imperative that County government work closely with both BCPS and CCBC to ensure
that funds for those institutions are being wisely spent and that all efficiencies are being
examined.

County government, BCPS, and CCBC all must recognize that any attempt to address
structural budget issues must start by examining education’s large portion of the
budget. Continuing to meet growing needs within the County’s current revenue
structure may be difficult, but it is too early for the Commission to weigh-in on this
question with certainty. The County benefits from a strong and positive relationship
with both institutions, and that relationship should continue. The Commission also
encourages the administration to continue its community outreach to discuss budget
priorities. Prior to the final report later this spring, the Commission will meet with the
County’s budget analyst for education and will conduct additional analysis on these
specific budgets, in order to produce more specific recommendations at that time.

Next Steps

Prior to the Commissions Final Report, it will be requesting additional information on a

number of specific items from the Office of Budget and Finance.

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