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Budget & Finance

Baltimore on a Path to Fiscal Disaster

Baltimore could be on a path to bankruptcy without “serious fiscal reforms,” warns a 10-year forecast commissioned by the city’s Mayor Stephanie Rawlings-Blake.

The forecast, produced by Philadelphia-based Public Financial Management, Inc., shows the city will likely face a fiscal gap of about $30.3 million in fiscal year 2014 that grows to nearly $125 million by fiscal 2022. The city also faces an unfunded retiree liability of more than $3 billion and an “infrastructure gap” of about $1.1 billion, according to the report.

“This ten-year fiscal forecast makes clear that city government must implement serious new fiscal reforms in order to balance the budget, protect city services from major cuts, invest in infrastructure, and reduce the property tax burden for city residents over the next decade,” Rawlings-Blake said during a press conference Wednesday.  “Taking on these challenges will be critical—both for the health of the city’s finances and to help Baltimore compete for growth over the next ten years and beyond. A status quo approach is not sustainable.”

Falling revenue and increasing expenses mean that under a mainstream set of economic assumptions, the cumulative city government shortfall would total $744.8 million over the next nine years, according to PFM.

This projected structural deficit is driven by growing employee health care and pension costs, which are projected to grow by another 40% during the period covered by the forecast, the advisory firm said.

Major reforms are needed because the existing avenues for increasing revenue will not be enough.

Baltimore’s second-largest revenue source, the income tax, is already at the maximum level allowed under state law. The report concludes that the city also cannot use property taxes to close the gap, as this would fall heavily on businesses and impede the city’s growth.

The infrastructure gap does not include public schools or water infrastructure, but does represent a shortfall between current funding projections for roads, bridges, police and fire stations and what will be necessary to maintain them at an acceptable level. The city would need to increase capital funding for basic infrastructure by an order of magnitude of well over $100 million per year to meet “reasonable” standards, the report states.

The report comes just after Moody’s Investors Service, last month, affirmed Baltimore’s more than $630 million of outstanding general obligation debt at an Aa2 rating, citing the city’s “satisfactory financial position” and “prudent fiscal management.”

The ten-year PFM report points to the need to address the pension challenge to avoid a loss of credit stature. “The major credit rating agencies now also have a growing focus on retiree benefit funding and other liabilities beyond just debt service,” the forecast notes.

The city has already eliminated about $300 million in funding shortfalls to balance the budget over the past three years, primarily through spending reductions such as hiring freezes and unpaid furloughs for city workers.

Rawlings-Blake is expected to announce a sweeping set of additional reforms in the coming weeks, according to her office.

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