State Budget Hole Deepens

… Analysts anticipate $1.6 billion deficit, up from September projection …

By Julie Bykowicz, The Baltimore Sun

9:58 PM EST, November 10, 2010

The rising costs of Medicaid and other state-funded assistance programs have outpaced a promising uptick in revenue, state fiscal analysts reported Wednesday.

The development means Maryland lawmakers will face a $1.6 billion budget deficit when they return to Annapolis in January.

Just weeks ago, officials were hopeful that better-than-expected receipts from taxes and fees would boost the state’s budget outlook. But such “dollops of good news,” state analyst Warren G. Deschenaux said, “didn’t really mitigate the dimension of the problem.”

By law, officials must balance the budget. Democratic Gov. Martin O’Malley, who was re-elected last week, said again Wednesday that he will not propose new taxes in the spending plan he is preparing for the fiscal year that begins next July.

The projected shortfall has grown by a third from estimates earlier in the fall. Asked Wednesday how O’Malley would address it, spokesman Shaun Adamec wrote in an e-mail that the governor “has repeatedly said that we will continue to be on a steady diet of cuts until we come through the other side of this recession.”

Yet some lawmakers, briefed Wednesday on the state’s fiscal forecast, are eyeing taxes — and Republicans are bracing for a fight. House Republican leader Anthony O’Donnell said the Democratic majority “has demonstrated an inability to make spending reductions. The state is devoid of fiscal discipline.”

Deschenaux and other nonpartisan state policy analysts presented their spending affordability report at a joint hearing of the Senate and House budget committees.

On the plus side, the state’s revenue picture is not as bleak as the analysts had once feared. After the 1990 recession, it took the state more than five years to return to its peak employment enrollment. Analysts said Maryland appears to be recovering at a somewhat faster clip after the 2007 recession.

Receipts from the sales tax and from vehicle and home sales are all up a bit this year compared with last year. Though revenue from the fiscal year 2010 was down about 2.5 percent from 2009, it was $183.7 million more than analysts had expected.

The state’s new slots program also shows glimmers of hope.

Analysts project that the state will bring in $217 million next year from the Cecil County slots parlor that opened in September and the Eastern Shore parlor scheduled to launch next month. If larger sites in Baltimore and Anne Arundel County get up and running, the state could be making about $1 billion per year from its slots program by 2015, the analysts believe.

Some of the budget holes were filled in previous years by more than $1.2 billion in money from the stimulus and other federal sources, chunks of which helped cover pensions and other annual expenses.

“We are now seeing what it means to rely on one-time money for ongoing expenditures,” said Deschenaux, who has argued against such dependence.

Noting that “demands exceed resources,” analysts warned also of impending capital budget pressures. Of $925 million in general obligation bonds, all but about $240 million has been spoken for. Yet state agencies like public safety, higher education and the environment have requested a total of nearly $700 million for capital projects.

Democratic Senate President Thomas V. Mike Miller called the projections “dire.”

Asked how the state might address the deficit, he said that “at some point in time, we’re going to have to pass a gasoline tax increase.” He noted that the state’s levy on fuel hasn’t risen since 1992, even as the transportation fund withers.

Miller said he’d again push teacher pension changes, which the Senate has approved but the House of Delegates has not taken up, in the session beginning in January. The state is paying about $900 million in teacher pension this year. Shifting some of that cost to the 23 counties and Baltimore City could prompt an increase in local property taxes.

With the election over, policy changes — including taxes — are receiving fresh attention in Annapolis.

At a hearing Wednesday of the Public Employees’ and Retirees’ Benefit Sustainability Commission, an analyst said that Maryland is one of the few states that does not share teacher pension costs with local governments. The analyst, Mark W. Collins, said it is “extremely difficult, politically,” to begin shifting even some of the cost to the local governments.

The benefit sustainability commission is to issue its first report by the end of the year. O’Malley has said he would like to address pension issues “sooner rather than later,” but Adamec, his spokesman, said the governor would wait for the commission report before shaping specific reforms.

A commission of lawmakers and officials evaluating the state’s corporate tax structure heard testimony from business interests and public policy groups this week about the benefits and drawbacks of adopting the accounting system known as combined reporting.

Combined reporting would prohibit regional and national companies from sheltering profits earned in Maryland in states with lower taxes. By some estimates, the change could bring the state an extra $170 million in corporate taxes. But business groups warned that it could lead some companies to leave the state.

“The juice is not worth the squeeze at this time,” said Gene Burner, president of the Manufacturers’ Alliance of Maryland.

Others called combined reporting a matter of fairness, saying that large businesses should not be able to dodge Maryland taxes. The Maryland Public Interest Research Group said combined reporting would help level the playing field between small, Maryland-only establishments and larger, multi-state competitors.

The commission could make its recommendation as soon as next week.

Seeing looks of worry spread across his colleagues’ faces Wednesday, Miller predicted a tough winter legislative session — possibly even a special session — to sort through the budget problems. Some lawmakers steadfastly oppose raising revenues, while others won’t budge on cost-cutting measures, he said.

“It’s very frustrating,” Miller said, “but we’re going to get through it.”

Sun reporter Childs Walker contributed to this article.

Copyright © 2010, The Baltimore Sun

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