Democrats and Republicans sparred Tuesday over whether a special session of the General Assembly is needed to pass tax increases to avert steep budget cuts, while Moody's Investors Service warned the situation could hurt the credit ratings of localities that depend on state aid.

House Republicans called a press conference to dispute the need for a special session, arguing that the so-called "doomsday" budget state lawmakers adopted last week is far from draconian and that there's no need to raise taxes.

"We can live with this budget for a year," said Del. Anthony J. O'Donnell, the Republican leader of the House of Delegates. He said Marylanders should be spared any more tax increases because they are still struggling to recover from the worst economy in 75 years.

But Gov. Martin O'Malley said legislators need to come back to pass a tax increase to "protect the priorities of our state," including its highly rated school systems, affordable college education and health and public safety programs.

O'Malley, a Democrat, spoke to reporters after meeting for 75 minutes Tuesday evening with Senate President Thomas V. Mike Miller and other Senate leaders. The governor made clear he's committed to working out differences between the House and Senate that stymied agreement on a tax plan in the final hours of the 90-day session that ended at midnight April 9.

Asked when he would call lawmakers back to Annapolis, the governor replied, "The second we have consensus, we'll have a session."

Meanwhile, Moody's — one of the major agencies that rates government debt — said Tuesday that Maryland's unsettled budget situation could undercut the creditworthiness of Baltimore and the state's 23 counties.

Moody's said in a weekly newsletter that the state budget that lawmakers passed as a placeholder — which calls for cutting aid to local governments by $262 million — would be "credit negative" for the state's counties and Baltimore in combination with legislation O'Malley has already signed into law that requires local officials to maintain school spending at state-prescribed levels.

With state aid cut and their ability to trim their own spending limited, local governments could have a harder time balancing their own budgets, Moody's said.

"We're not saying there's going to be any rating changes at this point," said David Jacobson, a Moody's spokesman. "It's something that we'll be analyzing."

But others saw the Moody's comment as a sign that local governments' bond ratings may be in jeopardy of being downgraded, potentially hitting them with higher borrowing costs if the state budget standoff is not resolved.

Andrea Mansfield, legislative director of the Maryland Association of Counties, said officials had raised just that concern about so-called "maintenance of effort" legislation that authorizes the state to redirect local tax revenues to school systems if state spending targets are not met.

"It means it reduces their financial 'flexibility,' which is a negative compared to the flexibility the rating agency perceives they had before," said Warren G. Deschenaux, fiscal specialist with the nonpartisan Department of Legislative Services. "By itself, it is not determinative as to credit rating, but if added to other negatives could contribute to a downgrade."

In arguing against a special session, O'Donnell and other GOP lawmakers pointed out that even though the overwhelmingly Democratic assembly failed to pass $500 million in tax increases and other changes to fund the budget to which leaders had agreed, the "doomsday" plan adopted by default still increases state spending by nearly $700 million over this year's budget.

But while overall spending would grow, Deschenaux pointed out that the additional money would go mainly for infrastructure improvements and other government functions not paid for with income taxes. The general fund budget would actually decline by $160 million from this year, he said.

Del. Jeannie Haddaway-Riccio, the House Republican whip from Talbot County, blamed the budget mess at the end of the session on Democratic leaders who she contended had "haphazardly" put together a package of bills raising income taxes to cover a higher level of spending.

"Unfortunately, the plan backfired, so now they want a do-over," she said. And if legislators come back to Annapolis, she said, the GOP fears even more taxes would be proposed.

The issue that apparently tripped up the budget and tax deal was legislation pushed by Miller that would allow a casino in Prince George's County, which he represents. It was uncertain there were enough votes in the House to pass such legislation. O'Malley said gambling remains a point of contention between the two chambers, but one that shouldn't get in the way of straightening out the state's fiscal course.

"Whether we have five casino sites or six sites doesn't matter to me," he said, as much as ensuring adequate funding for police and maintaining affordable college.

O'Malley said he has met with House Speaker Michael E. Busch and spoken with other legislators, and he said he would continue to work with them to find agreement.

The governor indicated he was in no hurry to call a special session, which some have suggested could cost $20,000 a day or more, until differences are resolved.

"Nobody ever wants to raise taxes," O'Malley said, but he said he was convinced voters and their elected leaders would see the wisdom of maintaining important services and programs.

"What has yet to happen is for the counties and school boards to start making decisions about their own budgets that reflect the half-baked reality of this budget," he said. Once local officials actually identify what programs and staff positions would have to be cut, he added, "I think the reality of these cuts will become much more real to people."

tim.wheeler@baltsun.com

  • Text NEWS to 70701 to get Baltimore Sun local news text alerts