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Maryland cuts revenue expectations by $405 million

Maryland is now facing a $405 million revenue shortfall over this year and next, largely the result of sluggish job growth, stagnant incomes and a weak housing market, state officials reported Wednesday.

Five years after the official end of the recession, Maryland continues to confront fiscal trouble. This latest shortfall will force Gov. Martin O'Malley's administration and the General Assembly to make deeper cuts than previously expected to balance the state's roughly $40 billion budget.

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"Another year has passed, and ordinary families and small businesses haven't even recovered to where they were before the financial collapse, much less made up for the wages they've lost," Comptroller Peter Franchot said. "We need to recognize that hope is not an economic strategy."

The state's revenue picture is fraught with political implications, as the latest report landed less than six weeks before the Nov. 4 election when Republican Larry Hogan will face Democrat Lt. Gov. Anthony G. Brown to replace term-limited O'Malley.

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Hogan has made the state's economy under O'Malley the main issue in his campaign.

"Today's report is utterly devastating and confirms what we have been saying, that Martin O'Malley and Anthony Brown have taxed and spent our economy into the ground. Overtaxed Marylanders are earning less, small-business profits are disappearing and people have less to spend on goods and services," Hogan said in statement.

Brown's camp defended the administration's fiscal stewardship in a statement from campaign manager Justin Schall.

"After years of hard work recovering from the Bush recession while maintaining a AAA bond rating, it's disappointing that Republican Larry Hogan would continue to root for bad economic news to further his own political career," Schall said. "We will do what all Maryland families do when faced with hardship. We will tighten our belts and make do with less."

The state has been wrestling with a long-term revenue shortfall — known in Annapolis as the structural deficit — for more than a decade. The O'Malley administration took steps to close it with a series of tax increases in 2007, only to lose most of the revenue gains it made to the recession that hit in 2008.

Since the economy began recovering, the governor and General Assembly have chipped away at the structural deficit with budget cuts and further tax increases. The state came close to eliminating it entirely in 2013 but since then has failed to close the gap. Wednesday's write-down represents a setback in that effort.

With the latest economic forecasts, the Bureau of Revenue Estimates said the state will collect less revenue than previously expected. It lowered anticipated revenue in the current budget year that ends in June by $177 million and decreased its projection for the next fiscal year by $228 million.

Andrew M. Schaufele, director of the bureau, called the write-downs "very significant," though he noted they were not as large as those the state grappled with at the beginning of the recession.

Budget Secretary T. Eloise Foster a member of O'Malley's Cabinet, said the state will not need to seek more cuts this year. She noted the Board of Public Works cut $84 million in July because of an earlier write-down. Even with the latest revenue shortfall, she said, the state still has a cash balance of about $10 million.

"Even with this write-down, we remain in balance," she said.

O'Malley spokeswoman Nina Smith confirmed that the governor wants to see cuts in next year's budget rather than the current one. Smith said Thursday that it's not yet clear whether cuts will be necessary next year, as the revenue estimate could still change.

But Franchot, who sits on the three-member Board of Public Works with the governor and state treasurer, said it would be fiscally prudent to make further cuts this year, in case the economy takes an even worse turn.

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"I don't see how it can be avoided," he said.

Democratic leaders in the General Assembly came down on the administration's side.

Sen. Edward J. Kasemeyer, who chairs the Senate Budget and Taxation Committee, called the numbers a disappointment. But the Howard County Democrat said decisions should be left up to the next governor, who proposes the annual budget, instead of the board, which is authorized to make mid-year cuts when the General Assembly isn't in session.

He was adamant that when the General Assembly takes up the budget next year, only cuts would be on the table.

"There certainly won't be any new taxes, I can guarantee you that," he said.

House Speaker Michael E. Busch, an Annapolis Democrat, said Maryland is still in better shape than other states in the Northeast and Mid-Atlantic. He noted that Virginia is considering tapping its rainy-day fund for the first time to deal with a nearly $900 million budget shortfall, while New Jersey has skipped pension fund payments the past two years.

"We're pretty much positioned pretty well when compared to our sister states," he said.

Schaufele said the lower projections reflect diminished expectations for income tax, withholding tax and sales tax receipts. He said a housing recovery that was expected to help jump-start revenue growth "has proven to be insufficient."

The revenue report follows two straight months of weak state employment numbers. Revised figures show that Maryland lost 11,500 jobs in July. A more recent report said it gained only 600 jobs in August.

Schaufele said weakness in the job market is largely the result of declining federal payrolls and the uncertainty that budget cuts have bred among private businesses that depend on federal contracts.

"It seems plain that it is difficult to make labor and capital decisions," Schaufele said.

Schaufele said the state's sluggish economy persisted as budget uncertainty continued on Capitol Hill.

"The whole region has been lagging the nation ever since sequestration was put on table in Congress" in 2011, he said. "It's affecting Virginia to an even more substantial degree."

Stephen S. Fuller, director of the Center for Regional Analysis at George Mason University in Virginia, agreed that the problem is a regional one stemming from budget cutbacks and a dependence on the federal government. He pointed to 2013 economic growth figures for all states released in August that ranked Virginia, Maryland and the District of Columbia 49th, 50th and 51st, respectively.

"Maryland, D.C. and Virginia are in the same kettle of fish," Fuller said. "It isn't that there's something wrong in Maryland. It's something in this entire region."

Fuller said Maryland and Virginia have been losing six-figure jobs with federal contractors. Meanwhile, he said, the region is gaining low-paid jobs in the service sector.

"It's going to continue unless the diversification of the states' economy is achieved," he said.

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Smith, the governor's spokeswoman, pointed to a U.S. Census report last week that showed Maryland had the highest household median income in the nation last year.

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