Memo says state faces 1993 deficit Schaefer is warned $365 million shortfall may mean new taxes


ANNAPOLIS -- Budget advisers to Gov. William Donald Schaefer have warned him that the budget for fiscal 1993, which he will have to submit to the General Assembly 10 months from now, already faces a potential shortfall of $365 million.

The "best guess" prediction, outlined in a Feb. 21 internal memorandum obtained by The Sun, describes the projected shortfall as "well outside the 'manageable level.' "

"This preliminary analysis suggests that the fiscal year 1993 budget cannot be balanced by traditional means," wrote the memorandum's author, Dennis H. Parkinson, deputy secretary for budget and fiscal planning.

"Unless there are widespread layoffs or major reductions in entitlement programs or local aid, the vast majority of this shortfall would have to come from the revenue side."

Covering a shortfall "from the revenue side" means increasing taxes.

The governor proposed a major tax restructuring this year that would have raised at least $800 million in new revenue the first year alone. But the legislature rejected it, saying that it arrived too late and was too complicated and too far-reaching to adopt so quickly. The General Assembly referred the bill to summer study, with pledges that tax restructuring would be a central part of the legislative agenda a year from now.

Sen. Barbara A. Hoffman, D-Baltimore, vice chairman of the Budget and Taxation Committee, said she did not believe legislators had seen the Parkinson memorandum. She concluded that "the bottom line is obvious: It means there is going to be some revision of our taxing structure the next session."

"You can be a frugal homemaker, but when you run out of money, you have to get more," she said.

Administration officials are privately blaming the legislature for the bleak outlook for fiscal 1993, saying legislators could have done more this year to avoid next year's problems. Schaefer aides complain that not only did legislators fail to raise taxes in any meaningful way but that they also balanced the budget with a number of one-time-only transfers that do nothing to solve long-term fiscal problems.

"Our point all along has been that a broader, more comprehensive, honest look at the state's tax system and fiscal outlook is crucial," said Mark L. Wasserman, chief of the governor's executive staff. "That didn't happen this year. It seems all but certain we'll have to be much more serious about it in the next cycle."

Senator Hoffman said she believes a number of General Assembly leaders recognized that a restructuring of the tax system was justified this year but could not bring themselves to do it for political reasons.

"We had people who are otherwise rational saying, 'I am not voting for any tax this year.' They got the message" from voters last fall, she said.

Public support for raising taxes, she said, will not come until "the public that is not on welfare" feels the pain of services being cut.

The dire prediction for fiscal 1993 comes just as the 1991 General Assembly is about to complete months of work covering more than a half-billion dollars in deficits in this year's and next year's budgets. The administration's forecast assumes that revenues will grow at a relatively robust rate of 7 percent.

Delegate Charles J. Ryan Jr., D-Prince George's, chairman of the Appropriations Committee, said he was not surprised to hear the administration deficit estimate and said the fiscal picture could be even worse.

"I don't see revenue growing at 7 percent," he said. "I would think their revenue [estimate] may be even more positive than we would expect. When we start our next year's budget [discussions] in the middle of the summer, I would expect you would see even a greater [revenue] hole."

The administration forecast assumes that the rate of inflation will be 4 percent and that expensive "entitlement programs" such as Medicaid will continue to expand by rates as high as 10 percent.

The projection also includes an expected $100 million pay raise for state employees, who were given no cost-of-living adjustment in the coming year's budget and were even denied their previously scheduled "step" increases because of the state's financial problems.

Mr. Parkinson suggested in the memo that the pay raises could be withheld. But, he said, "I cannot recall an instance when the state did not provide a [cost-of-living adjustment] to its employees two years in a row." In fact, traditionally the state provides a 'make-up COLA' in the years after a COLA was denied."

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