In a rare dose of good fiscal news, Baltimore stands to gain an unexpected $9.3 million in local income tax money that the Maryland Comptroller's Office mistakenly sent to Anne Arundel County over three years because of a processing error, state officials say.
The comptroller's office says it uncovered the glitch in March but has not determined exactly how much money is involved. And a big question remains unanswered: whether to give Baltimore a lump sum or spread the money out over several years.
"We haven't decided yet," said Michael Golden, spokesman for Comptroller William Donald Schaefer.
Baltimore City officials haven't received formal notice that they'll receive the money - or when - but they say it won't affect next year's lean city budget proposal, which relies on tax increases and layoffs to make up for a projected shortfall of tens of millions of dollars.
Instead, officials see the money as a "one-time shot" that should be used for capital projects or set aside in the city's rainy day fund.
"Any unanticipated money that we receive, we certainly have numerous things that we can put that to, but it's definitely in our minds one-time money," city Finance Director Peggy Watson said yesterday. "We couldn't take that $9 million and go hire 30 people or something, because what am I going to do the next year?"
Still, Mayor Martin O'Malley is certain to be pressured by City Council members, union leaders and other constituencies to use the money to a politically popular end, such as laying off fewer workers, preventing a library branch from closing, continuing the survival of the city's "blue bag" recycling program - and not taxing churches and other nonprofits on their energy bills, as he has proposed.
"I'm glad to hear that this money is coming to Baltimore, but I'd like to have it be used in some immediate areas that could benefit," City Council President Sheila Dixon said yesterday, instantly rattling off possibilities for where to direct the money, including libraries and recycling.
"Let's look at how we can minimize some of the impact on services that are going to be affected."
Watson said she could think of several one-time uses for the money that would be fiscally prudent, such as contributing $1 million to a summer jobs program and paying off a $5 million debt to the Housing Authority of Baltimore City, a federally funded city agency.
But first, she wants to see proof the city will get the money.
"I'm hoping that this is real, this is true," she said.
In Anne Arundel, where County Executive Janet S. Owens introduced what she termed a cautious $858 million budget this week, the blow will be cushioned by a budget surplus that had been expected to reach $39 million, and by a $22 million rainy day fund.
Revenue estimates have already been lowered.
"In the big picture, we're OK," Owens said yesterday. "But I certainly could have used that money. Every dollar counts."
Owens said she still "fundamentally" doesn't accept that the money is not the county's. "I want confirmation that it's one, legitimate, and two, accurate," she said, adding, "If it's a legitimate debt, we'll of course pay it."
Schaefer has signaled that he will try to ease the pain for Anne Arundel, telling Owens "he will do everything to help the county through this," Golden said.
In reality, the county would not write a check to the state. Rather, future disbursements of tax money to Anne Arundel would be reduced.
The estimated $9.3 million in tax payments was made to the state by a bank - Golden wouldn't say which one - that manages trusts. Trusts pay income tax to the city or county in which they are administered. In this case, that's Baltimore, but the bank's division that mailed the tax returns is in Anne Arundel.
Since the division's mailing address listed Anne Arundel, the comptroller's office forwarded the tax receipts to the county's coffers instead of the city's.
"It was definitely our error, we did finally catch it and we are going to try to make it good," Golden said.
The first year Anne Arundel noticed a spike in fiduciary-related taxes, the amount jumped from $1.3 million to $5.7 million. County budget officials say the comptroller's office assured them all was in order. Moreover, capital gains taxes were skyrocketing nationwide, partly because of the roaring stock market.
One reason the error went undetected as long as it did is that Baltimore and Anne Arundel had identical local income tax rates until last year, Golden said. After last year's slight adjustment, state computers detected something amiss.
In a March 27 memo, the comptroller's office told county finance officers around Maryland about the "processing issue," among other tax matters. The memo explained the sudden $4.2 million decline in Anne Arundel's trust-related tax receipts for the first half of the fiscal year and a $3.6 million rise in Baltimore's.
Aside from the $9.3 million windfall, the correction means Anne Arundel can expect each year to receive a couple of million dollars less - and Baltimore can expect a similar increase. But after they learned of the correction, city officials said they adjusted revenue estimates for future years and have taken that into account for next year's budget.
O'Malley has portrayed the city's budget for next fiscal year, which begins July 1, as the "toughest" he's ever had to deal with as an elected official in the past decade. His budget plan calls for a 20 percent increase in the income tax, an expansion of the city's 8 percent energy tax to include nonprofits, and as many as 377 layoffs.
And in the current fiscal year, the city has had to institute a hiring freeze and other cost-cutting measures to avoid running a deficit by June 30.
Now, at the least, the $9.3 million in unexpected revenue might pay for some one-time projects that the administration hadn't considered possible because of the budget squeeze - and virtually every agency will have its ideas for the money.
Beyond that, the political consequences of having more money than expected will play out in the coming weeks, as the City Council officially receives and reviews the administration's proposed budget for next year. The council is scheduled to vote on the fiscal 2002 budget in June.