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Taxes, fees found to be key to state's $2 billion surplus

THE BALTIMORE SUN

Maryland's budget surplus has more to do with tax and fee increases - and a general economic recovery - than government downsizing and conservative management, an analysis by The Sun shows.

Gov. Robert L. Ehrlich Jr. frequently boasts of his administration's success in reversing a fiscal crisis in state government. In nearly every speech he gives, the governor says that in just three years, he turned $4 billion in deficits into nearly $2 billion in surpluses, a turnaround he says is the result of his determination to end the tax-and-spend culture of Annapolis.

A Sun analysis of the figures that form the basis for the governor's assertion, and of the past four state budgets, confirms that Maryland's finances made a roughly $6 billion turnaround from what analysts expected over Ehrlich's first three years in office.

The figures also show that 18 percent of the improvement was the result of Ehrlich budget-cutting. By contrast, 28 percent of the change was the result of tax and fee increases the governor enacted.

Budget-cutting by the General Assembly is responsible for a small piece, and much of the turnaround - about $1.5 billion worth - is the result of sharply increased tax revenues due to the state's hot economy. Ehrlich's transfer to general operations of funds that are supposed to pay for roads, land preservation and other programs was responsible for the rest.

Democrats say the gap between Ehrlich's fiscally conservative rhetoric and the reality of his management became clear this month when he unveiled the biggest budget increase for state programs Maryland has seen in at least 25 years. Despite tight financial times and his much-ballyhooed systematic review of the entire state budget, nearly every state department and agency will spend more money this year than it did when the governor took office.

In fact, the only state department to see its budget cut is the budget department.

"He has not lived up to this perception or notion of being a fiscal conservative," said Sen. Ulysses Currie, a Prince George's County Democrat who chairs the Budget and Taxation Committee. "The big part of the picture is that the economy turned around. ... That has as much if not more to do with where we are now than what the governor has done."

Budget Secretary Cecilia Januszkiewicz said the true measure of Ehrlich's fiscal stewardship comes after considering what might have been. Before he took office, Democrats were gearing up for a major tax increase to fund a historic education spending initiative they passed the year before, she said. But instead, Ehrlich came in, reined in spending growth and trimmed the state work force.

"What do I think about the governor's stewardship? I think he's done a fabulous job," Januszkiewicz said. "You have to look at what was predicted when the governor took office and what actually happened. ... You can't point to simply any one factor, but certainly a leader who is not looking to expand substantially government or government expenditures helps the government coffers."

The $4 billion deficit claim (actually, the numbers the governor's office cited add up to $4.6 billion) doesn't include the last budget Ehrlich is responsible for in his current term - which he released last week. If it did, the deficits could have been pegged at nearly $7 billion instead.

But bringing that year into the equation radically changes the calculations for Ehrlich's role in resolving the deficits, too. Buoyed by a bonanza of tax revenue, Ehrlich proposed a spending increase so large for the budget year that begins July 1 that he has nearly wiped out the cuts of early in his term and erased much of the surplus.

Political cycle

Analysts call that the "political budget cycle," said Roy Meyer, professor of political science and a government budgeting expert at the University of Maryland, Baltimore County.

"You spend a lot of money before elections, people think times are going to be good, and then a couple of years later when the bills come due, they find some spending commitments they made before an election couldn't be financed," Meyer said. "I prefer a more stable path, myself."

According to the governor's office, the source of the $4 billion claim is the report of the General Assembly's Spending Affordability Committee from December 2002, issued after Ehrlich was elected but before he took office.

Analysts who craft those reports try to err on the side of caution, meaning they estimate revenues conservatively and spending liberally. In times of economic downturn, that can lead to dire projections.

That's what happened in 2002. The state was still feeling the effects of recession and the collapse of the stock market and was coming off of several years of large spending increases. Moreover, Medicaid costs were growing rapidly, and the legislature had just passed the Thornton education funding plan that called for more than $1 billion in new spending to be phased in over several years.

Looking ahead at that point, analysts predicted that revenues would fall short of spending by $1.2 billion, $1.6 billion and $1.9 billion in the next three years.

Maryland law prohibits deficit spending, so Ehrlich, who had run as an opponent of sales or income tax increases, was in a bind.

"The first few meetings of our budget group were some of the most painful moments I've had in public life," Ehrlich said recently. "The budget situation was worse than expected, worse than reported. It was dire. We were not going to raise taxes. We had hoped to pass a slots bill. We knew that would take time."

"As a result," he added, "we had to manage. We had to do counter-cultural things with respect to the state budget. It was not tax and spend. ... We simply were not going to follow the status quo Annapolis political formulas."

It was in that year that Ehrlich made his deepest cuts in state programs - about $535 million from what analysts had expected it would cost to fund current operations.

Generally, cuts in state spending don't mean that a department or program gets less money than it did the year before. Most often, a cut reflects a reduction in the rate of growth. But the budget situation in the fiscal year from July 1, 2003, through June 30, 2004, was so bad that the state actually wound up spending about $103 million less on government programs than it did the year before.

But it wasn't enough to solve the problem. The House of Delegates rejected Ehrlich's slots plan, punching another $400 million hole in the budget. And revenue estimates that came out in the middle of the 2003 legislative session made the situation look worse by about $200 million.

Taxes increased

That's when Ehrlich agreed to an increase in the state portion of the property tax, which meant that general funds would no longer be needed to cover debt service. Combined with various other fee increases and cuts by the General Assembly, that was enough to bring the budget into balance.

In the next two years, the state's financial situation gradually improved, and the governor and General Assembly followed the same playbook to balance the budget: some cuts, increased fees and transfers from other funds.

By this point, another quirk of state budgeting was having profound effects on the health of Maryland's finances.

The state budget is so large and complex that it takes time - usually about two years - before analysts are able to report reliable, final figures for a year's spending and revenues. During Ehrlich's term, analysts have consistently found tax collections coming in higher than expected, meaning the bad years weren't really as bad as they had seemed at the time.

That means that in each of the last three years, state leaders have taken more action than turned out to be necessary to balance the books. In fiscal 2004, they overshot the mark by $453 million. In each of the last two budgets, it was about $1.2 billion apiece. That money carries over to the next fiscal year, giving the governor a cushion as he prepares his budget.

The cumulative effect of those rolled-over funds allowed Ehrlich to propose an election-year budget that dwarfs his previous spending plans. His general fund budget for the coming fiscal year is 11.4 percent higher than the fiscal 2006 plan. If the legislature approved his proposal without changes, spending on state programs would grow by $1 billion this year alone, nearly as much as the total cuts Ehrlich made in the previous three years.

At that rate of spending, the cushion is not expected to last long. The same analysts who predicted more than $4 billion in deficits for Ehrlich say the next governor - whether Ehrlich or one of his opponents - will inherit more than $3 billion in spending shortfalls.

"Before the last general election, the legislature and the governor decided to pass legislation that clearly produced a deficit over the median term," Meyer said.

"I don't see that much difference between that year and this year," he said. "In the later 1990s and early 2000s we built up a very large cash balance, and we spent it. And may have spent more money than we had. We saved some money last year, and we are going to spend it the next two years, and three years from now, we're going to have a significant structural deficit."

Januszkiewicz acknowledged that Ehrlich is still leaving behind projected shortfalls, but she said the situation is still much better than when Ehrlich took office. As soon as he was inaugurated, she said, he had to close a $389 million shortfall in Gov. Parris N. Glendening's last budget before he could begin crafting a spending plan of his own.

Moreover, she said, Ehrlich has repeatedly put forth a plan to fix the structural problems in the budget - by legalizing slot machines - only to see it fail in the legislature.

"The fact that people are looking into 2009 is certainly indicative of the fact that they can't find much wrong with what he's done so far," she said.

andy.green@baltsun.com

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