Md. revenue plunges

The Baltimore Sun

State revenues are expected to drop more than $330 million below previous estimates for the next 16 months, setting the stage for another round of difficult budget cuts in the General Assembly amid warning signs of a weakening economy, state officials said yesterday.

Lawmakers say they have no appetite for higher taxes in the wake of November's special legislative session, when they voted to raise them by $1.3 billion.

Instead, the legislature will have to cut hundreds of millions of dollars to balance Gov. Martin O'Malley's budget. Senators charged with managing the state's finances already gave preliminary approval to about $280 million in cuts this week.

The targets of the proposed spending reductions include the Inter-County Connector, stem cell research, Medicaid, higher education and economic development.

"The hard numbers that have been presented here today speak for themselves," state Comptroller Peter Franchot, who sits on the state's Board of Revenue Estimates, which reviews revenue forecasts, said yesterday.

"They merely confirm that the collapse of the U.S. subprime mortgage industry has taken a profound toll on consumer confidence and, for that matter, virtually every aspect of our nation's economy, and that the state of Maryland is not immune to these trends."

Franchot warned that the "storm clouds" were not receding: "The conditions are likely to get worse before they improve."

Leaders in the Senate and House of Delegates have said they hope to preserve new spending approved in November's session, including efforts to clean up the Chesapeake Bay and expand health care coverage.

But the numbers could topple opposition to the "tech tax." Lawmakers say they might have a hard time replacing that new levy on computer services, which is expected to raise $200 million.

Faltering state revenues are bound to figure into the debate over November's slot machine gambling referendum. Proponents have signaled that the benefits of slots to the state's bottom line will be their primary argument for expanded gambling.

The declines in expected revenues came almost entirely from flagging income and sales taxes. The revenue projection board expects to collect nearly $75 million less in the fiscal year that ends June 30 and $258 million less in the year that begins July 1.

The state's economy has continued to expand, albeit at a sluggish rate, the figures show, with the number of jobs increasing 1.2 percent in calendar year 2007 and only 1 percent in 2008.

State Treasurer Nancy K. Kopp, who sits on the board with Franchot and Secretary of Budget and Management T. Eloise Foster, said that although economic times are tough, they do not rival the early 1990s, when Maryland faced its worst financial crisis since the Great Depression. In 1992, revenues slid so precipitously that lawmakers had to call two extra General Assembly sessions to balance the budget.

Lawmakers and state officials who opposed the special session on the grounds that the economy was too uncertain to make budget decisions at the time took the figures as a vindication. But others defended it, pointing out that lawmakers went a long way toward closing a $1.7 billion budget shortfall and managed to fund a number of new initiatives in the process.

"None of us can predict exactly where the economy is going to be, but you do try to set your initiatives and what you want to accomplish for the citizens while you're in office, and I think that was the overall framework which we came to Annapolis and worked under," said House Speaker Michael E. Busch.

General Assembly leaders had been preparing to make between $100 million and $150 million in cuts to O'Malley's budget before the estimates. Now they will have to go further to balance the budget and provide a cushion should revenues slide even more.

Republican legislators have long argued the state needs to severely curtail its spending. The House Republican Caucus proposed an alternative budget plan Tuesday that members said would have cut enough to allow a repeal of the computer services tax and add to the rainy day fund.

"This was what we said was likely to happen," Del. Anthony O'Donnell, the House minority leader, said of the decision to hold a special session before the economic outlook was clear. "It's not like we had an epiphany with respect to what was going on with the economy. All the warning signs were there in late summer.

"The General Assembly and the governor continue to spend way too much money," he said. "We need to rein in that rate of growth in spending. When are they going to start listening? How much evidence do they need?"

Busch said his chamber would begin making targeted cuts soon. He said he expected his chamber would try to preserve environmental, health care and education programs as much as possible but he did not foresee major differences with the Senate.

Among the Senate proposals, direct reductions to the budget include cuts of nearly $10 million to higher education, $18 million for stem cell research, $20 million from malpractice insurance subsidies, $10 million in economic development and $5 million to mass transit in the Washington suburbs. Senators might also roll back millions of dollars in subsidies intended to help small businesses pay for more health care coverage, part of a bill that passed in November's special session.

A number of the reductions involve not cuts but changing how programs are funded, either by spreading out the spending on projects over more years or using debt. One such trim includes a $32 million reduction toward financing the Inter-County Connector, a controversial six-lane toll road that would run from Rockville to Laurel. State transportation officials said the cut could mean the $2.2 billion project would ultimately cost more.

Another such cut is a $40 million reduction in the state's $5.5 billion Medicaid budget, proposed by legislative analysts who estimate that some Department of Health and Mental Hygiene reimbursements will cost less than budgeted. Only half of that money comes from state tax revenues. While officials with that agency said it was not unusual for the legislature to make such suggestions, they warned it could result in a deficit by the end of the year.

P.J. Hogan, a former state senator who now lobbies for the state's university system, said it was too soon to tell how a proposed $6.8 million reduction in funding would affect the effort to freeze tuition rates, a top priority for O'Malley.

bradley.olson@baltsun.com

Sun reporters Timothy B. Wheeler and Laura Smitherman contributed to this article.

cuts loom

SHORTFALL: Comptroller Peter Franchot estimates that state tax revenues will fall short by $330 million over the next 16 months because of the slowing economy.

Income tax: down $202.1 million

Sales taxes: down $120.4 million

Estate taxes: up $17.5 million

State interest income: down $27.9 million

CUTS: Lawmakers are considering millions of dollars in cuts, including:

Medical malpractice insurance subsidies: $20 million

Medicaid: $20 million

Stem cell research: $18 million

Medevac helicopters: $3 million

University System of Maryland: $6.8 million

Community colleges: $7.9 million

Grants to private colleges: $3.1 million

Intercounty Connector: $32 million

Economic development: $10 million

Rural broadband Internet: $2 million

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