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O’Malley’s budget proposal reaps benefits of Maryland’s rebounding economy

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Maryland has all but weathered the economic downturn, Gov. Martin O’Malley said Wednesday, releasing a $37.3 billion state budget that for the first time since he took office more than six years ago would require no new taxes or significant cuts to finish the year in the black.

A combination of rebounding economic activity, bounty from last year’s tax increases and greater federal funding flowing to the state under the new health-care law all but polished off a structural deficit that since the emergence of the housing crisis had saddled Maryland, like most states, with record annual shortfalls.

Maryland, like Virginia, was spared the worst of the crisis thanks to its proximity to Washington and increased federal spending. But unlike Republicans in Virginia, who have mostly cut their way to a balanced budget in recent years, O’Malley and his fellow Democrats in the state refused to yield on spending.

On Wednesday, even as federal across-the-board cuts loomed, they claimed victory in finding their own way through the storm — a path that set successive records on education spending, expanded Medicaid coverage to more than 376,000 residents, and maintained a four-year freeze on in-state tuition at public colleges and universities.

To the chagrin of the state’s Republican minority, it was also a path that included income-tax increases last year on all six-figure earners and a dramatic expansion of casino gambling that the Democratic majority bet will help cover future education costs.

“These have been challenging years, to say the least — the biggest economic downturn since the Great Depression — and yet the people of our state have continued to move forward,” O’Malley said at a news conference at the Maryland State House in Annapolis. “They expected that just as every family has done more with less, that their state government could do more with less, and in a great number of instances, that’s what we have done.”

With increased revenue, the budget, if approved, would increase overall state spending by 4 percent and continue to fund classrooms at record levels.

It would also begin to restore money for an array of grant programs curtailed during the downturn. State employees would get 3 percent pay raises; police would receive money for training; municipalities would see a bump in road funds; and state agencies would get millions in “innovation” grants to rethink how to deliver services to residents.

Tuition increases for students at state colleges would be capped at 3 percent.

The governor asserted that his expanding capital budget — including new school construction, affordable-housing projects and seed money for a new hospital in Prince George’s County — would support about 48,000 jobs.

O’Malley also proposed new spending and tax credits that could burnish his credentials with key constituencies if he runs for national office after his second term ends next year. He proposed increased funding for cancer research, green energy projects and environmental initiatives. And he pitched tax credits for cybersecurity and biotechnology jobs and tax breaks to lure more film production to the state.

To accomplish it all, the budget O’Malley sent to the General Assembly has evolved in complexity from the simpler ones he introduced early in his first term.

As he has in recent years, O’Malley squeezed extra spending out of state revenue in part by shifting funding from special accounts — such as a tax collected on housing transactions and earmarked for environmental work — to the state’s general fund. He again proposed funding some of those projects with borrowed bond money that would be repaid over 15 years.

To that end, the spending plan for the budget year beginning in July would also mark the first time under O’Malley that the state would have to dip into its general-fund revenue to pay debt service on increased borrowing.

The governor’s general-fund budget, derived mostly from state tax dollars, would increase about 6 percent to $16.1 billion.

But more than a quarter of that increase would be set aside to help the state deal with cuts to federal aid to Maryland that would follow if Congress fails to reach a deal by March on sequestration — automatic, across-the-board cuts.

On health care, O’Malley’s budget anticipates an increase of more than $400 million in federal funding to expand health-care services to the poor under the Affordable Care Act.

It also calculates that the state can use some of those funds to pay for health-care services now paid for by the state. That would begin to lower the state’s obligation for residents that it has extended health-care coverage to under O’Malley.

Despite the nearly balanced budget, talk of an increase in the gas tax or the creation of a regional transportation tax remains on the table.

Without some new form of revenue, the state’s transportation trust fund will not be able to fund any new road or transit projects for five years because all gas-tax revenue will be needed to cover maintenance on existing infrastructure.

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