O'Malley Faces a Run Of Budget Shortfalls

Debate on Spending Cuts, Taxes or Slots May Reignite

Maryland Gov.-elect Martin O'Malley (D) is inheriting a shortfall of more than $400 million in the first budget he must present on taking office in January and faces future deficits four times larger.

The projections, released yesterday by nonpartisan legislative analysts, suggest that despite achieving temporary surpluses during the final years of Gov. Robert L. Ehrlich Jr.'s term, state leaders have done little to address longer-term fiscal problems. It also suggests that lawmakers could soon see a reprise of a debate over whether they should cut spending, raise taxes or legalize slot-machine gambling.

Plans to legalize slots, which could generate hundreds of millions in new revenue, dominated the first three legislative sessions under Ehrlich, ending in stalemates. The Democratic-controlled legislature and the Republican governor were unable to agree on other efforts to pass large-scale revenue packages, including a $1 billion tax package pushed by House leaders in 2004.

The debate will start again as O'Malley arrives with a list of spending priorities that includes accelerating school construction, holding the line on college tuition, increasing funding for stem cell research and reducing property taxes if possible.

"He's inherited a very difficult budget situation," Senate President Thomas V. Mike Miller Jr. (D-Calvert) said. "Part of it is his own doing, in that he made campaign promises that I know he intends to keep."

According to analysts' projections, the state faces a shortfall of $413 million for fiscal 2008, which starts in July. That gap could be closed, lawmakers and fiscal analysts said, with relatively modest spending cuts or by dipping well into the state's "rainy day" fund.

Far more difficult choices are likely to occur in fiscal 2009, when projected spending is expected to exceed projected revenue by $1.6 billion.

The gulf, analysts said, remains largely attributable to major increases in education spending mandated by a 2002 law that was passed without a funding source.

O'Malley spokesman Steve Kearney said the incoming governor was undaunted, citing successful efforts after O'Malley's 1999 election as Baltimore mayor to improve the city's fiscal outlook.

"We expect to work with the legislature to do the same here," he said.

Kearney was among several O'Malley aides from City Hall who sat in on yesterday's fiscal briefing to lawmakers. O'Malley plans to announce today the appointment of one of them, First Deputy Mayor Michael R. Enright, as his chief of staff in Annapolis, aides said.

Spokesman Henry Fawell said yesterday that Ehrlich was proud to have submitted balanced budgets that included substantial increases in education without raising the state's income or sales taxes.

Lawmakers have known for months about looming shortfalls in the state's $15 billion general fund. Analysts yesterday described the situation as becoming more dire because of an expected slowdown in an economy whose robust growth helped Ehrlich conquer deficits he inherited on taking office in 2003.

Ehrlich also helped balance budgets early in his term by diverting millions of dollars from separate state funds intended for land preservation and construction of transportation projects -- actions that drew O'Malley's criticism during the campaign.

"That either leaves you some very significant budget cuts or revising our tax structure in some way that brings in more money," said Del. Richard S. Madaleno Jr. (D-Montgomery), a former state budget staff analyst who was elected to the Senate this month.

During the campaign, O'Malley did not rule out proposing a tax increase in the next four years but said, "Marylanders are taxed enough." Aides said yesterday that it is unlikely he would call for a tax increase in his first year.

Few lawmakers are talking openly about a tax increase at this point. But privately, some acknowledged it could be needed. Raising the state's sales tax from 5 to 6 percent, for example, would generate nearly $700 million a year in additional revenue, analysts said.

Miller was adamant that lawmakers should instead legalize slot machine gambling, a priority that he and Ehrlich have embraced for four years without success.

"Don't look to the Senate for any type of tax increase, period," Miller said. "We've had a revenue source on the table for the past four years. Unless that revenue source is utilized, we're not going to go into people's pocketbooks."

O'Malley has voiced support for a limited slots plan, with betting sites only at horse-racing tracks. He has, however, said he does not think the state should count on slot proceeds as a major source of revenue.

House Speaker Michael E. Busch (D-Anne Arundel), a vocal opponent of slots, said other options should be considered.

"It's a time for everyone to take a deep breath," Busch said. "No one's been sworn in yet."

Virginia will have $600 million in additional funds to spend this year and next but could begin facing significant budget shortfalls after that, a legislative committee recently told lawmakers in Richmond.

D.C. officials project a budget surplus of $730 million in the city's 2008 fiscal year, which begins in October.