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Md., Va., D.C. Face Budget Upheaval
Next Step Is Tax Hikes, Service Cuts

By Anita Kumar and David Nakamura
Washington Post Staff Writers
Wednesday, September 24, 2008

Virginia officials said yesterday that the state budget shortfall may be as wide as $3 billion over two years, triple what they estimated a month ago, while District officials said they are facing a gap of $131 million after years of surpluses.

Those forecasts and a projected shortfall of almost $1 billion in Maryland mean that Virginia and Maryland are considering cutting services they usually increase, including funding to state and local agencies, schools and colleges. Some of those reductions might include vital government services, officials said. District officials are just starting discussions about where to cut.

State and local governments across the country are struggling to balance budgets in the face of an economic slowdown, a weakening housing market and rising unemployment, all key factors in the revenue they collect.

"It's daunting. It's very daunting,'' Virginia Gov. Timothy M. Kaine (D) said. "These cuts will be tougher because some of the easier things we have already done. It's going to be difficult to do these cuts and just have them be opaque to people. They will be seen and felt."

Kaine said he will not propose raising taxes, but District officials said they might do so as a last resort. Maryland lawmakers raised taxes by almost $1.4 billion annually during a special session last year.

Kaine said he will begin implementing the cuts in Virginia in early October after releasing the state's new forecast for the rest of the two-year, $77 billion budget period that began July 1. Legislators will review Kaine's cuts when they convene in January, but he does not need legislative approval to begin.

State agencies are working on contingency plans, due Friday, to slash their budgets by 5, 10 or 15 percent. Kaine will use them as a blueprint for future cuts.

In the District, officials have identified a $131 million revenue shortfall, which will force the city to cut funding for programs in the fiscal year that begins next month, said sources who have been briefed by D.C. Chief Financial Officer Natwar M. Gandhi. The D.C. budget is about $5.6 billion.

The shortfall is due largely to income taxes, which have fallen off projections because of the troubles in the stock market, said the sources, who spoke on condition of anonymity because Gandhi intends to announce the figures today.

The District, which enjoyed large surpluses for years, had hints of the problem when Gandhi announced a $35 million budget gap for fiscal 2009. Mayor Adrian M. Fenty (D) and the D.C. Council made up that deficiency in part by raising cigarette taxes by $1 a pack. The new shortfall might not be as easy to swallow.

The city is projected to have $17 million left over from fiscal 2008, the sources said, but the rest of the gap will probably have to be bridged by budget cuts or tax increases, which require council approval.

In Maryland, legislative analysts projected this month that by fiscal 2010, the state could face a shortfall of almost $1 billion in its roughly $15 billion general fund.

Slumping collections of sales and income taxes are likely to force Gov. Martin O'Malley (D) to make about $300 million in cuts by next month. Another round of proposed cuts is expected to be detailed in January, when O'Malley unveils his spending plan for fiscal 2010.

O'Malley has said little about what he intends to cut, but he is facing mounting pressure to reduce aid to local governments, which makes up about 40 percent of Maryland's budget. O'Malley, a former Baltimore mayor, told reporters yesterday that he remains opposed to shifting teacher pension costs to Maryland counties, a move that could save the state more than $600 million a year.

In Virginia, the cuts will be deep, officials said. "We're facing a major reduction in state spending, a lot more than anyone predicted,'' said Sen. R. Edward Houck (D-Spotsylvania), one of the legislature's budget negotiators.

Virginia's latest budget shortfall stems from declines in sales, corporate and withholding taxes, among other factors.

"I don't think it's that surprising,'' said Del. M. Kirkland Cox (R-Colonial Heights), the House majority whip and a budget negotiator. "But it's a pretty big mountain to climb."

The forecast was presented yesterday at a closed meeting of the Governor's Advisory Council on Revenue Estimates, composed of state legislators and business leaders.

In recent weeks, Kaine and legislators had talked about a possible $1 billion shortfall. But estimates are now between $2 billion and $2.9 billion during the next two years.

Kaine said he will wait until he receives revenue numbers for the first quarter of the fiscal year before he officially revises his estimate next month. In the past year, he has laid off employees, dipped into the rainy-day fund and curtailed spending.

Maryland's fiscal situation is particularly challenging, given a special legislative session last year designed to address the state's long-term finances. During the session, convened by O'Malley, lawmakers raised taxes by almost $1.4 billion annually and slowed planned spending on education and other services.

O'Malley and other state leaders have been pushing a November referendum on whether to legalize slot machine gambling as an important piece of the state's budget solution. The slots plan is projected to yield more than $500 million a year for the state within a few years. It would allow 15,000 slot machines at five locations.

The slumping economy has taken a toll on planned transportation spending in Maryland. Transportation officials this month announced this month that they are deferring $1.1 billion of $10.5 billion in planned projects in the next six years. The cuts are a result of slower-than-expected collection of gas and vehicle-titling taxes.

Staff writer John Wagner contributed to this report.

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