Md. Officials May Tap Reserve Fund

Some Fear Harm to AAA Bond Rating

Maryland's top elected officials are considering taking up to $367 million from an obscure reserve fund as a partial solution to mounting budget shortfalls.

The money, which has been accumulating for years, is set aside to pay annual refunds owed on income taxes imposed by county governments. In Maryland, the state collects income taxes for the state and counties and sends counties their share.

As a practical matter, the money in question has not been needed, according to the state Comptroller's Office. That's because tax collections in any given year have been sufficient to pay refunds that are owed, officials said.

Comptroller Peter Franchot (D) has proposed to Gov. Martin O'Malley (D) that the state use the reserve fund to help cover budget shortfalls in either the current or upcoming fiscal years. Legislative analysts put the current year's shortfall at about $400 million, and they said the gap in the coming fiscal year, which begins in July, is nearly $1.9 billion.

"In real-world effect, the money just sits in a reserve that is not tapped and will never be tapped," said Franchot spokesman Joseph Shapiro.

Officials in the Comptroller's Office and elsewhere said that bond-rating agencies on Wall Street might frown on the move. From an accounting standpoint, it would create a liability for the state, they said, even if there is no practical effect.

Maryland is one of a handful of states that maintain an AAA bond rating, which allows it to borrow money at a more favorable rate.

O'Malley spokesman Rick Abbruzzese said the governor is "looking into" the idea of using the fund as he "explores all options to address the budget shortfall."

Legislative leaders indicated yesterday that they are still learning about the proposal. A spokeswoman for House Speaker Michael E. Busch (D-Anne Arundel) said that O'Malley mentioned it during a breakfast meeting this week and that Busch is waiting for specifics.

Sen. Edward J. Kasemeyer (D-Baltimore), vice chairman of the Budget and Taxation Committee, appeared cool to the idea. "My gut reaction is it doesn't appeal to me," he said. "I hope we don't do a lot to gimmicky stuff to resolve this problem."

Warren Descheneaux, the legislature's chief fiscal adviser, said he sees "no legal impediment" to using the income-tax reserve fund to mitigate general fund budget shortfalls.

Descheneaux said bond-rating agencies "would be less concerned" about the move if a plan to pay the money back over a number of years were in place.

Shapiro said Franchot is looking to O'Malley for guidance on that issue.