Md. Starts Fiscal Year $700 Million in Red

Less than two weeks into its new fiscal year, Maryland is facing the prospect of a $700 million budget shortfall and the need for additional spending cuts, according to the legislature's chief financial analyst.

The gap, which amounts to about 5 percent of Maryland's roughly $14 billion general fund, reflects a challenge facing states across the country as tax receipts continue to lag far behind expectations.

"It appears that the state budget is once again being overwhelmed by the deteriorating economy," Warren Deschenaux, the General Assembly's top budget adviser, wrote to lawmakers in a letter that became public yesterday. "Addressing a shortfall of this magnitude will be a daunting task."

Virginia officials recently announced that the state finished $300 million short for the fiscal year that ended June 30 and that more budget cuts could be on the way. The District is facing a two-year shortfall because of the recession, including a $150 million gap in a budget plan that takes effect Oct. 1, the start of its fiscal year.

Yesterday, Maryland Gov. Martin O'Malley (D) told reporters that he will present a sizable package of spending cuts this month to the Board of Public Works, a state panel authorized to cut the budget when the legislature is not in session.

O'Malley said that he would work hard to avoid "the sort of massive layoffs you see in other states" but that "everything is on the table." He provided few specifics.

"It's all going to be painful," he said. "None of it's going to be easy. . . . These are cyclical challenges, but this is a big, daunting cycle. Worst one we've seen since the 1930s, I think."

Since the downturn began, Maryland officials have made repeated efforts to scale back planned spending, a pattern that has also played out in Virginia and the District. "We've gone through this I don't know how many times," O'Malley said.

To balance the budget that started July 1, Maryland lawmakers in April approved significant cuts in state aid for road projects, froze most state agency budgets and provided no salary increases for state employees, among many other reductions. Deeper cuts were avoided through the use of federal stimulus dollars.

In Maryland and elsewhere, collection of sales taxes, individual and corporate income taxes and other revenue has continued to fall short of projections, even as estimates have been revised downward on multiple occasions.

In Virginia, Gov. Timothy M. Kaine (D) announced last month that state revenue collections had dropped 9.3 percent for the year, eclipsing an estimated drop of 7.3 percent, which led to the shortfall.

In his letter to lawmakers, Deschenaux was highly critical of the economic forecasters whose data state officials use to build their budgets, saying the forecasters' performance partly explains "how our budget can get so far out of whack so fast."

"In short, the economics profession has not distinguished itself in this recession, particularly the commercial and academic economic forecasters upon which we rely," he said. "They were slow to recognize the recession and have consistently failed to anticipate the pace and depth of the unraveling which has occurred."

Both O'Malley and House Speaker Michael E. Busch (D-Anne Arundel), who were appearing in Baltimore at a state conference on autism, said Maryland's budget outlook is less dire than that of many states.

California, for example, has started issuing IOUs in place of tax refunds. And Ohio's "rainy-day" reserve fund has dwindled from almost $1 billion to almost nothing.

Maryland's budget outlook would arguably be significantly worse if not for a special session called by O'Malley in 2007, during which lawmakers raised taxes by almost $1.4 billion a year. That session was intended to address structural problems in the Maryland budget that were largely not attributable to the economy.

In his letter, Deschenaux said the magnitude of Maryland's budget challenges are now "equivalent, if not more substantial, than that which precipitated the special session of 2007."