Maryland Gov. Harry Hughes told local government officials yesterday that the state is facing several critical issues this year, including a potential revamping of education funding, and that the money for solutions may not be available.

Speaking in Ocean City at the annual convention of the Maryland Associations of Counties, Hughes said the national economic recovery has not yet affected Maryland and that recent revenue reports were "not encouraging."

At the same time, he said, the state may face further reductions in federal support.

Both factors, he said, could affect the state's ability to have available the money needed to fund any new system of local education aid, implement recently enacted jobs programs, provide adequate staffing for prison programs and begin a much-needed cleanup of the Chesapeake Bay.

In his prepared remarks, Hughes again raised the possibility of an increase in the state income tax next year to compensate for sluggish revenues.

While not mentioning the income tax directly, the governor said, "If we must seek additional state revenues, our proposals will be well-conceived, fair and equitable."

Hughes and other state officials brought up the idea of increasing the state's income tax, especially at higher income levels, after last winter's legislative session.

Then, Hughes proposed a minimal increase in state spending to be funded, in part, by increased taxes on cigarettes, beer, wine and liquor. The legislature turned down his proposal and instead cut some positions and programs to balance the budget as required by the state constitution.

This spring, officials were optimistic that the economic recovery would soon begin to affect state revenues but, as Hughes' speech indicated, that optimism has faded somewhat. Hughes recently told heads of major departments to prepare budgets for next year that limit increases to 3 percent.

Hughes spent most of his speech on the need to clean up the Chesapeake Bay. According to the governor's aide, Hughes has decided to make cleaning up the bay the major thrust of his second term.

Labeling pollution of the Chesapeake "a problem which jeopardizes our very life style," he called on local officials to improve sewage treatment facilities, control runoff of chemicals and topsoil from farm lands and control growth along the bay and its tributaries.

Hughes' concerns stem from the findings of a seven-year study of the bay by the federal Environmental Protection Agency and by state agencies in Maryland, Virginia and Pennsylvania.

The study showed that the bay is being polluted at an accelerating pace and that bay grasses and freshwater spawning fish are at their lowest levels ever. It also showed elevated levels of heavy metals and toxic organic compounds that can kill fish and algae and are hazardous to humans as well.