Maryland Gov. Robert L. Ehrlich Jr. will advise his Cabinet secretaries this week to begin preparing budgets for next year that cut services by as much as 12 percent and identify "peripheral, under-performing programs" that could be eliminated.

Thwarted in his bid to raise revenue from slot machine gambling and unwilling to increase sales or income taxes, Ehrlich (R) is planning to balance his next budget almost entirely with cost savings and reductions to existing programs, said Budget Secretary Chip DiPaula Jr.

Administration officials hope the process brings with it a sweeping reorganization of state government that will close the chronic gap between revenues and expenditures, known as the structural deficit. Already, Maryland is facing a projected $830 million shortfall for fiscal 2006, which begins in July 2005.

"We have to live within our means," DiPaula said in an interview Friday. "We are determined to resolve the structural deficit. And the only way we will make significant progress is with greater efficiency and the elimination of unnecessary programs."

Missing from the approach, DiPaula said, would be any attempt to increase revenue by imposing new taxes or restructuring the tax burden -- as Democrats had proposed during the last legislative session. DiPaula said the governor "feels Maryland is a high-tax state, and doesn't need to solve our problems with more revenue."

But Democratic leaders have been seeking what they are calling a more balanced solution to the state's financial woes.

"We need a comprehensive approach that also addresses the revenue needs of the state," said Isiah Leggett, chairman of the Maryland Democratic Party. "To have people coming in on hands and knees, begging him not to make cuts, that's not productive, and ultimately it's going to shortchange the people of Maryland."

DiPaula would not discuss dollar figures or say which departments would be targeted -- or spared -- in the reductions. But he said the first step in preparing next year's $24 billion budget, which Ehrlich will deliver to lawmakers in January, is a 52-page list of instructions to be given to department secretaries beginning tomorrow.

The instruction manual, which Ehrlich has named the "strategic budgeting guide," lays out a step-by-step process for ranking spending priorities, determining how many state employees are needed and deciding which programs are expendable.

The review, DiPaula predicted, will be the most exhaustive self-examination ever of Maryland's massive bureaucracy. It will force agency heads to prioritize each of their departments' programs based on how crucial they are to the lives of Marylanders and by how well they adhere to Ehrlich's goals. When it is completed, DiPaula said, Ehrlich should have on his desk a long list of programs that can be slashed.

Maryland budget analysts agreed with DiPaula's assertion that this undertaking, if it is taken seriously, will be unusually broad in scope.

Former governor Parris N. Glendening (D) introduced a performance component to his budget review process, which was in place until this year. But Warren Deschenaux, the legislature's top fiscal analyst, said it was not as far-reaching as what Ehrlich is proposing.

"I've never seen anything like this," Deschenaux said.

Deschenaux reviewed a draft of the budgeting guide, which includes a questionnaire intended to help department heads determine whether the programs they oversee warrant current levels of spending. It asks, for instance, whether a program "directly serves a critical life, health, or safety need," whether it has "demonstrated effectiveness" and whether it is "integral to the state's strategic priorities as represented in the five pillars" of the Ehrlich administration.

The five pillars, it explains in small print below, are education, public safety, health and the environment, commerce, and fiscal responsibility.

Attached to the survey is a letter that tells agency heads, "In order to afford the services Marylanders need most, peripheral, under-performing programs need to be identified and reduced or eliminated."

That process "could be enormously useful," Deschenaux said.

"If the [agency heads] can do it in a sincere way, there's no question they will identify areas where they can become more lean. I think it will be very interesting to see if that can happen," he said.

What may be most revealing, Deschenaux pointed out, is the survey's final page, in which agency heads are asked to identify how much money they want for each program by checking one of three boxes. One box indicates that the dollar amount is the same as what was spent in 2005. The second indicates spending will be reduced. The third is checked if the program will be eliminated outright.

Nowhere does it give an opportunity for the department head to ask for an increase.

DiPaula said that was by design.

"That's our attempt at fiscal discipline," he said. "There's no need to have that option."

Leggett said he suspects the letter DiPaula sent to Cabinet members Friday amounts to little more than a scare tactic to increase pressure on the legislature to pass the governor's slot machine proposal. And in some respects, the exercise is reminiscent of steps the Ehrlich administration took when launching into the fiscal 2005 budget at this time last year.

Last June, Ehrlich announced that he intended to "impound" $650 million, or 10 percent of the funds the General Assembly had approved for most government operations. The move angered lawmakers, who said Ehrlich was overstepping his authority. But over time, as he made most of the money available for government spending, it became clear the move was largely intended to send a strong message to Cabinet secretaries that he was serious about making cuts.

DiPaula said that this year's announcement is not meant to be a psychological ploy by which Ehrlich uses fear to force his department heads to look seriously at cuts, or to create more pressure for slots.

"That's not what's happening here," DiPaula said. "Governor Ehrlich believes we owe it to Maryland to engage in this type of comprehensive exercise in order to reach our goals."

Leggett said he has a more skeptical view of the exercise.

"It sounds to me like he's come in with a patchwork, piecework approach, at the eleventh hour," the state Democratic Party chairman said. "I think it shows a lack of leadership."

The department heads will have until August to finish their internal reviews. Ehrlich will then have four months to evaluate the agency proposals and determine where exactly he wants to make cuts to keep the budget in balance.

"He's aiming for a lot," Deschenaux said.

"I don't know how it will come out. But I'll be very interested to see what it produces."

Gov. Ehrlich plans to use program reductions, rather than increased taxes, to lessen the state's budget shortfall, which will reach an estimated $830 million in fiscal 2006.