State shortfall may reach $1.7 billion

Medicaid costs rise as tax revenue falls, budget analysts say

October 31, 2001|By Greg Garland | Greg Garland,SUN STAFF

In their grimmest assessment to date, legislative policy analysts warned yesterday that Maryland faces a potential budget shortfall of as much as $1.7 billion by the end of next year.

The budget woes are due to higher-than-expected costs for Medicaid and other programs, at the same time that state revenues are plummeting in a weakening economy, analysts said.

The bad news was delivered in a report to the Joint Spending Affordability Committee, a panel of legislators and business leaders that advises the governor and General Assembly on spending limits.

"Today's the day before Halloween, and the story we have to tell you may be appropriate to that season and time," said Warren Deschenaux, the legislature's chief policy analyst.

He said estimates of general fund revenues for this fiscal year and next are $20.5 billion, while expenditures are estimated at $22.2 billion -- creating a shortfall of $1.7 billion.

Gov. Parris N. Glendening recently announced cost-cutting measures to help address the shortfall, including a hiring freeze and canceling several building projects, which Deschenaux said will save $205 million.

Along with $725 million from the state's "rainy day" fund -- past surpluses that have not been spent -- the budget imbalance could be cut to $770 million, Deschenaux said.

The budget news means that lawmakers are likely to face the prospect of cutting programs, raising taxes or finding new sources of revenues.

The state's constitution requires that the budget be balanced.

"The big problem is that the budget we passed last [session] was unsustainable," said state Sen. Robert R. Neall, an Anne Arundel County Democrat. "This budget was in trouble the day we enacted it."

He said signs arose early this year that the booming economy was beginning to cool, even before terrorist attacks sent it reeling.

"We would have been in financial trouble without Sept. 11," Neall said.

Some committee members said even the bleak numbers presented by legislative analysts may prove optimistic.

"This is too optimistic, too ambitious," said H. Furlong Baldwin, retired president and chief executive officer of Mercantile Bankshares Corp. who is one of four citizen members of the panel.

He said the projections don't factor in the possibility of another terrorist attack and what that might do to further harm the economy.

Analysts said revenues for the first three months of the fiscal year that began July 1 were down by $47.6 million compared with the same period last year.

The report estimates that by the end of this fiscal year, the state will collect $238.5 million less than the $9.9 billion that budget analysts had forecast in May.

The new estimates anticipate that personal income taxes will be off by $150.8 million from original forecasts, while sales and use taxes will be down by $97.8 million and corporate income taxes off by $51 million.

At the same time revenues are falling, spending is increasing sharply for some programs -- especially Medicaid.

Medicaid costs are projected to be $173.1 million over original estimates this year alone because more people signed up for the program than expected, and the medical inflation rate is higher than expected.

The state also is incurring $25 million in new "homeland security costs" in the wake of the Sept. 11 terrorist attacks, and costs are running higher than expected for several other programs.

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