State's budget shortfall balloons

Gap for this fiscal year, next one put at $1.7 billion

Income tax revenue declines

Stock market's slump, Md. spending contribute

September 19, 2002|By Howard Libit | Howard Libit,SUN STAFF

Maryland's next governor and General Assembly will face a budget shortfall of as much as $1.7 billion when they arrive in Annapolis in January, threatening severe cuts to state services, according to the latest tax estimates.

The dire budget projections stem from a steep drop in anticipated income from tax collections and significant increases in state spending over the past few years, Maryland tax officials said.

"It doesn't look good," said Comptroller William Donald Schaefer, whose office released the latest tax estimates. "It's going to be very tough."

The new figures - indicating a shortfall at least $600 million greater than was forecast three weeks ago - seem sure to thrust Maryland's budget situation, and what role Democrat Kathleen Kennedy Townsend played in developing the state's spending plans, into the forefront of the gubernatorial campaign.

Republican Robert L. Ehrlich Jr., who has repeatedly criticized Lt. Gov. Townsend and Gov. Parris N. Glendening for "overspending," is set to release a "framework" for his budget at a news conference this morning in Baltimore.

"The budget situation is bad, and it's about to get worse," the Baltimore County congressman said yesterday morning in a speech to the Rotary Club of Towsontowne.

"Is it all Parris Glendening and Kathleen Kennedy Townsend's fault? Of course not. Is it part their fault? Did they overspend? Of course."

Townsend acknowledged yesterday that Maryland will face an "austere" budget but emphasized that the state's economy is poised to pick up.

Townsend and other Democratic officials said most other states face far worse budget situations, in part because they have smaller cash reserves and their economies have been hit harder by the national recession.

"We should understand that Maryland's economy is in a sense fundamentally strong," Townsend said in Annapolis. "Yes, we have challenges, but we have to meet them. We're going to have a tough time, but I'm ready to do the job."

The comptroller's staff projects that tax collections in the current fiscal year, which began July 1, will be $310 million lower than previously predicted, and they recommended reducing revenue estimates for fiscal year 2004 by $315 million.

The staff's recommendation goes to the state Board of Revenue Estimates, which is scheduled to make its next formal report in December.

The new estimates are in addition to the $104 million shortfall that budget officials found when they closed the books on the 2002 fiscal year, leaving a smaller-than-expected surplus to keep the current year balanced.

For the fiscal year starting July 1, legislative analysts have been predicting that spending will exceed revenues by more than $900 million.

Altogether, Maryland's shortfall in the current year's budget is predicted to be about $414 million, and next year's budget gap is expected to increase from $1 billion to about $1.3 billion, said David F. Roose, director of the comptroller's Bureau of Revenue Estimates.

"The period of economic uncertainty is lasting longer than anyone thought it would," Roose said.

About 80 percent of the expected revenue reduction is tied to lower-than-expected income tax collection, mostly because the slumping stock market has severely cut into Marylanders' capital gains.

"They built into their budget these revenues that had been inflated by a stock market bubble," said Anirban Basu, director of applied economics for Towson University's RESI research institute. "We know now that the bubble has burst and so, too, has the state government's fiscal picture. It tells us we should have been more conservative in our fiscal spending."

That leaves the newly elected lawmakers and governor to grapple with a two-year budget gap of almost $1.7 billion in next year's legislative session.

The Maryland Constitution requires the governor and General Assembly to approve a balanced budget each year, which means significant spending cuts or tax increases to close the projected shortfall.

If Maryland's income tax were increased to cover the projected shortfall, it would cost an average family of four about $1,000. By contrast, the 10 percent income tax reduction phased in over the past four years saved the average family about $375 a year.

Ehrlich and Townsend have rejected tax increases, at least in their first year in office, which means large spending cuts are likely.

Ehrlich has announced that he would look for at least 4 percent cuts to most agencies, and Townsend has pledged that she'll freeze spending. Both have said they would exclude education, public safety and health care from such constraints.

Glendening has asked his budget officials to look for $150 million in cuts, and Townsend said yesterday that she has spoken to them about looking for another $150 million. The hiring freeze at state agencies - which has been in effect since October - is expected to continue indefinitely, a Glendening spokesman said yesterday.

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