City sees surplus ahead for 2nd year

Extra $60.6 million is likely to go to schools, tax relief


Baltimore, flush with cash drawn from a once-explosive real estate market, is pro- jecting a $60.6 million budget surplus this year - money likely to be directed to school construction and other quality-of-life initiatives, officials said yesterday.

Though the money represents a small portion of the city's $2.3 billion budget, the announcement immediately set off a debate over how the excess would be most wisely spent - with suggestions ranging from a reduction in property taxes to more frequent trash collection.

Mayor Martin O'Malley, crediting the city's growing economy for its second consecutive surplus, said this year's rosy budget projections are symbolic of the city's progress and offer hope for its financial future. How the money will be spent remains to be seen.

"We are going to be debating, discussing, arguing about the best way to invest a surplus, rather than the least harmful way to make cuts," said O'Malley, who is seeking the Democratic nomination for governor this year.

Baltimore's budget boon - which comes as other cities across the nation have faced police layoffs and other deep cuts - is due largely to a real estate market that has boosted both property tax revenue and recordation fees collected when homes are sold.

O'Malley has been criticized by some who claim the administration has understated revenues in the past to maintain greater fiscal autonomy - "found money," the theory goes, can be spent more freely - and to set low expectations so that surpluses can be trotted out in election years.

Critics also note that at least a portion of the city's good fortune has come from tax and fee increases that O'Malley pushed through the City Council in 2004. The plan nearly doubled the recordation tax and tacked a $3.50 monthly fee onto telephone bills.

The mayor has countered that his administration shrewdly makes conservative estimates. He also said the tax increases have diversified the city's revenue base - reducing its reliance on property taxes.

"We made a lot of tough decisions. Council members had to cast tough votes on many a budget, and we had to do a lot of difficult things," O'Malley said. "But this year, as a result of that hard work ... we are going to be seeking ways to invest a $60 million surplus."

Nearly 66 percent of that surplus came from recordation fees charged when homes are sold - the fee is $5 for every $500 of transaction value. With the recent housing boom, the city expects to collect $106.6 million from the tax this year.

But city budget chief Raymond S. Wacks struck a note of caution as he briefed officials at a hastily organized City Council committee hearing on the surplus yesterday: A slowdown in the housing market, which some have forecast, would also bring about smaller surpluses, he said.

Thomas A. Darling, a professor at the University of Baltimore's School of Public Affairs, also warned against excessive spending, given the housing market.

"That's putting more of our eggs in one basket than one might want," he said.

Caution was not the word of the day, however, as several City Council members began to suggest ways the money could be spent. One group, advocating for after-school programs, came to City Hall to request a $19 million appropriation in next year's budget for youth groups.

Some council members are expected to zero in on property tax relief, especially in light of recent assessments in South Baltimore that have soared. Though assessment increases are phased in and capped at 4 percent annually, Baltimore's property tax rate is the highest in Maryland.

"There has to be some real, sustainable tax relief on property," said Councilman Keiffer J. Mitchell Jr., chairman of the council's committee on taxation.

The property tax rate was reduced by 2 cents in this year's budget, and O'Malley suggested that a further reduction is likely, if the council approves.

Councilman Robert W. Curran had another concern. Noting reported under-spending by the city's Department of Public Works, he asked why the agency seemed to be scrimping when, he said, streets and alleys are frequently covered in trash.

"We need to spend some of this surplus to clean this town up," Curran said during an impassioned speech at the council's Budget and Appropriations Committee hearing. "Our streets are horrible."

Despite discussion of how the surplus might be spent, nearly half of the money has been earmarked. At an event in December, O'Malley and other officials pledged $25 million from the surplus for school construction and rehabilitation.

The city's surplus for the fiscal year that ends in June is actually projected to be $72.5 million. The difference, about $11.9 million, will go to agencies that overspent their budget this year - the city's Police Department chief among them.

The administration came under fire from some council members last summer when they were asked to divert $20 million in last year's surplus money to agencies that had overspent, including for overtime. Last year, the city had a total surplus of about $59 million.

Baltimore appears to be in better shape than many cities across the country, especially those that have continued to rely heavily on property and income taxes to fund day-to-day operations. A study by the National League of Cities found that 63 percent of cities were less able to meet their obligations in 2004 than they were the year before.

Some Rust Belt urban centers, such as Pittsburgh and Detroit, have faced police layoffs and other significant budget cuts, according to news reports.

"We've made a great deal of progress together by wisely investing our dividends," O'Malley said. "We're going to continue Baltimore's comeback, and we're going to be building up Baltimore's nationally recognized progress."

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