State's fiscal woes to linger

O'Malley will face string of deficits, analysts predict

November 16, 2006|By Andrew A. Green | Andrew A. Green,Sun reporter

Gov.-elect Martin O'Malley will face fiscal problems nearly as dire as those endured by Gov. Robert L. Ehrlich Jr., with state spending expected to outpace tax receipts by more than $1 billion a year for the foreseeable future without major policy changes, nonpartisan General Assembly analysts predicted yesterday.

One of Ehrlich's major claims on the campaign trail was that he turned $4 billion in predicted deficits into a $2 billion surplus. That was true, but the report presented yesterday to the state Spending Affordability Committee indicates that the state's fiscal turnaround was a blip of good fortune masking a long-term, structural imbalance between revenues and spending that the Ehrlich administration did not fix.

"Structural deficits require structural solutions, and as a result, everything is going to have to be on the table," said O'Malley spokesman Steve Kearney, who watched the fiscal briefing with First Deputy Mayor Michael Enright, who will be named O'Malley's gubernatorial chief of staff today.

Required increases in education spending, combined with Medicaid increases and other commitments, will outpace expected growth in income and property taxes and lottery proceeds, the analysts said.

When Ehrlich took office four years ago, he faced an immediate crisis, forcing him to make budget cuts the day he took office. The new projections suggest that the short-term situation isn't as bad as it was then.

Surging revenues, particularly from real estate and capital gains, helped push state budgets into the black in the latter years of Ehrlich's term. Spending cuts, one-time transfers, and tax and fee increases helped Ehrlich produce short-term surpluses.

The good news for O'Malley is that Ehrlich is leaving behind more than $800 million in surplus rainy day funds that can be spent in the fiscal 2008 general fund budget - expected to total nearly $15 billion - without jeopardizing Maryland's AAA bond rating.

$400 million hole

The bad news is that the budget, which will be prepared jointly by the outgoing Ehrlich administration and incoming O'Malley administration, will still have a $400 million hole to be filled by cuts or revenue increases.

In some ways, the situation O'Malley faces is worse, said Del. Richard S. Madaleno Jr., a Montgomery County Democrat who was elected to the Senate this month. In the past four years, Ehrlich has raided special funds and used one-time transfers to keep the budget balanced, and many of those options are no longer available, Madaleno said.

On the campaign trail, O'Malley proposed programs that could cost millions, and he said he would not rule out tax increases to pay for government programs. But Kearney said the governor-elect, who faced tough fiscal problems when he was first elected mayor, will make cuts first.

Warren G. Deschenaux, the General Assembly's chief fiscal analyst, said personal income in Maryland is not keeping pace with national figures, and home sales are down 20 percent compared with last year's, a far bigger drop than in the rest of the country.

Meanwhile, the state still has one more annual installment of the landmark six-year education funding formula known as the Thornton Plan. Next year's projected increase in education spending ($732 million) outpaces the expected increase in tax collections ($579 million), even before increased spending for Medicaid, debt payments and general government services is accounted for.

"While things are looking bleak on the revenue side, things on the spending side are going beautifully," said Deschenaux, who is known for his droll presentation of budget figures.

Despite the gloomy projections - $5.7 billion in structural deficits over the next four fiscal years - the Democrats who control the General Assembly are sanguine about the tough choices ahead.

"We have been here before," said Sen. Ulysses Currie of Prince George's County, chairman of the Budget and Taxation committee.

Del. Murray D. Levy, a Charles County Democrat who is a member of the Appropriations Committee, said there is no great magic to fixing the problem. The state can raise revenues or cut the budget, he said.

"That's it," he said. "The arithmetic is really very simple.

State Treasurer Nancy K. Kopp, who was standing next to Levy after the meeting, chimed in, "You mean two and two don't equal five?"

"Not anymore," Levy said. "The election is over.

Legislative analysts' projections are often conservative, with revenues understated. Ehrlich budget secretary Cecilia Januskiewicz said her department's estimates assume less spending than the General Assembly analysts do.

She said, however, that long-term problems might be worse than the analysts projected because of a new requirement that the state account for the cost of current and future retiree health benefits. An actuary hired by the state estimated last year that Maryland's liability could be as high as $20 billion.

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