State considers tapping reserve to ease shortfall

January 09, 2009|By Laura Smitherman and Gadi Dechter | Laura Smitherman and Gadi Dechter, and

State officials are considering a $366 million budget fix that could spare difficult spending cuts by transferring money in an unused reserve fund kept by the Maryland comptroller's office.

The fund is maintained for accounting purposes and could go a long way to reducing a $1.9 billion shortfall that Gov. Martin O'Malley and state lawmakers must close to balance the next annual budget.

O'Malley, a Democrat, is considering various ways to pare the budget he will submit to the General Assembly that convenes next week.

"I think we need to explore all viable ideas," the governor said last night about the fund transfer proposal. "I had a conversation with the comptroller the other day, and I'm hopeful that working together we'll be able to mitigate some of the greatest pain of what will be a painful year of cuts."

The so-called local income tax reserve fund has been eyed during previous budget crises but has never been tapped. The money is set aside every year to show that the state can cover what it owes taxpayers for refunds. But the refunds are paid out of incoming tax receipts, and the reserve fund has never been used.

"Given the dire fiscal situation and given that this would have no negative impact on operations or what happens for taxpayers, we felt this is an option we would bring to the attention of the administration to help," said Joseph Shapiro, a spokesman for Comptroller Peter Franchot.

O'Malley officials said they discovered the "excess" funds in their search for cost savings.

O'Malley spokesman Rick Abbruzzese said the administration is giving "careful thought" to whether the fund can be used to help address the shortfall.

The hangup: A simple transfer might not be so easy. State officials say they would have to weigh how bond-rating agencies would view the budgeting maneuver. Maryland is one of a few states that holds a coveted AAA bond rating, which enables the state to obtain lower interest rates and therefore save taxpayers money. The top rating is based in part on the state's ability to cover its liabilities.

Shapiro said that the comptroller's office had an "internal debate" over the implications of the fund transfer and concluded that it was unlikely it would affect the state's bond rating.

A debate continues at the State House, however, whether it would be prudent to tap the fund, and whether the state should pledge to repay the fund if it does. Del. Norman Conway, an Eastern Shore Democrat who chairs the House budget committee, said he is not comfortable with using the money.

"It's there," Conway said, "but how it got accounted creates some questions. ... We're going to have to make some analysis first."

He added: "I'm always amazed when a pot of money shows up."

Del. Murray Levy, a Charles County Democrat who is a considered a budget expert in the General Assembly, called the fund transfer idea "something we need to consider."

Levy said the governor's revenue gap in the budget year beginning in June could go as high as $2.3 billion. Tapping the comptroller's reserve fund is "the kind of thing we need to do to mitigate larger amounts of cuts," he said.

Meanwhile, O'Malley spent last night preparing local government leaders for cuts in his next budget.

"None of us are going to be spared," he said. "That's the sad, sobering bad news, and I can't sugarcoat it."

O'Malley did not specify the nature of the cuts, but The Baltimore Sun reported this week that his administration is considering as a first step $66 million in state aid to public schools, local police, health departments and community colleges.

"We've been left pretty whole so far," said Baltimore Mayor Sheila Dixon, also attending the conference. "But we know it's coming."

Dixon said additional cuts in state aid could mean worker layoffs and furloughs in the city. "We're going to have to do a whole lot more with a whole lot less," she said.

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