Maryland faces a projected budget shortfall of nearly $2 billion next year, far more than expected, the state Board of Revenue Estimates reported Thursday. The gap means that the cycle of wrenching cutbacks will continue.
Budget Secretary T. Eloise Foster said the widening gap became clear when updated projections showed a $920 million drop from previous revenue estimates, on top of the expected shortfall of more than $1 billion. The numbers form the foundation of the spending plan that Gov. Martin O'Malley will release in January, which by law must be balanced. Less revenue than expected means less money for state programs.
"We have a significant cut, and we have a significant mess on our hands," said Comptroller Peter Franchot, who sits on the state's revenue board. "The question is: Is the beginning of the economic recovery real, or are we simply treading water here?"
State officials revised the forecast because they now predict that Maryland's economy won't begin to rebound until the middle of next year, or six months later than thought. That means the collection of state revenue from taxes and fees will grow at a much slower rate for the budget year that begins in July, after year-over-year declines this fiscal year and last.
The state's annual operating fund has shrunk just four times since the 1960s; the other two contractions occurred during a downturn earlier this decade.
According to the board's estimates, the state must trim about $230 million more to keep the current year's budget balanced. This year's budget has been pared by about $735 million in recent weeks - including cuts to police, roads and health and by laying off more than 200 state employees - as O'Malley tried to keep ahead of the problem.
Foster said she would recommend $290 million to $300 million in budget cuts to leave a cushion in case the revenue outlook worsens. She said she could not say which programs or agencies face cutbacks, but that they must be undertaken soon.
"We have made a number of deep cuts, and once again we're going to have to go back to the drawing board," said Foster, who is also a member of the revenue board. "We're going to act quickly and responsibly."
Maryland officials have been struggling to balance the state's $13 billion budget in the midst of the worst economic recession in decades while also anticipating a rebound in state revenues that would forestall the need to make the most drastic budget cuts.
O'Malley, a Democrat, released a statement defending his fiscal record and listing ways in which he has reduced state spending. He also touted investments made in public education - a rapidly growing area of the budget - and in environmental cleanup.
"The unfortunate reality is that more cuts will be needed," the governor said.
Republicans have criticized the O'Malley administration's approach to balancing the budget, calling for more comprehensive action to close a structural deficit. Legislative analysts project recurring shortfalls that grow to nearly $2.7 billion in four years.
"We spend more than we take in; it doesn't take a rocket scientist to figure that out, but they fail to pro-actively address the situation," said House Minority Leader Anthony J. O'Donnell, a Southern Maryland Republican. "It's mismanagement."
Warren G. Deschenaux, the legislature's chief fiscal analyst, characterized the budget situation as "quite serious." He said the governor and General Assembly have a number of big-ticket options for paring the budget, including shifting more costs to local governments, further shrinking the work force and reducing health care and retirement benefits for state employees.
O'Malley has ordered $735 million in budget reductions in recent weeks, but almost half of those are one-time actions, so the savings won't be carried forward. Details of the next round of budget cuts won't be available for weeks.
Del. Norman H. Conway, chairman of the Appropriations Committee and an Eastern Shore Democrat, said lawmakers would revisit whether one-time spending cuts should be made permanent. "We'll have to take a look at everything again," he said.
Conway sits on a joint legislative task force that met Thursday to begin a broad review of state and local finances. One of the more controversial topics that the group is expected to tackle is whether localities should pick up teacher pension costs.
Also Thursday, the state revenue board heard from representatives of the banking, real estate and retail sectors. Several warned of a slow recovery in which employment will continue to lag behind other economic indicators. After home loan defaults primarily by subprime borrowers helped to spark the recession, bankers told the board, they now are seeing borrowers with more stable credit histories defaulting because of lost jobs.
Michael Harreld, president of the greater Washington region at PNC Bank, said he has been tracking home equity lines of credit and contributions to retirement funds to get a feel for whether consumer spending, a major driver of the economy, will pick up.
"They're saving money and paying down debt," he said. "That's good for their personal balance sheets, but that's not good for your revenue estimates."