A fiscal cliff

Our view: A new report on state finances is a sobering look at how reliant we were on federal stimulus funds and offers no easy way forward

November 11, 2010

Here's the good news about Maryland's budget picture: The latest estimates for spending growth and revenue growth in the coming fiscal year are pretty close to one another.

Projected ongoing spending — accounting for increases in health care costs, student enrollments in schools, employee retirement benefits and all the other things that steadily drive the state's costs upward — is about $676 million higher in fiscal 2012 than it is in fiscal 2011. And projected revenues — taking into account a modest recovery and the first influx of cash from Maryland's slot machine gambling program — are about $485 million higher in the coming fiscal year than they are now.

That's a difference of just $191 million out of a $15.7 billion general fund budget, pretty close as these things go.

Or at least it would be if not for the bad news about Maryland's budget picture: State spending and revenues have been balanced on paper, as required by law, but they haven't been balanced in reality. Maryland has weathered this recession through a reliance on federal aid, fund transfers and one-time cuts. If this was a normal economic downturn, that would probably have been enough.

But instead we face a fiscal cliff. The federal stimulus funds that carried us through — to the tune of about $1.2 billion last year — are gone, and the results of last week's election suggest they're not coming back. We can't go on pilfering from the state's income tax reserve fund, and the strategy of taking from pots of money like the Program Open Space fund and backfilling with borrowed money is coming to an end as the state nears its self-imposed debt limits.

So, taking all that into consideration, the Department of Legislative Services pegs the shortfall we face next year at $1.6 billion — if we drain our remaining cash balance. Not taking that into account, the real structural imbalance between ongoing spending and revenues is more like $2.1 billion.

What this means is that all of the cutting Gov. Martin O'Malley has done during the last four years has gotten us to the point where we're treading water — at the bottom of a well.

Mr. O'Malley insists that he's preparing a budget for the next fiscal year that includes no tax or fee increases. If true, that will be an impressive sight to behold — or a frightening one if you depend in some way on state services. The briefing prepared by DLS for the state's Spending Affordability Committee — a group of lawmakers form both parties and some appointees from the business community — suggests no easy solutions for bridging the gap.

The assumptions already include no cost of living increases for state employees, continued furloughs and a presumption that tuition will be allowed to rise at state universities. It assumes the abolition of 500 government jobs and modest revenue from Maryland's fledgling slot machine gambling program. And it assumes that personal income will increase in the state by more than 5 percent next year, a rate not seen in recent memory. No matter how quickly the economy recovers, we're not going to grow out of this problem anytime soon.

What this latest report makes clear is just how crucial federal stimulus funds have been in staving off massive state spending cuts that would have made life all the more precarious for Maryland's poor and unemployed — and would have added to their ranks through layoffs of state workers. But the idea of a second round of stimulus funds was going nowhere before Republicans took over the House of Representatives, and it's all but impossible now.

During the gubernatorial campaign this fall, Mr. O'Malley frequently described the previous four years as "terrible." Unfortunately, he may soon consider them the good old days.

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