A gaping budget gap awaits Gov. Martin O'Malley and Maryland lawmakers when they return to Annapolis this month — a problem that persists even after three years of recession-driven trimming and now amplified by the evaporation of federal stimulus aid.
But fresh from re-election to four-year terms, officials have the political capital this year to make unpopular choices.
O'Malley, a Democrat who campaigned heavily on his commitment to education and secured the backing of the state's largest labor union, is considering cuts to schools and reductions to the state work force. And the Democratic-controlled legislature, emboldened by its immunity to November's national Republican tide, is weighing tax increases, including those on alcoholic beverages and gasoline.
"The general rule is, get the hard decisions out of the way early," said former Gov. Parris N. Glendening, a Democratic elected official for 31 years. "Even if there are budget-balancing gimmicks left, it's still better to just make the tough calls now so that voters can see the full benefits of what you've done by the next election."
Such was the case with O'Malley's first term. He called a special session of the legislature in 2007, pushed through a billion-dollar tax plan and laid the foundation for a slot machine gambling program.
Due largely to a national recession and a slow start for gambling, the state's budget remains awash in red, with as much as a $1.6 billion shortfall in the next fiscal year's $13 billion operating budget and a structural deficit — the persistent difference between state revenue and state spending — of about $2 billion, legislative analysts say.
A committee of top legislators recently recommended that the governor shrink the structural deficit by at least one-third this year, meaning that O'Malley would need to reduce spending by about $667 million, in addition to closing the gap in the operating budget.
The governor has said that his fiscal 2012 spending plan, to be unveiled this month, reflects the "new normal" of more than 7 percent unemployment and lower revenue from income taxes and other sources. He has pledged not to introduce new or increased taxes, though he has said that he would be open to revenue proposals approved by the General Assembly.
In recent memos and conversations with agency leaders and advocates, state officials have revealed some of O'Malley's options for cost savings.
For the first time since taking office in 2007, the governor is considering cuts to education spending. One plan calls for an across-the-board 5 percent cut to K-12 schools. He also is trying to reduce the state work force through buyouts — or layoffs, if necessary — and might merge some agencies.
And there's a movement to attack the unfunded pension liabilities, which could help drive down the structural deficit. O'Malley's budget advisers have presented him with plans to reduce benefits to new state workers, and renegotiate with existing employees. Local governments or school boards might be asked to shoulder some of the teacher pension burden — an option the former Baltimore mayor has bristled at in past years.
"This is going to be the most difficult budget that this governor has ever proposed," said Matt Gallagher, O'Malley's chief of staff. "No one will be happy, but we have to figure out the fairest and most sustainable path."
T. Eloise Foster, secretary of the Maryland Department of Budget and Taxation throughout O'Malley's tenure, said the next budget will be particularly ugly because "there are no easy choices left to make." In O'Malley's first term, she said, the state cut $5.6 billion in spending.
Annapolis has counted on Washington for federal Band-Aids for its budget the past two years. In the current fiscal year, which ends June 30, the state applied $1.3 billion in federal stimulus money to its operating budget. But with Republicans gaining control of the House of Representatives in the November elections and picking up seats in the U.S. Senate, a new round of stimulus dollars appears unlikely.
"Up until now, we've been on federal life support," said Minority Whip David Brinkley, a Republican representing Frederick and Carroll counties in the state Senate and a member of the Budget and Taxation Committee. "Everybody knew this was going to happen, but nobody wanted to acknowledge it."
As bad as Maryland's budget problems might appear, state leaders hasten to say they could be worse. States across the country face budget gaps, and some, including California and Illinois, are laying off teachers by the hundreds and defaulting on payments to contractors.
Nationally, state revenues have dropped an average of 12 percent since the recession began, said Elizabeth McNichol, a senior fellow at the Center on Budget and Policy Priorities in Washington. And it typically takes states two or three years longer than the rest of the economy to recover from a recession.