Maryland’s budget woes will dominate 2011 legislative session 

Posted: 7:00 pm Thu, January 6, 2011
By Nicholas Sohr
Daily Record Business Writer

Maryland’s budget woes will dominate the 2011 legislative session as lawmakers seek to bridge a $1.6 billion deficit without the federal safety net that eased the state’s fiscal pain in recent years.

Gov. Martin O’Malley has vowed to avoid tax increases in his budget proposal due Jan. 21 and legislative leaders say they agree with that approach, putting some sacred cows — education, pensions and health care potentially among them — on the chopping block and ensuring brawls among interest groups battling for funding.

But some members of the General Assembly, which convenes Wednesday, are sure to ignore the no-tax pledge and push for higher levies on alcohol, among other things, pitting them against lobbying powerhouses as well as other legislators.

Whatever the solution, Maryland will not be able to rely on Washington. The stimulus dollars that boosted the general fund the last two years — by $1.1 billion in fiscal 2010 and $1.4 billion in fiscal 2011 — are gone.

“This year is going to be much more difficult than the last few years,” said Senate Minority Leader Allan H. Kittleman, R-Howard and Carroll. “Just like any kind of dependency, it’s very difficult to go cold turkey, to get yourself back in shape.”

Maryland is not alone in that.

State budgets across the country will have $37.9 billion less in stimulus money this year and face a cumulative deficit of $82.1 billion.

“States will very much be on their own in figuring out what to do,” said Arturo Pérez, a fiscal analyst with the National Conference of State Legislatures. “There is no parallel. This is the worst economic crisis the states have faced since the Great Depression.”

Pérez said “all the low-hanging fruit has been picked” from state budgets.

“Everything is on the table,” he said. “And when they say everything, they mean everything.”

O’Malley, a Democrat, said 2011 will “feel like a more painful year than the last two when it comes to the state budget.”

Addressing the structural deficit

Some lawmakers see this as an opportunity to address the state’s persistent structural budget deficit of about $2 billion. Members of the Spending Affordability Committee, which sets guidelines for the governor’s budget, said in December they want O’Malley to reduce the deficit by one-third, or about $670 million.

Republican members argue that the state should address the entire structural deficit this year.

“The state has used gimmicks, fund transfers, smoke and mirrors, massive tax increases, federal stimulus dollars, all to paper over what reduces to excessive spending,” said House Minority Leader Anthony J. O’Donnell, R-Calvert and St. Mary’s. “We need to fix that.”

O’Malley spokesman Shaun Adamec said the governor is still mulling cuts, including a 5 percent reduction in education spending. The state expects to spend nearly $7 billion on K-12 education and another $5.1 billion on colleges and universities this fiscal year.

Another option is to shift a portion of teacher pension costs, which the state shoulders alone, to the counties and Baltimore. A state commission recommended Dec. 20 that the counties take on about $250 million in teacher pension obligations.

“They made some very positive recommendations,” Senate President Thomas V. Mike Miller Jr. said. “Now, is the governor going to have enough political will to take the recommendations and move forward? I hope so.”

Opponents, including some traditional allies of O’Malley and his party, have already lined up against the proposals.

Leaders of state employee unions say changes to pension and health plans unfairly shift the burden of Maryland’s fiscal woes to its employees. Local jurisdictions warn of cuts to school funding if they are forced to shoulder more teacher pension costs.

O’Malley said the budget also will likely include some of the same deficit-bridging tools employed in prior years, including raids of funds dedicated to obligations like transportation projects and the University System of Maryland.

The governor has offered employees a $15,000 buyout with the goal of emptying 1,500 of the state’s approximately 80,000 positions. Adamec said the governor has not decided if he will continue employee furloughs and government shutdown days in the coming year. The administration cut about 4,200 vacant positions in O’Malley’s first term.

Bracing for tax increases

Despite the austerity pledges from the top elected officials in Annapolis, business leaders are warily looking at tax proposals being discussed in other corners of the General Assembly.

“Clearly there’s a roadmap being built here,” said Ellen Valentino, state director of the National Federation of Independent Business. “I think the pressure to increase taxes is going to be enormous.”

A host of tax increases being discussed could weigh heavily on small businesses, she said, including raising the alcohol tax, resurrecting the millionaire’s tax and expanding the sales tax.

The Maryland Budget and Tax Policy Institute and Progressive Maryland recently backed a proposal to extend the 6 percent sales tax to many services. Those groups also support extending the “millionaire’s tax” — a tax bracket for the state’s top earners that expired at the end of 2010.

The dime-a-drink alcohol tax hike is likely to see the strongest support, but it also faces staunch opposition from alcohol wholesalers, retailers and distributors, a well-funded and influential lobby in Annapolis.

Beer and wine excise taxes were last raised in 1972 and the liquor tax in 1955. Proponents hope to generate $210 million with the increase to put toward mental health and addictions programs, though revenue-hungry legislators could decide to use the proceeds to reduce the deficit.

The Maryland Health Care for All! Coalition has 55 delegates and 19 senators signed on to its pledge — short of, but relatively close to the 71 votes in the House and 24 in the Senate it needs.

“I think that’s one [tax increase] people seem to be open to,” said House Speaker Michael E. Busch, D-Anne Arundel. “It depends on how it’s structured. It’s a huge burden on the hospitality industry and I don’t know if it’ll happen with the way bars and restaurants are struggling right now.”

Miller, however, called the alcohol tax increase “nonsense.”

Protecting business incentives

Donald C. Fry, president and CEO of the Greater Baltimore Committee, said his organization will be keeping a close watch on business and development incentives.

The biotech tax credit was increased last year from $6 million to $8 million. But lawmakers balked at another O’Malley proposal — to extend the $10 million Sustainable Communities Tax Credit for redevelopment projects beyond a single year, meaning it will debated again this year.

And the film production credit, winnowed to $1 million, has consistently been on the chopping block.

“When you’ve got a fragile economy, those are the kind of things that can make a difference,” said Fry, a former lawmaker who served on budget committees in both houses. “Just maintaining them at their current level is always a significant achievement.”

The General Assembly also will debate the largest piece of O’Malley’s business agenda — a $100 million venture fund fueled by premium tax credits sold to insurance companies. A similar plan stalled last year when the administration and General Assembly could not agree on how much of the fund should be controlled by the Department of Business and Economic Development, and how much by private firms.

Lawmakers are also expected to tweak the rules for the state’s fledgling casino industry in hopes of bringing in more revenue-producing slot machines.

Wholesale changes, such as adding casino locations and table games to the mix, appear destined to fail for lack of support in the House and the governor’s office. But minor changes to the gaming license for the state-owned Rocky Gap Lodge & Resort are likely, said Fry, who is also chairman of the Video Lottery Facility Location Commission.

The General Assembly will tackle thousands of other bills, including legalization of gay marriage, wind energy regulations, the framework for the health insurance exchange mandated by the federal health care reform, and campaign finance changes spurred by a list of recommendations released Tuesday by Attorney General Douglas F. Gansler and a U.S. Supreme Court decision last January that opened elections to corporate donors.

But the budget will be front and center through it all.

“It’s a sign of the times,” Busch said of the looming budget cuts.

“We’re in a recessionary period. We had some stimulus money, but the economy hasn’t recovered as well as we thought it would,” he added. “But we’re under an obligation to have a balanced budget and we’re going to protect the priorities of the state as best we can.”