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C. Fraser Smith: A post of opportunity and peril for O’Malley

Gov. Martin O’Malley, who won re-election claiming he had kept Maryland (relatively) solvent, now finds himself as the leader of those states that made him look so good by comparison.

It could be an honor of dubious value or a great opportunity.

As the newly elevated chairman of the Democratic Governors Association, O’Malley could be presiding over a second major financial meltdown. States across the nation face what experts say are, cumulatively, trillions of dollars in obvious and hidden debt.

Are states headed toward an unprecedented wave of defaults? Unmet pension obligations, dwindling revenue streams and a nationwide aversion to bailouts and tax increases have led already to deep trauma in state capitals.

Like businesses, governments need good credit to function properly. Already, though, concerns about states’ ability to pay bills have led investors to be wary about buying state bonds.

Some analysts say widespread defaulting is unlikely despite the magnitude of the budget pressures. Credit rating agencies have said, somewhat cavalierly, that tough decisions rather than default are in the offing. Many such decisions have already been made.

A new ballgame

Historically, governments have met their obligations even at the expense of services to the taxpayers. But in states like California and Illinois, thousands of teachers have been dismissed — an action unthinkable before since public education is a state service dear to most voters.

The positive assurances, moreover, are based on history — not on the deep distress caused by the recession — and by a combination of over-promising and unwillingness to raise taxes. This may be a whole new ballgame.

O’Malley said during the campaign that Maryland had survived the deepest declines in service although important services were sharply reduced. This occurred, in part, because so much of state spending — on public education, for example — is required by law. Relatively few government departments could be cut.

Other governors found themselves slicing much more deeply. According to a survey by The New York Times, food stamp services were reduced in some states even as more people qualified for them. Elsewhere, vendors were paid with IOUs, and tax refunds were delayed. In Maryland, virtually every fund has been raided repeatedly to patch holes. The Transportation Trust Fund, the source for maintaining and improving roads and highways, is seriously depleted. An increase in the gasoline tax is being discussed.

Nor did the immediate future offer much hope in terms of economic growth and a return to normal revenue flow. Worse, The Times reported, states have typically faced some of their most difficult budget years after a recession has ended.

Needed: A prudent leader

Many states, including Maryland, were able to ease pressure because federal economic stimulus funds were available. No one expects that bailout to be repeated next year, though experts quoted by The Times said the federal government may have no choice. Recent tax reductions proposed by President Barack Obama may be seen in some quarters as a stimulus.

O’Malley became head of the governors association by moving up through the chairs. It was a virtually automatic promotion. Still, his 14-percentage point victory margin in The Year of the Great (Democratic) Shellacking must have impressed his peers — even if many of them were just as happy they were not next in line for the top post.

It is probably too late for O’Malley to make much impact even if he had a trove of untried ideas. He did make $5 billion in budget cuts — and he did raise the sales tax from 5 percent to 6 percent.

The jobless rate in Maryland, below the national average, has probably been held lower by the nearness of government jobs and by the state’s status as one of the wealthiest in the nation.

Still, for this governor — a man of national leadership aspirations — the new role may have upside potential. It may seem an ironic form of reward, but it could be an opportunity to project himself as the kind of prudent leader sorely needed in these times.

C. Fraser Smith is senior news analyst for WYPR-FM. His column appears Fridays in The Daily Record. His e-mail address is fsmith@wypr.org.