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Federal debt, deficit negotiations loom large in Maryland

Maryland’s top budgetary analyst told senators Tuesday the best defense against fiscal uncertainty at the federal level is to get the state’s own balance sheet in order.

Warren Deschenaux urged the Senate Budget and Taxation Committee to address the state’s structural deficit — Gov. Martin O’Malley will face about a $1.1 billion deficit when crafting his fiscal 2013 budget this fall — and leave a larger pool of money to cushion the state’s finances.

“Fund balance is the key variable that is in the state’s hands exclusively,” he said. “The one manipulative variable is our budget and how we manage it.”

The analyst suggested expanding the state’s Rainy Day Fund to 7.5 percent of general fund revenues. Lawmakers now set 5 percent aside and expect $681 million to be there at the end of fiscal 2012.

Deschenaux said a similar change was made after the recession in the early 1990s, when Maryland was hit particularly hard. The Rainy Day Fund was increased then from 2 percent of the general fund to 5 percent.

“I think you probably want to get it to 7.5, over time,” he said. “Our budget is bigger, and the uncertainty is no less, and I would argue greater, than it was in the 90s.”

Deschenaux was discussing the decision by Moody’s Investors Service to place on review for potential downgrade the AAA ratings of Maryland and four other states heavily dependent on federal spending.

He said the outlook in the debt limit and long-term deficit debate is not good for Maryland and other states, which will likely be hit on both the discretionary spending side of the equation and in entitlement programs.

“The easiest way to reform an entitlement program is to reform Medicaid,” Deschenaux said. “And the easiest way to reform it is to push more costs on to the states.”

Maryland expects $9.1 billion in federal funding in fiscal 2012. Medicaid accounts for 45 percent of that, food stamps 13 percent, special education 3 percent, with a litany of social assistance, education, environmental, energy and other programs making up the rest. High planning and construction accounts for 6 percent of the federal aid to Maryland’s state government.

“The outlook for even maintaining current levels of highway funding in the present Congress is quite low,” Deschenaux said. “The question is how impaired that funding level will be.”