By BRADY HOLT
ANNAPOLIS (Jan. 21, 2010) - A series of fund transfers that would close nearly half the state's projected $2 billion budget shortfall has sparked some concern that the move could harm Maryland's future finances and its prized AAA bond rating.
Gov. Martin O'Malley's proposed fiscal year 2011 budget hinges on the $913 million that would be diverted from the capital budget, local income tax reserves and a variety of other sources to help cover the state's operating costs.
O'Malley and other Democratic lawmakers maintain the transfers are necessary to preserve key programs during the economic downturn, but Republican legislators said they worried the state's financial picture would worsen if spending isn't reduced this year.
"We haven't done enough yet to cut the size of the government, and next year or the following year I think we're going to be devastated," said Sen. J. Lowell Stoltzfus, R-Somerset. "I'm very concerned that we're kicking the ball down the road."
The recession's impact on revenue leaves Maryland with annual projected shortfalls of more than a billion dollars for the next five years, said Office of Policy Analysis director Warren Deschenaux, even though he said revenue is expected to start increasing again this summer.
"We've lost enough revenue at this point that natural growth even in a recovery isn't likely to close the gap," Deschenaux said. "To balance our budget just through revenue growth through the next year would require a double-digit increase in revenues, and we're not projecting that."
Furthermore, the $350 million that O'Malley wants to transfer from accounting reserves of local income tax money would need to be repaid at the rate of $50 million a year, Deschenaux said.
Nick Johnson, who analyzes state budgets for the Center on Budget and Policy Priorities think tank, said while fund transfers are typically harmless, those that require repayment can be problematic.
"That then becomes a double whammy because not only is the money not there next year" to be transferred again, but future revenue must be designated to replenish the fund, Johnson said.
Nonetheless, Johnson said, "It's legitimate to some degree to acknowledge that next year's problems are going to have to wait until next year."
"We all understand it's not something we would ordinarily do. But these are extraordinary times," Deschenaux said.
Speaking about his budget proposals at a press conference Tuesday, O'Malley said he was confident the current recession will end and relax the state's budget crunch, a sentiment echoed by Sen. Jim Rosapepe, D-Prince George's.
"In general, this is what families do" when faced with tight finances, Rosapepe said. "You conserve your resources; you move money around to try to get through tough times."
But at the forefront of any discussion of fund transfers is Maryland's AAA bond rating, which makes it easier and cheaper for the state to borrow money.
Analysts at credit-rating firms said they couldn't comment yet on the details of the fiscal year 2011 proposed budget released Wednesday morning, but Douglas Offerman, who oversees Maryland's budget for Fitch Ratings, said the state will come up for its periodic full review next month.
Maryland has consistently fared well under industry analysis because it "has very strong oversight of debt, it has a diverse economy, and their financial management has been consistently conservative," Offerman said.
Deschenaux said he didn't think these tenets were missing from the newly proposed budget, but said he couldn't be entirely sure that Maryland wouldn't join the 14 states that saw "negative credit action" in their Fitch ratings in the last two years.
"I don't believe our AAA rating is in imminent risk, but nothing is forever," he said. "We've been a AAA state since they started giving bond ratings, and it means a lot to the folks who are elected to represent us that we keep that rating."
Capital News Service contributed to this report.