Time to make some hard choices

That was the line put out by the governor and lawmakers. But the Department of Legislative Services took a look at the state’s budget and concluded Maryland still faces significant hurdles.

The bottom line: State government continues to spend far more than it brings in through tax revenues.

If you compare ongoing income to ongoing expenses, Maryland remains $719 million in the red for the current fiscal year. The state will be at least $351 million in hock for the fiscal year that starts July 1. Even with all those new taxes on consumers, businesses and millionaires, we’re still paying out far more than we’re taking in.

Only by shifting funds and dipping into cash reserves can Maryland pull off the required balancing act. Indeed, what state leaders like to call a $1 billion surplus actually consists primarily of a ‘‘rainy day” account that cannot be touched unless the state encounters a catastrophic financial crisis.

So things aren’t nearly as sunny as state officials want us to believe. Looking down the road, it gets downright stormy.

Legislative Services predicts O’Malley will have a nearly quarter-billion-dollar budget shortfall to deal with next January and a structural deficit (not enough ongoing revenue to pay expenses) of nearly half-a-billion dollars.

In 2010, the budget deficiency grows to nearly $600 million. And if slot machines aren’t approved by voters this November, Maryland faces a budget gap of nearly three-quarters of a billion dollar in 2011 and again in 2012.

Had enough bad news? Well, there’s a ray of hope.

Over the next five budget years, Legislative Services predicts the state’s flow of tax revenue will grow 4.7 percent but on-going spending will increase only 4.1 percent. Of course, that assumes there will be at least a half-billion dollars in slot machine proceeds pouring into the state’s coffers and no new programs initiated.

With slot machine money in hand, the state’s budget bind should vanish in four or five years. Without slots, Maryland faces huge deficits far into the future.

What does this mean for O’Malley and legislators over the next two years? Painful budget decisions. These politicians are unlikely to vote for additional tax increases until after the 2010 elections. They know another round of tax hikes would be suicidal.

This leaves one viable option — cutting back on program spending. Only this time, the cuts won’t be modest in size like the past year’s reductions. All the easy cuts have been made. It will take serious belt-tightening to close the large projected deficits.

O’Malley and lawmakers this year refused to consider eliminating entire programs or making deep cuts in local aid. But such steps may be necessary in 2009 and 2010, particularly if Maryland’s shaky economy worsens or fails to bounce back quickly.

Without slots revenue in 2011 and 2012, Senate President Mike Miller says state aid to public schools will be on the chopping block. There may be no other way — short of raising taxes — to balance the books as required by the state constitution.

Yet state government is in far better budget shape than many of Maryland’s counties, which are heavily dependent upon real estate tax revenue.

The housing depression has pinched tax collections for Maryland counties. Under the state’s three-year, rolling real-estate assessment system, counties will be hurt by lower housing prices in 2008, 2009 and 2010 — and beyond. That means a continuing drop in real estate revenue for local governments.

The days of large, annual pay raises for teachers and local government workers may be ending. It already happened in Baltimore County, where County Executive Jim Smith denied pay increases to avoid higher local taxes.

There also could be a sharp retrenchment of local government programs, including in the schools. County officials are even more hostile to raising taxes than their state counterparts (Montgomery County’s leaders being an exception). A combination of aid cuts from the state and plunging property tax revenue could force Maryland counties to shrink programs and do away with non-essential activities.

This may not be a bad thing. Growth in government cannot be sustained forever. At some point, hard choices have to be made. Which programs are expendable? Which can function with less money?

If O’Malley and county officials want to encourage innovative, outside-the-box thinking to make government smaller yet more effective, a prolonged period of budget retrenchment is an ideal time to do so.

Barry Rascovar is a communications consultant and State House columnist. He can be reached at brascovar@hotmail.com.