WASHINGTON - Maryland Gov. Martin O'Malley yesterday announced more than $345 million in cuts to balance the state's fiscal 2009 budget, joining Virginia, Rhode Island, and many other states forced to continually rein in spending as their tax revenues plummet during the financial crisis confronting the nation.

The state's action comes as new reports from the Center on Budget and Policy Priorities and Moody's Investors Service try to gauge the magnitude of the problem and its ramifications for municipal bond issuers.

The CBPP's report shows that at least 21 states and the District of Columbia face a combined $8.9 billion of gaps in their fiscal 2009 budgets, a figure that is expected to increase as the nationwide economic downturn continues. Those gaps come just three months after some of those same states were forced to close a combined $48 billion of revenue shortfalls for that same fiscal year.

Moody's report concludes that the continuous lower revenues, along with the current credit market conditions, could put downward pressure on some muni bond issuers' long-term credit ratings.

But states such as Maryland, which currently has a triple-A credit rating from all three major rating agencies, are probably in better shape than other states.

O'Malley's announcement of budget cuts and the elimination of 830 state jobs came after the state found last month that it would face a $432 million revenue shortfall in fiscal 2009.

"The cuts we are making ... are not easy," O'Malley said. "Eighty percent of Maryland's state budget is dedicated to public safety, public education, and public health. Yet, as our national economy has faltered, states across our country, like families across our nation, are now faced with the hard decisions necessary to balance our state budget in very difficult economic times."

Rhode Island just approved its fiscal 2009 budget in July, but is now forecasting a $26 million shortfall in that budget.

"We were preparing for what we were looking at as a slowdown in revenues and a tight budget," state Treasurer Frank Caprio said yesterday. "The fact that now revenues have slowed even more than our conservative estimates is obviously pointing toward an unprecedented downturn."

"The legislature will be looking at what we call the supplemental budget to make even more cuts and changes to save as much as possible," Caprio added. "It's unprecedented times in our economy and our markets, so we need to be flexible and stand ready to face the challenges that we're seeing now."

Virginia Gov. Timothy Kaine said last week that state finance officials plan to tap about $400 million from the state's rainy-day fund, issue $250 million of tax-exempt bonds, and cut state jobs to help plug a revenue shortfall of more than $2.5 billion in the state's $77 billion biennial budget.

The state budget gaps "will almost certainly widen as the continuing economic turmoil causes revenues to come in below estimates in more states," the CBPP said.

At least 14 states have looked ahead and prepared revenue and-or spending projections for fiscal 2010 and beyond that foresee continued fiscal distress, the group said. These 14 states include eight of the states projecting mid-year gaps for the current fiscal year - California, Connecticut, Florida, Hawaii, Maryland, New York, Vermont, and Virginia. The others are Kansas, Maine, Minnesota, Oregon, Washington, and Wisconsin.

As revenues continue to decline, states will be forced to cut services and draw down remaining reserves that are not now sufficient to allow states to weather a significant downturn or recession, the CBPP said.

"The other alternatives - spending cuts and tax increases - can further slow a state's economy during a downturn and contribute to the further slowing of the national economy," the group said.

Moody's said that municipal bond issuers will be tested by current economic and credit market conditions.

"As a result of the economic downturn, state revenues, particularly sales, personal income, and real estate transaction tax collections, will fall below budgeted forecasts in many cases," Moody's vice president Nicholas Samuels said in the agency's report. "The economic downturn will stress many issuers of municipal bonds, and require a broad array of difficult choices, but many governments and other enterprises are expected to have the flexibility to adjust and maintain their strong credit ratings."

Issuers that lack strong liquidity and are reliant on short-term note borrowing will face the most pressure if markets do not reopen quickly, Moody's added.

"Ratings on these issuers' short-term borrowings may suffer and there may be downward pressure on long-term ratings if the short-term liquidity crunch manifests as longer-term credit risk," the report said.

Also, issuers of variable-rate debt who are unable to restructure and who cannot absorb higher interest rates or have significant counterparty exposure may experience liquidity constraints that could negatively affect their long-term credit ratings, it added.

Both the CBPP and Moody's said that as tax revenues fall, state and local governments will face an onslaught of negative effects years to come.

Moody's looked broadly on the credit impacts of the ongoing economic downturn and recent credit unrest for state and local governments, as well as issuers, such as airports, hospitals, and toll roads.

"While economic declines are usually weathered fairly well by most municipal issuers because they have substantial powers to adapt, not the least of which is the ability to defer operating and capital spending, their ability to cope will depend on the length and severity of the downturn," Moody's said.

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