WASHINGTON — Maryland Gov. Martin O’Malley yesterday released a proposal for the state’s fiscal 2011 budget that would reduce reserve fund contributions and increase public debt by 7.1% over fiscal 2010.

The state expects to issue $916.5 million of general obligation bonds in fiscal 2011, consistent with the capital debt affordability committee’s December recommendation, a spokesperson for the governor said yesterday.

Facing almost a $2 billion revenue shortfall for fiscal 2011, the proposed budget would slash spending by more than a $1 billion, including $330 million in aid to localities, on top of cuts the governor made late last year to help balance the fiscal 2010 budget.

The “tough decisions” on the budget have helped the state preserve its triple-A rating, O’Malley said in a letter sent yesterday to state representatives.

The governor’s budget also relies on about $900 million of transfer payments. Some of them would transfer cash that would have been spent on construction projects to the general fund. The budget indicates that those projects would be financed with bonds.

About $113 million of the construction projects would be funded with bonds and $177 million would be funded with unexpended special-fund balances for bond-eligible projects from prior-year appropriations, according to the budget. The projects fit within the state’s existing bond capacity because some projects scheduled for fiscal 2011 are not ready while a favorable bidding environment has freed up cash, O’Malley spokesman Shaun Adamec said in an e-mail.

The budget also authorizes $4.6 million for qualified zone academy bonds. It proposes the issuance of GOs for community development, housing, and land conservation.

Rating analysts said they are still reviewing the budget proposal to see what effect it might have on the state’s credit.

General fund revenue is estimated to grow 3.0% year over year in fiscal 2011 as the state’s investment returns recover and the economy rebounds. General fund receipts dropped 6.6% through the first four months of fiscal 2010 compared with the year-earlier period, Comptroller Peter Franchot reported in November.

The budget would allocate $15 million for the state reserve fund, which comprises four accounts, down from a $115 million allocation in fiscal 2010. The governor is required to include $100 million for the reserve stabilization account, if the balance is less than 3% of estimated general fund revenues. The budget is expected to keep that fund at 5% of general fund revenue, a rating analyst said.

O’Malley’s budget would remove a $127 million commitment from the general fund for the Intercounty Connector, an 18.8-mile toll road project to connect Montgomery and Prince George’s counties, and authorizes that money for bonds. The Maryland Transportation Authority has issued $750 million of grant anticipation revenue vehicle bonds for the project, scheduled to open in 2013 .

The MdTA was rated Aa3 by Moody’s Investors Service and AA-minus by ­Standard & Poor’s and Fitch Ratings in December when it issued $549 million of tax-exempt and taxable bonds for transportation projects, including the connector.

In November, O’Malley sent the Board of Public Works a proposal to cut $360 million from the fiscal 2010 budget. The cuts depleted $25 million from the reserve fund. The Board of Public Works can reduce expenditures by 25% and authorizes all GO issuance.

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