WASHINGTON — Maryland officials approved $454 million in further spending cuts this week, which will include layoffs of state workers and a 24% decrease in the aid it provides local governments, to alleviate a budget shortfall in fiscal 2010.

But the municipalities are unlikely to issue debt to replace the loss of state funds, sources said.

The cuts also will require furloughs, salary reductions and layoffs of state workers at a time when these have become legally contentious issues in Maryland and other states.

Union workers in Prince George’s County challenged a county-approved furlough and last week won a favorable decision from a judge in the U.S. District Court for the Southern District of Maryland. The ruling — which concluded the county violated the contract clause of the U.S. Constitution by failing to consider alternatives — drew national attention, though the county said it would appeal.

The Maryland Board of Public Works, which includes Gov. Martin O’Malley, the state’s treasurer and comptroller, slashed state spending for the second time in two months on Wednesday to address an estimated $700 million budget deficit in fiscal 2010, which began July 1.

The cuts include $210.7 million in aid the state provides to municipalities for health care, police services, community colleges, and highway user revenue. The board also approved furloughs, layoffs and salary reductions of state employees to cut costs. Aid for public schools was spared.

The largest cuts come from transportation revenue that municipalities share with the state. Most municipalities will lose 90% of their highway user revenue, according to a statement released by O’Malley’s office. Baltimore, the largest recipient of road revenues, will lose 19% of its original appropriation. Funding for health care and police services was cut 35%. Community college funding was cut 5%.

“Our member municipalities are pretty much in shock,” said James P. Peck, director of research for the Maryland Municipal League, which represents 157 municipalities. Most local governments will halt capital projects, like road surfacing, as the funding dries up, he said. They are not expected to issue debt to continue projects because the fiscal year is already underway, and municipalities usually plan their debt needs before the fiscal year begins, Peck said.

Alicia Stephens, a Moody’s Investors Service analyst who covers the municipalities in Maryland, agreed that cities and counties are unlikely to issue debt because of the cuts. Since most of them are in transportation funding, municipalities have flexibility to cancel projects that have not started yet rather than cut essential services, she said. The highway user revenues from the state have been volatile in the past, and municipalities have experience managing this flux, according to Stephens.

The Board of Public Works approved $281.5 million of spending cuts on July 22. Combined with Wednesday’s cuts, the state budget is on pace to be balanced this year. However, the state could face a $1.7 billion shortfall in fiscal 2011, according to the Maryland Budget and Tax Policy Institute.

The process for making the cuts is unusual because it involves the board and not the state legislature. As a result, the cuts are not codified into law and will have to be taken into account for the fiscal 2011 budget.

The state Board of Revenue Estimates is expected in September to issue revised estimates for fiscal 2010 and preliminary estimates for 2011.

Maryland is one of seven states that has triple-A ratings from all three major rating agencies. The state has $8.5 billion in debt outstanding, the 13th-highest among states, according to Moody’s.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.