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Accountants within the Comptroller's Office have suggested that Maryland tap a $370 million reserve fund for tax refunds as a way to help ease the budget crisis either in the current financial year or the next.

Using the money would not affect the state's ability to pay the refunds; the account is kept to balance ledgers.

How Gov. Martin O'Malley would employ the fund has been the subject of staff meetings and legislative briefings.

"It's one of the things you do when you're running out of money in a big way," said Warren G. Deschenaux, director of the Office of Policy Analysis.

O'Malley must find about $400 million to balance the budget for fiscal 2009, which ends June 30, and about $1.9 billion to plug a gap in fiscal 2010. By law, Maryland budgets must balance.

When lawmakers arrive in Annapolis on Wednesday, they will start a 90-day session focused on the budget.

The General Assembly has no stomach for raising taxes after the 2007 special session, and the economic downturn has increased demand for government services. Lawmakers are pondering whether to cancel "bond bills" — a cherished capital program that helps local nonprofits — even though the savings will be slight in the face of the deficit.

"That's tough because politicians like to be able to take things back to their district and say, ‘Look what I got,'" said Del. Peter F. Murphy (D-Dist. 28) of Bryans Road.

"One person's pork is another person's valuable program," said Del. Murray D. Levy (D-Dist. 28) of La Plata. "They're good programs, but the house is burning down, the rooms are on fire. We have to make some tough decisions. I think that's probably the least damaging as a way to start."

O'Malley (D) is pondering a number of options, including taking money from surpluses in a variety of funds, spokesman Shawn Adamec said.

"Hopefully, the budget we submit will be improved by the time the legislature finishes working with it," O'Malley said Wednesday, a reference to President-elect Barack Obama's effort to channel federal money into state coffers.

Senate President Thomas V. Mike Miller Jr. said agencies could expect level funding.

"It's not a cut; it's just not an increase," said Miller (D-Dist. 27) of Chesapeake Beach.

If the state uses the tax refund money, officially called the Local Income Tax Refund Account, officials expect to have to explain what they're doing to Wall Street's bond rating agencies, to preserve Maryland's AAA bond rating, Treasurer Nancy K. Kopp said.

"The discussion has just started. I don't know what impact it would have. In theory, I don't know why it wouldn't be good for '09 or 2010," Kopp (D) said.

Using the money would mean the state's financial records would show a $367 million unfunded liability, but one that would be replenished with the start of the next calendar year.

The reserve acts something like an escrow account. Tax receipts are deposited into the account, and a portion is saved to cover state income tax refunds that would be paid out as part of the local income tax.

But taxes are collected over a calendar year, and the state budgets on a fiscal year, so taxes collected from Jan. 1 to June 30 get refunds starting July 1, which marks the start of the next fiscal year. The refunds end up being paid through different funds, leaving the refund reserve alone.

The Comptroller's Office is trying to decide whether the fund needs to be replenished and, if so, what the payback plan would be.

Kopp said the state has used the reserve before, including in the 1991-1992 recession.

Talk of the fund has only just begun to filter to legislators. Comptroller Peter V.R. Franchot informed a few legislators of its existence Wednesday. The fund came up at O'Malley's Wednesday breakfast with House Speaker Michael E. Busch (D-Dist. 30) of Annapolis.

Officials are unsure whether it should be part of budget resolution for fiscal 2009 or fiscal 2010. Deschenaux said it doesn't really matter.

"But you can only spend it once, because it's one-time cash," he said.

If used in 2010, the fund will not prevent drastic budget changes, O'Malley spokesman Rick Abbruzzese said.

"All it does is make a $1.9 billion problem into a $1.6 billion problem," he said. "The challenges we face regardless of the fund are significant, and substantial cuts will have to be made."