2009 State of Maryland General Obligation Bonds, State and Local ...
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NEW ISSUES—BOOK-ENTRY ONLY$485,000,000STATE OF MARYLAND<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong><strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>, Second Seriesconsisting <strong>of</strong>Fitch Ratings: AAAMoody’s Investors Service, Inc: AaaSt<strong>and</strong>ard & Poor’s: AAA(See “Ratings” herein)$235,000,000 $200,000,000 $50,000,000Second Series A † Second Series B †† Second Series C †††Build America <strong>Bonds</strong>Dated: Date <strong>of</strong> DeliveryDue: See Inside CoverThe Second Series A <strong>Bonds</strong>, the Second Series B <strong>Bonds</strong> <strong>and</strong> the Second Series C <strong>Bonds</strong> are sometimes collectively referred to hereinas the “<strong>Bonds</strong>.” The <strong>Bonds</strong> will be issued as fully registered bonds in denominations <strong>of</strong> $5,000 each or any integral multiple there<strong>of</strong>. Purchaserswill not receive physical delivery <strong>of</strong> bond certificates. The <strong>Bonds</strong> will be registered initially in the name <strong>of</strong> Cede & Co., as nominee <strong>of</strong> TheDepository Trust Company (“DTC”), New York, New York, to which principal <strong>and</strong> interest payments will be made so long as Cede & Co. is theregistered owner <strong>of</strong> the <strong>Bonds</strong>. Interest on the <strong>Bonds</strong> will accrue from the date <strong>of</strong> their issuance <strong>and</strong> delivery <strong>and</strong> will be payable on February 15,2010 <strong>and</strong> semiannually thereafter on August 15 <strong>and</strong> February 15 <strong>of</strong> each year unless redeemed prior to maturity. So long as the <strong>Bonds</strong> aremaintained under a book-entry only system, the Treasurer <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (the “Treasurer”) will act as Paying Agent <strong>and</strong> BondRegistrar. Interest on the <strong>Bonds</strong> will be paid as specified herein to the owner <strong>of</strong> record as <strong>of</strong> the last day <strong>of</strong> the month immediately preceding theinterest payment date.FOR MATURITY SCHEDULES SEE INSIDE COVERSecond Series A <strong>Bonds</strong> maturing on or after August 15, 2018 are subject to optional redemption commencing on August 15, 2017 at aredemption price equal to 100% <strong>of</strong> the principal amount there<strong>of</strong>. Second Series B <strong>Bonds</strong> maturing on or after August 15, 2020 <strong>and</strong> Second SeriesC <strong>Bonds</strong> are subject to optional redemption commencing on August 15, 2019 at a redemption price equal to 100% <strong>of</strong> the principal amountthere<strong>of</strong>. See “The BONDS – Redemption.”In the opinion <strong>of</strong> the Honorable Douglas F. Gansler, Attorney <strong>General</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, <strong>and</strong> <strong>of</strong> Kutak Rock LLP, Washington, D.C., BondCounsel, the <strong>Bonds</strong> will be valid <strong>and</strong> legally binding general obligations <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> to the payment <strong>of</strong> which the full faith <strong>and</strong> credit<strong>of</strong> the <strong>State</strong> are pledged. In the opinion <strong>of</strong> Bond Counsel, under existing laws, regulations, rulings <strong>and</strong> judicial decisions <strong>and</strong> assuming theaccuracy <strong>of</strong> certain representations <strong>and</strong> continuing compliance with certain covenants, interest on the Second Series A <strong>Bonds</strong> <strong>and</strong> the SecondSeries B <strong>Bonds</strong> is excludable from gross income for federal income tax purposes <strong>and</strong> is not a specific preference item or included in adjustedcurrent earnings for purpose <strong>of</strong> the federal alternative minimum tax. Interest on the Second Series C <strong>Bonds</strong>, which are being issued as BuildAmerica <strong>Bonds</strong> (Direct Payment to the <strong>State</strong>), is included in gross income for federal income tax purposes. It is also the opinion <strong>of</strong> the Attorney<strong>General</strong> <strong>and</strong> <strong>of</strong> Bond Counsel that under existing law <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, the <strong>Bonds</strong>, their transfer, the interest payable thereon, <strong>and</strong> anyincome derived therefrom, including any pr<strong>of</strong>it realized in the sale or exchange there<strong>of</strong>, will be exempt from taxation within the <strong>State</strong> <strong>of</strong><strong>Maryl<strong>and</strong></strong> by the <strong>State</strong> or by any <strong>of</strong> its political subdivisions, municipal corporations, or public agencies; however, the law <strong>of</strong> the <strong>State</strong> <strong>of</strong><strong>Maryl<strong>and</strong></strong> does not expressly refer to, <strong>and</strong> no opinion is expressed concerning, estate or inheritance taxes or any other taxes not levied directly onthe <strong>Bonds</strong> or the interest thereon. See “LEGAL MATTERS” herein for a more complete description <strong>of</strong> the opinion <strong>of</strong> Bond Counsel <strong>and</strong>additional federal tax law consequences.The interest rates shown on the inside cover are the interest rates per annum payable by the <strong>State</strong> resulting from the negotiated sale <strong>of</strong>the Second Series A <strong>Bonds</strong> to the Underwriters (listed below), <strong>and</strong> the successful bids for the Second Series B <strong>Bonds</strong> <strong>and</strong> the Second Series C<strong>Bonds</strong> on August 5, <strong>2009</strong>, by groups <strong>of</strong> banks <strong>and</strong> investment banking firms. The prices or yields shown on the maturity schedule were furnishedby the Underwriters <strong>and</strong> the successful bidders. Any other information concerning the terms <strong>of</strong> the re<strong>of</strong>fering <strong>of</strong> any <strong>of</strong> the <strong>Bonds</strong> should beobtained from the Underwriters or successful bidders, as applicable, <strong>and</strong> not from the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>.The <strong>Bonds</strong> are <strong>of</strong>fered for delivery, when <strong>and</strong> if issued, subject to the receipt <strong>of</strong> the approving opinions <strong>of</strong> the Attorney <strong>General</strong> <strong>of</strong> the<strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> <strong>and</strong> Kutak Rock LLP, Washington D.C., <strong>and</strong> certain other conditions including, in the case <strong>of</strong> the Second Series B <strong>Bonds</strong> <strong>and</strong>the Second Series C <strong>Bonds</strong>, the conditions specified in the applicable Official Notice <strong>of</strong> Sale. Certain legal matters will be passed upon for theUnderwriters <strong>of</strong> the Second Series A <strong>Bonds</strong> by their counsel, Miles & Stockbridge P.C., Baltimore, <strong>Maryl<strong>and</strong></strong>. The <strong>Bonds</strong> in definitive form willbe available for delivery to DTC in New York, New York, on or about August 18, <strong>2009</strong>.CitiM&T Securities, Inc. Merrill Lynch & Co. RBC Capital Markets Siebert Br<strong>and</strong>ford Shank & Co., LLCBarclays Capital Goldman, Sachs & Co. J.P. Morgan Securities Inc. Loop Capital Markets, LLC Morgan Keegan & Company, Inc.August 5, <strong>2009</strong>† Only the Second Series A <strong>Bonds</strong> were purchased by the Underwriters listed above as described herein under “UNDERWRITING – SECOND SERIES A BONDS”.†† The Second Series B <strong>Bonds</strong> were sold on a competitive sale basis as described herein under “SALE AT COMPETITIVE BIDDING – SECOND SERIES B BONDS AND SECOND SERIESC BONDS” <strong>and</strong> pursuant to the Revised Official Notice <strong>of</strong> Sale for the Second Series B <strong>Bonds</strong> attached hereto as Appendix E.††† The Second Series C <strong>Bonds</strong> were sold on a competitive sale basis as federally taxable Build America <strong>Bonds</strong> (Direct Payment to the <strong>State</strong>), as described herein under “SALE ATCOMPETITIVE BIDDING – SECOND SERIES B BONDS AND SECOND SERIES C BONDS” <strong>and</strong> pursuant to the Revised Official Notice <strong>of</strong> Sale for the Second Series C <strong>Bonds</strong> attachedhereto as Appendix E.
MATURITY SCHEDULES$235,000,000 Second Series A <strong>Bonds</strong>MaturingAugust 15PrincipalInterestRatePrice orYieldCUSIP2012 $8,500,000 2.00% 0.94% 574192S842012 4,280,000 3.00 0.94 574192S922013 11,810,000 2.00 1.28 574192T262013 10,440,000 3.00 1.28 574192T342014 13,505,000 2.00 1.72 574192T422014 5,925,000 3.00 1.72 574192T592015 12,070,000 2.00 2.00 574192T672015 6,380,000 3.00 2.00 574192T752016 11,095,000 2.25 2.28 574192T832016 6,140,000 3.00 2.28 574192T912017 8,535,000 2.50 2.54 574192U242017 10,480,000 3.00 2.54 574192U322018 1,570,000 3.00 2.79† 574192U652018 7,600,000 4.00 2.79† 574192U402018 1,165,000 5.00 2.79† 574192U572019 8,270,000 4.00 2.99† 574192U732019 9,865,000 5.00 2.99† 574192U812020 6,730,000 3.10 3.17 574192U992020 11,790,000 5.00 3.17† 574192V232021 6,785,000 3.25 3.33 574192V312021 16,275,000 5.00 3.33† 574192V492022 6,130,000 3.40 3.46 574192V562022 17,620,000 5.00 3.46† 574192V642023 8,935,000 3.50 3.56 574192V722023 23,105,000 5.00 3.56† 574192V80† Priced at the stated yield to the August 15, 2017 optional redemption date at a redemption price <strong>of</strong> 100%.$200,000,000 Second Series B <strong>Bonds</strong>**MaturingAugust 15PrincipalInterestRatePrice orYieldCUSIP2012 $16,290,000 5.25% 0.90% 574192V982013 7,845,000 5.25 1.23 574192W222014 11,650,000 5.25 1.67 574192W302015 13,705,000 5.25 1.95 574192W482016 16,100,000 5.25 2.23 574192W552017 15,590,000 5.25 2.49 574192W632018 25,775,000 5.25 2.73 574192W712019 19,730,000 5.25 2.94 574192W892020 21,180,000 5.00 3.12†† 574192W972021 18,545,000 5.00 3.28†† 574192X212022 19,880,000 4.00 3.51†† 574192X392023 13,710,000 4.00 3.61†† 574192X47††Priced at the stated yield to the August 15, 2019 optional redemption date at a redemption price <strong>of</strong> 100%.$50,000,000 Second Series C <strong>Bonds</strong>** (Build America <strong>Bonds</strong> (Direct Payment to the <strong>State</strong>))MaturingAugust 15PrincipalInterestRatePrice orYieldCUSIP2024 $50,000,000 4.55 % 4.57% 574192X54** Offered on competitive sale basis pursuant to the related Revised Official Notice <strong>of</strong> Sale attached hereto as Appendix E.
No dealer, broker, salesman, or other person has been authorized by the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> or theUnderwriters to give any information or to make any representations with respect to the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> or its<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> other than those contained in this Official <strong>State</strong>ment, <strong>and</strong>, if given or made, such otherinformation or representations must not be relied upon as having been authorized by any <strong>of</strong> the foregoing. ThisOfficial <strong>State</strong>ment does not constitute an <strong>of</strong>fer to sell or the solicitation <strong>of</strong> an <strong>of</strong>fer to buy nor shall there be any sale<strong>of</strong> the <strong>Bonds</strong> by any person in any jurisdiction in which it is unlawful for such person to make such <strong>of</strong>fer,solicitation, or sale.The Underwriters for <strong>and</strong> with respect to the Second Series A <strong>Bonds</strong> have provided the following sentencefor inclusion in this Official <strong>State</strong>ment. The Underwriters have reviewed the information in this Official <strong>State</strong>mentin accordance with, <strong>and</strong> as part <strong>of</strong>, their respective responsibilities under the federal securities laws as applied to thefacts <strong>and</strong> circumstances <strong>of</strong> the Second Series A <strong>Bonds</strong>, but the Underwriters do not guarantee the accuracy orcompleteness <strong>of</strong> such information.In connection with the <strong>of</strong>fering <strong>of</strong> the Second Series A <strong>Bonds</strong>, the Underwriters may overallot or effecttransactions which stabilize or maintain the market prices <strong>of</strong> the Second Series A <strong>Bonds</strong> at levels above those whichmight otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. The<strong>Bonds</strong> have not been registered under the Securities Act <strong>of</strong> 1933, as amended, in reliance upon exemptions withoutprior notice contained in such Act. In making an investment decision, investors must rely on their own examination<strong>of</strong> the <strong>State</strong> <strong>and</strong> terms <strong>of</strong> the <strong>of</strong>fering, including the merits <strong>and</strong> risks involved. These securities have not beenrecommended by any federal or state securities commission or regulatory authority. Furthermore, the foregoingauthorities have not confirmed the accuracy or determined the adequacy <strong>of</strong> this document. Any representation to thecontrary may be a criminal <strong>of</strong>fense.CUSIP numbers on the inside cover page <strong>of</strong> this Official <strong>State</strong>ment are copyrighted <strong>2009</strong> by the AmericanBankers Association. CUSIP data herein is provided by St<strong>and</strong>ard & Poor’s, CUSIP Service Bureau, a division <strong>of</strong>The McGraw-Hill Companies, Inc. The <strong>State</strong> takes no responsibility for the accuracy there<strong>of</strong>. The data are notintended to create a database <strong>and</strong> does not serve in any way as a substitute for the CUSIP Service Bureau.To ensure compliance with Treasury Circular 230, taxpayers are hereby notified that the informationcontained in this Official <strong>State</strong>ment is not intended to be used, <strong>and</strong> cannot be used, by a purchaser <strong>of</strong> the <strong>Bonds</strong> forthe purpose <strong>of</strong> avoiding federal tax penalties. Each purchaser <strong>of</strong> the <strong>Bonds</strong> is urged to contact an independent taxadvisor concerning an investment in the <strong>Bonds</strong>.This Official <strong>State</strong>ment is not to be construed as a contract or agreement between the <strong>State</strong> <strong>and</strong> thepurchasers or holders <strong>of</strong> any <strong>of</strong> the <strong>Bonds</strong>.All quotations from <strong>and</strong> summaries <strong>and</strong> explanations <strong>of</strong> provisions <strong>of</strong> laws <strong>and</strong> documents herein do notpurport to be complete <strong>and</strong> reference is made to such laws <strong>and</strong> documents for full <strong>and</strong> complete statements <strong>of</strong> theirprovisions. All statements made in this Official <strong>State</strong>ment involving estimates or matters <strong>of</strong> opinion, whether or notexpressly so stated, are intended merely as estimates or opinions <strong>and</strong> not as representations <strong>of</strong> fact. The information<strong>and</strong> expressions <strong>of</strong> opinion herein are subject to change without notice <strong>and</strong> neither the delivery <strong>of</strong> this Official<strong>State</strong>ment nor any sale <strong>of</strong> the <strong>Bonds</strong> shall under any circumstances create any implication that there has been nochange in the affairs <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> since the respective dates as <strong>of</strong> which information is given herein. Theinformation set forth herein has been obtained from the <strong>State</strong> <strong>and</strong> other sources that are deemed to be reliable. Theinformation from sources other than the <strong>State</strong> is not guaranteed as to accuracy or completeness nor should it beconstrued as representations <strong>of</strong> the <strong>State</strong> or the Underwriters.
STATE OF MARYLANDSELECTED STATE OFFICIALSEXECUTIVEMartin O’MalleyGovernorAnthony G. BrownLieutenant GovernorPeter FranchotComptrollerDouglas F. GanslerAttorney <strong>General</strong>Nancy K. KoppTreasurerJUDICIALRobert M. BellChief JudgeCourt <strong>of</strong> Appeals <strong>of</strong> <strong>Maryl<strong>and</strong></strong>LEGISLATIVEThomas V. M. Miller, Jr.President <strong>of</strong> the Senate(47 Senators)Michael E. BuschSpeaker <strong>of</strong> the House <strong>of</strong> Delegates(141 Delegates)
TABLE OF CONTENTSPagePageINTRODUCTION .............................................................................................iTHE STATE ......................................................................................................1THE BONDS......................................................................................................2<strong>General</strong> .......................................................................................................2Build America <strong>Bonds</strong>................................................................................2Authorization for the <strong>Bonds</strong>....................................................................3Security for the <strong>Bonds</strong>..............................................................................3Redemption................................................................................................3Remedies.....................................................................................................4Estimated Sources <strong>and</strong> Uses <strong>of</strong> Funds ...................................................5Use <strong>of</strong> Proceeds..........................................................................................5STATE GOVERNMENT ................................................................................5Legislature..................................................................................................5Executive Branch ......................................................................................5Board <strong>of</strong> Public Works.............................................................................6Principal Departments .............................................................................6Judiciary.....................................................................................................7STATE FINANCES..........................................................................................8Budgetary System .....................................................................................8<strong>State</strong> Revenues...........................................................................................9<strong>State</strong> Expenditures <strong>and</strong> Services ..........................................................12<strong>State</strong> Reserve Fund.................................................................................14FY 2004-2008 GAAP <strong>General</strong> Fund Results <strong>of</strong> Operations.............16<strong>General</strong> Fund <strong>2009</strong> Budget....................................................................17<strong>General</strong> Fund 2010 Budget....................................................................19Interim <strong>General</strong> Fund Revenues <strong>and</strong> Expenditures..........................20Federal Stimulus Funding .....................................................................21Funds Supporting <strong>State</strong> <strong>General</strong> Fund Commitments .....................21Higher Education....................................................................................24FY 2004-2008 <strong>General</strong> Fund Budget vs Actual..................................25Cigarette Restitution Fund....................................................................26Transportation Trust Fund...................................................................26Investment <strong>of</strong> <strong>State</strong> Funds .....................................................................27<strong>State</strong> Retirement <strong>and</strong> Pension System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>..........................28Other Retirement Programs .................................................................29Other Post Employment Benefits (OPEB)..........................................29Labor Management Relations ..............................................................31Aid to <strong>Local</strong> Government ......................................................................31STATE TAX SUPPORTED DEBT AND CAPITAL PROGRAM.........32Tax Supported Debt Outst<strong>and</strong>ing ........................................................32<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> .....................................................................32Department <strong>of</strong> Transportation Debt....................................................33<strong>Maryl<strong>and</strong></strong> Stadium Authority <strong>Bonds</strong> ...................................................34Lease <strong>and</strong> Conditional Purchase Financings......................................34Other Tax Supported Debt....................................................................34Debt Data..................................................................................................35Capital Programs....................................................................................37Capital Debt Affordability Committee................................................38OTHER INFORMATION.............................................................................56Report <strong>of</strong> Independent Public Accountants........................................56Financial Advisor....................................................................................56Ratings......................................................................................................56Book-Entry Only System.......................................................................56Continuing Disclosure ............................................................................58Official <strong>State</strong>ment ...................................................................................58APPENDIX A ..............................................................................................A-(i)FINANCIAL AND ACCOUNTING SYSTEM..............................A-(i)REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ....... A-8MANAGEMENT'S DISCUSSION AND ANALYSIS ................. A-10FINANCIAL STATEMENTS.......................................................... A-21REQUIRED SUPPLEMENTARY INFORMATION.................. A-85APPENDIX B ................................................................................................B-1SUPPLEMENTARY DEBT SCHEDULES......................................B-1APPENDIX C ............................................................................................... C-1SUPPLEMENTARY REVENUE SCHEDULES............................ C-1APPENDIX D ............................................................................................... D-1FORMS OF OPINIONS OF THE ATTORNEY GENERAL OFMARYLAND AND BOND COUNSEL............................................ D-1APPENDIX E ................................................................................................E-1REVISED OFFICIAL NOTICE OF SALE FOR THE SECONDSERIES B BONDS................................................................................E-1REVISED OFFICIAL NOTICE OF SALE FOR THE SECONDSERIES C BONDS ...............................................................................E-7APPENDIX F.................................................................................................F-1FORM OF CONTINUING DISCLOSURE AGREEMENT .........F-1MISCELLANEOUS REVENUE AND ENTERPRISEFINANCINGS .................................................................................................40STATE DEMOGRAPHIC AND ECONOMIC DATA.............................41Introduction.............................................................................................41Population ................................................................................................41Personal Income......................................................................................42Employment.............................................................................................44Assessed Value <strong>of</strong> Property ...................................................................46Residential Construction .......................................................................47Taxable Retail Sales................................................................................47Other Economic Factors........................................................................48LEGAL MATTERS .......................................................................................49Legality <strong>of</strong> the <strong>Bonds</strong>..............................................................................49Certain <strong>General</strong> Federal Income Tax Considerations......................49Treasury Circular 230 Disclosure .....................................................49Federal Tax-Exemption - Second Series A <strong>Bonds</strong> And SecondSeries B <strong>Bonds</strong> .........................................................................................49Federally Taxable Build America <strong>Bonds</strong> - Second Series C<strong>Bonds</strong>.........................................................................................................51Tax-Exemption - <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> Taxation...................................54Changes in Federal <strong>and</strong> <strong>State</strong> Tax Law...............................................55Litigation..................................................................................................55UNDERWRITING - SECOND SERIES A BONDS ................................55SALE AT COMPETITIVE BIDDING - SECONDSERIES B BONDS AND SECOND SERIES C BONDS .........................55
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INTRODUCTIONISSUERThe <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>SECURITIES <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>, <strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>,Second Series A – $235,000,000Second Series B – $200,000,000Second Series C – $50,000,000 (Build America <strong>Bonds</strong>)AGGREGATE PRINCIPALAMOUNT OF ISSUE $485,000,000INTEREST PAYMENT DATESSTATE ECONOMIC FACTORSBUDGET AND FINANCIALFebruary 15, 2010 <strong>and</strong> semiannually thereafter on August 15 <strong>and</strong> February15.The <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> has a population <strong>of</strong> approximately 5.6 million, withemployment based largely in services, trade, <strong>and</strong> government. Those sectors,along with financial activities, are the largest contributors to the gross stateproduct, according to the U.S. Department <strong>of</strong> Commerce, Bureau <strong>of</strong>Economic Analysis. Population is concentrated around the Baltimore <strong>and</strong>Washington, D.C. PMSAs, <strong>and</strong> proximity to Washington, D.C. influences theabove average percentage <strong>of</strong> employees in government. Manufacturing, onthe other h<strong>and</strong>, is a much smaller proportion <strong>of</strong> employment than for thenation as a whole. Annual unemployment rates have been below those <strong>of</strong> thenational average for each <strong>of</strong> the last 20 years. The unemployment figure for2008 was 4.4% compared to a national rate for the same period <strong>of</strong> 5.8%. InJune <strong>2009</strong> the rates had increased to 7.3% in <strong>Maryl<strong>and</strong></strong> <strong>and</strong> 9.5% in theUnited <strong>State</strong>s. Total employment increased by 6.7% between 1999 <strong>and</strong>2008. The <strong>State</strong>’s per capita personal income was the sixth highest in thecountry in 2008, according to the Bureau <strong>of</strong> Economic Analysis, at 121% <strong>of</strong>the national average. See “STATE DEMOGRAPHIC AND ECONOMICDATA.”The <strong>State</strong> enacts its budget annually. Revenues are derived largely fromcertain broad-based taxes, including <strong>State</strong>wide income, sales, motor vehicle,<strong>and</strong> property taxes. Non-tax revenues are largely from the federalgovernment for transportation, health care, welfare <strong>and</strong> other socialprograms. <strong>General</strong> fund revenues on a budgetary basis realized in the <strong>State</strong>’sfiscal year ended June 30, 2008, were below estimates by $71.2 million, or0.5%. The <strong>State</strong> ended fiscal year 2008 with a $487.1 million general fundbalance on a budgetary basis. This balance reflects a $50.9 million decreasecompared to the balance projected at the time the <strong>2009</strong> budget was enacted.In addition, there was a balance in the Revenue Stabilization Account <strong>of</strong>$684.8 million. On a GAAP basis, the fiscal year 2008 reserved general fundbalance was $1,388.2 million, while the unreserved, designated <strong>and</strong>undesignated, fund balances were $538.0 million <strong>and</strong> $959.4 million,respectively; this compares to the reserved general fund balance <strong>of</strong> $2,373.7million, <strong>and</strong> unreserved, designated <strong>and</strong> undesignated fund balances <strong>of</strong>$195.1 million <strong>and</strong> $690.2 million respectively at the end <strong>of</strong> fiscal year 2007.The total GAAP fund balance for fiscal year 2008 was $2,885.6 millioncompared with a total GAAP fund balance <strong>of</strong> $3,259.0 million for fiscal year2007. See “STATE FINANCES.”For fiscal year <strong>2009</strong>, the total budget was $31.3 billion, a $1.8 billionincrease over fiscal year 2008. The <strong>General</strong> Fund accounts for approximately$14.3 billion, <strong>of</strong> which the largest expenditures are for health <strong>and</strong> education,which together represent 74.0% <strong>of</strong> total general fund expenditures. <strong>General</strong>fund expenditures exclude transportation, which is funded with special fundrevenues from the Transportation Trust Fund. See “STATE FINANCES —<strong>State</strong> Expenditures <strong>and</strong> Services.”i
STATE DEBTAPPLICATION OF PROCEEDSThe <strong>State</strong> Reserve Funds consist <strong>of</strong> the Revenue Stabilization Account <strong>and</strong>other reserve funds, which together totaled $720.3 million at the end <strong>of</strong> fiscalyear 2008. The Revenue Stabilization Account was established to retain <strong>State</strong>revenues for future needs <strong>and</strong> to reduce the need for future tax increases.Current estimates for the close <strong>of</strong> fiscal year <strong>2009</strong> project a total reservebalance <strong>of</strong> $701.0 million, <strong>of</strong> which $692.1 million is projected to be in theRevenue Stabilization Account. The projected balance in the RevenueStabilization Account represents 5.2% <strong>of</strong> estimated general fund revenues.See “STATE FINANCES — <strong>State</strong> Reserve Fund.”<strong>Maryl<strong>and</strong></strong> had $8,635.1 million <strong>of</strong> net <strong>State</strong> tax-supported debt outst<strong>and</strong>ing as<strong>of</strong> March 31, <strong>2009</strong>. <strong>General</strong> obligation bonds accounted for $5,873.6 million<strong>of</strong> that amount. In fiscal year <strong>2009</strong>, debt service on general obligation bondswas paid primarily from <strong>State</strong> property tax receipts. Department <strong>of</strong>Transportation bonds outst<strong>and</strong>ing account for another $1,503.5 million <strong>of</strong><strong>State</strong> tax-supported debt as <strong>of</strong> March 31, <strong>2009</strong>; the debt service on thosebonds is payable from taxes <strong>and</strong> fees related to motor vehicles <strong>and</strong> motorvehicle fuel <strong>and</strong> a portion <strong>of</strong> the corporate income tax. Debt obligationsissued by the <strong>Maryl<strong>and</strong></strong> Stadium Authority in the form <strong>of</strong> lease-backedrevenue bonds account for $254.4 million <strong>of</strong> <strong>State</strong> tax-supported debtoutst<strong>and</strong>ing as <strong>of</strong> March 31, <strong>2009</strong>. Rental payments under the leases aresubject to annual appropriation by the <strong>General</strong> Assembly. The <strong>State</strong> has als<strong>of</strong>inanced construction <strong>and</strong> acquisition <strong>of</strong> various other facilities <strong>and</strong>equipment through lease-type financing, subject to annual appropriation bythe <strong>General</strong> Assembly, in the amount <strong>of</strong> $249.2 million as <strong>of</strong> March 31, <strong>2009</strong>.There was $704.4 million <strong>of</strong> Grant Anticipation Revenue Vehicle(“GARVEE”) <strong>Bonds</strong> outst<strong>and</strong>ing as <strong>of</strong> March 31, <strong>2009</strong>. Debt Service is paidfrom a portion <strong>of</strong> <strong>Maryl<strong>and</strong></strong>’s federal highway aid. The <strong>Maryl<strong>and</strong></strong> Department<strong>of</strong> Environment has issued Bay Restoration Revenue <strong>Bonds</strong> in the amount<strong>of</strong> $50.0 million as <strong>of</strong> March 31, <strong>2009</strong>.The <strong>State</strong> had $1,216.4 million <strong>of</strong> authorized but unissued debt as <strong>of</strong> March31, <strong>2009</strong>. The current <strong>of</strong>fering is the first general obligation bond sale <strong>of</strong>fiscal year 2010; four sales are anticipated during fiscal year 2010. See“STATE TAX SUPPORTED DEBT AND CAPITAL PROGRAM – TaxSupported Debt Outst<strong>and</strong>ing <strong>and</strong> Debt Data.”The proceeds <strong>of</strong> the <strong>Bonds</strong> will be applied for a variety <strong>of</strong> publicpurposes, including the acquisition <strong>and</strong> construction <strong>of</strong> <strong>State</strong> facilities;capital grants to local governments for public schools, communitycolleges, <strong>and</strong> jails <strong>and</strong> correctional facilities; <strong>and</strong> matching fund loans<strong>and</strong> grants to local governments, nonpr<strong>of</strong>it institutions, <strong>and</strong> other entitiesfor hospitals, cultural projects <strong>and</strong> other projects.CONTINUING DISCLOSUREThe <strong>State</strong> will provide annual financial <strong>and</strong> other information, includingnotices <strong>of</strong> certain events, in order to assist bidders <strong>and</strong> the Underwriters incomplying with SEC Rule 15c2-12(b)(5). Appropriate periodic creditinformation will be provided to the rating agencies maintaining ratings on the<strong>Bonds</strong>. See Appendix F – “FORM OF CONTINUING DISCLOSUREAGREEMENT”.THE FOREGOING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE DETAILEDINFORMATION CONTAINED IN THIS OFFICIAL STATEMENT.ii
STATE OF MARYLANDOfficial <strong>State</strong>ment$485,000,000<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong><strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>, Second Seriesconsisting <strong>of</strong>Second Series A Second Series B Second Series C$235,000,000 $200,000,000 $50,000,000Build America <strong>Bonds</strong>THE STATEThe <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (the “<strong>State</strong>”) ratified the United <strong>State</strong>s Constitution on April 28, 1788. The capital <strong>of</strong>the <strong>State</strong> is Annapolis, where the principal activities <strong>of</strong> the <strong>State</strong> Government are centered. The <strong>State</strong>’s 2008 populationwas 5,633,597. <strong>Maryl<strong>and</strong></strong> ranks 42nd among the states in l<strong>and</strong> area with 9,844 square miles. The largest city in the<strong>State</strong> is Baltimore with a 2008 population <strong>of</strong> 636,919 (2,667,117 for the primary metropolitan statistical area).1
THE BONDS<strong>General</strong>The $485,000,000 aggregate principal amount <strong>of</strong> general obligation bonds <strong>of</strong>fered by this Official <strong>State</strong>mentconstitute the <strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>, Second Series. The <strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>,Second Series <strong>Bonds</strong> consist <strong>of</strong>: $235,000,000 Second Series A <strong>Bonds</strong> (the “Second Series A <strong>Bonds</strong>”) sold in anegotiated sale; $200,000,000 Second Series B <strong>Bonds</strong> (the “Second Series B <strong>Bonds</strong>”) sold by competitive bid; <strong>and</strong> the$50,000,000 Second Series C <strong>Bonds</strong> (Build America <strong>Bonds</strong>) (the “Second Series C <strong>Bonds</strong>”) sold by competitive bid asfederally taxable Build America <strong>Bonds</strong>. The Second Series A <strong>Bonds</strong>, the Second Series B <strong>Bonds</strong>, <strong>and</strong> the SecondSeries C <strong>Bonds</strong> are sometimes collectively referred to herein as the “<strong>Bonds</strong>”. Interest on the <strong>Bonds</strong> will accrue from thedate <strong>of</strong> issuance <strong>and</strong> delivery <strong>of</strong> the <strong>Bonds</strong>, expected to occur on or about August 18, <strong>2009</strong>, <strong>and</strong> will be payable onFebruary 15, 2010 <strong>and</strong> semiannually thereafter on August 15 <strong>and</strong> February 15 <strong>of</strong> each year until maturity unlessredeemed prior to maturity. Payment <strong>of</strong> the principal <strong>of</strong> <strong>and</strong> interest on the <strong>Bonds</strong> shall be in such currency <strong>of</strong> theUnited <strong>State</strong>s <strong>of</strong> America as at the time <strong>of</strong> payment is legal tender for payment <strong>of</strong> public <strong>and</strong> private debts. The <strong>Bonds</strong>will be issued in fully registered form in denominations <strong>of</strong> $5,000 each or any integral multiple there<strong>of</strong>. The <strong>Bonds</strong> willinitially be maintained under a book-entry-only system; individual purchasers (“Beneficial Owners”) shall have no rightto receive physical possession <strong>of</strong> the <strong>Bonds</strong>, <strong>and</strong> any payment <strong>of</strong> the principal or redemption price <strong>of</strong> <strong>and</strong> interest on the<strong>Bonds</strong> will be made as described under “OTHER INFORMATION — Book-Entry Only System.” So long as the <strong>Bonds</strong>are maintained under a book-entry only system, the Treasurer will serve as Bond Registrar <strong>and</strong> Paying Agent.Interest on each Bond will be paid on the date payable or, if that date is not a Business Day (hereinafterdefined), on the next succeeding Business Day, to the person in whose name the Bond is registered on the registrationbooks (the “Bond Register”) maintained by the Bond Registrar as <strong>of</strong> the close <strong>of</strong> business on the last day <strong>of</strong> the monthimmediately preceding each interest payment date for the <strong>Bonds</strong>. “Business Day” means a day other than a Saturday,Sunday, or day on which banking institutions are authorized or obligated by law or required by executive order toremain closed. Principal <strong>and</strong> any redemption premium will be payable upon presentation <strong>of</strong> the <strong>Bonds</strong> at the principal<strong>of</strong>fice <strong>of</strong> the Paying Agent, or at the principal <strong>of</strong>fice <strong>of</strong> any other Bond Registrar <strong>and</strong> Paying Agent appointed by theTreasurer, on the date the principal is payable or, if that date is not a Business Day, on the next succeeding BusinessDay. So long as the <strong>Bonds</strong> are maintained in a book-entry-only system, interest will be paid by electronic funds transferon the interest payment date with respect to <strong>Bonds</strong> held by The Depository Trust Company, New York New York(“DTC”) from funds sent to DTC.So long as the <strong>Bonds</strong> are maintained in a book-entry-only system, Beneficial Owners will not have physicalpossession <strong>of</strong> the <strong>Bonds</strong> <strong>and</strong> transfers <strong>of</strong> their interest in the <strong>Bonds</strong> will be made through DTC. Beneficial ownersshould look to the institution from which their <strong>Bonds</strong> were purchased for payment.See “STATE TAX SUPPORTED DEBT AND CAPITAL PROGRAM — <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>” for adescription <strong>of</strong> the constitutional <strong>and</strong> other legal foundations <strong>of</strong> general obligation bonds <strong>of</strong> the <strong>State</strong>.Build America <strong>Bonds</strong>The America Recovery <strong>and</strong> Reinvestment Act <strong>of</strong> <strong>2009</strong> (the “ARRA”) authorizes the <strong>State</strong> to issue taxablebonds known as “Build America <strong>Bonds</strong>” to finance capital expenditures for which it could issue tax-exempt bonds <strong>and</strong>to elect to receive a subsidy payment (a “Subsidy Payment”) from the federal government equal to the amount <strong>of</strong> 35%<strong>of</strong> each interest payment on such taxable bonds. At the time <strong>of</strong> sale, the <strong>State</strong> determined to issue the Second Series C<strong>Bonds</strong> as federally taxable Build America <strong>Bonds</strong> <strong>and</strong> the Subsidy Payments will be paid to the <strong>State</strong>; no registeredowner <strong>of</strong> Second Series C <strong>Bonds</strong> will be entitled to a tax credit or Subsidy Payment, <strong>and</strong> interest paid to registeredowners <strong>of</strong> Second Series C <strong>Bonds</strong> will be subject to federal income tax but will be exempt from <strong>Maryl<strong>and</strong></strong> income tax.See “LEGAL MATTERS - Federally Taxable Build America <strong>Bonds</strong> – Second Series C <strong>Bonds</strong>.” The Subsidy Paymentshave not been pledged to the payment <strong>of</strong> the <strong>Bonds</strong>. To the extent such Subsidy Payments are paid by the federalgovernment to the <strong>State</strong>, such amounts would be part <strong>of</strong> the <strong>State</strong>’s general revenues. The Subsidy Payments are notfull faith <strong>and</strong> credit obligations <strong>of</strong> the United <strong>State</strong>s.2
Authorization for the <strong>Bonds</strong>The <strong>General</strong> Assembly annually enacts general obligation bond enabling acts authorizing funds for variouscapital projects <strong>and</strong> programs to be financed through the sale <strong>of</strong> <strong>State</strong> general obligation bonds. The total amount <strong>of</strong>general obligation bonds authorized but unissued as <strong>of</strong> June 30, 2008, was $2,063,852,643. In the nine months endedMarch 31, <strong>2009</strong>, the <strong>State</strong> has issued <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> in the amounts <strong>of</strong> $415,000,000 <strong>and</strong> $425,000,000 <strong>and</strong>Qualified Zone Academy <strong>Bonds</strong> in the amount <strong>of</strong> $5,563,000. After accounting for cancellations in this nine-monthperiod <strong>of</strong> $1,939,135 the cumulative amount <strong>of</strong> general obligation bonds authorized but unissued as <strong>of</strong> March 31, <strong>2009</strong>is $1,216,350,508. See “STATE TAX SUPPORTED DEBT AND CAPITAL PROGRAM – Capital Programs” <strong>and</strong>Appendix B – SUPPLEMENTARY DEBT SCHEDULES.Based on the <strong>State</strong>’s anticipated capital needs, the Board <strong>of</strong> Public Works (the “Board”) has authorized thissale <strong>and</strong> issuance <strong>of</strong> up to $485,000,000 <strong>of</strong> the <strong>State</strong>’s general obligation bonds for capital improvements.It is anticipated that the proceeds <strong>of</strong> the sale <strong>of</strong> the <strong>Bonds</strong> will be expended for authorized projects in thecategories shown in “THE BONDS – Use <strong>of</strong> Proceeds”The <strong>State</strong> Constitution prohibits the contracting <strong>of</strong> <strong>State</strong> debt unless authorized by a law providing for thecollection <strong>of</strong> an annual tax or taxes sufficient to pay the interest when due <strong>and</strong> to discharge the principal within 15 years<strong>of</strong> the date <strong>of</strong> debt issuance. The <strong>State</strong> Constitution also provides that the taxes levied for this purpose may not berepealed or applied to any other purpose until the debt is fully discharged. As a matter <strong>of</strong> practice, general obligationbonds, other than refunding bonds, are issued to mature in serial installments designed to provide payment <strong>of</strong> interestonly during the first two years <strong>and</strong> an approximately level annual amortization <strong>of</strong> principal <strong>and</strong> interest over theremaining years. Beginning with its 1990 session, the <strong>General</strong> Assembly annually has enacted a <strong>Maryl<strong>and</strong></strong>Consolidated Capital Bond Loan Act (the “MCCBL”) that consolidates within a single enabling act authorizations forvarious capital programs administered by <strong>State</strong> agencies <strong>and</strong> other projects for local governments or private institutions.The Board <strong>of</strong> Public Works, a constitutional body composed <strong>of</strong> the Governor, the Comptroller, <strong>and</strong> theTreasurer, by resolution authorizes the issuance <strong>of</strong> bonds in a specified amount for part or all <strong>of</strong> the loans authorized byvarious enabling acts. Since 1969, the Board has used its statutory authority to issue <strong>and</strong> sell general obligation bondsauthorized by various enabling acts on a consolidated basis as a single issue designated as a “<strong>State</strong> <strong>and</strong> <strong>Local</strong> FacilitiesLoan” <strong>of</strong> a numerical series indicating the order <strong>of</strong> sale during the calendar year. The <strong>Bonds</strong> have been authorized forissuance under this procedure.Security for the <strong>Bonds</strong>The <strong>Bonds</strong> will be general obligations <strong>of</strong> the <strong>State</strong> to the payment <strong>of</strong> which the full faith <strong>and</strong> credit <strong>of</strong> the <strong>State</strong>are pledged.RedemptionThe <strong>Bonds</strong> are subject to redemption prior to their respective maturities as a whole or in part at the option <strong>of</strong>the <strong>State</strong> as set forth in this paragraph on at least 30 days’ notice <strong>and</strong>, if in part, in any order <strong>of</strong> maturity at the option <strong>of</strong>the <strong>State</strong>, at the redemption price <strong>of</strong> par, plus accrued interest, if any, to the redemption date. The Second Series A<strong>Bonds</strong> maturing on or after August 15, 2018 are subject to redemption on or after August 15, 2017. The Second SeriesB <strong>Bonds</strong> maturing on or after August 15, 2020 <strong>and</strong> the Second Series C <strong>Bonds</strong> are subject to redemption on or afterAugust 15, 2019.If less than all <strong>of</strong> the <strong>Bonds</strong> <strong>of</strong> any series or <strong>of</strong> any one maturity within a series shall be called for redemption,the particular <strong>Bonds</strong> to be redeemed shall be selected by the Paying Agent in such manner as, in its discretion, it shalldetermine, except that so long as DTC or its nominee is the sole registered owner <strong>of</strong> the <strong>Bonds</strong>, the particular <strong>Bonds</strong> orportion to be redeemed shall be selected by DTC, in such manner as DTC shall determine.3
In case part but not all <strong>of</strong> any series or maturity <strong>of</strong> the <strong>Bonds</strong> shall be selected for redemption, then upon itssurrender, there shall be issued without charge to the registered owner replacement bonds in any authorizeddenominations as specified by the registered owner. The aggregate principal amount <strong>of</strong> bonds so issued shall be equalto the unredeemed balance <strong>of</strong> the principal amount <strong>of</strong> the bond surrendered, <strong>and</strong> bonds so issued shall bear the sameinterest rate <strong>and</strong> shall mature on the same date as the bond surrendered.Should the <strong>State</strong> elect to redeem all or a portion <strong>of</strong> any series or maturity <strong>of</strong> the <strong>Bonds</strong> outst<strong>and</strong>ing, it shall givea redemption notice by first class mail, postage prepaid, at least 30 days prior to the redemption date to each registeredowner as identified within the Bond Register; provided, however, that neither the failure to mail the redemption noticenor any defect in the notice shall affect the validity <strong>of</strong> the redemption proceedings.The redemption notice shall state: (1) whether the <strong>Bonds</strong> are to be redeemed in whole or in part <strong>and</strong>, if in part,the maturities <strong>and</strong> aggregate principal amounts <strong>of</strong> the <strong>Bonds</strong> to be redeemed; (2) the redemption date <strong>and</strong> theredemption price or prices; (3) that the <strong>Bonds</strong> to be redeemed shall be presented for redemption <strong>and</strong> payment on or afterthe redemption date at the principal <strong>of</strong>fice <strong>of</strong> the Paying Agent; <strong>and</strong> (4) that interest on the <strong>Bonds</strong> called for redemptionshall cease to accrue on the redemption date.From <strong>and</strong> after the redemption date, if notice has been duly <strong>and</strong> properly given <strong>and</strong> if funds sufficient for thepayment <strong>of</strong> the redemption price <strong>of</strong> the <strong>Bonds</strong> called for redemption plus accrued interest are available on such date, the<strong>Bonds</strong> so called for redemption shall become due <strong>and</strong> payable at the redemption price or prices on the redemption date,interest on the <strong>Bonds</strong> shall cease to accrue, <strong>and</strong> the registered owners <strong>of</strong> the <strong>Bonds</strong> so called for redemption shall haveno rights in respect there<strong>of</strong> except to receive payment <strong>of</strong> the redemption price plus accrued interest to the redemptiondate. Upon presentation <strong>and</strong> surrender <strong>of</strong> a <strong>Bonds</strong> called for redemption in compliance with the redemption notice, thePaying Agent shall pay the redemption price <strong>of</strong> such <strong>Bonds</strong> plus accrued interest to the redemption date. If <strong>Bonds</strong> socalled for redemption are not paid upon presentation <strong>and</strong> surrender as described above, such <strong>Bonds</strong> shall continue tobear interest at the rates stated therein until paid.RemediesBased upon the provisions <strong>of</strong> Sections 34 <strong>and</strong> 52 <strong>of</strong> Article III <strong>of</strong> the <strong>State</strong> Constitution, general statutory law,<strong>and</strong> the enabling legislation for general obligation bond authorizations, in the opinion <strong>of</strong> the Attorney <strong>General</strong>, thecourts <strong>of</strong> <strong>Maryl<strong>and</strong></strong> have jurisdiction to entertain proceedings <strong>and</strong> power to grant m<strong>and</strong>atory injunctive relief to: (1)require the Governor to include in the annual Budget an appropriation sufficient to pay all general obligation bond debtservice for the ensuing fiscal year; (2) prohibit the <strong>General</strong> Assembly from taking action to reduce any suchappropriation below the level required for that debt service; (3) require the Board <strong>of</strong> Public Works to fix <strong>and</strong> collect atax on all property in the <strong>State</strong> subject to assessment for <strong>State</strong> tax purposes at a rate <strong>and</strong> in an amount sufficient to makesuch payments to the extent that adequate funds are not provided in the annual Budget; <strong>and</strong> (4) provide such other reliefas might be necessary to enforce the collection <strong>of</strong> these taxes <strong>and</strong> payment <strong>of</strong> the proceeds to the holders <strong>of</strong> generalobligation bonds, pari passu, subject to the inherent limitations <strong>of</strong> the Constitution referred to below.It is also the opinion <strong>of</strong> the Attorney <strong>General</strong> that, while the m<strong>and</strong>atory injunctive remedies would be available<strong>and</strong> while the general obligation bonds <strong>of</strong> the <strong>State</strong> are entitled to constitutional protection against the impairment <strong>of</strong> theobligation <strong>of</strong> contracts, such constitutional protection <strong>and</strong> the enforcement <strong>of</strong> such remedies would not be absolute.Enforcement <strong>of</strong> a claim for payment <strong>of</strong> the principal <strong>of</strong> or interest on the <strong>Bonds</strong> could be subject to the provisions <strong>of</strong>any statutes that hereafter may be constitutionally enacted by the United <strong>State</strong>s Congress or by the <strong>General</strong> Assemblyextending the time for payment or imposing other constraints upon enforcement.4
Estimated Sources <strong>and</strong> Uses <strong>of</strong> FundsSecond Series <strong>Bonds</strong>Series A Series B Series C TotalSources:Bond Proceeds:Par Amount..................................................................... $235,000,000 $200,000,000 $50,000,000 $485,000,000Plus Original Issue Premium (Discount)* .................... 13,275,721 30,501,403 (108,000) 43,669,124Total Sources .................................................................. $248,275,721 $230,501,403 $49,892,000 $528,669,124Uses:Deposit to <strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan Fund.......... $235,000,000 $200,000,000 $49,619,500 $484,619,500Deposit to the Annuity Bond Fund ............................... 11,959,853 30,087,400 - 42,047,253Costs <strong>of</strong> Issuance** ........................................................ 111,443 118,557 - 230,000Underwriters’ Discount ................................................. 1,204,425 295,446 272,500 1,772,371Total Uses ...................................................................... $248,275,721 $230,501,403 $49,892,000 $528,669,124* The premium earned on the sale <strong>of</strong> the <strong>Bonds</strong> will be applied first to pay the underwriters’ discount <strong>and</strong> costs <strong>of</strong> issuance.**Estimated. Includes fees for legal, rating agency, financial advisory services <strong>and</strong> other miscellaneous expenses.Use <strong>of</strong> ProceedsThe expenditure <strong>of</strong> bond proceeds for capital improvements is accounted for on a “cash flow” basis rather thana “project” basis. The proceeds from the sale <strong>of</strong> the <strong>Bonds</strong> will be deposited in the <strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities LoanFund, <strong>and</strong> expended as needed on any project authorized by an enabling act, whether or not bonds have been sold tospecifically fund that project. “Project” accounting will be maintained to assure that individual project expenditureswill not exceed individual project authorizations.The proceeds <strong>of</strong> the <strong>Bonds</strong> deposited to the <strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan Fund are reasonably anticipated tobe expended for the following purposes:Education ..................................................... $ 208,836,416Health <strong>and</strong> Hospital .................................... 35,117,000Public Safety ................................................ 31,572,000Environment................................................. 102,127,500Housing ........................................................ 1,500,000Utilities......................................................... 7,490,594Other ........................................................... $ 97,975,990Total ............................................................. $484,619,500LegislatureSTATE GOVERNMENTThe <strong>State</strong> has a bicameral legislature, the <strong>General</strong> Assembly, composed <strong>of</strong> the Senate with 47 members <strong>and</strong> theHouse <strong>of</strong> Delegates with 141 members. The <strong>State</strong> is divided into 47 legislative districts, each with one senator <strong>and</strong> threedelegates. All members <strong>of</strong> the <strong>General</strong> Assembly are elected for four-year terms. The <strong>General</strong> Assembly meets annuallyfor a 90-day session beginning on the second Wednesday in January. This regular session may be extended by the<strong>General</strong> Assembly or the Governor, <strong>and</strong> the <strong>General</strong> Assembly may meet in special sessions, but no extended or specialsession may last for longer than 30 days except for the purpose <strong>of</strong> enacting the Budget.Executive BranchThe Executive Branch includes four <strong>of</strong>ficials elected by the voters on a statewide basis for four-year terms: theGovernor, the Lieutenant Governor, the Comptroller, <strong>and</strong> the Attorney <strong>General</strong>. The Treasurer is elected by joint ballot<strong>of</strong> the Senate <strong>and</strong> the House <strong>of</strong> Delegates for a four-year term.5
The Governor is the chief executive <strong>of</strong>ficer <strong>of</strong> the <strong>State</strong>. The Lieutenant Governor has such duties as aredelegated to him by the Governor, which may include any <strong>and</strong> all powers <strong>and</strong> duties <strong>of</strong> the Governor, <strong>and</strong> may serve asActing Governor during the absence or incapacity <strong>of</strong> the Governor. The Comptroller is required to exercise generalsuperintendence over the fiscal affairs <strong>of</strong> the <strong>State</strong>, to prepare plans for the improvement <strong>and</strong> management <strong>of</strong> revenue<strong>and</strong> support <strong>of</strong> public credit, to keep the accounts <strong>of</strong> the <strong>State</strong> <strong>and</strong> its agencies, to prescribe the form <strong>of</strong> completing <strong>and</strong>stating these accounts, <strong>and</strong> to superintend <strong>and</strong> enforce the collection <strong>of</strong> all taxes <strong>and</strong> revenue. The Attorney <strong>General</strong> islegal counsel to the Governor, the <strong>General</strong> Assembly, <strong>and</strong> all departments <strong>and</strong> units <strong>of</strong> the <strong>State</strong> government except thePublic Service Commission <strong>and</strong> certain authorities. The Treasurer maintains custody <strong>of</strong> all deposits <strong>of</strong> <strong>State</strong> monies,invests the <strong>State</strong>’s surplus funds, maintains custody <strong>of</strong> all securities, <strong>and</strong> is responsible for all disbursements <strong>of</strong> <strong>State</strong>funds, including payment <strong>of</strong> principal <strong>and</strong> interest on <strong>State</strong> debt. Acting on behalf <strong>of</strong> the Board <strong>of</strong> Public Works, theTreasurer manages the <strong>State</strong>’s general obligation debt program, including all matters relating to the issuance <strong>and</strong>oversight <strong>of</strong> general obligation bonds.Board <strong>of</strong> Public WorksThe Governor, Comptroller, <strong>and</strong> Treasurer are the members <strong>of</strong> the Board <strong>of</strong> Public Works. The Constitution <strong>of</strong><strong>Maryl<strong>and</strong></strong>, Article XII, Section 2, provides that a majority <strong>of</strong> the Board shall be competent to act. A constitutional body,the Board supervises the expenditure <strong>of</strong> all funds obtained by <strong>State</strong> general obligation bond issues <strong>and</strong> all fundsappropriated for capital improvements other than roads, bridges, <strong>and</strong> highways. The Board must review <strong>and</strong> approve allcontracts for such capital expenditures after review by the legislatively authorized control agency, principally, theDepartment <strong>of</strong> Transportation, the Department <strong>of</strong> <strong>General</strong> Services, the Department <strong>of</strong> Budget <strong>and</strong> Management or theUniversity System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>. The Board considers, acts upon, <strong>and</strong> authorizes all issues <strong>of</strong> <strong>State</strong> general obligationbonds, fixes the rate <strong>of</strong> the <strong>State</strong> property tax required for debt service, <strong>and</strong> administers, through the InteragencyCommittee on School Construction, the <strong>State</strong> program for payments to the counties <strong>and</strong> Baltimore City for publicschool construction.Principal DepartmentsThe executive functions <strong>of</strong> <strong>State</strong> Government are organized into 20 major departments, 19 <strong>of</strong> which are headedby a Secretary appointed by the Governor with the advice <strong>and</strong> consent <strong>of</strong> the Senate. The <strong>State</strong> Department <strong>of</strong>Education is headed by the <strong>State</strong> Board <strong>of</strong> Education, the members <strong>of</strong> which are appointed by the Governor foroverlapping five-year terms, <strong>and</strong> the <strong>State</strong> Superintendent <strong>of</strong> Schools, who is appointed by the Board for a four-yearterm. The departments <strong>and</strong> their principal responsibilities are as follows:The Department <strong>of</strong> Aging administers the delivery <strong>of</strong> services <strong>and</strong> activities for the elderly.The Department <strong>of</strong> Agriculture is responsible for supervising, administering, <strong>and</strong> promoting agriculturalactivities in the <strong>State</strong>.The Department <strong>of</strong> Budget <strong>and</strong> Management analyzes <strong>and</strong> plans budgetary matters <strong>and</strong> provides coordination<strong>and</strong> liaison for the Governor with the <strong>General</strong> Assembly, <strong>State</strong> operating agencies, <strong>and</strong> the public on matters relating tothe operating <strong>and</strong> capital budgets, analysis <strong>of</strong> program revenues <strong>and</strong> budget implications, <strong>and</strong> performance auditing;manages <strong>and</strong> coordinates employee health benefits; administers personnel policies with respect to <strong>State</strong> employees; <strong>and</strong>reviews executive agency procurements <strong>of</strong> services.The Department <strong>of</strong> Business <strong>and</strong> Economic Development promotes economic development, industrialopportunities, tourism, <strong>and</strong> economic resources <strong>of</strong> the <strong>State</strong>; <strong>and</strong> provides for <strong>and</strong> assists in financing industrial <strong>and</strong>commercial development.The Department <strong>of</strong> Disabilities is responsible for developing, maintaining, revising, <strong>and</strong> enforcing <strong>State</strong>widedisability policies <strong>and</strong> st<strong>and</strong>ards.The Department <strong>of</strong> the Environment is responsible for fostering <strong>and</strong> protecting the <strong>State</strong>’s natural environment<strong>and</strong> administers various <strong>State</strong> programs regulating air, water, <strong>and</strong> hazardous waste pollution.The Department <strong>of</strong> <strong>General</strong> Services advises the Board <strong>of</strong> Public Works <strong>and</strong> <strong>State</strong> agencies on matters <strong>of</strong>engineering, construction, <strong>and</strong> contracts in connection with capital expenditures; coordinates l<strong>and</strong> acquisitions <strong>and</strong> the6
design <strong>and</strong> construction <strong>of</strong> <strong>State</strong> public works projects; <strong>and</strong> purchases supplies <strong>and</strong> equipment for the use <strong>of</strong> <strong>State</strong>agencies.The Department <strong>of</strong> Health <strong>and</strong> Mental Hygiene is responsible for matters concerning public health in the <strong>State</strong>,including the direct delivery <strong>of</strong> health care services through <strong>State</strong>-owned health centers <strong>and</strong> hospitals <strong>and</strong> the financing<strong>of</strong> health services to low-income individuals through the Medicaid program.The Department <strong>of</strong> Housing <strong>and</strong> Community Development administers the <strong>State</strong>’s housing <strong>and</strong> communitydevelopment assistance programs, including certain housing loan <strong>and</strong> mortgage insurance programs.The Department <strong>of</strong> Human Resources administers, on the <strong>State</strong> level, the federal <strong>and</strong> <strong>State</strong> social service,public assistance, child support, <strong>and</strong> income maintenance programs.The Department <strong>of</strong> Information Technology is responsible for <strong>State</strong>wide Information Technology (“IT”)policy, oversight <strong>of</strong> large IT projects <strong>and</strong> expenditures, <strong>and</strong> centralizations <strong>of</strong> common IT functions <strong>and</strong> assetsstatewide.The Department <strong>of</strong> Juvenile Services is responsible for <strong>State</strong> programs serving delinquent youths, children inneed <strong>of</strong> supervision, <strong>and</strong> children in need <strong>of</strong> assistance.The Department <strong>of</strong> Labor, Licensing, <strong>and</strong> Regulation administers various <strong>State</strong> regulatory agencies <strong>and</strong>licensing boards responsible for licensing <strong>and</strong> regulating pr<strong>of</strong>essions, businesses, <strong>and</strong> trades, <strong>and</strong> has responsibility forthe direction, coordination, <strong>and</strong> monitoring <strong>of</strong> all <strong>State</strong> employment <strong>and</strong> training <strong>and</strong> unemployment insuranceprograms.The Department <strong>of</strong> Natural Resources is responsible for developing, coordinating, <strong>and</strong> administering policies<strong>and</strong> programs involving the natural resources <strong>and</strong> wildlife <strong>of</strong> the <strong>State</strong>.The Department <strong>of</strong> Planning is the principal agency for planning matters concerning the development <strong>and</strong>effective use <strong>of</strong> the natural <strong>and</strong> other resources <strong>of</strong> the <strong>State</strong> <strong>and</strong> also is responsible for various historical <strong>and</strong> culturalprograms.The Department <strong>of</strong> Public Safety <strong>and</strong> Correctional Services is responsible for public safety, <strong>State</strong> correctionalfacilities, <strong>and</strong> parole <strong>and</strong> probation.The Department <strong>of</strong> <strong>State</strong> Police is responsible for law enforcement <strong>and</strong> crime prevention.The Department <strong>of</strong> Transportation is responsible for <strong>State</strong>-owned transportation facilities <strong>and</strong> programs,including the planning, financing, construction, operation, <strong>and</strong> maintenance <strong>of</strong> highway, transit, rail, port, <strong>and</strong> aviationfacilities.The Department <strong>of</strong> Veterans Affairs assists the <strong>State</strong>’s veterans in obtaining benefits <strong>and</strong> services, maintainsveterans’ cemeteries <strong>and</strong> war memorials, <strong>and</strong> operates the <strong>State</strong>’s veterans’ home.The <strong>State</strong> Department <strong>of</strong> Education is charged with the general care <strong>and</strong> supervision <strong>of</strong> public elementary <strong>and</strong>secondary education <strong>and</strong> is responsible for establishing <strong>and</strong> administering <strong>State</strong> educational policies <strong>and</strong> programs.See “STATE FINANCES — <strong>State</strong> Expenditures <strong>and</strong> Services” for information concerning the activities <strong>of</strong> thedepartments that administer functions requiring the largest expenditures <strong>of</strong> funds by the <strong>State</strong>.JudiciaryThe Judiciary, a separate branch <strong>of</strong> government established in the <strong>State</strong> Constitution, includes two courts <strong>of</strong>appellate jurisdiction. The Court <strong>of</strong> Appeals, originally created by the <strong>State</strong> Constitution <strong>of</strong> 1776, is the <strong>State</strong>’s highestcourt; today this court’s appellate jurisdiction is almost entirely discretionary. The Court <strong>of</strong> Special Appeals wasestablished in 1966 as an intermediate appeals court having statewide jurisdiction; almost all initial civil <strong>and</strong> criminalappeals are now included in the jurisdiction <strong>of</strong> this court.7
The Circuit Courts, which function as trial courts <strong>of</strong> general jurisdiction, are the common law <strong>and</strong> equity courts<strong>of</strong> record exercising original jurisdiction within the <strong>State</strong>, <strong>and</strong> h<strong>and</strong>le the major civil <strong>and</strong> the more serious criminalmatters. A Circuit Court sits in each county <strong>and</strong> in Baltimore City. The District Court <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, created in 1970, isdivided into 12 geographic districts throughout the <strong>State</strong>, <strong>and</strong> exercises limited civil <strong>and</strong> criminal jurisdiction.Budgetary SystemSTATE FINANCESThe <strong>Maryl<strong>and</strong></strong> Constitution governs the system for making appropriations from the Treasury <strong>and</strong> requires thesubmission <strong>and</strong> enactment <strong>of</strong> an annual balanced Budget. Section 52 <strong>of</strong> Article III requires the Governor to submit tothe <strong>General</strong> Assembly, shortly after the beginning <strong>of</strong> its annual session, a Budget containing a complete plan <strong>of</strong>proposed expenditures <strong>and</strong> estimated revenues for the ensuing fiscal year, together with a statement showing: (1) therevenues <strong>and</strong> expenditures for the preceding fiscal year; (2) the current assets, liabilities, reserves, <strong>and</strong> surplus or deficit<strong>of</strong> the <strong>State</strong>; (3) the debts <strong>and</strong> funds <strong>of</strong> the <strong>State</strong>; (4) an estimate <strong>of</strong> the <strong>State</strong>’s financial condition as <strong>of</strong> the beginning<strong>and</strong> end <strong>of</strong> the preceding fiscal year; <strong>and</strong> (5) any explanation the Governor may desire to make as to the importantfeatures <strong>of</strong> the Budget <strong>and</strong> any suggestions as to methods for reduction or increase <strong>of</strong> the <strong>State</strong>’s revenue. The Budget isrequired to include a total for all appropriations <strong>and</strong> all estimated revenues; total appropriations may not exceed theestimated revenues, either as submitted by the Governor or as enacted by the <strong>General</strong> Assembly. The Constitutionrequires the Governor to include appropriations for certain matters, including specifically an appropriation to pay <strong>and</strong>discharge the principal <strong>and</strong> interest <strong>of</strong> the debt <strong>of</strong> the <strong>State</strong> in conformity with Article III, Section 34 <strong>of</strong> the Constitution<strong>and</strong> all laws enacted pursuant thereto. See “STATE TAX SUPPORTED DEBT AND CAPITAL PROGRAM.” TheGovernor also is required to include in his annual Budget sufficient appropriations to fund programs for which specificstatutory spending levels or rates have been established by the <strong>General</strong> Assembly at a preceding session. With thesubmission <strong>of</strong> the Budget for the ensuing year, the Governor also presents to the <strong>General</strong> Assembly any deficiencyappropriations that he may deem necessary to supplement the current year’s appropriations in light <strong>of</strong> currentconditions. By law the Governor has the power, with the approval <strong>of</strong> the Board <strong>of</strong> Public Works, to reduce by not morethan 25% any appropriation that he may deem unnecessary, except appropriations for the payment <strong>of</strong> interest <strong>and</strong> theretirement <strong>of</strong> <strong>State</strong> debt, the legislature, the public schools, the judiciary, the salaries <strong>of</strong> public <strong>of</strong>ficers during theirterms <strong>of</strong> <strong>of</strong>fice, <strong>and</strong> the salaries <strong>of</strong> non-temporary employees in the <strong>State</strong> Personnel Management System (except inaccordance with statutory provisions).The <strong>General</strong> Assembly is prohibited by the Constitution from amending the Budget to affect certain specifiedprovisions, including the obligations or debt <strong>of</strong> the <strong>State</strong> under Article III, Section 34 <strong>of</strong> the Constitution. Except forthese specified provisions, the <strong>General</strong> Assembly may amend the Budget to increase or decrease appropriations relatingto the legislative <strong>and</strong> judicial branches <strong>and</strong> it may strike out or reduce executive branch appropriations submitted by theGovernor. The <strong>General</strong> Assembly must enact a balanced Budget. After the enactment <strong>of</strong> the Budget, <strong>and</strong> not before, the<strong>General</strong> Assembly is permitted to enact supplementary appropriations but may not enact any supplementaryappropriation unless embodied in a separate bill that is limited to a single object or purpose <strong>and</strong> provides the revenuenecessary to pay the appropriation by a tax to be levied <strong>and</strong> collected under the terms <strong>of</strong> the bill.<strong>State</strong> expenditures are made pursuant to the appropriations in the annual Budget, as amended from time to timeby budget amendment. The various units <strong>of</strong> <strong>State</strong> government may, with the Governor’s approval, amend theappropriations for particular programs in their individual budgets funded from the <strong>General</strong> Fund, provided they do notexceed their total general fund appropriations as contained in the annual Budget. Additionally, appropriations forprograms funded in whole or in part from funds other than the <strong>General</strong> Fund may permit expenditures in excess <strong>of</strong>original appropriations to the extent that revenues from the particular non-<strong>General</strong> Fund sources exceed original Budgetestimates <strong>and</strong> the additional expenditures are approved by the Governor.The Department <strong>of</strong> Budget <strong>and</strong> Management is headed by a Secretary who assists the Governor in thepreparation <strong>and</strong> administration <strong>of</strong> the Budget <strong>and</strong> constitutes a statutorily created department that currently employsapproximately 321 persons.The Department <strong>of</strong> Legislative Services provides full-time pr<strong>of</strong>essional assistance to all committees <strong>and</strong>subcommittees <strong>of</strong> the <strong>General</strong> Assembly including those involved with budget, taxation <strong>and</strong> fiscal matters. TheDepartment also conducts research into fiscal <strong>and</strong> policy issues. The Office <strong>of</strong> Legislative Audits is part <strong>of</strong> theDepartment <strong>and</strong> is required by law to examine <strong>and</strong> report on the books <strong>and</strong> accounts <strong>of</strong> all agencies <strong>of</strong> <strong>State</strong> governmentat least every three years. See Appendix A — “FINANCIAL AND ACCOUNTING SYSTEM.”8
The Spending Affordability Committee consists <strong>of</strong> certain designated <strong>of</strong>ficers <strong>of</strong> the <strong>General</strong> Assembly <strong>and</strong>other members as may be appointed by the President <strong>of</strong> the Senate <strong>and</strong> the Speaker <strong>of</strong> the House <strong>of</strong> Delegates. Eachyear the Committee must submit a report to the Legislative Policy Committee <strong>of</strong> the <strong>General</strong> Assembly <strong>and</strong> to theGovernor recommending the level <strong>of</strong> <strong>State</strong> spending, the level <strong>of</strong> new debt authorization, the level <strong>of</strong> <strong>State</strong> personnel,<strong>and</strong> the use <strong>of</strong> any anticipated surplus. See also, “STATE TAX SUPPORTED DEBT AND CAPITAL PROGRAM –Capital Debt Affordability Committee.”<strong>State</strong> RevenuesThe <strong>State</strong> derives most <strong>of</strong> its revenue from a combination <strong>of</strong> specialized taxes <strong>and</strong> user charges. Substantialchanges were made to <strong>Maryl<strong>and</strong></strong>’s revenue structure at the 2007 Special Session <strong>of</strong> the <strong>General</strong> Assembly, most <strong>of</strong>which became effective in January 2008, <strong>and</strong> one <strong>of</strong> which had an effective date <strong>of</strong> July 1, 2008. These changes aredescribed below. The following are principal sources <strong>of</strong> the <strong>State</strong>’s revenues:Income Taxes. An income tax is imposed on: (1) the federal adjusted gross income <strong>of</strong> individuals, subject tocertain positive <strong>and</strong> negative adjustments <strong>and</strong> minus certain deductions <strong>and</strong> personal exemptions; <strong>and</strong> (2) the federaltaxable income <strong>of</strong> corporations, subject to certain positive <strong>and</strong> negative adjustments. Individuals may elect to use ast<strong>and</strong>ard deduction in lieu <strong>of</strong> itemized deductions. The st<strong>and</strong>ard deduction is 15% <strong>of</strong> the individual’s <strong>Maryl<strong>and</strong></strong> adjustedgross income, but not less than $1,500 nor more than $2,000 in the case <strong>of</strong> most individual returns, <strong>and</strong> not less than$3,000 nor more than $4,000 in the case <strong>of</strong> a joint return or an individual return <strong>of</strong> a head <strong>of</strong> household or survivingspouse.For tax years prior to 2008, $2,400 was allowed for each regular personal exemption <strong>and</strong> aged dependent, <strong>and</strong>$1,000 was allowed for each aged or blind personal exemption. The rate <strong>of</strong> tax for individuals was 2% on the first$1,000 <strong>of</strong> taxable income, 3% on the second $1,000, 4% on the third $1,000, <strong>and</strong> 4.75% on taxable income in excess <strong>of</strong>$3,000. For tax year 2008 <strong>and</strong> later, regular personal exemptions are determined based on federal adjusted grossincome, ranging from $3,200 for those with federal adjusted gross income under $150,000/$100,000 (joint/singlereturns) to $600 for those with federal adjusted gross income over $250,000/$200,000 (joint/single returns). The taxbrackets have also been restructured with the addition <strong>of</strong> 5%, 5.25% <strong>and</strong> 5.5% brackets beginning at net taxable incomelevels <strong>of</strong> $200,000/$150,000 (joint/single returns), $350,000/$300,000 (joint/single returns), <strong>and</strong> $500,000 (for bothjoint <strong>and</strong> single returns), respectively.In the 2008 Legislative Session, an income tax surcharge was imposed for tax years 2008 through 2010 toaddress budget shortfalls. The <strong>State</strong>’s top marginal income tax rate increases from 5.5% to 6.25% for net taxableincome <strong>of</strong> $1,000,000 or more.In addition to the above, each county <strong>and</strong> Baltimore City must levy a local income tax at the rate <strong>of</strong> at least 1%but not more than 3.2% <strong>of</strong> the individual’s <strong>Maryl<strong>and</strong></strong> taxable income. There are a number <strong>of</strong> credits available againstthe income taxes, including a refundable earned income credit (which was increased from 20% to 25% <strong>of</strong> the federalcredit for tax year 2008 <strong>and</strong> later) <strong>and</strong> a credit for rehabilitation <strong>of</strong> historic properties. An additional tax on the income<strong>of</strong> non-residents is imposed in the amount <strong>of</strong> the lowest county income tax rate in effect (currently 1.25%).For tax year 2007 <strong>and</strong> earlier, corporations (domestic <strong>and</strong> foreign), including financial institutions <strong>and</strong> utilities,paid tax at the rate <strong>of</strong> 7% on the portion <strong>of</strong> net taxable income allocable to the <strong>State</strong>. Beginning with tax year 2008, therate increased to 8.25%. Manufacturing corporations apportion their income based on sales only, rather than thehistorically applicable three-factor apportionment <strong>of</strong> sales, property, <strong>and</strong> payroll, where the sales factor is doubleweighted.Corporate taxpayers are required to add to income any payments made for interest or intangibles to a relatedcompany <strong>and</strong>, as <strong>of</strong> tax year 2007, any payments made as dividends by “captive” Real Estate Investment Trusts, inorder to prevent out-<strong>of</strong>-state subsidiaries from sheltering income from the <strong>Maryl<strong>and</strong></strong> corporate income tax.Sales <strong>and</strong> Use Taxes. Effective January 3, 2008, the <strong>State</strong> imposed a 6% sales <strong>and</strong> use tax on a retail sale oruse <strong>of</strong> tangible personal property in the <strong>State</strong> <strong>and</strong> certain enumerated services (including custom telephone, detective<strong>and</strong> building cleaning services among others); most services are exempt. The prior sales tax rate was 5%. Among theexemptions from the sales <strong>and</strong> use tax are sales <strong>of</strong> food for consumption <strong>of</strong>f the premises by a vendor who operates asubstantial grocery or market business at the same location, medicines, medical supplies <strong>and</strong> medical aids, agriculturalequipment <strong>and</strong> supplies, manufacturing <strong>and</strong> research <strong>and</strong> development equipment <strong>and</strong> supplies, tangible personalproperty used in a production activity, residential utilities <strong>and</strong> fuel, motor vehicles <strong>and</strong> vessels subject to excise taxes,9
<strong>and</strong> sales to nonpr<strong>of</strong>it charitable, educational or religious organizations to enable the organizations to carry on theirexempt activities.Property Taxes. <strong>General</strong>ly, all real property in the <strong>State</strong> is physically inspected <strong>and</strong> assessed at full cash valueonce every three years, with any increase arising from the assessment phased in over the ensuing three taxable years inequal installments. Certain farm, marshl<strong>and</strong>, woodl<strong>and</strong>, country club, <strong>and</strong> planned development property is assessedunder special valuation techniques while public utility property is assessed at fair market value determined by referenceto both income <strong>and</strong> property values.The <strong>State</strong> imposes a tax at a rate expressed per $100 <strong>of</strong> assessed value on all real property subject to taxation.For fiscal years 1982 through 2003, the effective <strong>State</strong> property tax rate was maintained at a constant level (8.4 cents).For fiscal years 2004 through 2006, the <strong>State</strong> property tax rate was set at 13.2 cents. For fiscal years 2007 through<strong>2009</strong>, the <strong>State</strong> property tax rate was set at 11.2 cents. Properties exempt from the <strong>State</strong> property tax include publicproperty <strong>and</strong> property owned by certain nonpr<strong>of</strong>it organizations for their designated purposes. The Homestead PropertyTax Credit limits to 10% the maximum annual increase in assessments for owner-occupied principal residences that aresubject to the <strong>State</strong> property tax. Revenues from the <strong>State</strong> property tax are credited to the Annuity Bond Fund <strong>and</strong> usedto service general obligation debt.Each <strong>of</strong> the counties <strong>and</strong> Baltimore City levies its own property tax at rates established by them, as do mostincorporated municipalities. Tangible personal property <strong>and</strong> commercial <strong>and</strong> manufacturing inventory <strong>of</strong> businesses isassessed at fair market value determined from annual reports filed with the <strong>State</strong> Department <strong>of</strong> Assessments <strong>and</strong>Taxation. There is no <strong>State</strong> personal property tax but nineteen counties levy a tax on business personal property. Seealso, “STATE DEMOGRAPHIC AND ECONOMIC DATA — Assessed Value <strong>of</strong> Property.”Lottery Revenues. The <strong>State</strong> currently operates eight major lottery games: three- <strong>and</strong> four-digit games drawntwice daily; a six-number <strong>Maryl<strong>and</strong></strong>-only lotto-type game drawn daily; an 18-number, three-line lotto-type game drawntwice a week; a multi-state six-number lotto-type game (Mega Millions) drawn twice a week; Keno; Racetrax, aterminal game; <strong>and</strong> various instant ticket games. Lottery tickets are sold by licensed agents under the supervision <strong>of</strong> the<strong>State</strong> Lottery Agency. In fiscal year 2008, the allocation <strong>of</strong> gross sales was 57.8% to prizes, 10.6% to administrativecosts <strong>and</strong> agents’ commissions, <strong>and</strong> 31.6% to <strong>State</strong> revenues. Except for administrative costs <strong>and</strong> a portion <strong>of</strong> MegaMillions revenues appropriated to the <strong>Maryl<strong>and</strong></strong> Stadium Authority, the <strong>State</strong> revenues are credited to the <strong>General</strong> Fund.Public Service Company Franchise Taxes. The <strong>State</strong> imposes a franchise tax at the rate <strong>of</strong> 2% on the grossreceipts from operations <strong>of</strong> public service companies engaged in the telephone business or in the transmission,distribution or delivery <strong>of</strong> electricity or natural gas in <strong>Maryl<strong>and</strong></strong>. In addition, a franchise tax <strong>of</strong> .062 cents for eachkilowatt hour <strong>of</strong> electricity delivered for final consumption in <strong>Maryl<strong>and</strong></strong>, <strong>and</strong> <strong>of</strong> .402 cents for each therm <strong>of</strong> natural gasdelivered for final consumption in <strong>Maryl<strong>and</strong></strong>, is imposed on each public service company engaged in the transmission,distribution or delivery <strong>of</strong> electricity or natural gas in <strong>Maryl<strong>and</strong></strong>. Public service companies subject to the tax on kilowatthours <strong>of</strong> electricity <strong>and</strong> therms <strong>of</strong> natural gas are entitled to credits with respect to deliveries <strong>of</strong> such products to certainindustrial customers.Insurance Taxes. Insurance companies, including health maintenance organizations, are taxed at the rate <strong>of</strong> 2%on all new <strong>and</strong> renewal gross direct premiums (after certain deductions) allocable to the <strong>State</strong>.Motor Vehicle Fuel <strong>and</strong> Titling Taxes <strong>and</strong> Registration Fees. The <strong>State</strong> imposes a per gallon tax <strong>of</strong> 23.5 centson gasoline <strong>and</strong> motor fuels, 24.25 cents on special fuel other than aviation <strong>and</strong> turbine fuel, <strong>and</strong> 7 cents on aviation <strong>and</strong>turbine fuel. There is an excise tax imposed upon the issuance <strong>of</strong> original <strong>and</strong> subsequent certificates <strong>of</strong> title to motorvehicles at the rate <strong>of</strong> 6% <strong>of</strong> the fair market value <strong>of</strong> the vehicle, with an allowance for 100% <strong>of</strong> the value <strong>of</strong> a trade-in(prior to January 1, 2008, the excise tax rate was 5% <strong>and</strong> there was no trade-in allowance). The <strong>State</strong> requires a biennialregistration fee on all motor vehicles that ranges from $2.50 to $1,800 per vehicle depending on the size <strong>and</strong> type <strong>of</strong>vehicle. Registration fees are generally imposed for two (2) years at time <strong>of</strong> titling or at the time registration isrenewed. There are several classes <strong>of</strong> vehicles, <strong>and</strong> fees vary within a class depending on the size <strong>of</strong> the vehicle. Forexample, the registration fee for passenger cars (Class A) ranges from $128 to $180 depending on the weight <strong>of</strong> thevehicle. An annual surcharge <strong>of</strong> $13.50 is included in most registration fees <strong>and</strong> is dedicated to the statewideEmergency Medical Services System.10
Transfer Taxes. The <strong>State</strong> imposes a tax upon the recordation <strong>of</strong> instruments conveying title to real or personalproperty <strong>and</strong> conveying leasehold interests in real property. These are special fund revenues, although in some fiscalyears all or a portion these revenues were transferred to the <strong>General</strong> Fund. The most recent transfer occurred in fiscalyear <strong>2009</strong> when a total <strong>of</strong> $137.1 million in transfer taxes, previously allocated to Program Open Space in theDepartment <strong>of</strong> Natural Resources, was transferred to the <strong>General</strong> Fund. Effective July 1, 2008, the transfer tax isapplied to the transfers <strong>of</strong> controlling interests <strong>of</strong> certain entities.Tobacco Taxes. Effective January 1, 2008, the <strong>State</strong> imposed a tax at the rate <strong>of</strong> $2.00 per pack <strong>of</strong> 20cigarettes <strong>and</strong> 15% <strong>of</strong> the wholesale price <strong>of</strong> other tobacco products (the prior rate <strong>of</strong> tax for cigarettes was $1.00 perpack). All cigarette packs in retailers’ <strong>and</strong> wholesalers’ inventories on January 1, 2008 were subject to a floor tax <strong>of</strong>$1.00 per pack.Death Taxes. The <strong>State</strong>’s inheritance tax rate is 10% (bequests to direct relations <strong>and</strong> siblings are exempt).The <strong>State</strong> also imposes an estate tax <strong>and</strong> a generation-skipping transfer tax. These taxes were initially designed tocapture the maximum revenue possible without imposing an additional tax burden on estates through a credit againstthe federal taxes. Despite the repeal <strong>of</strong> the federal credit <strong>and</strong> increases in the size <strong>of</strong> estates that are subject to the tax,the <strong>State</strong> has retained its estate tax. For <strong>State</strong> estate tax purposes, the unified credit is fixed at $345,000, whicheffectively exempts $1.0 million from the estate tax.Alcoholic Beverage Taxes. There is a tax at the rate <strong>of</strong> $1.50 per gallon on all alcoholic beverages, except beer<strong>and</strong> wine, sold or delivered by a manufacturer or wholesaler to any retail dealer in the <strong>State</strong>. Taxes at the rates <strong>of</strong> 40cents per gallon <strong>of</strong> wine <strong>and</strong> 9 cents per gallon <strong>of</strong> beer are imposed on the sale or delivery <strong>of</strong> those beverages by amanufacturer to a wholesale or retail dealer in the <strong>State</strong>.Bay Restoration Fee. All users <strong>of</strong> sewerage <strong>and</strong> septic systems in the <strong>State</strong> are charged a m<strong>and</strong>atory fee <strong>of</strong> $30per year (or $30 per “equivalent dwelling unit”). Revenues from users <strong>of</strong> sewerage systems are pledged, to the extentnecessary, as security for Bay Restoration Revenue <strong>Bonds</strong> issued by the <strong>Maryl<strong>and</strong></strong> Water Quality FinancingAdministration, the proceeds <strong>of</strong> which will be applied primarily to provide grant funds to upgrade wastewater treatmentplants with enhanced nutrient removal technology.Other Revenues. Exclusive <strong>of</strong> the proceeds <strong>of</strong> bond issues, approximately 52.6% <strong>of</strong> <strong>State</strong> revenues in fiscalyear 2008 were received from sources other than taxes <strong>and</strong> lottery receipts. The largest component (22.9% <strong>of</strong> totalrevenues) was received from the federal government for highway <strong>and</strong> transit reimbursements; reimbursements <strong>and</strong>grants for health care programs; categorical <strong>and</strong> matching aid for public assistance, social services, <strong>and</strong> employmentsecurity; aid for public education; <strong>and</strong> miscellaneous grants-in-aid to <strong>State</strong> agencies. In addition to federal funds, the<strong>State</strong> receives revenues from court fines <strong>and</strong> costs; patient payments for services in <strong>State</strong> hospitals; interest on investedfunds; <strong>and</strong> tuition fees paid to institutions <strong>of</strong> higher education. The <strong>State</strong> also receives revenues from operations <strong>of</strong> the<strong>Maryl<strong>and</strong></strong> Transit Administration, the <strong>Maryl<strong>and</strong></strong> Port Administration, <strong>and</strong> the <strong>Maryl<strong>and</strong></strong> Aviation Administration, whichare paid into the Transportation Trust Fund.Revenue Estimates. The <strong>State</strong>’s revenue estimates are based upon projections by the Board <strong>of</strong> RevenueEstimates, composed <strong>of</strong> the Comptroller, the Treasurer, <strong>and</strong> the Secretary <strong>of</strong> Budget <strong>and</strong> Management. The Boardstudies the findings <strong>and</strong> recommendations <strong>of</strong> the Bureau <strong>of</strong> Revenue Estimates, a statutory <strong>State</strong> agencyadministratively under the Comptroller, that reviews the findings <strong>and</strong> recommendations <strong>of</strong> other agencies responsiblefor economic monitoring <strong>and</strong> revenue administration, <strong>and</strong> reports the estimates <strong>of</strong> revenue to the Governor forsubmission to the <strong>General</strong> Assembly in connection with the Budget.In its report issued each December, the Board <strong>of</strong> Revenue Estimates presents revised revenue estimates for thecurrent fiscal year (based upon current economic factors <strong>and</strong> legislative changes), <strong>and</strong> the first <strong>of</strong>ficial estimates for thenext succeeding fiscal year based upon current laws <strong>and</strong> administrative practices. The revised estimate for the currentyear is made seven months before the end <strong>of</strong> that fiscal year, while the Budget estimate for the next succeeding fiscalyear is made 19 months before the end <strong>of</strong> that fiscal year. The estimates are reviewed in March, prior to final action onthe Budget by the <strong>General</strong> Assembly, <strong>and</strong> any appropriate adjustments to the estimates are made at that time. Thefollowing table shows the accuracy <strong>of</strong> <strong>General</strong> Fund revenue estimates for the 2004 through 2008 fiscal years.11
Historic <strong>General</strong> Fund Revenue Estimates <strong>and</strong> Actual Collections($ in millions)Fiscal Actual Original Estimate Final EstimateYear Collections Amount %(a) Amount %(a)2004 .................................. $10,240.7 $10,011.6 102.28% $9,970.5 102.71%2005 .................................. 11,394.7 10,391.1 109.66 10,972.1 103.852006 .................................. 12,369.9 11,306.3 109.41 12,319.1 100.412007 .................................. 12,940.2 12,843.2 100.76 12,849.6 100.712008 .................................. 13,545.6 13,452.8 100.69 13,557.8 99.91______(a) Actual collections as a percentage <strong>of</strong> estimates.Note: Estimated <strong>and</strong> actual collections exclude transfers <strong>and</strong> other actions appearing in Appendix C, page C-3 as extraordinary transfers.Receipts from the <strong>State</strong> property tax, all <strong>of</strong> which are devoted to debt service on general obligation bonds <strong>and</strong>which provided approximately 90% <strong>of</strong> the current revenues available for general obligation bond debt service paymentin fiscal year 2008 (see “STATE TAX SUPPORTED DEBT AND CAPITAL PROGRAM — <strong>General</strong> <strong>Obligation</strong><strong>Bonds</strong>”), are credited to a separate account known as the Annuity Bond Fund. The Board <strong>of</strong> Public Works is requiredannually to fix the property tax rate by May 1, after the end <strong>of</strong> the regular legislative session, in an amount sufficient topay all debt service for the ensuing fiscal year on general obligation bonds after taking account <strong>of</strong> the amounts <strong>and</strong>sources <strong>of</strong> funds provided in the Budget for that fiscal year, which begins July 1. The Commission on <strong>State</strong> Debt(consisting <strong>of</strong> the Treasurer, the Comptroller, the Secretary <strong>of</strong> Budget <strong>and</strong> Management, the Secretary <strong>of</strong>Transportation, the Director <strong>of</strong> the <strong>State</strong> Department <strong>of</strong> Assessments <strong>and</strong> Taxation, <strong>and</strong> one individual appointed by theGovernor <strong>and</strong> not otherwise affiliated with <strong>State</strong> government) makes an original estimate approximately three monthsbefore July 1 <strong>of</strong> the year to which the property tax rate will apply <strong>and</strong> a revised estimate approximately nine monthsafter that date. The following table portrays the accuracy <strong>of</strong> estimates <strong>of</strong> <strong>State</strong> property tax revenue in fiscal years 2004through 2008.<strong>State</strong> Property Tax Revenue Estimates($ in millions)FiscalYearProperty TaxRate (a)ActualCollectionsOriginal EstimateAmount % (b)Final EstimateAmount % (b)2004 ............. 13.2¢ $468.4 $473.2 (c) 98.99% $471.7 99.30%2005 ............. 13.2 516.6 512.9 100.71 512.8 100.722006 ............. 13.2 575.1 566.6 101.50 573.0 100.372007 ............. 11.2 552.7 547.5 100.95 552.1 100.092008 ............. 11.2 625.7 619.4 101.02 642.0 97.47____________(a) The property tax rate is per $100 <strong>of</strong> assessed valuation.(b) Actual collections as a percentage <strong>of</strong> estimates.(c) The initial estimate was $301.1 million; this amount has been adjusted to reflect the rate change from 8.4¢/$100 to 13.2¢/$100.<strong>General</strong> fund revenues <strong>and</strong> <strong>State</strong> property tax revenues (once the rates <strong>and</strong> structures are set) are entirelyindependent <strong>of</strong> the expenditures from the funds into which they flow, thus accurate forecasting is important. On theother h<strong>and</strong>, the vast majority <strong>of</strong> federal funds are received under matching programs or <strong>State</strong> administered programswhere receipts vary directly with expenditures or expenditures are directly controlled by receipts. See Appendix C,“Supplemental Revenue Schedules – <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>” pages C-1 <strong>and</strong> C-2 for a more detailed comparison <strong>of</strong> revenueestimates to actual collections. See also page C-3 for details as to the sources <strong>of</strong> <strong>and</strong> adjustments to these revenues.<strong>State</strong> Expenditures <strong>and</strong> Services<strong>State</strong> expenditures <strong>and</strong> services for capital <strong>and</strong> operating programs include a typical range <strong>of</strong> directgovernmental services <strong>and</strong> activities, as well as <strong>State</strong> support <strong>and</strong> aid to local governmental units, primarily in the areas<strong>of</strong> education <strong>and</strong> transportation.12
Public Education. The agencies administering public education spend the largest portion <strong>of</strong> <strong>State</strong> revenue. Inthe fiscal year <strong>2009</strong> Budget, as amended, public education accounted for 51% <strong>of</strong> general fund appropriations <strong>and</strong> 37%<strong>of</strong> all appropriations.Elementary <strong>and</strong> Secondary Education. The school boards <strong>of</strong> the 23 counties <strong>and</strong> Baltimore City areresponsible for much <strong>of</strong> the administration <strong>of</strong> public elementary <strong>and</strong> secondary schools, including charter schools.There are no special, separate school districts in <strong>Maryl<strong>and</strong></strong>. The <strong>State</strong> supports the elementary <strong>and</strong> secondary educationprograms <strong>of</strong> the counties <strong>and</strong> Baltimore City through a number <strong>of</strong> aid programs. The major programs are described asfollows: (1) under a formula equalized for ability to pay <strong>and</strong> based on wealth <strong>and</strong> enrollment factors, the <strong>State</strong>distributes aid to the local school systems for current expenses; (2) for personnel in local public schools, the <strong>State</strong> paysdirectly the employer’s portion <strong>of</strong> the retirement system contributions; <strong>and</strong> (3) the <strong>State</strong> also distributes aid based on thenumber <strong>of</strong> students receiving free or reduced price meals, under various components <strong>of</strong> the Students with DisabilitiesAid Program, <strong>and</strong> for pupil transportation. In addition to these major programs, the <strong>State</strong> Department <strong>of</strong> Educationprovides aid for local libraries, food service, <strong>and</strong> various educational activities <strong>and</strong>, through the <strong>State</strong> Department <strong>of</strong>Education’s Interagency Fund, distributes funds to address the service needs <strong>of</strong> children at risk.Higher Education. The public higher education system consists <strong>of</strong> the University System <strong>of</strong> <strong>Maryl<strong>and</strong></strong> <strong>and</strong>Morgan <strong>State</strong> University, each governed by its respective Board <strong>of</strong> Regents; St. Mary’s College <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, governedby its own Board <strong>of</strong> Trustees; Baltimore City Community College, a <strong>State</strong> institution governed by its Board <strong>of</strong> Trustees;<strong>and</strong> 17 community colleges, each governed by a local or regional Board <strong>of</strong> Trustees.The <strong>Maryl<strong>and</strong></strong> Higher Education Commission is responsible for developing a statewide plan for highereducation, approving mission statements, setting funding guidelines, administering <strong>State</strong> aid to local communitycolleges, aid to private colleges <strong>and</strong> universities, <strong>and</strong> student financial aid programs.The <strong>State</strong> finances the <strong>State</strong> universities <strong>and</strong> colleges principally with <strong>State</strong> general fund revenues. In addition,the <strong>State</strong> finances a share <strong>of</strong> the cost <strong>of</strong> the locally owned two-year community colleges. <strong>State</strong> financial assistance isprimarily in the form <strong>of</strong> general purpose formula grants. The <strong>State</strong> also makes grants to eligible private institutions <strong>of</strong>higher education under a formula based on <strong>State</strong> support for <strong>State</strong> four-year universities <strong>and</strong> colleges. In total, thehigher education share <strong>of</strong> fiscal year 2008 expenditures was 15.8% <strong>and</strong> was 16.0% <strong>of</strong> the fiscal year <strong>2009</strong> Budget.The following table presents the trends <strong>of</strong> enrollment (expressed in full-time equivalent students) at the <strong>State</strong>universities <strong>and</strong> colleges <strong>and</strong> the local community colleges for the fiscal years shown.Enrollment (full-time equivalent students)<strong>State</strong> Universities <strong>and</strong> CollegesFiscalYear<strong>State</strong>Four YearInstitutionsCommunityCollegesTotal2005 ................................................................................................ 99,885 89,293 189,1782006 ................................................................................................ 101,400 90,815 192,2152007 ................................................................................................ 104,865 93,255 198,1202008 ................................................................................................ 108,148 96,135 204,283<strong>2009</strong> estimate ................................................................................. 110,837 97,351 208,188Health <strong>and</strong> Mental Hygiene. The Department <strong>of</strong> Health <strong>and</strong> Mental Hygiene has general responsibility forpublic health in the <strong>State</strong> <strong>and</strong> provides direct services through 16 residential health facilities, finances medical servicesto the indigent, <strong>and</strong> aids local health departments on a matching formula basis. For fiscal year <strong>2009</strong>, $8,110.5 millionwas budgeted for the Department <strong>of</strong> Health <strong>and</strong> Mental Hygiene, including $4,071.0 million in federal funds <strong>and</strong>$3,363.0 million in <strong>State</strong> general funds.The largest expenditure is for the medical assistance (Medicaid) program under which the <strong>State</strong> makes paymentsto health service vendors providing services to eligible low income individuals <strong>and</strong> families. For fiscal year 2008,$4,672.7 million was spent on this program, virtually all <strong>of</strong> which was for services for which the <strong>State</strong> recoveredapproximately 50% from the federal government. For fiscal year 2008, the average monthly Medicaid enrollment was13
532,082. For fiscal year <strong>2009</strong>, the Budget provided for 565,939 Medical Assistance enrollees <strong>and</strong> funding <strong>of</strong> $5,150.6million.The health centers operated by the Department <strong>of</strong> Health <strong>and</strong> Mental Hygiene provide care for psychiatric,mentally retarded, <strong>and</strong> chronically ill patients. In recent years the <strong>State</strong> has exp<strong>and</strong>ed programs to provide serviceswithin the community as an alternative to institutionalization in <strong>State</strong> facilities.Transportation. Transportation is the third largest category <strong>of</strong> <strong>State</strong> expenditures. The Department <strong>of</strong>Transportation is responsible for most <strong>of</strong> the <strong>State</strong>’s various transportation facilities <strong>and</strong> for developing <strong>and</strong> maintaininga <strong>State</strong> master plan for transportation. It administers the <strong>State</strong> highway system; operates a mass transit system in theBaltimore region; assists mass transit in the Washington D.C. region; operates <strong>and</strong> assists commuter rail systems <strong>and</strong>certain critical freight railroads; operates two airports, including Baltimore/Washington International ThurgoodMarshall Airport (“BWI”); operates <strong>State</strong>-owned port facilities, primarily in Baltimore Harbor; <strong>and</strong> administers thelicensing <strong>and</strong> regulation <strong>of</strong> motor vehicle drivers <strong>and</strong> dealers, as well as motor vehicles. For fiscal year <strong>2009</strong>, thetransportation budget totaled $3,695.5 million; on the same basis actual expenditures for fiscal year 2008 were $3,624.7million. See “STATE FINANCES — Transportation Trust Fund” with respect to the principal revenues <strong>and</strong>expenditures related to the Department <strong>of</strong> Transportation.The <strong>Maryl<strong>and</strong></strong> Transportation Authority (“MdTA”) <strong>of</strong> which the Secretary <strong>of</strong> Transportation is Chairman, isresponsible for the administration <strong>of</strong> the various toll revenue facilities, which consist <strong>of</strong> bridges over the Susquehanna,Patapsco, <strong>and</strong> Potomac Rivers <strong>and</strong> the Chesapeake Bay; two tunnels under the Baltimore Harbor; the John F. KennedyMemorial Highway, <strong>and</strong> other transportation facilities. The MdTA’s financial transactions are accounted for in aseparate special revenue fund <strong>and</strong> are not included in the Transportation Trust Fund.Human Resources. The Department <strong>of</strong> Human Resources administers <strong>State</strong> <strong>and</strong> federal programs relating tochild welfare, foster care, public assistance, family investment services, adult services, energy assistance, legal services,victim services, child support enforcement, <strong>and</strong> work opportunity assistance for adults receiving public assistance. Forfiscal year <strong>2009</strong>, approximately $1,909.7 million was for the Department <strong>of</strong> Human Resources, including $1,248.2million in federal funds <strong>and</strong> $589.7 million in <strong>State</strong> general funds.Public assistance programs include Temporary Cash Assistance (“TCA”), food stamps, assistance <strong>and</strong> loans todisabled citizens, <strong>and</strong> several emergency assistance programs. The largest categories <strong>of</strong> programs are TCA, in whichthe <strong>State</strong>/federal shares vary depending upon the areas to which the <strong>State</strong> directs its Maintenance <strong>of</strong> Effort <strong>and</strong> FoodStamps, which is 100% federal funds. The Department <strong>of</strong> Human Resources also provides a broad range <strong>of</strong> socialservices to the indigent <strong>and</strong> other eligibles under both federal-<strong>State</strong> <strong>and</strong> <strong>State</strong>-only programs.Public Safety <strong>and</strong> Correctional Services, <strong>State</strong> Police, Juvenile Services <strong>and</strong> Governor’s Office for CrimeControl <strong>and</strong> Prevention. The Departments <strong>of</strong> Public Safety <strong>and</strong> Correctional Services, <strong>State</strong> Police, <strong>and</strong> JuvenileServices include correctional agencies <strong>and</strong> institutions, parole units, the <strong>Maryl<strong>and</strong></strong> <strong>State</strong> Police, services <strong>and</strong> facilitiesfor adjudicated youth, <strong>and</strong> related activities. The Governor’s Office for Crime Control <strong>and</strong> Prevention administersfederal <strong>and</strong> <strong>State</strong> grant programs focusing on crime control <strong>and</strong> prevention. For fiscal year <strong>2009</strong>, approximately$1,899.6 million was budgeted for these departments, <strong>of</strong> which $1,606.1 million is from general funds.Other Expenditures <strong>and</strong> Services. The <strong>State</strong> has numerous other operating units, including the judicial system;financial <strong>and</strong> revenue administration; labor, licensing <strong>and</strong> regulation; planning, budgetary activity, <strong>and</strong> personneladministration; natural resources <strong>and</strong> recreation; business <strong>and</strong> economic development; housing <strong>and</strong> communitydevelopment; environment; <strong>and</strong> others, all <strong>of</strong> which account for approximately 8.7% <strong>of</strong> total expenditures for fiscal year2008 <strong>and</strong> 8.6% <strong>of</strong> the fiscal year <strong>2009</strong> Budget. <strong>General</strong> obligation bond debt service accounted for approximately 2.3%<strong>of</strong> total expenditures for fiscal year 2008 <strong>and</strong> 2.4% <strong>of</strong> the fiscal year <strong>2009</strong> Budget.<strong>State</strong> Reserve FundThe <strong>State</strong> Reserve Fund is currently composed <strong>of</strong> four accounts: the Revenue Stabilization Account, which isestablished to retain <strong>State</strong> revenues for future needs <strong>and</strong> to reduce the need for future tax increases; the DedicatedPurpose Account, which is established to retain appropriations for major multi-year expenditures <strong>and</strong> to meetcontingency requirements; the Economic Development Opportunities Program Account, which is to be used forextraordinary economic development opportunities as a supplement to existing programs; <strong>and</strong> the Catastrophic EventAccount, which is to be used to respond quickly to a natural disaster or other catastrophic event that cannot be managed14
within existing appropriations. All interest earned on the <strong>State</strong> Reserve Fund is credited to the Revenue StabilizationAccount.The Governor is required to include in each annual budget bill an appropriation <strong>of</strong> $100.0 million if thebalance in the Revenue Stabilization Account is less than 3.0% <strong>of</strong> estimated general fund revenues. If the balance inthe Account is at least 3.0% <strong>of</strong> estimated general fund revenues but less than 7.5% <strong>of</strong> estimated general fund revenues,the Governor is required to include an appropriation to the Account <strong>of</strong> $50.0 million or the amount necessary to bringthe balance <strong>of</strong> the Account to 7.5%, whichever is less. <strong>Maryl<strong>and</strong></strong> law defines estimated general fund revenues as thosestated in the annual report <strong>of</strong> the Board <strong>of</strong> Revenue Estimates submitted to the Governor.The Governor is also required to include an appropriation to the Revenue Stabilization Account equal to theunappropriated general fund balance in excess <strong>of</strong> $10.0 million from the second prior fiscal year. The appropriationrequired under this provision may be <strong>of</strong>fset by any appropriation required to reach a certain percent <strong>of</strong> estimated generalfund revenues, as discussed above.Withdrawals that do not result in a Revenue Stabilization Account balance below 5.0% <strong>of</strong> estimated general fundrevenues may be authorized by an act <strong>of</strong> the <strong>General</strong> Assembly or specifically authorized in the <strong>State</strong> Budget.Withdrawals that result in a Revenue Stabilization Account balance below 5.0% <strong>of</strong> estimated general fund revenuesmust be authorized by an act <strong>of</strong> the <strong>General</strong> Assembly other than the <strong>State</strong> Budget Bill.The following table presents the balances <strong>of</strong> the <strong>State</strong> Reserve Fund for the four fiscal years ended June 30,2008, <strong>and</strong> the estimate for the fiscal year ended June 30, <strong>2009</strong>.<strong>State</strong> Reserve FundFiscal Years 2005–<strong>2009</strong>($ in millions)FiscalYearRevenueStabilizationAccountBalance at Fiscal Year EndOtherAccountsTotal <strong>State</strong>Reserve FundRevenue StabilizationAccount as a % <strong>of</strong><strong>General</strong> Fund Revenue2005 ................................................ $521.4 $18.7 $540.1 4.5%2006 ................................................. 758.8 52.6 811.4 6.12007 ................................................. 1,432.2 157.6 1,589.7 11.12008 (a)............................................ 684.8 35.5 720.3 5.1<strong>2009</strong> estimate (b) ............................ 692.1 8.9 701.0 5.2_________(a) In fiscal year 2008, transfers to the <strong>General</strong> Fund included $978.0 million from the Revenue Stabilization Account <strong>and</strong> $100.0 millionfrom the Dedicated Purpose Account.(b) See also, “STATE FINANCES — <strong>General</strong> Fund Current Year Budget versus Prior Year Actual.”(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)15
FY 2004-2008 GAAP <strong>General</strong> Fund Results <strong>of</strong> OperationsThe GAAP <strong>General</strong> Fund is that fund from which all general costs <strong>of</strong> <strong>State</strong> government are paid <strong>and</strong> to whichtaxes <strong>and</strong> other revenues not specifically directed by law to be deposited in separate funds are recorded in accordancewith <strong>General</strong>ly Accepted Accounting Principles (“GAAP”). The following table presents the comparative statement <strong>of</strong>revenues, expenditures <strong>and</strong> changes in fund balances in the GAAP <strong>General</strong> Fund for fiscal years ended June 30, 2004through 2008.GAAP <strong>General</strong> Fund Comparative <strong>State</strong>ment <strong>of</strong> Revenues,Expenditures <strong>and</strong> Changes in Fund BalanceFiscal Years 2004-2008($ in thous<strong>and</strong>s)2004 2005 2006 2007 2008Revenues (a):Income taxes....................................................................................................... $ 5,499,953 $ 6,814,378 $ 7,108,573 $ 7,325,181 $ 7,868,899Sales <strong>and</strong> use taxes............................................................................................. 2,945,060 3,153,676 3,382,851 3,447,896 3,748,933Other taxes.......................................................................................................... 1,380,320 1,585,267 1,748,366 1,687,223 1,816,652Other licenses <strong>and</strong> fees ...................................................................................... 754,995 759,953 808,617 782,712 651,079Charges for services........................................................................................... 499,337 561,657 597,719 642,801 732,103Interest <strong>and</strong> other investment income............................................................... 25,299 93,819 201,783 292,262 296,636Federal revenue.................................................................................................. 5,168,922 5,093,047 5,258,137 5,624,412 5,846,077Other ................................................................................................................... 132,092 314,019 99,236 206,076 188,575Total revenues........................................................................................... 16,405,978 18,375,816 19,205,282 20,008,563 21,148,954Expenditures (a):<strong>General</strong> government........................................................................................... 625,644 700,963 737,060 715,676 727,569Health <strong>and</strong> mental hygiene................................................................................ 6,064,735 6,329,383 6,547,288 7,252,117 7,536,747Education ........................................................................................................... 5,518,511 5,881,899 6,352,121 7,151,741 7,997,946Human resources................................................................................................ 1,560,876 1,569,032 1,622,922 1,643,078 1,761,284Public Safety ...................................................................................................... 1,357,943 1,435,406 1,606,314 1,790,595 1,835,652Judicial................................................................................................................ 434,135 462,568 490,861 527,618 556,056Labor, licensing <strong>and</strong> regulation......................................................................... 174,047 166,787 154,607 164,255 166,848Natural resources <strong>and</strong> recreation....................................................................... 166,730 167,018 165,439 177,553 188,675Housing <strong>and</strong> community development............................................................. 202,346 211,577 215,940 228,105 244,581Environment....................................................................................................... 84,443 76,393 83,793 92,460 95,918Agriculture.......................................................................................................... 60,537 56,624 64,044 101,252 147,494Business <strong>and</strong> economic development............................................................... 58,259 57,287 56,374 65,774 94,503Intergovernmental.............................................................................................. 504,807 555,810 553,941 503,014 408,208Total expenditures ..................................................................................... 16,813,013 17,670,747 18,650,704 20,413,238 21,761,481Excess (deficiency) <strong>of</strong> revenues over expenditures................................. (407,035) 705,069 554,578 (404,675) (612,527)Other sources (uses) <strong>of</strong> financial resources:Capital leases...................................................................................................... 66,729 38,318 71,798 50,575 31,185Operating transfers in ........................................................................................ 818,101 664,660 653,163 613,148 648,718Operating transfers out ...................................................................................... (173,026) (275,527) (368,942) (532,635) (440,755)Net other sources (uses) <strong>of</strong> financial resources........................................ 711,804 427,451 356,019 131,088 239,148Net change in fund balances.............................................................................. 304,769 1,132,520 910,597 (273,587) (373,379)Fund balance at the beginning <strong>of</strong> the year................................................................ 1,184,668 1,489,437 2,621,957 3,532,554 3,258,967Fund balances, June 30.............................................................................................. $ 1,489,437 $ 2,621,957 $ 3,532,554 $ 3,258,967 $ 2,885,588Fund balance as % <strong>of</strong> revenues................................................................................. 9.1% 14.3% 18.4% 16.3% 13.6%_________(a)The budgetary system's principal departures from the modified accrual basis, i.e., GAAP, are with the classification <strong>of</strong> the <strong>State</strong>'s budgetary funds <strong>and</strong> thetiming <strong>of</strong> certain revenues <strong>and</strong> expenditures. See Appendix A – “Financial <strong>State</strong>ments”.16
<strong>General</strong> Fund <strong>2009</strong> Budget<strong>2009</strong> Budget. On April 5, 2008, the <strong>General</strong> Assembly approved the Budget for fiscal year <strong>2009</strong>. The Budgetincluded, among other things: (1) $5,959.8 million in aid to local governments from general funds reflecting fullfunding <strong>of</strong> the public school assistance enhancements enacted at the 2002 Session <strong>of</strong> the <strong>General</strong> Assembly(“Thornton”), as amended; (2) $16.2 million for capital projects; (3) $231.5 million to the <strong>State</strong> Reserve Fund; <strong>and</strong> (4)deficiency appropriations <strong>of</strong> $77.5 million for fiscal year 2008, including $32.5 million for the Department <strong>of</strong> JuvenileServices primarily for overtime, per diem placements, <strong>and</strong> re-opening the Victor Cullen Academy; $13.7 million for theDepartment <strong>of</strong> Public Safety <strong>and</strong> Correctional Services mostly for overtime <strong>and</strong> to provide a death benefit for members<strong>of</strong> the United <strong>State</strong>s uniformed services; $12.9 million to the Department <strong>of</strong> Human Resources primarily to providelegal services for children <strong>and</strong> electricity assistance for low-income <strong>Maryl<strong>and</strong></strong>ers; <strong>and</strong> $5.8 million for the Department<strong>of</strong> <strong>State</strong> Police to provide for operating shortfalls.The Budget included funds for the <strong>State</strong>’s retirement <strong>and</strong> pension systems consistent with the “corridor”methodology <strong>of</strong> funding as prescribed by statute. Subsequently, the <strong>State</strong>’s retirement actuary reevaluated itscalculation <strong>of</strong> the <strong>State</strong> contribution <strong>and</strong> recommended an increase <strong>of</strong> $87.7 million, however the enacted Budget didnot include this increase. See “STATE FINANCES – <strong>State</strong> Retirement <strong>and</strong> Pension System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>.”The $231.5 million for the <strong>State</strong> Reserve Fund included $146.5 million to the Revenue Stabilization Account,representing the portion <strong>of</strong> the fiscal year 2007 general fund balance in excess <strong>of</strong> the amount used to fund the fiscal year2007 budget (less $10.0 million). The Budget included $85.0 million in the Dedicated Purpose Account for transfer tothe <strong>Maryl<strong>and</strong></strong> Transportation Authority for the Intercounty Connector, a <strong>State</strong> highway project located in PrinceGeorge’s <strong>and</strong> Montgomery counties. Transfers from the <strong>State</strong> Reserve Fund to the <strong>General</strong> Fund totaled $125.0 millionin fiscal year <strong>2009</strong>.The Budget funded fiscal year <strong>2009</strong> debt service on the <strong>State</strong>’s general obligation bonds with $745.5 million inspecial funds, primarily from <strong>State</strong> property tax revenues. The projected amount <strong>of</strong> <strong>State</strong> property tax revenues reflectsa property tax rate <strong>of</strong> 11.2 cents (per $100 <strong>of</strong> taxable assessed value), a rate unchanged from fiscal year 2008. TheBudget included funds for a 2% employee cost <strong>of</strong> living adjustment, merit increases, <strong>and</strong> the statutory match forcontributions to deferred compensation. In addition, the <strong>2009</strong> Budget provided $62.8 million in general funds <strong>and</strong>$44.7 million in non-general funds for Other Post Employment Benefits to address the liability for future retiree healthcare costs.Subsequent Events. Since the <strong>2009</strong> Budget was enacted the Board <strong>of</strong> Revenue Estimates decreased its <strong>2009</strong>general fund revenue estimate by $1,292.7 million including $431.9 million in September 2008, $415.3 million inDecember, 2008 <strong>and</strong> $445.5 million in March, <strong>2009</strong>.In order to close the gap between anticipated revenues <strong>and</strong> budgeted expenditures, the Governor proposed <strong>and</strong>the Board <strong>of</strong> Public Works approved expenditure reductions totaling $364.3 million on October 15, 2008 <strong>and</strong> March 4,<strong>2009</strong>. The October reductions totaled $297.2 million <strong>and</strong> included $13.9 million in aid to local governments, $20.0million in the Dedicated Purpose Account <strong>of</strong> the <strong>State</strong> Reserve Fund reflecting a reduced payment for the IntercountyConnector, $46.1 million for Other Post Employment Benefits <strong>and</strong> $217.2 million in other reductions to <strong>State</strong> agencies.Expenditures were reduced by $67.1 million in March <strong>2009</strong>, including $34.1 million in savings from furloughing <strong>State</strong>employees <strong>and</strong> $9.2 million in savings from abolishing vacant positions.As part <strong>of</strong> the fiscal year 2010 budget plan, the <strong>General</strong> Assembly enacted the Budget Reconciliation <strong>and</strong>Financing Act <strong>of</strong> <strong>2009</strong> (the “<strong>2009</strong> Act”), legislation that authorized various transfers <strong>and</strong> funding changes resulting inincreased general fund revenues <strong>and</strong> decreased general fund appropriations. The <strong>2009</strong> Act authorized transfers to the<strong>General</strong> Fund <strong>of</strong> $380.2 million from accounting reserves <strong>and</strong> $414.4 million from various special fund balancesincluding $137.1 million in transfer tax revenues, $73.0 million from the Dedicated Purpose Account <strong>of</strong> the <strong>State</strong>Reserve Fund, $52.7 million from the Helicopter Replacement Fund, $29.0 million from the University System <strong>of</strong><strong>Maryl<strong>and</strong></strong>, $28.0 million from the Injured Worker’s Insurance Fund actuarial liability reserve for claims against the<strong>State</strong>, <strong>and</strong> $17.0 million from the Trauma Fund. The 2010 budget plan also increased the transfer from the RevenueStabilization Account <strong>of</strong> the <strong>State</strong> Reserve Fund to the <strong>General</strong> Fund by $45.0 million for a total <strong>of</strong> $170.0 million infiscal year <strong>2009</strong>.17
<strong>General</strong> Fund 2010 Budget2010 Budget. On April 13, <strong>2009</strong>, the <strong>General</strong> Assembly approved the Budget for fiscal year 2010. TheBudget includes, among other things: (1) funds to the <strong>State</strong>’s retirement <strong>and</strong> pension systems consistent with the“corridor” methodology <strong>of</strong> funding as prescribed by statute; (2) $5,745.7 million in aid to local governments fromgeneral funds reflecting full funding <strong>of</strong> the public school assistance enhancements enacted at the 2002 Session <strong>of</strong> the<strong>General</strong> Assembly (“Thornton”), as amended; (3) $60,000 for capital projects; (4) $139.9 million to the <strong>State</strong> ReserveFund; <strong>and</strong> (5) deficiency appropriations <strong>of</strong> $273.0 million for fiscal year <strong>2009</strong>, including $35.5 million for the <strong>State</strong>Department <strong>of</strong> Education, a reduction <strong>of</strong> $364.9 million in the Department <strong>of</strong> Health <strong>and</strong> Mental Hygiene primarily inMedicaid due to the availability <strong>of</strong> federal stimulus funds; $14.7 million to the Department <strong>of</strong> Juvenile Servicesprimarily for personnel costs <strong>and</strong> per diem placements; <strong>and</strong> $15.3 million for the Department <strong>of</strong> Public Safety <strong>and</strong>Correctional Services mostly for overtime, fuel <strong>and</strong> utilities.As part <strong>of</strong> the fiscal year 2010 Budget, the <strong>General</strong> Assembly enacted the Budget Reconciliation <strong>and</strong>Financing Act <strong>of</strong> <strong>2009</strong> (the “<strong>2009</strong> Act”) that authorizes various transfers <strong>and</strong> funding changes resulting in increasedgeneral fund revenues <strong>and</strong> decreased general fund appropriations.The <strong>2009</strong> Act provides for transfers to the <strong>General</strong> Fund in fiscal year 2010 <strong>of</strong> $216.3 million, including $31.0million <strong>of</strong> transfer tax revenues <strong>and</strong> $161.9 million from the local share <strong>of</strong> highway user revenues. The <strong>2009</strong> Act <strong>and</strong>other legislative actions cumulatively decrease fiscal year 2010 revenues by $24.8 million. Decreases include $45.0million in corporate income taxes to reauthorize the Higher Education Investment Fund <strong>and</strong> $35.9 million in individualincome taxes due to coupling with federal actions in the American Recovery <strong>and</strong> Reinvestment Act <strong>of</strong> <strong>2009</strong> (“ARRA”).Increases include $21.5 million in sales <strong>and</strong> motor fuel tax diversions from the Chesapeake Bay 2010 Fund, $8.6million from reducing the commission earned by lottery sales agents, <strong>and</strong> $4.5 million from reducing the Mined CoalTax Credit.Reductions to required fiscal year 2010 general fund appropriations include $34.0 million in aid to communitycolleges; $24.0 million due to modifications in the local jail reimbursement program; $16.1 million representing adecrease in the <strong>State</strong> share (from 80% to 70%) <strong>of</strong> the cost <strong>of</strong> placing students with special needs in non-publicestablishments; <strong>and</strong> $11.8 million reflecting the elimination <strong>of</strong> a <strong>State</strong> match <strong>of</strong> employee contributions to the deferredcompensation plan. The Budget does not include funds for any employee cost <strong>of</strong> living adjustment or merit increases.The budget includes $139.9 million for the Revenue Stabilization Account <strong>of</strong> the <strong>State</strong> Reserve Fund. Therequired payment <strong>of</strong> $63.0 million from the Dedicated Purpose Account to the <strong>Maryl<strong>and</strong></strong> Transportation Authority forthe Intercounty Connector was reduced <strong>and</strong> funded with general obligation bonds instead. Transfers from the <strong>State</strong>Reserve Fund to the <strong>General</strong> Fund total $210.0 million in fiscal year 2010.The Budget funds fiscal year 2010 debt service on the <strong>State</strong>’s general obligation bonds with $785.0 million inspecial funds, primarily from <strong>State</strong> property tax revenues. The projected amount <strong>of</strong> <strong>State</strong> property tax revenues reflectsa property tax rate <strong>of</strong> 11.2 cents (per $100 <strong>of</strong> taxable assessed value), a rate unchanged from fiscal year 2008.<strong>State</strong> aid to primary <strong>and</strong> secondary schools includes $39.3 million in Education Trust Fund revenues generatedthrough anticipated licensing fees for Video Lottery Terminals <strong>and</strong> $297.3 million in <strong>State</strong> Fiscal Stabilization Fundsauthorized by the ARRA. The Budget also includes $660.0 million in additional federal fund attainment in theMedicaid program resulting from an increased federal matching percentage authorized by the ARRA.Based on the Board <strong>of</strong> Revenue Estimates March <strong>2009</strong> general fund revenue estimate <strong>and</strong> actions enacted bythe <strong>General</strong> Assembly in the <strong>2009</strong> session, its was estimated that the general fund balance on a budgetary basis at June30, 2010 would be $87.9 million.In June <strong>2009</strong>, the Bureau <strong>of</strong> Revenue Estimates reported that <strong>2009</strong> general fund revenues will likely fallapproximately $400.0 million short <strong>of</strong> the March <strong>2009</strong> estimate. On July 22, the Governor proposed <strong>and</strong> the Board <strong>of</strong>Public Works approved $282.0 million in <strong>General</strong> Fund budget reductions <strong>and</strong> other budget actions, <strong>and</strong> the Governorintends to propose future budget reductions as necessary in order to maintain a balanced 2010 Budget. By law theGovernor has the power, with the approval <strong>of</strong> the Board <strong>of</strong> Public Works, to reduce by not more than 25% anyappropriation that he may deem unnecessary, except appropriations for the payment <strong>of</strong> interest <strong>and</strong> the retirement <strong>of</strong>19
<strong>State</strong> debt, the legislature, the public schools, the judiciary, <strong>and</strong> certain salaries. See “STATE FINANCES – BudgetarySystem”.Interim <strong>General</strong> Fund Revenues <strong>and</strong> ExpendituresThe <strong>State</strong> does not issue, nor does it have procedures in effect that provide, interim financial statements;however, the Office <strong>of</strong> the Comptroller has compiled the following summary data with respect to the revenues <strong>and</strong>expenditures <strong>of</strong> the <strong>General</strong> Fund for the nine months ended March 31, 2008 <strong>and</strong> <strong>2009</strong>. The <strong>General</strong> Fund is that fundfrom which all general costs <strong>of</strong> <strong>State</strong> government are paid <strong>and</strong> to which taxes <strong>and</strong> other revenues not specificallydirected by law to be deposited in separate funds are recorded. Approximately 47.3% <strong>of</strong> revenues were accounted forin the <strong>General</strong> Fund in fiscal year 2008, <strong>and</strong> it is currently estimated that the <strong>General</strong> Fund will account for 43.8% <strong>of</strong> allrevenues in fiscal year <strong>2009</strong>. The presentation <strong>of</strong> these data does not purport to be, <strong>and</strong> should not be construed as, aninterim <strong>State</strong>ment <strong>of</strong> <strong>General</strong> Fund Revenues, Expenditures, <strong>and</strong> Surplus; however, adjustments have been made topresent the revenues on a basis reasonably comparable to the table <strong>of</strong> operating revenues included in the section“STATE FINANCES — <strong>State</strong> Revenues” presented elsewhere in this Official <strong>State</strong>ment.<strong>General</strong> Fund Revenues. The following presents a summary <strong>of</strong> general fund revenues on a budgetary basis bymajor categories for the nine months ended March 31, 2008 <strong>and</strong> <strong>2009</strong>.<strong>General</strong> Fund Revenues($ in millions)Nine months Ended March 31Fiscal Year 2008 Fiscal Year <strong>2009</strong>Amount% <strong>of</strong> FY ActualRevenues (a)Amount% <strong>of</strong> FY EstimatedRevenues (a)Income Taxes (b) ...................................... $4,635.0 61.9% $4,616.0 62.7%Sales <strong>and</strong> Use Taxes (b) ........................... 2,357.4 64.1 2,436.7 67.5Motor Vehicle User Taxes, Fees.............. 7.8 59.5 6.5 100.0Property, Franchise, Excise Taxes........... 705.6 60.9 725.1 61.6Sundry Fees, Licenses, Charges, Etc....... 711.1 58.9 573.0 53.5Federal ....................................................... 67.1 83.2 78.3 109.3Total........................................................... $8,484.1 62.6% $8,435.6 63.8%________(a) For the first nine months <strong>of</strong> fiscal year 2008, represents the percentage <strong>of</strong> actual revenues for the full fiscal year; for the first ninemonths <strong>of</strong> fiscal year <strong>2009</strong>, represents the percentage <strong>of</strong> revenues as estimated by the Board <strong>of</strong> Revenue Estimates on March 11, <strong>2009</strong>.(b) Income taxes <strong>and</strong> sales <strong>and</strong> use taxes reflect amounts actually received from July through March, excluding amounts received in thatperiod allocable to the preceding fiscal year.* Totals may not add due to rounding.(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)20
<strong>General</strong> Fund Expenditures. The following presents a summary <strong>of</strong> general fund expenditures on a budgetary basisby major category for the nine months ended March 31, 2008 <strong>and</strong> <strong>2009</strong> (see note (a)):<strong>General</strong> Fund Expenditures($ in millions)Nine months Ended March 31Fiscal Year 2008 Fiscal Year <strong>2009</strong>Amount% <strong>of</strong> FY ActualExpenditures (b)Amount% <strong>of</strong> FY BudgetExpenditures (b)Public Education .............................................. $5,667.4 80.7% $5,843.8 80.9%Human Resources ............................................ 394.0 69.1 356.2 63.7Public Health.................................................... 2,561.7 70.0 2,770.9 73.0Public Safety .................................................... 1,067.6 69.1 1,059.4 70.6Administrative & Other................................... 1,067.1 73.0 1,016.9 67.6Capital Funding (c).......................................... 9.4 100.0 1.0 100.0<strong>State</strong> Reserve Fund - Revenue StabilizationAccount....................................................... 162.8 100.0 146.5 100.0Public Debt (d)................................................. 29.3 100.0 -Total.................................................................. $10,959.3 75.8% $11,194.7 76.0%___________(a) The <strong>State</strong>'s accounting procedures do not require recording encumbrances (i.e., commitments evidenced by purchase orders or contracts)for financial reporting purposes except at the end <strong>of</strong> each fiscal year. Accordingly, no amounts <strong>of</strong> encumbrances have been recorded forthe nine months ended March 31, 2008 <strong>and</strong> <strong>2009</strong>. At June 30, 2007 <strong>and</strong> 2008, <strong>General</strong> Fund encumbrances charged to expenditures forthe fiscal years ended totaled $206.4 million <strong>and</strong> $179.7 million, respectively. The Office <strong>of</strong> the Comptroller has no reason to believe thatthe current patterns <strong>of</strong> commitments are not in conformity with historical practices. See Appendix A, Notes 1 <strong>and</strong> 2 <strong>of</strong> Notes to Financial<strong>State</strong>ments <strong>and</strong> Notes to Required Supplementary Information as to certain changes, accrual methods, <strong>and</strong> practices affecting thepresentation <strong>of</strong> expenditures.(b) For the first nine months <strong>of</strong> fiscal year 2008, represents the percentage <strong>of</strong> actual expenditures for the full fiscal year; for the first ninemonths <strong>of</strong> fiscal year <strong>2009</strong>, represents the percentage <strong>of</strong> current budget expenditures.(c) Capital Funding is appropriated in the <strong>General</strong> Fund <strong>and</strong> transferred to the Capital Projects Fund at the beginning <strong>of</strong> the fiscal year.(d) Funding for public debt is appropriated in the <strong>General</strong> Fund <strong>and</strong> transferred to the Annuity Bond Fund at the beginning <strong>of</strong> the year.* Totals may not add due to rounding.Federal Stimulus FundingThe American Recovery <strong>and</strong> Reinvestment Act <strong>of</strong> <strong>2009</strong> (“ARRA”) provides support for the <strong>State</strong>s by fundinginfrastructure, education programs, human services programs, <strong>and</strong> providing discretionary funds. The table belowshows that the ARRA provides $4.1 billion in formula funding to <strong>Maryl<strong>and</strong></strong> governments. Of this amount, almost $2.5billion was appropriated at the <strong>2009</strong> session <strong>of</strong> the <strong>General</strong> Assembly.ARRA grants to <strong>Maryl<strong>and</strong></strong> provide $396.0 million for educational programs, $765.2 million for infrastructureprograms, <strong>and</strong> $546.2 million for other programs. These funds provide additional federal support <strong>and</strong> do not supplantgeneral funds. ARRA also includes $101.8 million in grants to local governments <strong>and</strong> aid organizations that are notappropriated in the <strong>State</strong> budget. These funds will be distributed directly to the local governments <strong>and</strong> aid organizations.ARRA also provides federal grants for which <strong>State</strong> <strong>and</strong> local governments must compete, including grants tosupport law enforcement, habitat conservation, <strong>and</strong> the arts. It is uncertain how much <strong>of</strong> these funds the <strong>State</strong> willreceive <strong>and</strong> they are not included in the ARRA estimates for <strong>Maryl<strong>and</strong></strong>.Funds Supporting <strong>State</strong> <strong>General</strong> Fund CommitmentsARRA’s most significant impact for <strong>Maryl<strong>and</strong></strong> is the $2.3 billion that can support <strong>State</strong> general fundcommitments. These funds support Medicaid, education, <strong>and</strong> discretionary <strong>State</strong> spending. The funds are used in theplace <strong>of</strong> general funds to sustain <strong>State</strong> funding from fiscal years <strong>2009</strong> to 2011. When the funds are no longer available,the <strong>State</strong> will need to replace the funds or reduce spending.21
Medicaid funds total $1,435.9 million <strong>and</strong> are available from October 2008 through the end <strong>of</strong> December2010. The largest share is $891.8 million attributable to a 6.2% increase in the <strong>State</strong>’s Federal Medical AssistancePercentage. The <strong>State</strong> receives another $544.1 million based on projected unemployment rates. ARRA providesadditional funding for each state whose unemployment rate has risen by 1.5% since December 2007. <strong>Maryl<strong>and</strong></strong> qualifiesfor this additional funding throughout the period. Additional funds are provided to states whose unemployment rate hasrisen by 2.5%. The 2010 budget assumes that <strong>Maryl<strong>and</strong></strong> meets this threshold as <strong>of</strong> February <strong>2009</strong>.Impact <strong>of</strong> the ARRA on <strong>Maryl<strong>and</strong></strong> <strong>and</strong> <strong>Local</strong> BudgetsFiscal <strong>2009</strong> <strong>and</strong> 2010 – Appropriations Compared to Total Available Funds($ in Millions)____Program <strong>2009</strong> 2010 Unapprop. TotalSupporting <strong>State</strong> <strong>General</strong> Fund CommitmentsFiscal Stabilization – Education $0.0 $295.9 $425.3 $721.2Fiscal Stabilization – Discretionary 1.5 79.6 79.4 160.5Medicaid Assumed in Fiscal 2010 Budget 0.0 350.0 0.0 350.0Additional Medicaid 435.0 302.0 348.9 1,085.9Subtotal 436.5 1,027.5 853.5 2,317.5Education Grants Appropriated in the <strong>State</strong> BudgetSpecial Education 0.0 107.3 100.7 208.0Title I 0.0 156.8 22.9 179.7Education Technology 0.0 4.3 4.1 8.3Subtotal 0.0 268.4 127.7 396.0Infrastructure Appropriated in the <strong>State</strong> BudgetHighways 0.0 249.0 182.0 431.0Transit Capital 0.0 93.1 86.2 179.3HOME Investment Partnership Program 0.0 31.7 0.0 31.7Clean Water 0.0 96.0 0.3 96.3Drinking Water 0.0 27.0 0.0 27.0Subtotal 0.0 496.8 268.4 765.2Other Grants Appropriated in the <strong>State</strong> Budget<strong>State</strong> Energy Programs 1.5 0.0 56.0 57.5Weatherization 6.6 28.1 31.0 65.6Community Services Block Grant 0.0 12.6 1.1 13.7Homelessness Prevention 0.0 5.7 0.0 5.7Community Development Block Grant 0.0 2.2 0.0 2.2Foster Care 8.6 11.5 5.8 25.9Food Assistance 36.8 47.0 145.6 229.4Temporary Assistance for Needy Families 20.0 0.6 8.6 29.2Ind. Living, Homeless Educ. & Work Study 0.4 0.9 2.9 4.2Child Care & Development Block Grant 0.0 19.0 5.0 24.0Vocational Rehabilitation 3.4 3.4 0.0 6.9UI/Workforce Inv./Dislocated Workers 1.8 34.9 7.8 44.5Preventative Health BG/Immunization 0.0 0.0 4.0 4.0Byrne Grants/Public Safety Grants 0.0 13.1 20.3 33.4Subtotal 79.2 178.9 288.1 546.20 0 0 0Total <strong>State</strong> Grants 515.7 1,971.5 1,537.8 4,025.0Federal Grants Not Appropriated in the <strong>State</strong> Budget<strong>Local</strong> Homelessness Prevention n/a n/a n/a 16.8<strong>Local</strong> Community Development Block Grant n/a n/a n/a 12.8Head Start n/a n/a n/a 7.9<strong>Local</strong> Byrne Grants n/a n/a n/a 15.8Public Housing n/a n/a n/a 48.4Subtotal - - - 101.80 0 0 0Total <strong>State</strong> Grants for <strong>Maryl<strong>and</strong></strong> Governments $515.7 $1,971.5 $1,537.8 $4,126.8Source: Department <strong>of</strong> Legislative Services.* Totals may not add up due to rounding.Budget <strong>and</strong> <strong>State</strong> Aid. The fiscal year 2010 budget introduced by the Administration assumed $350.0 millionin federal funds for Medicaid in fiscal year 2010. The first Supplemental Budget provided another $435.0 million in22
fiscal year <strong>2009</strong> <strong>and</strong> $302.0 million in fiscal year 2010. Another $348.9 million is projected in fiscal year 2011. Thefunds are used to replace general funds <strong>and</strong> match federal funds.The table below shows that the ARRA provides $881.6 million to <strong>Maryl<strong>and</strong></strong> in Fiscal Stabilization funds. Thelegislation requires that 81.8%, or $721.2 million, support education programs. The education funds must first be usedto restore elementary <strong>and</strong> secondary school reductions to fiscal year 2008 spending levels. Since <strong>Maryl<strong>and</strong></strong> hasincreased spending, this requirement does not apply. Remaining funds must be used to support <strong>State</strong> formula increasesin fiscal years 2010 <strong>and</strong> 2011 for elementary <strong>and</strong> secondary education or to restore reductions made to <strong>State</strong> highereducation funding below fiscal years 2008 or <strong>2009</strong> levels. The Administration has applied these funds to supportelementary <strong>and</strong> secondary education increases. The first Supplemental Budget provides $295.9 million in fiscal year2010, leaving another $425.3 million in unappropriated funds that can be used in fiscal year 2011.Finally, the ARRA allows that 18.2% <strong>of</strong> the Fiscal Stabilization funds can support general governmentservices. These discretionary funds total $160.5 million, <strong>of</strong> which $1.5 million was appropriated for fiscal year <strong>2009</strong><strong>and</strong> $79.6 million was appropriated for fiscal year 2010.(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)23
Higher EducationEvery segment <strong>of</strong> higher education will receive an increase in <strong>State</strong> funds in fiscal year 2010. Overall, newgeneral, Higher Education Investment Funds (“HEIF”), <strong>and</strong> federal funds total $33.5 million, or a 2.2%, increase overfiscal year <strong>2009</strong>.Higher Education Investment Fund: Language in the fiscal year 2010 budget bill reduced the general fundappropriation for higher education by $46.5 million contingent on the reauthorization <strong>of</strong> HEIF, replacing those generalfunds with HEIF. The Budget Reconciliation <strong>and</strong> Financing Act <strong>of</strong> <strong>2009</strong>, reauthorizes the allocation <strong>of</strong> corporate taxrevenues to HEIF for an additional year, fiscal year 2010, <strong>and</strong> allows HEIF to be allocated to University System <strong>of</strong><strong>Maryl<strong>and</strong></strong> (“USM”) research institutes.Tuition Freeze: In an effort to continue to make college affordable for <strong>Maryl<strong>and</strong></strong> residents, the tuition freeze isextended for a fourth year for resident undergraduate students at USM institutions <strong>and</strong> Morgan <strong>State</strong> University(“MSU”). A total <strong>of</strong> $17.0 million <strong>of</strong> discretionary federal funds made available through ARRA is used to freezetuition rates, an amount equivalent to approximately a 4.0% tuition increase at USM institutions <strong>and</strong> 5.0% at MSU. St.Mary’s College <strong>of</strong> <strong>Maryl<strong>and</strong></strong> is not affected by the tuition freeze <strong>and</strong> will increase tuition 5.0% in fall <strong>2009</strong>.ARRA – Federal Stabilization Spending by ProgramFiscal <strong>2009</strong>-2010($ in Millions)Program <strong>2009</strong> 2010 Unapprop. TotalFiscal Stabilization – EducationFoundation Program $0.0 $110.3 $0.0 $110.3Compensatory Education 0.0 26.3 0.0 26.3Teacher Retirement 0.0 137.3 0.0 137.3Limited English Pr<strong>of</strong>icient Grant 0.0 4.7 0.0 4.7Student Transportation 0.0 17.3 0.0 17.3Unappropriated 0.0 0.0 425.3 425.3Subtotal 0.0 295.9 425.3 721.2Fiscal Stabilization – DiscretionaryCommunity College Formula Fund Swap 0.0 14.5 0.0 14.5Higher Education Funding Fund Swap 0.0 17.6 0.0 17.6MSP Salary Expenses Fund Swap 0.0 18.0 0.0 18.0DJS Per Diem Placement Costs Fund Swap 0.0 0.7 0.0 0.7DHR Temporary Disability Assistance Program 1.5 1.5 0.0 3.0DPSCS Overtime, Food, <strong>and</strong> Utility Costs 0.0 21.6 0.0 21.6DJS Salary Expenses 0.0 3.8 0.0 3.8MSP Salary, Fuel, <strong>and</strong> Utility Costs 0.0 1.9 0.0 1.9Unappropriated 0.0 0.0 79.4 79.4Subtotal 1.5 79.6 79.4 160.5Total Fiscal Stabilization $1.5 $375.5 $504.6 $881.6____Source: Department <strong>of</strong> Legislative Services.* Totals may not add up due to rounding.(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)24
FY 2004-2008 <strong>General</strong> Fund Budget vs. ActualThe following statement presents a comparison <strong>of</strong> budget versus actual revenues, expenditures <strong>and</strong>encumbrances <strong>and</strong> changes in fund balance in the <strong>State</strong>’s <strong>General</strong> Fund using the budgetary basis <strong>of</strong> accounting for each<strong>of</strong> the past five fiscal years ending June 30.Statutory <strong>General</strong> Fund Comparative <strong>State</strong>ment <strong>of</strong> Revenues,Expenditures <strong>and</strong> Encumbrances <strong>and</strong> Changes in Fund BalanceBudget <strong>and</strong> Actual Fiscal Years 2004 to 2008($ in thous<strong>and</strong>s)2004 2005 2006 2007 2008Budget Actual Budget Actual Budget Actual Budget Actual Budget ActualRevenues:Income taxes ................................................................... $ 5,284,329 $ 5,417,671 $ 6,017,543 $6,323,895 $ 6,831,911 $6,843,809 $ 7,167,363 $ 7,268,949 $7,545,165 $7,491,807Sales <strong>and</strong> use taxes ........................................................... 2,865,389 2,921,794 3,109,302 3,129,352 3,350,608 3,355,168 3,457,229 3,420,149 3,691,717 3,675,263Other taxes ........................................................................ 826,352 864,136 885,269 902,448 976,705 945,458 956,817 961,416 1,083,077 1,100,788Licenses <strong>and</strong> fees .............................................................. 164,502 182,390 164,342 187,284 181,709 198,533 212,457 209,504 205,284 205,314Charges for services ......................................................... 266,860 281,480 282,118 287,762 292,566 296,653 294,546 306,806 308,532 299,709Interest <strong>and</strong> other investment income.............................. 27,101 33,065 50,846 82,891 133,976 195,395 172,795 260,708 122,585 234,289Other.................................................................................. 535,918 516,039 613,760 718,906 572,042 928,778 588,371 1,477,980 601,428 837,322Total revenues (a)...................................................... 9,970,451 10,216,575 11,123,180 11,632,538 12,339,517 12,763,794 12,849,578 13,905,512 13,557,788 13,844,492Expenditures <strong>and</strong> encumbrances by major function:Payments <strong>of</strong> revenue to civil divisions <strong>of</strong> the <strong>State</strong>........ 136,821 136,761 128,490 128,246 132,036 131,793 145,033 144,794 149,512 149,218Public debt......................................................................... - - - - - - - - 29,349 29,349Legislative......................................................................... 59,860 59,860 61,320 61,319 65,284 64,184 69,128 68,156 72,258 70,838Judicial review <strong>and</strong> legal.................................................. 353,527 347,235 368,100 365,310 392,974 392,541 432,829 429,676 457,197 453,810Executive <strong>and</strong> administrative control.............................. 120,373 118,917 140,482 136,668 169,705 168,299 278,878 276,634 195,834 193,466Financial <strong>and</strong> revenue administration.............................. 146,883 143,107 162,865 161,610 165,026 164,754 182,851 179,001 185,550 180,191Budget <strong>and</strong> management.................................................. 30,137 28,701 45,423 43,523 60,033 59,190 65,860 62,537 31,546 28,611<strong>General</strong> services................................................................ 48,150 47,697 51,523 51,381 50,388 50,387 59,815 58,814 58,062 58,062Natural resources <strong>and</strong> recreation ..................................... 70,818 70,656 68,545 68,408 65,529 65,298 75,692 75,387 76,856 76,476Agriculture ........................................................................ 27,168 26,922 25,654 25,526 24,822 24,812 30,292 30,021 34,392 33,710Health, hospitals <strong>and</strong> mental hygiene.............................. 2,868,584 2,865,340 3,191,989 3,191,049 3,382,496 3,381,597 3,588,004 3,588,003 3,671,920 3,651,019Human resources .............................................................. 550,273 550,021 562,954 562,952 551,865 550,865 569,924 569,924 575,743 575,743Labor, licensing <strong>and</strong> regulation ....................................... 24,505 24,261 18,505 18,034 19,020 16,681 16,004 15,728 15,880 15,440Public safety <strong>and</strong> correctional services ........................... 781,341 764,810 822,979 819,696 890,577 890,305 1,034,310 1,033,397 1,034,831 1,034,830Public education................................................................ 4,660,572 4,657,668 5,030,484 5,026,284 5,523,831 5,517,071 6,201,859 6,197,845 7,014,660 7,007,355Housing <strong>and</strong> community development............................ 10,724 10,724 11,016 11,016 6,924 6,924 46,132 45,621 13,701 13,688Business <strong>and</strong> economic development.............................. 55,489 55,489 63,057 63,057 59,939 59,939 103,205 103,086 95,708 95,670Environment...................................................................... 38,773 38,764 37,192 37,171 34,472 34,472 50,835 50,340 44,527 44,471Juvenile services............................................................... 170,345 170,340 178,171 177,761 197,656 197,334 238,791 238,520 267,188 266,734<strong>State</strong> police........................................................................ 135,177 134,207 212,444 211,515 230,966 230,555 245,559 245,559 247,375 246,745<strong>State</strong> reserve fund ............................................................. 10,000 10,000 114,653 114,653 349,372 349,372 791,382 791,382 262,795 262,795Reversions:Current year reversions ................................................. (37,180) - (20,000) - (20,000) - (20,000) - (30,000) -Prior year reversions...................................................... - (11,231) - (11,368) - (14,863) - (29,971) - (49,268)Total expenditures <strong>and</strong> encumbrances..................... 10,262,340 10,250,249 11,275,846 11,263,811 12,352,915 12,341,510 14,206,383 14,174,454 14,504,884 14,438,953Changes in encumbrances during fiscal year..................... - 28,620 - (8,528) - 2,834 - (51,543) - 26,735Total expenditures..................................................... 10,262,340 10,278,869 11,275,846 11,255,283 12,352,915 12,344,344 14,206,383 14,122,911 14,504,884 14,465,688Excess <strong>of</strong> revenues over (under) expenditures........ (291,889) (62,294) (152,666) 377,255 (13,398) 419,450 (1,356,805) (217,399) (927,096) (621,196)Other sources (uses) <strong>of</strong> financial resources:Operating transfers in (out).............................................. - 363,099 - 380,125 - 30,386 - (23,798) - (72,596)Excess <strong>of</strong> revenues over (under) expenditures <strong>and</strong>other sources <strong>of</strong> financial resources ........................ (291,889) 300,805 (152,666) 757,380 (13,398) 449,836 (1,356,805) (241,197) (927,096) (693,792)Fund balances at the beginning <strong>of</strong> the year........................ 814,028 814,028 1,114,833 1,114,833 1,872,213 1,872,213 2,322,049 2,322,049 2,080,852 2,080,852Fund balances, June 30 (b).................................................. $ 522,139 $ 1,114,833 $ 962,167 $ 1,872,213 $ 1,858,815 $ 2,322,049 $ 965,244 $ 2,080,852 $ 1,153,756 $ 1,387,060_________(a) This amount differs from the total general fund revenues noted in the “<strong>General</strong> Fund Revenues <strong>and</strong> Appropriations – Budgetary Basis” schedule due to the different treatment <strong>of</strong> transfers, including the transfer <strong>of</strong>revenues from the <strong>State</strong> Reserve Fund.(b) Includes balances for the <strong>State</strong> Reserve Fund <strong>and</strong> encumbrances.25
Cigarette Restitution FundAll payments received by the <strong>State</strong> related to the tobacco settlement are to be deposited into the CigaretteRestitution Fund (“CRF”), which can only be spent through appropriations in the annual <strong>State</strong> budget. At least 50% <strong>of</strong>the appropriations must be for: the reduction <strong>of</strong> tobacco use by minors; implementation <strong>of</strong> the agriculture plan adoptedby the Tri-County Council for Southern <strong>Maryl<strong>and</strong></strong>; public <strong>and</strong> school education campaigns to decrease tobacco use;smoking cessation programs; enforcement <strong>of</strong> laws regarding tobacco sales; support for programs that exp<strong>and</strong> access tohealth care for the uninsured; primary health care in rural areas <strong>and</strong> those targeted by tobacco companies; prevention,treatment, <strong>and</strong> research, including capital projects, concerning cancer, heart disease, lung disease, <strong>and</strong> tobacco use <strong>and</strong>control; <strong>and</strong> substance abuse treatment <strong>and</strong> prevention programs. Thirty percent <strong>of</strong> appropriations funded by the CRFmust be for the Medicaid program. The remainder <strong>of</strong> the CRF may be appropriated for any public purpose. <strong>Maryl<strong>and</strong></strong>law provides a framework for two <strong>of</strong> the primary uses <strong>of</strong> the CRF by creating <strong>and</strong> outlining two specific programs - theTobacco Use Prevention <strong>and</strong> Cessation Program <strong>and</strong> the Cancer Prevention, Education, Screening, <strong>and</strong> TreatmentProgram.The special fund appropriations <strong>of</strong> the CRF are limited to the available proceeds <strong>of</strong> the tobacco settlement. Inits budgetary process, the <strong>State</strong> has made various revenue assumptions; in the event the anticipated revenues or fundsare less than the <strong>State</strong> expects, the appropriations cannot be fully expended. Net expenditures from the fund were$179.8 million in fiscal year 2008 <strong>and</strong> are expected to be $192.7 million in fiscal year <strong>2009</strong>.Transportation Trust FundThe Transportation Trust Fund, administered by the Department <strong>of</strong> Transportation, is the largest <strong>of</strong> the specialfunds <strong>and</strong> consolidates into a single fund substantially all fiscal resources, excluding the <strong>Maryl<strong>and</strong></strong> TransportationAuthority, dedicated to transportation, including the excise taxes on motor vehicle fuel <strong>and</strong> motor vehicle titles, sales<strong>and</strong> use tax on short-term vehicle rentals, a portion <strong>of</strong> the corporate income tax, wharfage <strong>and</strong> l<strong>and</strong>ing fees, rentals, <strong>and</strong>fare box revenues. See “STATE TAX SUPPORTED DEBT AND CAPITAL PROGRAM — Department <strong>of</strong>Transportation Debt.” All expenditures <strong>of</strong> the Department <strong>of</strong> Transportation are made from the Transportation TrustFund. In addition, the various categories <strong>of</strong> transportation bonds are serviced from the Transportation Trust Fund, <strong>and</strong>the particular taxes <strong>and</strong> other designated revenues are both dedicated to the payment <strong>of</strong> such indebtedness <strong>and</strong> constitutethe sole sources to which holders <strong>of</strong> transportation bonds legally may look for repayment.Amounts in the Transportation Trust Fund do not revert to the <strong>General</strong> Fund if unexpended at the end <strong>of</strong> thefiscal year; however, from time to time, the <strong>General</strong> Assembly has enacted legislation requiring that certain unpledgedrevenue in the Transportation Trust Fund be delivered to the <strong>General</strong> Fund. In some instances, such legislation also hasprovided for the subsequent re-transfers from the <strong>General</strong> Fund to the Transportation Trust Fund.The following table shows a condensed summary <strong>of</strong> the fund balances <strong>of</strong> the Department <strong>of</strong> TransportationSpecial Revenue <strong>and</strong> Debt Service Funds for each <strong>of</strong> the past five fiscal years ended June 30, 2008.(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)26
Department <strong>of</strong> Transportation Special Revenue <strong>and</strong> Debt Service FundsFiscal Years 2004-2008($ in thous<strong>and</strong>s)2004 2005 2006 2007 2008Revenues ........................................... $3,316,624 $3,598,395 $3,534,227 $3,501,115 $3,341,196Expenditures ..................................... 3,748,822 3,755,239 3,650,196 3,670,657 3,769,682Excess (deficiency) <strong>of</strong> revenuesover expenditures ....................... (432,198) (156,844) (115,969) (169,542) (428,486)Net other sources (uses) <strong>of</strong>financial resources...................... 566,998 128,437 158,510 111,077 249,319Excess (deficiency) <strong>of</strong> revenuesover expenditures <strong>and</strong> netother sources (uses) <strong>of</strong>financial resources...................... 134,800 (28,407) 42,541 (58,465) (179,167)Fund balance, July 1.......................... 238,949 373,749 345,342 387,883 329,418Fund balance, June 30....................... $373,749 $345,342 $387,883 $329,418 $150,251NOTE: The Department <strong>of</strong> Transportation Special Revenue <strong>and</strong> Debt Service Funds account for substantially all <strong>of</strong> the financial activities <strong>of</strong> the Transportation TrustFund. The <strong>Maryl<strong>and</strong></strong> Transportation Authority (“MdTA”) is not part <strong>of</strong> the Transportation Trust Fund. The above summary was prepared from the audited financialstatements <strong>of</strong> the Department <strong>of</strong> Transportation which are prepared in accordance with <strong>General</strong>ly Accepted Accounting Principles.Investment <strong>of</strong> <strong>State</strong> Funds<strong>State</strong> statute provides that the investment <strong>of</strong> unexpended or surplus money over which the Treasurer hascustody, which includes both general funds <strong>and</strong> special funds, is limited to: (1) obligations <strong>of</strong> the United <strong>State</strong>s or itsagencies or instrumentalities; (2) repurchase agreements collateralized in an amount not less than 102% <strong>of</strong> principal byobligations <strong>of</strong> the United <strong>State</strong>s or its agencies or instrumentalities; (3) bankers’ acceptances, money market mutualfunds <strong>and</strong> commercial paper (limited to 10% <strong>of</strong> total investments) all only with the highest rating; <strong>and</strong> (4) the <strong>Maryl<strong>and</strong></strong><strong>Local</strong> Government Investment Pool.Investment Portfolio Distribution(par value)March 31, 2008(a)March 31, <strong>2009</strong>(a)U.S. Treasuries............................................... $895,000 $895,000Agencies ......................................................... 5,729,346,000 4,703,714,000Repurchase Agreements ................................ 225,905,437 636,699,628Money Market Funds .................................... 201,278,069 26,903,898MLGIP............................................................ 92,879,631 216,229,285Total*.............................................................. $6,250,304,137 $5,584,441,810Weighted Average Maturity in Days............ 1,490 1,379___* Totals may not add due to rounding.(a) UnauditedAt March 31, <strong>2009</strong>, approximately 84% <strong>of</strong> the portfolio was invested in U.S. Treasuries <strong>and</strong> U.S. governmentagencies, <strong>and</strong> 11% <strong>of</strong> the portfolio was in shorter-term repurchase agreements. Investments in Treasuries <strong>and</strong> Agencieswere approximately 92% <strong>of</strong> the portfolio on March 31, 2008, while repurchase agreements were approximately 3% atthat time. The monthly weighted average portfolio interest rate was 4.794% at March 31, 2008 compared to 3.031% atMarch 31, <strong>2009</strong>.27
The portfolio size on March 31, <strong>2009</strong> was $666.0 million less than on March 31, 2008, generally reflectingdeclining <strong>State</strong> revenues. Future interest earnings are expected to moderate because the portfolio size is projected tocontinue to decrease <strong>and</strong> the Federal Open Market Committee has reduced interest rates to unprecedented levels,resulting in lower earnings on the <strong>State</strong>’s investments.<strong>State</strong> Retirement <strong>and</strong> Pension System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>The <strong>State</strong> Retirement <strong>and</strong> Pension System <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (the “System”), a multi-employer public employeeretirement system, provides defined benefits, including death <strong>and</strong> disability benefits, to all <strong>State</strong> employees, teachers,<strong>and</strong> employees <strong>of</strong> participating governmental units. The System is administered by a 14-member Board <strong>of</strong> Trusteeswhich has the authority to invest <strong>and</strong> reinvest the System’s assets. The <strong>State</strong> is the guarantor for the payment <strong>of</strong> allpensions, annuities, retirement allowances, refunds, reserves, <strong>and</strong> other benefits <strong>and</strong> expenses <strong>of</strong> the System.Employee retirement benefits are based on years <strong>of</strong> service <strong>and</strong> the highest three-year average salary.<strong>General</strong>ly, full service retirement benefits are based on 30 years <strong>of</strong> service, but reduced benefits are provided for earlyservice retirements. Retirement allowances are adjusted annually to provide for increases in the cost <strong>of</strong> living which, forcertain members, are limited to 3% <strong>of</strong> the original allowance amount.Pension Enhancements passed by the <strong>Maryl<strong>and</strong></strong> <strong>General</strong> Assembly during the 2006 legislative sessionestablished the Alternative Contributory Pension Selection (“ACPS”) plan within the Teachers’ <strong>and</strong> Employees’Pension Systems. The ACPS provides for an increased annual benefit multiplier <strong>of</strong> 1.8% per year <strong>of</strong> service since July1, 1998 <strong>and</strong> a 1.2% multiplier for prior years. Effective July 1, 2008, employees pay 5% <strong>of</strong> annual salary as them<strong>and</strong>atory contribution.By law, employer contribution rates are established by annual actuarial valuations using the entry age normalcost method <strong>and</strong> other actuarial assumptions adopted by the Board <strong>of</strong> Trustees. The unfunded actuarial accrued liability(UAAL) which existed as <strong>of</strong> the June 30, 2000, actuarial valuation is being amortized over the period ending on June30, 2020. The UAAL for each fiscal year subsequent to the year ended June 30, 2000, represents a separate liabilitylayer for actuarial funding purposes, <strong>and</strong> accordingly will be amortized over a 25-year period commencing July 1 <strong>of</strong> thefollowing fiscal year.The Budget Reconciliation <strong>and</strong> Financing Act <strong>of</strong> 2002 modified the methodology for determining the <strong>State</strong>’sannual required employer contribution to the Teachers’ <strong>and</strong> Employees’ combined systems for fiscal years beginningafter June 30, 2002. Accordingly, effective July 1, 2002, the <strong>State</strong>’s employer contribution to the Teachers’ <strong>and</strong>Employees’ combined systems is determined by the System’s actuary under a modified corridor funding method. Thismethod effectively maintains the contribution rate in effect for the Teachers’ <strong>and</strong> Employees’ combined systems duringthe preceding fiscal year (as adjusted for any legislative changes in the benefit structure) as long as such systems remainbetween 90 percent <strong>and</strong> 110 percent funded. If either system falls below 90 percent funded (i.e., below the corridor),then the contribution rate in effect for the subsequent fiscal year will be the rate in effect for the preceding fiscal yearplus 20 percent <strong>of</strong> the difference between the current fiscal year full funding rate <strong>and</strong> the prior fiscal year contributionrate. Conversely, if either system exceeds 110 percent funded (i.e., above the corridor), then the contribution rate ineffect for the subsequent fiscal year will be the rate in effect for the preceding fiscal year minus 20 percent <strong>of</strong> thedifference between the current fiscal year full funding rate <strong>and</strong> the prior fiscal year contribution rate. The methodologyfor computing the <strong>State</strong>’s employer contribution rates for the Law Enforcement Officers’ Pension System, <strong>State</strong> PoliceRetirement System, <strong>and</strong> the Judges’ Retirement System remain unchanged. For each <strong>of</strong> these three systems, theemployer contribution rate is equal to the sum <strong>of</strong> the normal contribution <strong>and</strong> the accrued liability contribution rates.(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)28
The following table presents information regarding the unfunded actuarial accrued liability <strong>of</strong> the System forthe years 2004 to 2008 as <strong>of</strong> June 30 valuation dates, derived from a report by the System’s independent actuary.Unfunded Actuarial Accrued Liability <strong>of</strong> the<strong>State</strong> Retirement <strong>and</strong> Pension System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>($ in thous<strong>and</strong>s)ValuationDateJune 30ActuarialAccruedLiabilityActuarialValue OfAssetsFunded Ratio(Assets/Liab.)UnfundedActuarial LiabilityCoveredPayroll(Active Members)UAL Asa Percent<strong>of</strong> Payroll%2004.......... $36,325,704 $33,484,657 92.2% $2,841,047 $8,069,481 35.2%2005.......... 39,133,450 34,519,500 88.2 4,613,949 8,603,761 53.62006.......... 43,243,492 35,795,025 82.8 7,448,467 9,287,576 80.12007 (a) .... 47,144,354 37,886,936 80.4 9,257,418 9,971,012 92.82008.......... 50,244,047 39,504,284(b) 78.6 10,739,763 10,542,806 101.9(a) Beginning July 1, 2006, the System changed its funding method from the Aggregate Entry Age Normal method to the Individual Entry Age Normal method.The Actuary’s revaluation <strong>of</strong> the <strong>State</strong>’s fiscal year <strong>2009</strong> contribution resulted in a recommended increase <strong>of</strong> $87.7 million. Due to timing <strong>of</strong> therecommendation, however, this amount was not included in the FY<strong>2009</strong> Budget, but will be included in the June 30, <strong>2009</strong> valuation <strong>and</strong> will be amortized as aportion <strong>of</strong> the UAAL commencing on July 1, 2010.(b) As <strong>of</strong> June 30, 2008, the market value <strong>of</strong> the assets was $36,613,710.Like many pension funds, the investments <strong>of</strong> the Retirement <strong>and</strong> Pension System have been significantlyimpacted by the stock market decline since June 30, 2008. Because the values <strong>of</strong> the individual investments fluctuatewith market conditions, the amount <strong>of</strong> investment losses that the System will recognize in its future financialstatements, if any, cannot be determined at this time. The next valuation date for the System’s assets <strong>and</strong> liabilities willbe June 30, <strong>2009</strong>. For a more detailed discussion <strong>of</strong> the Retirement <strong>and</strong> Pension System, see Appendix A, Note 15 toFinancial <strong>State</strong>ments, pages A-76 to A-79. Note 15, however, does not address the errors or corrections stated above.Other Retirement ProgramsIn addition to the principal retirement programs administered by the Board <strong>of</strong> Trustees, the <strong>Maryl<strong>and</strong></strong> TransitAdministration <strong>of</strong> the Department <strong>of</strong> Transportation provides pension benefits to its employees for the three unions itrecognizes <strong>and</strong> for former union members promoted to management positions. All other management employees hiredafter April 30, 1970, are members <strong>of</strong> the <strong>State</strong> Employees’ Retirement or Pension Systems for employees.The annual funding <strong>of</strong> the plan is based upon a report <strong>of</strong> the consulting actuary. The Department’s budget forfiscal year 2010 provides $24.8 million for the plan. The most recent actuarial valuation by Milliman, Inc., for the planyear ended June 30, 2008, sets the past service liability <strong>of</strong> the plan at $170.0 million <strong>and</strong> places the present value <strong>of</strong>vested benefits under the plan at $297.0 million.Other Post Employment Benefits (OPEB)Retired <strong>State</strong> employees <strong>and</strong> their eligible dependents meeting certain qualifications may participate, on asubsidized basis, in the <strong>State</strong> Employees’ Health Insurance Program (the “Plan”). For fiscal year 2008, the <strong>State</strong>’s Planmembership included 84,425 active employees, 4,468 vested former employees <strong>and</strong> 53,635 retirees <strong>and</strong> beneficiaries.The Plan assesses a charge to retirees for post-employment health care benefits which is based on health care insurancecharges for active employees. During fiscal year 2008, retiree plan members contributed $62.5 million <strong>and</strong> the <strong>State</strong>contributed $271.4 million for retiree health care benefits.For the year ended June 30, 2008, the <strong>State</strong> adopted the Governmental Accounting St<strong>and</strong>ard Board (“GASB”)<strong>State</strong>ment No. 45 (“GASB 45”) which addresses how state <strong>and</strong> local governments should account for <strong>and</strong> report costs<strong>and</strong> obligations related to post employment health care <strong>and</strong> other post employment non-pension benefits (“OPEB”).GASB 45 generally requires that the annual cost <strong>of</strong> OPEB <strong>and</strong> the related obligations <strong>and</strong> commitments be accountedfor <strong>and</strong> reported in essentially the same manner as pensions. Annual OPEB costs typically will be based on actuariallydetermined amounts that, if paid on an ongoing basis, would provide sufficient resources to pay benefits as they comedue. The provisions <strong>of</strong> GASB 45 do not require governments to fund their OPEB plans. GASB 45 establishesaccounting st<strong>and</strong>ards including disclosure requirements for the post employment plans, the funding policies, theactuarial valuation processes <strong>and</strong> assumptions, <strong>and</strong> the extent to which the plans have been funded over time.29
As <strong>of</strong> June 30, 2008, the initial actuarial valuation date for the <strong>State</strong>’s financial statements, the actuarial accruedliability for benefits was $14.8 billion, <strong>and</strong> the actuarial value <strong>of</strong> assets was $118.9 million, resulting in an unfundedactuarial accrued liability (UAAL) <strong>of</strong> $14.7 billion. The discount rate used was 4.3%. The ratio <strong>of</strong> the actuarial value<strong>of</strong> assets to the actuarial accrued liability was 0.8%. The covered payroll (annual payroll <strong>of</strong> active employees coveredunder the Plan) was $4.7 billion, <strong>and</strong> the ratio <strong>of</strong> the UAAL to the covered payroll was 316%.The <strong>State</strong>'s annual OPEB cost (expense) is calculated based on the annual required contribution (“ARC”) <strong>of</strong> theemployer, an amount actuarially determined in accordance with the parameters <strong>of</strong> GASB 45. The ARC represents alevel <strong>of</strong> funding that, if paid on an ongoing basis, is projected to cover normal cost each year <strong>and</strong> amortize anyunfunded actuarial liabilities over a period not to exceed 30 years. The following table shows the components <strong>of</strong> the<strong>State</strong>'s annual OPEB cost, the amount actually contributed to the Plan <strong>and</strong> the <strong>State</strong>'s net OPEB obligation as <strong>of</strong> June30, 2008, the year <strong>of</strong> the initial actuarial valuation.Annual OPEB Cost <strong>and</strong> Net OPEB <strong>Obligation</strong>Fiscal Year 2008($ in millions)Annual required contribution (ARC) $1,086.2Less: Contributions made 390.3Increase in net OPEB obligation 695.9Net OPEB obligation - beginning <strong>of</strong> year -Net OPEB obligation - end <strong>of</strong> year $695.9Percentage <strong>of</strong> annual OPEB cost contributed 35.9%The <strong>State</strong>'s <strong>General</strong> Fund has historically contributed approximately 60% <strong>of</strong> the annual pay-as-you-go costs <strong>of</strong>other post employment benefits, with special <strong>and</strong> federal funds contributing the balance. Chapter 355 <strong>of</strong> the Laws <strong>of</strong>2007 created the Postretirement Health Benefits Trust Fund as an irrevocable trust. Funds <strong>of</strong> the Trust will be used toassist in financing the <strong>State</strong>’s post-retirement health insurance subsidy. During fiscal year 2008, $100.0 million wastransferred to the Trust Fund from the Dedicated Purpose Account. In addition, <strong>State</strong> law provides that the subsidyreceived by the <strong>State</strong> as a result <strong>of</strong> the federal Medicare Prescription Drug Improvement <strong>and</strong> Modernization Act <strong>of</strong>2003, or similar federal subsidies, shall be deposited in the Trust Fund beginning in fiscal year 2008. During fiscal year2008, $18.9 million was transferred. However, the <strong>2009</strong> Budget Reconciliation <strong>and</strong> Financing Act redirects the subsidyto the <strong>State</strong> Employees <strong>and</strong> Retirees Health <strong>and</strong> Welfare Benefits Fund instead <strong>of</strong> the Trust Fund in each year throughfiscal year 2012. The amount <strong>of</strong> funds held in trust for post-retirement health benefits as <strong>of</strong> June 30, 2008 was $124.4million. This balance also reflects the activity for investment earnings <strong>and</strong> administrative expenses during the year.For a more detailed discussion <strong>of</strong> the Other Post-employment Health Benefits, see Appendix A, Note 16 to theFinancial <strong>State</strong>ments.The 2006 <strong>General</strong> Assembly established a Blue Ribbon Commission which is reviewing the assumptions <strong>and</strong>qualifications for assessing OPEB liability <strong>and</strong> is studying funding options. In an Interim Report released in December2008, the Blue Ribbon Commission reported its view that <strong>Maryl<strong>and</strong></strong> cannot sustain into the future the current level <strong>of</strong>retiree health benefits. The Commission is continuing to explore options for redesigning retiree health benefits <strong>and</strong>/orthe way the <strong>State</strong> pays for them to arrive at a solution that is both fiscally sound <strong>and</strong> fair to current <strong>and</strong> retired <strong>State</strong>employees.The Commission is also required to: review the <strong>State</strong>'s legal obligation to provide retiree health benefits; study the factors contributing to the rising cost <strong>of</strong> retiree health benefits; review current benefit levels for <strong>State</strong> employees <strong>and</strong> retirees; review the eligibility requirements for retiree health benefits; review alternatives for providing health benefits to <strong>State</strong> retirees; recommend a multi-year plan to fully fund <strong>State</strong> obligations for retiree health benefits; <strong>and</strong> issue a final report to the Governor <strong>and</strong> the <strong>General</strong> Assembly by December 31, <strong>2009</strong>.30
Labor Management RelationsAs <strong>of</strong> March 31, <strong>2009</strong>, the <strong>State</strong> had approximately 110,708 employees.<strong>State</strong>s are exempt from the provisions <strong>of</strong> the National Labor Relations Act; thus <strong>State</strong> employees may engagein collective bargaining only if specifically authorized. Since 1999, collective bargaining has been available toapproximately 35,000 <strong>State</strong> employees. Eligible <strong>State</strong> employees are assigned to one <strong>of</strong> nine bargaining units. In 2001,collective bargaining was extended to approximately 10,000 employees <strong>of</strong> the University System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, St.Mary’s College <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, Morgan <strong>State</strong> University, <strong>and</strong> Baltimore City Community College.Currently, <strong>State</strong> employees may join employee associations, <strong>and</strong> the <strong>State</strong> permits the deduction <strong>of</strong> dues fromemployees’ salaries for these associations. Approximately 24,329 employees pay dues to 15 <strong>State</strong> employeeassociations.Public school teachers throughout the <strong>State</strong> are not <strong>State</strong> employees but are employed <strong>and</strong> otherwise paid bythe local school boards <strong>of</strong> education. The <strong>State</strong>, however, pays retirement benefit contributions on behalf <strong>of</strong> thoseemployees. Teachers have been authorized by statute to form <strong>and</strong> participate in employee organizations for the purpose<strong>of</strong> representation on all matters relating to salaries, wages, hours, <strong>and</strong> other working conditions. Similar laws have beenenacted to cover employees <strong>of</strong> Baltimore City <strong>and</strong> some counties.The employees <strong>of</strong> the public community colleges <strong>and</strong> the public libraries are not <strong>State</strong> employees; the <strong>State</strong>,however, pays the employer’s share <strong>of</strong> the retirement contribution.Organizations certified as the exclusive bargaining representatives are entitled to negotiate wages, hours <strong>and</strong>working conditions on behalf <strong>of</strong> bargaining unit employees. Negotiated terms that require statutory changes orappropriations must be approved by the <strong>General</strong> Assembly.Aid to <strong>Local</strong> GovernmentThe <strong>State</strong> provides substantial assistance to local governments through a variety <strong>of</strong> direct <strong>and</strong> indirectassistance programs. Cash assistance is provided to support, among other local expenditures, community colleges, basiccurrent expenses <strong>of</strong> elementary <strong>and</strong> secondary schools, pupil transportation, road construction <strong>and</strong> maintenance, theeducation <strong>of</strong> students with disabilities, local health departments, <strong>and</strong> local police departments. In addition to cashgrants, the <strong>State</strong> has paid directly the retirement contributions for local teachers <strong>and</strong> librarians. The <strong>State</strong> also has paiddirectly a major share <strong>of</strong> the debt service on bonds issued to pay for the construction <strong>of</strong> local elementary <strong>and</strong> secondaryschools, community colleges, <strong>and</strong> water treatment facilities. Further, the <strong>State</strong> has assumed the non-federal share <strong>of</strong> thecosts <strong>of</strong> providing medical assistance, income maintenance payments, <strong>and</strong> social services for the needy. In thetransportation area, the <strong>State</strong> operates the mass transit program in the Baltimore area <strong>and</strong> provides grant assistance forthe <strong>Maryl<strong>and</strong></strong> portion <strong>of</strong> the Washington metropolitan area transit system.The following table presents a summary <strong>of</strong> major <strong>State</strong> financial support for fiscal years 2005 through 2008,<strong>and</strong> estimates for the <strong>2009</strong> fiscal year, excluding federal funds:Major <strong>State</strong> Financial Support to <strong>Local</strong> GovernmentsFiscal Years 2005–<strong>2009</strong>($ in millions)2005 2006 2007 2008Estimated<strong>2009</strong>Education.............................................. $3,855 $4,245 $4,729 $5,462 $5,688Transportation ...................................... 463 545 562 537 487Health ................................................... 61 62 64 67 57Environment......................................... 16 46 136 97 20Public Safety ........................................ 100 101 105 110 108Other ..................................................... 136 137 151 163 136Total...................................................... $4,631 $5,137 $5,746 $6,436 $6,496______________* Totals may not add due to rounding.31
STATE TAX SUPPORTED DEBT AND CAPITAL PROGRAMThe <strong>State</strong> issues general obligation bonds, to the payment <strong>of</strong> which the <strong>State</strong> ad valorem property tax ispledged, for capital improvements <strong>and</strong> for various <strong>State</strong>-sponsored projects. In addition, the <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong>Transportation issues for transportation purposes its limited, special obligation bonds payable primarily from specific,fixed-rate excise taxes <strong>and</strong> other revenues related mainly to highway use. The <strong>State</strong> <strong>and</strong> certain <strong>of</strong> its agencies also haveentered into a variety <strong>of</strong> lease-purchase agreements to finance the acquisition <strong>of</strong> capital assets. These lease agreementsspecify that payments thereunder are subject to annual appropriation by the <strong>General</strong> Assembly.At least since the end <strong>of</strong> the Civil War, the <strong>State</strong> has paid the principal <strong>of</strong> <strong>and</strong> interest on its general obligationbonds when due. There is no general debt limit imposed by the <strong>State</strong> Constitution or public general laws. Although the<strong>State</strong> has the authority to make short-term borrowings in anticipation <strong>of</strong> taxes <strong>and</strong> other receipts up to a maximum <strong>of</strong>$100.0 million, the <strong>State</strong> has not issued short-term tax anticipation notes or made any other similar short-termborrowings for cash flow purposes.Tax Supported Debt Outst<strong>and</strong>ingThe aggregate principal amount <strong>of</strong> outst<strong>and</strong>ing bonded indebtedness <strong>of</strong> the <strong>State</strong> is as follows:Tax Supported Debt Outst<strong>and</strong>ing($ in millions)Outst<strong>and</strong>ing atAs AdjustedMarch 31, <strong>2009</strong>for this Sale<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> (a) ................................ $5,873.6 $6,358.6Consolidated Transportation <strong>Bonds</strong> (b) ............... 1,503.5 1,503.5<strong>Maryl<strong>and</strong></strong> Stadium Authority <strong>Bonds</strong> (c)................ 254.4 254.4Capital Leases (d) ................................................... 249.2 249.2GARVEE <strong>Bonds</strong> (e) .............................................. 704.4 704.4Bay Restoration Revenue <strong>Bonds</strong> (e)...................... 50.0 50.0Net Tax Supported Debt......................................... $8,635.1 $9,120.1__________(a) As <strong>of</strong> March 31, <strong>2009</strong> the authorized but unissued amounts before <strong>and</strong> after giving effect to the sale <strong>of</strong> the bonds were $1,216.4 million <strong>and</strong>$731.4 million respectively. See also Appendix B – “SUPPLEMENTARY DEBT SCHEDULES.”(b) See “Department <strong>of</strong> Transportation Debt.”(c) See “<strong>Maryl<strong>and</strong></strong> Stadium Authority <strong>Bonds</strong>.”(d) See “Lease <strong>and</strong> Conditional Purchase Financings.”(e) See “Other Tax Supported Debt.”The above table excludes local debt as well as revenue <strong>and</strong> enterprise debt, all <strong>of</strong> which are not <strong>State</strong> taxsupporteddebt. (For further information on Revenue <strong>and</strong> Enterprise Debt see “MISCELLANEOUS REVENUE ANDENTERPRISE FINANCINGS” <strong>and</strong> Appendix B – “SUPPLEMENTARY DEBT SCHEDULES – Revenue <strong>and</strong>Enterprise Financings”.<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong><strong>General</strong> obligation bonds are authorized <strong>and</strong> issued primarily to provide funds for <strong>State</strong>-owned capitalimprovements, including institutions <strong>of</strong> higher education, <strong>and</strong> the construction <strong>of</strong> locally owned public schools. <strong>General</strong>obligation bonds also have been issued to fund local government improvements, including grants <strong>and</strong> loans for waterquality improvement projects <strong>and</strong> correctional facilities, <strong>and</strong> to provide funds for repayable loans or outright grants toprivate, nonpr<strong>of</strong>it, cultural, or educational institutions. In the fiscal year <strong>2009</strong> capital program, 40% <strong>of</strong> new generalobligation bond authorizations represent financing <strong>of</strong> <strong>State</strong>-owned capital facilities <strong>and</strong> <strong>State</strong> programs, 58% representfinancing <strong>of</strong> capital improvements owned by local government units, <strong>and</strong> 2% represent financing <strong>of</strong> capitalimprovements owned by non-pr<strong>of</strong>it or other private entities.Dedication <strong>of</strong> <strong>State</strong> Property Tax to <strong>General</strong> <strong>Obligation</strong> Debt. As stated above, the <strong>State</strong> Constitution prohibitsthe contracting <strong>of</strong> <strong>State</strong> debt unless the debt is authorized by a law levying an annual tax or taxes sufficient to pay thedebt service within 15 years <strong>and</strong> prohibiting the repeal <strong>of</strong> the tax or taxes or their use for another purpose until the debt32
is paid. As a uniform practice, each separate enabling act that authorizes the issuance <strong>of</strong> general obligation bonds for agiven object or purpose has specifically levied <strong>and</strong> directed the collection <strong>of</strong> a <strong>State</strong> ad valorem property tax on alltaxable property in the <strong>State</strong>. The Board <strong>of</strong> Public Works is directed by law to fix by May 1 <strong>of</strong> each year the propertytax rate necessary to produce revenue sufficient for the debt service requirements <strong>of</strong> the next fiscal year, which beginsJuly 1, but the taxes so levied need not be collected if or to the extent that funds sufficient for debt service requirementsin the next fiscal year have been appropriated in the annual Budget. Accordingly, the Board, in annually fixing the rate<strong>of</strong> property tax after the end <strong>of</strong> the regular legislative session in April, takes account <strong>of</strong> appropriations <strong>of</strong> general <strong>and</strong>other funds for debt service.From fiscal year 1972 through fiscal year 2003, general funds were appropriated to the <strong>State</strong> Department <strong>of</strong>Education for payment <strong>of</strong> debt service for public school construction debt. Other general obligation bonds have beenserviced to a lesser degree from general funds as well as from the <strong>State</strong> property tax. As a result, although all theenabling acts commit the <strong>State</strong> property tax to the service <strong>of</strong> general obligation debt, <strong>and</strong> all amounts collected fromsuch tax are applied to that purpose, it had been the normal practice to devote a significant amount <strong>of</strong> general fundrevenue to general obligation debt service. From fiscal years 2004 to 2006, however, an increase in the <strong>State</strong> propertytax rate eliminated the need for general funds to subsidize funding <strong>of</strong> general obligation debt service. Although thestate property tax rate was decreased in fiscal year 2007, property tax revenues were sufficient to make debt servicepayments without any general fund subsidy.In fiscal year 2008, the primary sources <strong>of</strong> current revenue <strong>of</strong> the Annuity Bond Fund, from which debt serviceon all general obligation debt is paid, were the <strong>State</strong> property tax (90%) <strong>and</strong> premium from bond sales (10%). For fiscalyear <strong>2009</strong>, the primary source <strong>of</strong> current revenue was the <strong>State</strong> property tax (100%). See Appendix B –“SUPPLEMENTARY DEBT SCHEDULES – <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>” for debt service requirements for <strong>General</strong><strong>Obligation</strong> <strong>Bonds</strong>.Department <strong>of</strong> Transportation DebtConsolidated Transportation <strong>Bonds</strong> are limited obligations issued by the <strong>State</strong> Department <strong>of</strong> Transportation(the “Department”), the principal <strong>of</strong> which must be paid within 15 years from the date <strong>of</strong> issue, for highway, port,transit, rail, or aviation facilities or any combination <strong>of</strong> such facilities. Current law limits the outst<strong>and</strong>ing aggregateprincipal amount <strong>of</strong> these bonds to $2.6 billion, an increase from the prior limit <strong>of</strong> $2.0 billion. Current law alsoprovides that the <strong>General</strong> Assembly may establish in the Budget for any fiscal year a maximum outst<strong>and</strong>ing aggregateamount <strong>of</strong> these bonds as <strong>of</strong> June 30 <strong>of</strong> the fiscal year that is less than $2.6 billion. For fiscal year <strong>2009</strong>, the limit is$1,620.1 million. At March 31, <strong>2009</strong>, the principal amount <strong>of</strong> outst<strong>and</strong>ing bonds was $1,503.5 million. In addition, theDepartment sold Consolidated Transportation <strong>Bonds</strong> in April <strong>2009</strong> in an amount <strong>of</strong> $110.0 million, to support theDepartment’s capital program.Debt service on Consolidated Transportation <strong>Bonds</strong> is payable from those portions <strong>of</strong> the excise tax on eachgallon <strong>of</strong> motor vehicle fuel <strong>and</strong> the motor vehicle titling tax, sales <strong>and</strong> use tax on short-term vehicle rentals, <strong>and</strong> thecorporate income tax as are credited to the Department after distribution to the political subdivisions, plus alldepartmental operating revenues <strong>and</strong> receipts. The holders <strong>of</strong> these bonds are not entitled to look to other sources forpayment. The Department has covenanted with the holders <strong>of</strong> outst<strong>and</strong>ing Consolidated Transportation <strong>Bonds</strong> not toissue additional bonds unless certain revenue adequacy tests are met.Nontraditional Debt. The 2008 <strong>General</strong> Assembly established a maximum outst<strong>and</strong>ing principal amount <strong>of</strong>$693.8 million as <strong>of</strong> June 30, <strong>2009</strong>, for all nontraditional debt <strong>of</strong> the Department. Nontraditional debt outst<strong>and</strong>ing isdefined as any debt instrument that is not a consolidated transportation bond or Grant Anticipation Revenue Vehicle(“GARVEE”) Bond. Such debt includes, but is not limited to: certificates <strong>of</strong> participation (documented by conditionalpurchase agreements), debt backed by customer facility charges, passenger facility charges, or other revenues, <strong>and</strong> debtissued by <strong>Maryl<strong>and</strong></strong> Economic Development Corporation (“MEDCO”) or any other third party on behalf <strong>of</strong> theDepartment. As <strong>of</strong> March 31, <strong>2009</strong>, the Department’s nontraditional debt outst<strong>and</strong>ing was $702.9 million. At June 30,<strong>2009</strong>, the outst<strong>and</strong>ing principal amount is estimated at $693.8 million. See Appendix B – “SUPPLEMENTARY DEBTSCHEDULES – <strong>State</strong> Tax Supported Lease <strong>and</strong> Conditional Purchase Financings” <strong>and</strong> “ – Revenue <strong>and</strong> EnterpriseFinancings” for nontraditional debt <strong>of</strong> the Department.(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)33
<strong>Maryl<strong>and</strong></strong> Stadium Authority <strong>Bonds</strong>The <strong>Maryl<strong>and</strong></strong> Stadium Authority (the “Authority”) was created in 1986 as an instrumentality <strong>of</strong> the <strong>State</strong>responsible for financing <strong>and</strong> directing the acquisition <strong>and</strong> construction <strong>of</strong> pr<strong>of</strong>essional sports facilities in <strong>Maryl<strong>and</strong></strong>.Since then, the Authority’s responsibility has been extended to include convention centers in Baltimore City, OceanCity <strong>and</strong> in Montgomery County, the Hippodrome Theater in Baltimore City, <strong>and</strong> the Camden Station Renovation. AtMarch 31, <strong>2009</strong>, the principal amount <strong>of</strong> outst<strong>and</strong>ing bonds <strong>of</strong> the Authority was $254.4 million. See Appendix B –“SUPPLEMENTARY DEBT SCHEDULES – <strong>Maryl<strong>and</strong></strong> Stadium Authority” for a summary <strong>of</strong> outst<strong>and</strong>ing debt <strong>and</strong>interest rate exchange agreements <strong>of</strong> the Authority <strong>and</strong> descriptions <strong>of</strong> the Authority’s projects.Lease <strong>and</strong> Conditional Purchase FinancingsThe <strong>State</strong> has financed <strong>and</strong> expects to continue to finance the construction <strong>and</strong> acquisition <strong>of</strong> various facilities<strong>and</strong> equipment through conditional purchase, sale-leaseback, <strong>and</strong> similar transactions. As <strong>of</strong> March 31, <strong>2009</strong>, the totaltax supported capital leases <strong>and</strong> conditional purchase financings outst<strong>and</strong>ing were $249.2 million. See Appendix B –“SUPPLEMENTARY DEBT SCHEDULES – <strong>State</strong> Tax Supported Lease <strong>and</strong> Conditional Purchase Financings” fordetails <strong>of</strong> the total tax supported capital leases outst<strong>and</strong>ing. All <strong>of</strong> the tax-supported lease payments under thesearrangements are subject to annual appropriation by the <strong>General</strong> Assembly. In the event that appropriations are notmade, the <strong>State</strong> may not be held contractually liable for the payments. These transactions generally are subject toapproval by the Board <strong>of</strong> Public Works. In connection with certain <strong>of</strong> these facilities, local government agencies orother lessors have issued revenue bonds or sold certificates <strong>of</strong> participation to finance the facilities.Financings <strong>of</strong> this type have been used, for example, for multi-agency <strong>of</strong>fice buildings in St. Mary’s County<strong>and</strong> Calvert County <strong>and</strong> district court facilities in Baltimore <strong>and</strong> Prince George’s Counties. In June 2002, MEDCOissued lease revenue bonds in the amount <strong>of</strong> $36.0 million to finance the construction <strong>of</strong> a new headquarters buildingfor the Department <strong>of</strong> Transportation. In addition, in October 2004, the Department sold $15.5 million in Certificates<strong>of</strong> Participation for the acquisition <strong>of</strong> shuttle buses for Baltimore/Washington International Thurgood Marshall Airport(“BWI”). In July 2005, the <strong>Maryl<strong>and</strong></strong> Transportation Authority (“MdTA”) issued lease revenue bonds in the amount <strong>of</strong>$23.8 million to finance the costs <strong>of</strong> a parking facility project for the Annapolis <strong>State</strong> Office complex, operated by the<strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> <strong>General</strong> Services (“DGS”). Lease revenue payable by DGS is pledged for the repayment <strong>of</strong>the bonds.The <strong>State</strong> consolidates equipment lease-purchases authorized in the budget into annual master leaseagreements for all Executive agencies. The <strong>State</strong> also has a master lease-purchase agreement to provide financing forenergy conservation projects at <strong>State</strong> facilities. Lease payments are made from the agencies’ annual utilityappropriations from the savings achieved through the implementation <strong>of</strong> energy performance contracts.Other Tax Supported DebtBay Restoration Revenue <strong>Bonds</strong>. During the 2004 legislative session, the <strong>Maryl<strong>and</strong></strong> <strong>General</strong> Assembly createdthe Bay Restoration Fund to be managed by the Water Quality Financing Administration <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Department<strong>of</strong> the Environment (“Administration”). The Bay Restoration Fund receives a m<strong>and</strong>atory fee <strong>of</strong> $30 per year perequivalent dwelling unit from users <strong>of</strong> sewerage systems in the <strong>State</strong>, as well as $30 per year from septic system users.The Bay Restoration Fund sewer fee generated $55.0 million in revenue (cash basis) during fiscal year 2008. Futuresewer fee revenues are projected at approximately $55.0 million per year. The sewer fee revenues are pledged, to theextent necessary, as security for Bay Restoration Revenue <strong>Bonds</strong> issued by the Administration, the proceeds <strong>of</strong> whichwill be applied primarily to provide grant funds to upgrade wastewater treatment plants with enhanced nutrient removaltechnology. The first $50.0 million <strong>of</strong> Bay Restoration Revenue <strong>Bonds</strong> were issued on June 25, 2008. Between <strong>2009</strong><strong>and</strong> 2012, the Administration expects to issue an additional $480.0 million in Bay Restoration Revenue <strong>Bonds</strong>.GARVEE <strong>Bonds</strong>. In 2005, the <strong>General</strong> Assembly authorized funding for the Intercounty Connector highwayproject to be built in Montgomery <strong>and</strong> Prince George’s Counties, <strong>Maryl<strong>and</strong></strong>. The MdTA is authorized to issueGARVEE bonds in an amount not to exceed $750.0 million, with a maximum maturity <strong>of</strong> 12 years. Debt service ispaid from a portion <strong>of</strong> <strong>Maryl<strong>and</strong></strong>’s federal highway aid. MdTA issued the first series <strong>of</strong> GARVEE bonds in June, 2007in the amount <strong>of</strong> $325.0 million, <strong>and</strong> issued the second <strong>and</strong> final series <strong>of</strong> GARVEE bonds in December, 2008 in theamount <strong>of</strong> $425.0 million.34
Debt DataThe following tables present, at fiscal year end, various data showing: (1) the trend <strong>of</strong> outst<strong>and</strong>ing generalobligation debt, its relationship to assessed value <strong>of</strong> property, personal income, <strong>and</strong> population, <strong>and</strong> the trend <strong>of</strong> generalobligation debt service <strong>and</strong> its relationship to revenues; (2) the trend <strong>of</strong> outst<strong>and</strong>ing general obligation, transportation,<strong>and</strong> other <strong>State</strong> tax supported debt <strong>and</strong> debt service <strong>and</strong> their relationships to the same factors; <strong>and</strong> (3) the totalcombined tax supported debt <strong>of</strong> the <strong>State</strong> <strong>and</strong> debt <strong>of</strong> Baltimore City <strong>and</strong> all <strong>of</strong> the counties, towns, <strong>and</strong> special taxingdistricts within <strong>Maryl<strong>and</strong></strong>, <strong>and</strong> various relationships <strong>of</strong> such local combined debt to the assessed value <strong>of</strong> property,population <strong>and</strong> personal income. While the <strong>State</strong> is not obligated for local debt, the Combined <strong>State</strong> <strong>and</strong> <strong>Local</strong> UnitDebt Ratios demonstrate the total state <strong>and</strong> local debt obligations relative to <strong>State</strong>wide assessed values, population <strong>and</strong>personal income, for general comparison with other states’ debt levels.The Capital Debt Affordability Committee (“CDAC”) annually reports ratios for tax supported debtoutst<strong>and</strong>ing compared to personal income <strong>and</strong> tax supported debt service compared to revenues. Debt outst<strong>and</strong>ing,personal income, debt service, revenues <strong>and</strong> population in the following tables are all as reported in the 2008 CDACreport. Because some <strong>of</strong> the numbers used in this report are preliminary, they may not agree with more recent figuresreported elsewhere in this Official <strong>State</strong>ment.<strong>General</strong> <strong>Obligation</strong> Bond Ratios($ in millions except per capita amounts)Fiscal Years2004 2005 2006 2007 2008<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> (a) ............. $4,102 $4,512 $4,868 $5,142 $5,494% Change (b) .................................. 4.3% 10.0% 7.9% 5.6% 6.8%Assessed Value (c)............................... $361,926 $398,416 $452,483 $527,182 $617,632Debt Ratio (d) ................................. 1.1% 1.1% 1.1% 1.0% 0.9%Population (e)....................................... 5,538 5,573 5,602 5,618 5,658Per Capita Debt............................... $741 $810 $869 $915 $971Personal Income (f) ............................. $220,127 $232,161 $245,303 $258,561 $269,860Debt Ratio (d) ................................. 1.9% 1.9% 2.0% 2.0% 2.0%<strong>General</strong> <strong>Obligation</strong> Debt Service........ $537 $554 $625 $654 $693Revenues (g) ........................................ $10,770 $12,159 $13,012 $13,530 $14,159Debt Service Ratio (d) ......................... 5.0% 4.6% 4.8% 4.8% 4.9%(CONTINUED ON NEXT PAGE;REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)35
Combined <strong>General</strong> <strong>Obligation</strong>, Transportation<strong>and</strong> Other <strong>State</strong> Tax Supported Debt Ratios($ in millions except per capita amounts)Fiscal Years2004 2005 2006 2007 2008Debt (a)<strong>General</strong> <strong>Obligation</strong> Debt .......................... $4,102 $4,512 $4,868 $5,142 $5,494Transportation <strong>Bonds</strong>:Consolidated Transportation............... 1,185 1,070 1,078 1,111 1,269County Transportation......................... 2 1 - - -Capital Leases ........................................... 199 175 227 248 248Stadium Authority .................................... 321 309 297 283 268GARVEE <strong>Bonds</strong>....................................... - - - 325 301Bay Restoration Revenue <strong>Bonds</strong> ............. - - - - 50Total <strong>State</strong> Tax Supported Debt .... $5,809 $6,067 $6,470 $7,109 $7,630Assessed Value (c).................................... $361,926 $398,416 $452,483 $527,182 $617,632Debt Ratio (d) ...................................... 1.6% 1.5% 1.4% 1.3% 1.2%Population (e)............................................ 5,538 5,573 5,602 5,618 5,658Per Capita Debt.................................... $1,049 $1,089 $1,155 $1,265 $1,349Personal Income (f) .................................. $220,127 $232,161 $245,303 $258,561 $269,860Debt Ratio (d) ...................................... 2.6% 2.6% 2.6% 2.7% 2.8%Debt Service.............................................. $751 $790 $842 $846 $933Revenues (h) ............................................. $12,676 $14,266 $15,155 $15,652 $16,659Debt Service Ratio (d) .............................. 5.9% 5.5% 5.6% 5.4% 5.6%Combined <strong>State</strong> <strong>and</strong> <strong>Local</strong> Unit Debt Ratios($ in millions except per capita amounts)Fiscal Years2004 2005 2006 2007 2008Debt (a)<strong>State</strong> Tax Supported Debt ................ $5,809 $6,067 $6,470 $7,109 $7,630<strong>Local</strong> Debt (i) .................................... 12,166 12,313 13,202 14,285 14,845Total Combined Debt............. $17,975 $18,380 $19,672 21,394 22,475Assessed Value (c)............................ $361,926 $398,416 $452,483 $527,182 $617,632Debt Ratio (d) .............................. 5.0% 4.6% 4.3% 4.1% 3.6%Population (e).................................... 5,538 5,573 5,602 5,618 5,658Per Capita Debt............................ $3,246 $3,298 $3,512 $3,808 3972Personal Income (f) .......................... $220,127 $232,161 $245,303 $258,561 $269,860Debt Ratio (d) .................................. 8.2% 7.9% 8.0% 8.3% 8.3%(a) Shows amount <strong>of</strong> debt outst<strong>and</strong>ing at the end <strong>of</strong> fiscal years shown (June 30) less amounts advance refunded <strong>and</strong> net <strong>of</strong> any sinking funds. <strong>Local</strong> debt includes the debt <strong>of</strong> Baltimore City,counties, towns, <strong>and</strong> special districts. <strong>Local</strong> debt data are derived from compilations by the Department <strong>of</strong> Legislative Services <strong>of</strong> data reported by the local units as required by statute.(b) Shows the percentage <strong>of</strong> increase or decrease <strong>of</strong> the dollar values from the preceding year’s amount.(c) Amounts for full value are stated as <strong>of</strong> January 1, the date assessments are made final for the fiscal year beginning the next July 1.(d) The debt ratios are expressed as the principal amounts <strong>of</strong> outst<strong>and</strong>ing debt as percentages <strong>of</strong> (i) assessed value <strong>and</strong> (ii) personal income. The debt service ratios are expressed as the total annualamounts <strong>of</strong> debt service as percentages <strong>of</strong> all revenues.(e) Population is stated in thous<strong>and</strong>s.(f) Personal income is for the calendar year ended December 31 <strong>of</strong> the year shown. The 2008 figure is an estimate.(g) Amounts <strong>of</strong> revenue represent general fund revenues, property taxes, <strong>and</strong> bond premium.(h) Amounts <strong>of</strong> revenue represent general fund revenues, property taxes, bond premium, transportation revenues, <strong>and</strong> lottery revenues transferred to the Stadium Authority, federal capital highwayrevenues <strong>and</strong> bay restoration fees.(i) Includes outst<strong>and</strong>ing debt <strong>of</strong> component units.N/A = not available.36
See Appendix B – “SUPPLEMENTARY DEBT SCHEDULES – <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>” for (1) amounts<strong>of</strong> the outst<strong>and</strong>ing general obligation bonds <strong>of</strong> the <strong>State</strong> at each fiscal year end for the period 2004-2008, <strong>and</strong> (2) for theannual debt service requirements on all general obligation bonds <strong>of</strong> the <strong>State</strong> for future fiscal years.Capital Programs<strong>General</strong> obligation debt is one <strong>of</strong> several sources <strong>of</strong> funds used to finance capital assets <strong>of</strong> the <strong>State</strong> <strong>and</strong> toprovide <strong>State</strong> capital grants <strong>and</strong> repayable loans to local governments <strong>and</strong> the private sector (see “STATE TAXSUPPORTED DEBT AND CAPITAL PROGRAM — <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>”). Other types <strong>of</strong> debt incurred by the<strong>State</strong> <strong>and</strong> its units to finance various capital facilities <strong>and</strong> programs include bonds issued by the Department <strong>of</strong>Transportation (see “STATE TAX SUPPORTED DEBT AND CAPITAL PROGRAM — Department <strong>of</strong>Transportation <strong>Bonds</strong>”), bonds issued by the <strong>Maryl<strong>and</strong></strong> Stadium Authority (see “STATE TAX SUPPORTED DEBTAND CAPITAL PROGRAM — <strong>Maryl<strong>and</strong></strong> Stadium Authority <strong>Bonds</strong>”) <strong>and</strong> capital leases for the acquisition <strong>of</strong> property<strong>and</strong> equipment (see “STATE TAX SUPPORTED DEBT AND CAPITAL PROGRAM — Lease <strong>and</strong> ConditionalPurchase Financings”).The <strong>State</strong> has also funded capital projects through current operating revenues <strong>and</strong> receipts. For example, theDepartment <strong>of</strong> Transportation funds roads, bridges, <strong>and</strong> other transportation facilities from current revenues fromdedicated sources; <strong>and</strong> the Department <strong>of</strong> Natural Resources constructs waterway improvements, shore erosion <strong>and</strong> l<strong>and</strong>development projects, purchases l<strong>and</strong> for recreational <strong>and</strong> conservation purposes, <strong>and</strong> provides capital grants to localgovernments from revenues in its operating budget. Furthermore, the operating budget from time to time has includedgeneral funds for projects normally eligible for funding by general obligation bonds.The <strong>General</strong> Assembly annually enacts general obligation bond enabling acts appropriating funds for thevarious capital programs to be funded through the sale <strong>of</strong> <strong>State</strong> bonds. Once authorized, the projects are implementedby various <strong>State</strong> agencies, generally under the supervision <strong>of</strong> the Board <strong>of</strong> Public Works. Project expenditures areaccounted for in the Capital Projects Fund. <strong>General</strong> obligation bonds are issued as cash is needed to meet projectrequirements. <strong>General</strong> obligation bond proceeds are credited to the <strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan Fund, <strong>and</strong> cash istransferred to fund capital project expenditures, as needed. For each fiscal year from 2005 through 2008, <strong>and</strong> for thenine months ended March 31, <strong>2009</strong>, the following table arrays the amount <strong>of</strong> bonds authorized, issued, cancelled, <strong>and</strong>retired; the cumulative amount <strong>of</strong> general obligation bonds outst<strong>and</strong>ing; <strong>and</strong> cumulative amount <strong>of</strong> bonds authorized butunissued.FiscalYear<strong>Bonds</strong> Authorized, Issued, Cancelled <strong>and</strong> Retired($ in thous<strong>and</strong>s)Activity during Fiscal YearStatus at Fiscal Year EndAuthorizedIssuedAuthorizations PrincipalAuthorized(a) New Refunding Cancelled Redeemed Refunded Outst<strong>and</strong>ing but Unissued2005............ $679,807 $784,043 $855,840 $6,730 $348,180 $882,155 $4,511,826 $1,835,4882006............ 712,742 750,000 — 23,747 393,355 — 4,868,471 1,774,4842007............ 821,126 679,378 — 4,645 405,695 — 5,142,154 1,911,5872008............ 937,644 779,986 — 5,393 428,310 — 5,493,830 2,063,852<strong>2009</strong>(b)....... (c) 845,563 65,800 1,939 464,725 66,825 5,873,643 1,216,351________(a)Amounts shown represent authorizations that become effective in the fiscal year indicated. The normal effective date is June 1, which is inthe same fiscal year as the session <strong>of</strong> the <strong>General</strong> Assembly enacting the authorization; however, some authorizations are not effectiveuntil July 1, which is the first day <strong>of</strong> the following fiscal year.(b) Amounts shown through March 31, <strong>2009</strong>.(c) Net authorizations passed by the <strong>2009</strong> <strong>General</strong> Assembly become effective June 1, <strong>2009</strong>.* Totals may not add due to rounding.37
The following table reflects activity <strong>and</strong> ending balances in the Capital Projects Fund on a budgetary basis.Capital Projects Fund($ in thous<strong>and</strong>s)Fiscal Beginning Bond Project <strong>General</strong> Fund EndingYear Balance Proceeds (a) Expenditures Other (b) Appropriation Balance2004................... $266,862 $552,615 $ (749,654) $ (91,316) $ 4,400 $ (17,093)2005 (c)............. (17,093) 852,729 (660,626) (86,097) 4,232 93,1452006................... 93,145 751,638 (700,692) 109,212 4,290 257,5932007................... 257,593 681,040 (855,953) 125,980 77,562 286,2222008................... 286,222 794,833 (1,039,012) 168,971 11,810 222,824_________(a) Includes premiums on the sale <strong>of</strong> bonds used to pay underwriter’s discount <strong>and</strong> costs <strong>of</strong> issuance.(b)(c)Consists primarily <strong>of</strong> <strong>State</strong> property transfer tax revenues <strong>and</strong> other transfers in (out).Total bond proceeds in FY 2005 were $1,793,320,000. Of these proceeds, $855,840,000 <strong>and</strong> $84,751,000 were refunding bonds <strong>and</strong>associated premiums, respectively, for existing debt.The largest component <strong>of</strong> the current five-year capital program is the general construction program. In January<strong>of</strong> each year, the <strong>State</strong> publishes a proposed capital improvements program for general construction projects for the fiveensuing fiscal years. This program reflects a projection <strong>of</strong> the capital improvements that will be required to maintain the<strong>State</strong>’s physical plant <strong>and</strong> to provide services m<strong>and</strong>ated by the <strong>General</strong> Assembly. The <strong>State</strong>’s anticipated capital needsfor fiscal years 2010 through 2014 for projects included in the January, <strong>2009</strong> proposed program that are to be fundedthrough general obligation bond sales totaled $2,619.4 million as follows: 2010, $549.4 million; 2011, $459.8 million;2012, $494.3 million; 2013, $536.1 million; <strong>and</strong> 2014, $579.9 million. The <strong>State</strong>’s capital needs for projects included inthe January, 2008, program that were to be funded through general obligation bond sales (for fiscal years <strong>2009</strong> through2013) totaled $2,447.7 million.Capital Debt Affordability CommitteeThe <strong>General</strong> Assembly created a Capital Debt Affordability Committee (the “CDAC”), the members <strong>of</strong> whichare the Treasurer, the Comptroller, the Secretary <strong>of</strong> Budget <strong>and</strong> Management, the Secretary <strong>of</strong> Transportation, <strong>and</strong> oneperson appointed by the Governor. Starting in June 2006, the Chairs <strong>of</strong> the Capital Budget Subcommittees <strong>of</strong> theSenate Budget <strong>and</strong> Taxation Committee <strong>and</strong> the House Appropriations Committee participate as non-voting members.The CDAC is required to submit to the Governor by September 10 <strong>of</strong> each year an estimate <strong>of</strong> the maximum amount <strong>of</strong>new general obligation debt that prudently may be authorized. Although the CDAC’s responsibilities are advisory only,the Governor is required to give due consideration to the CDAC’s finding in preparing a preliminary allocation <strong>of</strong> newgeneral obligation debt authorizations for the next ensuing fiscal year.The CDAC’s most recent report <strong>of</strong> September, 2008 encompasses all tax-supported debt, including, in additionto general obligation debt, Consolidated Transportation <strong>Bonds</strong> issued by the Department <strong>of</strong> Transportation, bondsissued by the <strong>Maryl<strong>and</strong></strong> Stadium Authority, <strong>State</strong> tax-supported capital lease transactions, GARVEE <strong>Bonds</strong> <strong>and</strong> BayRestoration Revenue <strong>Bonds</strong>. The CDAC’s recommendation to the Governor <strong>and</strong> the <strong>General</strong> Assembly for fiscal year2010 was to limit new general obligation bond authorizations to $1,110.0 million. This recommended level reflects aone-time increase <strong>of</strong> $150.0 million from the $960.0 million projected in the 2007 CDAC report for fiscal year 2010.Future projections assume $990.0 million in new authorizations to support the 2011 capital program <strong>and</strong> increases <strong>of</strong>3.0% annually in future years. Based on the 2008 CDAC’s recommendation <strong>and</strong> assumptions, total <strong>State</strong> tax-supporteddebt service <strong>and</strong> debt outst<strong>and</strong>ing were projected to remain within the self-imposed affordability criteria <strong>of</strong> 4.0% <strong>of</strong>personal income with respect to debt outst<strong>and</strong>ing (which was revised upward in September 2008 from the previouscriterion <strong>of</strong> 3.2%) <strong>and</strong> 8.0% <strong>of</strong> <strong>State</strong> revenues with respect to debt service.(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)38
The following table compares the CDAC’s recommendations for bond authorizations with the authorizationsenacted by the <strong>General</strong> Assembly during each <strong>of</strong> the last five sessions.CDAC’s Recommendations for Bond Authorizations($ in thous<strong>and</strong>s)<strong>General</strong>ForAssembly Fiscal CDAC ActualSession Year Recommendations Authorizations (a) Difference2005 2006 $ 670,000 $679,364 (b) $ 9,364 (b)2006 2007 690,000 690,000 -2007 2008 810,000 821,126 (b) 11,126(b)2008 <strong>2009</strong> 935,000 935,000 -<strong>2009</strong> 2010 1,110,000 1,112,000 (c) 2,000(c)_________(a) Actual authorizations are net <strong>of</strong> deauthorizations for prior years’ projects <strong>of</strong> $443,000, $22.7 million, $19.8 million, $2.6 million <strong>and</strong>(b)$30.8 million for fiscal years, 2005, 2006, 2007, 2008 <strong>and</strong> <strong>2009</strong>, respectively.Reflects bonds authorized for a special federal program (Qualified Zone Academy <strong>Bonds</strong>), which provide federal tax credits tobondholders in lieu <strong>of</strong> interest, <strong>and</strong> which the CDAC informally indicated should be considered outside its recommendation.(c) $2,000,000 <strong>Local</strong> Government Infrastructure Financing Program Capital Reserve Fund Loan <strong>of</strong> <strong>2009</strong> – Chapter 719 Acts <strong>of</strong> <strong>2009</strong>,effective 6/1/09.Total sales <strong>of</strong> general obligation bonds during the five fiscal years 2005 through <strong>2009</strong> were as follows:Total Sales <strong>of</strong> <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>Fiscal Years 2005-<strong>2009</strong>($ in thous<strong>and</strong>s)2005 2006 2007 2008 <strong>2009</strong>(a)<strong>General</strong> Construction........................ $581,176 $563,263 $205,029 $410,882 $455,200<strong>State</strong> Public School Construction .... 110,953 170,836 323,291 351,822 380,046Other .................................................. 91,914 15,901 151,058 17,282 10,317Total................................................... $784,043 $750,000 $679,378 $779,986 $845,563Refunding.......................................... $855,840 — — — 65,800Number <strong>of</strong> Sales................................ 4 2 3 3 3_________(a) as <strong>of</strong> March 31, <strong>2009</strong>The sale <strong>of</strong> the <strong>Bonds</strong> described in this Official <strong>State</strong>ment, expected to be delivered on or about August 18,<strong>2009</strong>, will be the first sale for the 2010 fiscal year.(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)39
MISCELLANEOUS REVENUE AND ENTERPRISE FINANCINGSCertain other units <strong>of</strong> the <strong>State</strong> government are authorized to borrow money under legislation that expresslyprovides that the loan obligations shall not be deemed to constitute a debt or a pledge <strong>of</strong> the faith <strong>and</strong> credit <strong>of</strong> the <strong>State</strong>.The Community Development Administration <strong>of</strong> the Department <strong>of</strong> Housing <strong>and</strong> Community Development, highereducation institutions (including the University System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, Morgan <strong>State</strong> University, St. Mary’s College <strong>of</strong><strong>Maryl<strong>and</strong></strong> <strong>and</strong> Baltimore City Community College), the <strong>Maryl<strong>and</strong></strong> Transportation Authority, the <strong>Maryl<strong>and</strong></strong> WaterQuality Financing Administration, <strong>and</strong> the <strong>Maryl<strong>and</strong></strong> Environmental Service have issued <strong>and</strong> have outst<strong>and</strong>ing bonds <strong>of</strong>this type. The principal <strong>of</strong> <strong>and</strong> interest on bonds issued by these bodies are payable solely from various sources,principally fees generated from use <strong>of</strong> the facilities or enterprises financed by the bonds. Outst<strong>and</strong>ing revenue <strong>and</strong>enterprise debt <strong>of</strong> these <strong>State</strong> units, together with their non-<strong>State</strong> tax supported lease <strong>and</strong> conditional purchasefinancings, amounted to approximately $6,424.9 million at March 31, <strong>2009</strong>. See Appendix B – “SUPPLEMENTARYDEBT SCHEDULES – Revenue <strong>and</strong> Enterprise Financings” for a summary <strong>of</strong> outst<strong>and</strong>ing Revenue <strong>and</strong> EnterpriseFinancings.On February 10, 1998, the Governor issued an Executive Order assigning responsibility to the Department <strong>of</strong>Budget <strong>and</strong> Management to report annually on the levels <strong>of</strong> debt issued <strong>and</strong> outst<strong>and</strong>ing by certain <strong>State</strong> agencies <strong>and</strong> torecommend annual debt issuance amounts for those agencies. The Executive Order also provides that the Governor mayestablish the amounts <strong>of</strong> such debt to be issued during the fiscal year, which amounts may be amended by the Governor.(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)40
STATE DEMOGRAPHIC AND ECONOMIC DATAIntroductionThe following selected economic, social, <strong>and</strong> employment data may be relevant in evaluating the economic<strong>and</strong> financial condition <strong>of</strong> the <strong>State</strong>; however, this information is not intended to provide all relevant data necessary fora complete evaluation <strong>of</strong> the <strong>State</strong>’s economic <strong>and</strong> financial condition.<strong>Maryl<strong>and</strong></strong> is located on the East Coast in the South Atlantic Census Region, <strong>and</strong> is bordered by Delaware,Pennsylvania, West Virginia, Virginia, <strong>and</strong> the District <strong>of</strong> Columbia. <strong>Maryl<strong>and</strong></strong> encompasses 12,193 square miles.Ranking 42nd among the 50 states in size, <strong>Maryl<strong>and</strong></strong>’s l<strong>and</strong> area (exclusive <strong>of</strong> inl<strong>and</strong> waterways <strong>and</strong> the 1,726 squaremiles <strong>of</strong> the Chesapeake Bay) is 9,844 square miles.PopulationAccording to 2000 Census reports, <strong>Maryl<strong>and</strong></strong>’s population on April 1 <strong>of</strong> that year was 5,296,486, an increase<strong>of</strong> 10.8% from the 1990 Census. <strong>Maryl<strong>and</strong></strong>’s population is concentrated in urban areas; the eleven counties <strong>and</strong>Baltimore City located in the Baltimore-Washington region contain 50.1% <strong>of</strong> the <strong>State</strong>’s l<strong>and</strong> area <strong>and</strong> 86.9% <strong>of</strong> itspopulation. The 2008 population for the Baltimore PMSA was estimated at 2,667,117 <strong>and</strong> for the <strong>Maryl<strong>and</strong></strong> portion <strong>of</strong>the Washington PMSA, 2,226,715. Overall, <strong>Maryl<strong>and</strong></strong>’s population per square mile was 572 in 2008. The followingtable presents estimated population <strong>of</strong> <strong>Maryl<strong>and</strong></strong> <strong>and</strong> the United <strong>State</strong>s from 1999-2008.Population<strong>Maryl<strong>and</strong></strong>United <strong>State</strong>sYear Population Change Population Change1999 ................ 5,254,509 1.0% 279,040,160 1.2%2000 ................ 5,310,451 1.1 282,171,936 1.12001 ................ 5,375,659 1.2 285,039,803 1.02002 ................ 5,439,327 1.2 287,726,647 0.92003 ................ 5,495,009 1.0 290,210,914 0.92004 ................ 5,538,989 0.8 292,892,127 0.92005 ................ 5,575,552 0.7 295,560,549 0.92006 ................ 5,602,258 0.5 298,362,973 0.92007 ................ 5,618,899 0.3 301,290,332 1.02008 ................ 5,633,597 0.3 304,059,724 0.9___________Source: U.S. Department <strong>of</strong> Commerce, Bureau <strong>of</strong> the Census.Note: Figures are estimates for July 1 <strong>of</strong> each year.(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)41
Personal Income<strong>Maryl<strong>and</strong></strong> residents received approximately $270.9 billion in personal income in 2008. <strong>Maryl<strong>and</strong></strong>’s TotalPersonal Income increased at a rate <strong>of</strong> 3.8%, slightly below the national average <strong>of</strong> 3.9%. Per capita income, however,remained significantly above the national average in 2008, $48,091 in <strong>Maryl<strong>and</strong></strong> compared with the national average <strong>of</strong>$39,751. In 2008, <strong>Maryl<strong>and</strong></strong>’s per capita personal income ranked sixth highest in the nation. Per capita income variesacross the <strong>State</strong>, with the highest incomes in the Washington <strong>and</strong> Baltimore regions. The table below shows trends inper capita personal income in <strong>Maryl<strong>and</strong></strong> <strong>and</strong> the United <strong>State</strong>s.Per Capita Personal Income TrendsYear <strong>Maryl<strong>and</strong></strong> Change US Change <strong>Maryl<strong>and</strong></strong> Ranking1998 ........................... $31,796 4.9% $27,939 3.9% 62000 ........................... 34,264 7.8 29,847 6.8 62001 ........................... 35,653 4.1 30,582 2.5 52002 ........................... 36,553 2.5 30,838 0.8 52003 ........................... 37,441 2.4 31,530 2.2 52004 ........................... 39,741 6.1 33,157 5.2 52005 ........................... 41,781 5.1 34,690 4.6 52006 ........................... 43,889 5.0 36,794 6.1 52007 ........................... 46,471 5.9 38,615 4.9 62008 ........................... 48,091 3.5 39,751 2.9 6________Source: US Department <strong>of</strong> Commerce, Bureau <strong>of</strong> Economic Analysis.<strong>Maryl<strong>and</strong></strong> is more reliant on the service <strong>and</strong> government sectors than the nation as a whole, while themanufacturing sector is much less significant than it is nationwide. As one <strong>of</strong> the wealthier states, a greater share <strong>of</strong>personal income is derived from dividends, interest <strong>and</strong> rent, <strong>and</strong> a lesser share comes from transfer payments. In 2008,the sources <strong>of</strong> personal income in the <strong>State</strong> <strong>and</strong> the comparable sources <strong>of</strong> personal income for the nation were asfollows:[Table appears on following page](REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)42
Sources <strong>of</strong> Personal Income2008($ in millions)Percentage <strong>of</strong> Personal IncomeBefore Residence Adjustment<strong>Maryl<strong>and</strong></strong> <strong>Maryl<strong>and</strong></strong> United <strong>State</strong>sMining, forestry, fishing......................................... $ 318 0.1% 1.4%Construction ............................................................ 13,539 5.6 4.3Manufacturing......................................................... 11,185 4.6 8.8Trade, transportation & utilities............................. 26,067 10.7 11.7Information services ............................................... 5,482 2.3 2.8Finance, insurance & real estate ............................ 15,174 6.2 7.4Pr<strong>of</strong>essional & business services ........................... 35,436 14.6 12.3Educational & health services................................ 22,150 9.1 8.4Leisure & hospitality services................................ 6,236 2.6 2.9Other services.......................................................... 5,813 2.4 2.2GovernmentFederal, civilian ............................................... 19,958 8.2 2.4Military ............................................................ 3,956 1.6 1.3<strong>State</strong> & local .................................................... 21,597 8.9 9.0Farm income ........................................................... 293 0.1 0.5Earnings by place <strong>of</strong> work...................................... 187,202Less:Personal contributions for social insurance........... (20,825) (8.6) (8.2)Plus:Dividends, Interest <strong>and</strong> Rent.................................. 45,437 18.7 17.4Transfer Payments .................................................. 31,492 12.9 15.5Personal income before residence adjustment ...... 243,307 100.0%* 100.0%*Residence adjustment ............................................. 27,617Total Personal Income............................................... $270,924*__________Source: US Department <strong>of</strong> Commerce, Bureau <strong>of</strong> Economic Analysis (<strong>State</strong> Quarterly Personal Income, Series SQ5N).Note: Total personal income is reported by place <strong>of</strong> residence, however income by industry is shown by place <strong>of</strong> work. The residence adjustmentaccounts for <strong>Maryl<strong>and</strong></strong> residents who work outside the <strong>State</strong>.* Totals may not add due to rounding.(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)43
Over the past five years, total personal income growth in <strong>Maryl<strong>and</strong></strong> has matched that <strong>of</strong> the United <strong>State</strong>s at 5.7%annually. Similarly, wage <strong>and</strong> salary income, the largest component <strong>of</strong> personal income, has increased 5.1% per yearfor both <strong>Maryl<strong>and</strong></strong> <strong>and</strong> the nation.Growth <strong>of</strong> Personal Income Components (Five-Year Average, 2004-2008)<strong>Maryl<strong>and</strong></strong>United <strong>State</strong>sWages <strong>and</strong> Salaries 5.1% 5.1%Supplements to Wages <strong>and</strong> Salaries 5.7 4.7Proprietors' Income 5.8 5.8Contributions for Social Insurance 5.4 5.1Residence Adjustment 5.0 4.4Dividends, Interest, <strong>and</strong> Rent 7.2 7.5Transfer Payments 6.4 6.7___________________Source: US Department <strong>of</strong> Commerce, Bureau <strong>of</strong> Economic Analysis (<strong>State</strong> Annual Personal Income, Series SA04).Note: Total personal income is reported by place <strong>of</strong> residence, however income by industry is shown by place <strong>of</strong> work.The residence adjustment accounts for <strong>Maryl<strong>and</strong></strong> residents who work outside the <strong>State</strong>.Employment<strong>Maryl<strong>and</strong></strong>’s labor force totaled just under 3.0 million individuals in 2008, including agricultural <strong>and</strong>nonagricultural employment, the unemployed, the self-employed <strong>and</strong> residents who commute to jobs in other states.The government, retail trade, <strong>and</strong> services sectors (notably pr<strong>of</strong>essional <strong>and</strong> business, <strong>and</strong> educational <strong>and</strong> health) arethe leading areas <strong>of</strong> employment in the <strong>State</strong>. In contrast to the nation as a whole, considerably more people in<strong>Maryl<strong>and</strong></strong> are employed in the federal government <strong>and</strong> service sectors <strong>and</strong> fewer in manufacturing, as shown in thefollowing table:Distribution <strong>of</strong> Employment2008<strong>Maryl<strong>and</strong></strong> United <strong>State</strong>sConstruction & mining 6.9% 5.8%Manufacturing 4.9 9.8Trade, transportation & utilities 17.9 19.3Information services 1.9 2.2Financial activities 5.9 5.9Pr<strong>of</strong>essional & business services 15.4 13.0Educational & health services 14.7 13.8Leisure & Hospitality services 9.0 9.8Other services 4.5 4.0GovernmentFederal 4.9 2.0<strong>State</strong> & local 13.9 14.4Total 100.0%* 100.0%*________________Source: U.S. Department <strong>of</strong> Labor, Bureau <strong>of</strong> Labor Statistics*Totals may not add due to rounding.44
Non-agricultural employment in <strong>Maryl<strong>and</strong></strong> has grown slightly slower in relation to the country as a whole overthe past five years although the components <strong>of</strong> growth are different. The employment decline in the manufacturingsector is almost twice that <strong>of</strong> the rest <strong>of</strong> the country. Given the prominent place Federal government employment has in<strong>Maryl<strong>and</strong></strong>, it is not surprising that employment in this sector has declined faster than in the U.S. In addition, the<strong>Maryl<strong>and</strong></strong> information services sector has seen only a modest decline in relation to the country as a whole. Otherindustries in <strong>Maryl<strong>and</strong></strong> have generally grown at or slightly slower than the national pace.Employment Growth(Five – year Average, 2004-2008)<strong>Maryl<strong>and</strong></strong>United <strong>State</strong>sConstruction & mining 1.3% 1.9%Manufacturing -2.4 -1.5Trade, transportation & utilities 0.2 0.9Information services -0.5 -1.2Financial activities -0.4 0.4Pr<strong>of</strong>essional & business services 1.5 2.2Educational & health services 2.4 2.6Leisure & hospitality services 1.8 2.0Other services 0.4 0.5GovernmentFederal -0.2 0.0<strong>State</strong> & local 1.5 1.0Total Non-agricultural Employment 0.9%* 1.1%*______Source: U.S. Department <strong>of</strong> Labor, Bureau <strong>of</strong> Labor Statistics.*Totals may not add due to rounding.Recent employment trends in <strong>Maryl<strong>and</strong></strong> are shown in the following table. <strong>Maryl<strong>and</strong></strong>’s unemployment rate hasbeen lower than the rest <strong>of</strong> the country for the past ten years, while the labor force has grown more slowly than the rest<strong>of</strong> the country in seven <strong>of</strong> the last ten years.Employment TrendsYearUnemployment Unemployment Growth in Growth inRate in Rate in the <strong>Maryl<strong>and</strong></strong> United <strong>State</strong>s<strong>Maryl<strong>and</strong></strong> United <strong>State</strong>s Labor Force Labor Force1999 3.6% 4.2% 0.3% 1.2%2000 3.6 4.0 0.9 2.32001 4.1 4.7 0.5 0.82002 4.5 5.8 1.2 0.82003 4.5 6.0 0.3 1.12004 4.3 5.5 0.5 0.62005 4.1 5.1 1.6 1.32006 3.8 4.6 1.8 1.42007 3.5 4.6 0.1 1.12008 4.4 5.8 0.3 0.8________________Source: <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Labor, Licensing <strong>and</strong> Regulation.Note: In June <strong>2009</strong> the unemployment rate was 7.3% in <strong>Maryl<strong>and</strong></strong> <strong>and</strong> 9.5% in the United <strong>State</strong>s.45
<strong>Maryl<strong>and</strong></strong>’s work force is more highly educated than that <strong>of</strong> the rest <strong>of</strong> the country. The percentage <strong>of</strong> thepopulation (25 years <strong>and</strong> over) with a Bachelor’s degree or higher is 35.2% as compared to 27.5% for the rest <strong>of</strong> thecountry. <strong>Maryl<strong>and</strong></strong> ranks third in the nation in the percentage <strong>of</strong> its population over 25 with a graduate or pr<strong>of</strong>essionaldegree. The percentage <strong>of</strong> the population with a high school diploma or better is 87.3% in <strong>Maryl<strong>and</strong></strong> compared to84.5% in the United <strong>State</strong>s. This educational attainment facilitates the rapid growth <strong>of</strong> the pr<strong>of</strong>essional services <strong>and</strong>information services sectors, which require an educated workforce.Educational Attainment <strong>of</strong> Population 25 Years <strong>and</strong> Over in 2007<strong>Maryl<strong>and</strong></strong> United <strong>State</strong>sLess than High School 12.6% 15.5%High School Diploma 27.4 30.1Some College 18.3 19.5Associate's Degree 6.4 7.4Bachelor's Degree 19.5 17.4Graduate or Pr<strong>of</strong>essional Degree 15.7 10.1________________Source: American Community Survey, 2008.Assessed Value <strong>of</strong> Property<strong>Maryl<strong>and</strong></strong> levies a <strong>State</strong> tax on real property, revenues from which are credited to the Annuity Bond Fund topay debt service. Through fiscal year 2003 the rate was 8.4 cents per $100 <strong>of</strong> assessment (21 cents on utility operatingproperty). In fiscal year 2004 the rate was increased to 13.2 cents per $100 <strong>of</strong> assessment (33 cents on utility operatingproperty). For fiscal years 2007 through <strong>2009</strong>, the tax rate is 11.2 cents per $100 <strong>of</strong> assessment (28 cents on utilityoperating property). From 1992 through 2001, most real property was assessed at 40% <strong>of</strong> full cash value. Beginning infiscal year 2002, all property is assessed at 100% <strong>of</strong> full cash value. Tax rates, <strong>and</strong> in some cases assessments, havebeen adjusted to <strong>of</strong>fset this change. Shown below is the assessed value for <strong>State</strong> purposes <strong>of</strong> real <strong>and</strong> personal propertyas determined by the <strong>State</strong> Department <strong>of</strong> Assessments <strong>and</strong> Taxation. Assessment growth in future years is expected tomoderate relative to current levels.FiscalYearAssessed Values <strong>of</strong> Real Estate <strong>and</strong> Tangible Personal Property($ in thous<strong>and</strong>s)RealPropertyUtility OperatingReal PropertyTotalChange inAssessedValues1999 $113,133,788 $4,577,542 $117,711,330 2.0%2000 116,658,517 4,189,011 120,847,528 2.72001 120,850,617 2,174,435 123,025,052 1.82002 317,031,724 2,161,893 319,193,617 159.52003 334,732,221 2,165,542 336,897,763 5.52004 360,626,451 1,299,590 361,926,041 7.42005 397,093,127 1,323,073 398,416,200 10.12006 451,090,503 1,392,322 452,482,825 13.62007 525,706,233 1,476,219 527,182,452 16.52008 616,526,923 1,105,319 617,632,242 17.2________________Source: <strong>State</strong> Department <strong>of</strong> Assessments <strong>and</strong> Taxation.Note: See also, “STATE FINANCES – <strong>State</strong> Revenues, Property Taxes <strong>and</strong> <strong>State</strong> Property Tax Revenue Estimates.”46
Residential ConstructionThe value <strong>of</strong> all residential unit permits issued in 2008 declined by 40.8% as a result <strong>of</strong> a incredibly weakenedhousing market. The total number <strong>of</strong> residential building permits declined by 26.8%. Home sales declined in 2006,2007 <strong>and</strong> 2008, while home prices, which showed double-digit growth in the four years prior, stagnated in 2006 <strong>and</strong>2007 before turning downwards in 2008.Aggregate Value <strong>of</strong> <strong>and</strong> Building Permits Issuedfor Residential Construction in <strong>Maryl<strong>and</strong></strong>Value <strong>of</strong>Construction inCurrent DollarsNumber <strong>of</strong>Year ($ in millions) Change Permits Issued Change1999 ........................ $3,102.4 6.9% 29,757 -3.6%2000 ........................ 3,232.1 4.2 30,358 2.02001 ........................ 3,228.0 -0.1 29,059 -4.32002 ........................ 3,517.9 9.0 29,293 0.82003 ........................ 3,723.6 5.8 29,914 2.12004 ........................ 3,822.7 2.7 27,382 -8.52005 ........................ 4,687.6 22.6 30,180 10.22006 ........................ 3,889.9 -17.0 23,262 -22.92007 ........................ 3,768.8 -3.1 18,582 -20.12008 ........................ 2,229.7 -40.8 13,593 -26.8__________________Source: U.S. Department <strong>of</strong> Commerce, Bureau <strong>of</strong> the Census.Home Sales <strong>and</strong> Median Home PriceUnitMedianYear Home Sales Growth Home Price Growth2000 ........................ 71,488 23.7% $131,902 N/A2001 ........................ 80,070 12.0 138,589 5.0%2002 ........................ 84,812 5.9 156,485 12.92003 ........................ 89,409 5.4 182,251 16.52004 ........................ 97,893 9.5 223,293 22.52005 ........................ 98,758 0.9 304,232 36.22006 ........................ 82,781 -16.2 307,987 1.22007 ........................ 63,381 -23.4 307,894 0.02008 ........................ 46,910 -26.0 284,927 -7.5_________________Source: <strong>Maryl<strong>and</strong></strong> Association <strong>of</strong> Realtors.Taxable Retail SalesFrom fiscal year 1999 to 2008, taxable retail sales in <strong>Maryl<strong>and</strong></strong> increased by $23.4 billion, or 41.3%. Thisgrowth is much higher than the rate <strong>of</strong> inflation for the same period, which was about 29%. Sales accelerated stronglyin 1999 <strong>and</strong> 2000 with a booming economy, high levels <strong>of</strong> consumer confidence <strong>and</strong> the “wealth effect” generated bythe robust equity market. The 2001 recession caused a steep slowdown in 2002 <strong>and</strong> 2003, while a relatively strongeconomy, low interest rates <strong>and</strong> high levels <strong>of</strong> mortgage refinancing resulted in robust growth in 2004 through 2006.As the economy slowed in fiscal year 2007, <strong>and</strong> the boost from mortgage refinancing <strong>and</strong> other housing-related issuesfaded, growth slowed precipitously. The onset <strong>of</strong> the current recession coupled with high gas prices resulted indeclining taxable retail sales for fiscal year 2008. The following table illustrates the changes in taxable sales for fiscalyears 1999 through 2008.47
Taxable Retail Sales in <strong>Maryl<strong>and</strong></strong>(includes automobile sales)($ in thous<strong>and</strong>s)FiscalTaxableYear Retail Sales Change1999....................... $56,688,200 6.7%2000....................... 62,040,240 9.42001....................... 65,177,540 5.12002....................... 66,562,680 2.12003....................... 67,788,320 1.82004....................... 73,296,320 8.12005....................... 77,427,480 5.62006....................... 81,933,900 5.82007....................... 82,568,490 0.82008....................... 80,120,978 -3.0___________________Source: Comptroller <strong>of</strong> the Treasury, Bureau <strong>of</strong> Revenue Estimates.Note: Includes sales <strong>and</strong> use tax base <strong>and</strong> motor vehicle excise tax base.Other Economic FactorsThe <strong>Maryl<strong>and</strong></strong> Economy. While most <strong>of</strong> the current difficulties caused by the recession are affecting the <strong>State</strong>’seconomy, these problems have not hit <strong>Maryl<strong>and</strong></strong> as hard as many other states. One positive future development for the<strong>State</strong> is the implementation <strong>of</strong> the 2005 decisions <strong>of</strong> the Base Realignment <strong>and</strong> Closure Commission (“BRAC”). Thisprocess has begun to bring to <strong>Maryl<strong>and</strong></strong> jobs, families with income, <strong>and</strong> increased dem<strong>and</strong> for goods <strong>and</strong> services.Energy. As a result <strong>of</strong> deregulation, many <strong>Maryl<strong>and</strong></strong> ratepayers experienced a 75% phased-in increase in theprice <strong>of</strong> electricity in 2007 <strong>and</strong> 2008. While plans are underway to construct two high voltage power lines through<strong>Maryl<strong>and</strong></strong> to reduce the possibility <strong>of</strong> shortages in the future, adjusting to the higher electricity prices represents aburden on consumers <strong>and</strong> businesses, despite renewed emphasis on conservation. Currently, gasoline prices remainrelatively low in comparison to past years, easing pressure on consumers, although the stability <strong>of</strong> the current pricelevel is uncertain.Real Estate. Home sales in <strong>Maryl<strong>and</strong></strong> started to slow in 2005 <strong>and</strong> 2006 prices began to decline in 2008. The<strong>Maryl<strong>and</strong></strong> Realtors Association reports the median price for a home sold in 2008 declined 7.5% from the median pricein 2007. The construction industry has contracted as new home construction slowed significantly <strong>and</strong> commercialconstruction was unable to compensate. In addition, retail sales <strong>of</strong> items such as appliances <strong>and</strong> furniture, typicallyassociated with a strong housing market, have declined.Biotechnology. <strong>Maryl<strong>and</strong></strong> is well positioned in the front ranks <strong>of</strong> the biotechnology field. The <strong>State</strong>’sconcentration <strong>of</strong> higher education <strong>and</strong> research institutions, particularly medical schools, thriving pharmaceuticalsindustry <strong>and</strong> one <strong>of</strong> the most highly educated workforces in the country has created growth opportunities for the biotechcompanies that have located or started up here.Base Realignment <strong>and</strong> Closure. The <strong>State</strong> is poised to receive more federal jobs than any other state in thecountry from the 2005 BRAC process <strong>and</strong> is now preparing for an influx <strong>of</strong> an estimated 45,300 jobs statewide startingin <strong>2009</strong>. The majority <strong>of</strong> these jobs are expected to be located within an eight county area in central <strong>Maryl<strong>and</strong></strong> (AnneArundel, Howard, Montgomery, Prince George’s, Harford, Baltimore <strong>and</strong> Cecil counties, <strong>and</strong> Baltimore City).48
LEGAL MATTERSLegality <strong>of</strong> the <strong>Bonds</strong>The legality <strong>of</strong> the issuance <strong>of</strong> the <strong>Bonds</strong> <strong>of</strong>fered by this Official <strong>State</strong>ment will be passed upon by theHonorable Douglas F. Gansler, Attorney <strong>General</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, <strong>and</strong> by Kutak Rock LLP, Washington, D.C. BondCounsel. However, Bond Counsel will rely upon the opinions <strong>of</strong> the Attorney <strong>General</strong> addressed to Bond Counsel <strong>and</strong>assume the accuracy <strong>of</strong> other opinions not addressed to Bond Counsel with respect to the validity <strong>of</strong> the specified <strong>State</strong>loans or installments there<strong>of</strong> represented by the <strong>Bonds</strong> <strong>and</strong> as to compliance with <strong>State</strong> law. Delivery <strong>of</strong> the <strong>Bonds</strong> isconditioned upon delivery by the Attorney <strong>General</strong> <strong>and</strong> Bond Counsel <strong>of</strong> unqualified opinions substantially in therespective forms set forth in Appendix D.Certain <strong>General</strong> Federal Income Tax ConsiderationsThe following is a summary <strong>of</strong> certain material federal income tax consequences <strong>of</strong> the purchase, ownership<strong>and</strong> disposition <strong>of</strong> the Second Series A <strong>Bonds</strong>, the Second Series B <strong>Bonds</strong>, <strong>and</strong> the Second Series C <strong>Bonds</strong>,(collectively, the “<strong>Bonds</strong>”) for the investors described below <strong>and</strong> is based on the advice <strong>of</strong> Kutak Rock LLP,Washington, D.C. as Bond Counsel. This summary is based upon laws, regulations, rulings <strong>and</strong> decisions currently ineffect, all <strong>of</strong> which are subject to change. The discussion does not deal with all federal tax consequences applicable toall categories <strong>of</strong> investors, some <strong>of</strong> which may be subject to special rules, including but not limited to, partnerships orentities treated as partnerships for federal income tax purposes, pension plans <strong>and</strong> foreign investors, except as otherwiseindicated. In addition, this summary is generally limited to investors who will hold the <strong>Bonds</strong> as “capital assets”(generally, property held for investment) within the meaning <strong>of</strong> Section 1221 <strong>of</strong> the Internal Revenue Code <strong>of</strong> 1986, asamended (the “Code”). Investors should consult their own tax advisors to determine the federal, state, local <strong>and</strong> othertax consequences <strong>of</strong> the purchase, ownership <strong>and</strong> disposition <strong>of</strong> <strong>Bonds</strong>. Prospective investors should note that norulings have been or will be sought from the Internal Revenue Service (the “Service”) with respect to any <strong>of</strong> the federalincome tax consequences discussed below, <strong>and</strong> no assurance can be given that the Service will not take contrarypositions.Treasury Circular 230 DisclosureTo ensure compliance with Treasury Circular 230, taxpayers are hereby notified that: (a) any discussion <strong>of</strong>U.S. federal tax issues in this Official <strong>State</strong>ment is not intended or written by us to be relied upon, <strong>and</strong> cannot be reliedupon, by taxpayers for the purpose <strong>of</strong> avoiding penalties that may be imposed on taxpayers under the Code; (b) suchdiscussion is written in connection with the promotion or marketing <strong>of</strong> the transactions or matters addressed herein; <strong>and</strong>(c) taxpayers should seek advice based on their particular circumstances from an independent tax advisor.Federal Tax-Exemption – Second Series A <strong>Bonds</strong> <strong>and</strong> Second Series B <strong>Bonds</strong><strong>General</strong>. In the opinion <strong>of</strong> Bond Counsel, under existing laws, regulations, rulings <strong>and</strong> judicial decisions,interest on the Second Series A <strong>Bonds</strong> <strong>and</strong> the Second Series B <strong>Bonds</strong> (collectively, the “Tax-Exempt <strong>Bonds</strong>”)(including original issue discount treated as interest, if any) is excludable from gross income for federal income taxpurposes <strong>and</strong> is not a specific preference item or included in adjusted current earnings for purposes <strong>of</strong> the federalalternative minimum tax. The opinions described in the preceding sentence assume the accuracy <strong>of</strong> certainrepresentations <strong>and</strong> compliance by the <strong>State</strong> with covenants designed to satisfy the requirements <strong>of</strong> the Code that mustbe met subsequent to the issuance <strong>of</strong> the Tax-Exempt <strong>Bonds</strong>. Failure to comply with such requirements could causeinterest on the Tax-Exempt <strong>Bonds</strong> to be included in gross income for federal income tax purposes retroactive to the date<strong>of</strong> issuance <strong>of</strong> the Tax-Exempt <strong>Bonds</strong>. The <strong>State</strong> has covenanted to comply with such requirements. Bond Counsel hasexpressed no opinion regarding other federal tax consequences arising with respect to the Tax-Exempt <strong>Bonds</strong>.The accrual or receipt <strong>of</strong> interest on the Tax-Exempt <strong>Bonds</strong> may otherwise affect the federal income taxliability <strong>of</strong> the owners <strong>of</strong> the Tax-Exempt <strong>Bonds</strong>. The extent <strong>of</strong> these other tax consequences will depend upon suchowner’s particular tax status <strong>and</strong> other items <strong>of</strong> income or deduction. Bond Counsel has expressed no opinion regardingany such consequences. Purchasers <strong>of</strong> the Tax-Exempt <strong>Bonds</strong>, particularly purchasers that are corporations (includingS corporations <strong>and</strong> foreign corporations operating branches in the United <strong>State</strong>s), property or casualty insurancecompanies, banks, thrifts or other financial institutions, certain recipients <strong>of</strong> social security or railroad retirementbenefits, taxpayers otherwise entitled to claim the earned income credit, or taxpayers who may be deemed to have49
incurred or continued indebtedness to purchase or carry tax-exempt obligations, should consult their tax advisors as tothe tax consequences <strong>of</strong> purchasing or owning the Tax-Exempt <strong>Bonds</strong>.Original Issue Discount. Certain maturities <strong>of</strong> the Tax-Exempt <strong>Bonds</strong> may be issued at an initial public<strong>of</strong>fering price which is less than the amount payable on such <strong>Bonds</strong> at maturity (collectively, the “Discount <strong>Bonds</strong>”).The difference between the initial public <strong>of</strong>fering prices <strong>of</strong> such Discount <strong>Bonds</strong> <strong>and</strong> their stated amounts to be paid atmaturity (other than “qualified stated interest”) constitutes original issue discount treated in the same manner for federalincome tax purposes as interest, as described above.The amount <strong>of</strong> original issue discount which is treated as having accrued with respect to a Discount Bond isadded to the cost basis <strong>of</strong> the owner in determining, for federal income tax purposes, gain or loss upon disposition <strong>of</strong>such Discount Bond (including its sale, redemption or payment at maturity). Amounts received upon disposition <strong>of</strong>such Discount Bond, to the extent such amounts exceed the cost basis <strong>of</strong> the owners there<strong>of</strong> as adjusted by the amount<strong>of</strong> original issue discount accrued on the Discount Bond up to the disposition date, will be treated as tax-exemptinterest, rather than as taxable gain, for federal income tax purposes.Original issue discount is treated as compounding semiannually, at a rate determined by reference to the yieldto maturity <strong>of</strong> each individual Discount Bond, on days which are determined by reference to the maturity date <strong>of</strong> suchDiscount Bond. The amount treated as original issue discount on such discount Bond for a particular semiannualaccrual period is equal to the product <strong>of</strong> (a) the yield to maturity for such Discount Bond (determined by compoundingat the close <strong>of</strong> each accrual period) <strong>and</strong> (b) the amount which would have been the tax basis <strong>of</strong> such Discount Bond atthe beginning <strong>of</strong> the particular accrual period if held by the original purchaser, less the amount <strong>of</strong> any interest payablefor such Discount Bond during the accrual period. The tax basis is determined by adding to the initial public <strong>of</strong>feringprice on such Discount Bond the sum <strong>of</strong> the amounts which have been treated as original issue discount for suchpurposes during all prior periods. If such Discount Bond is sold between semiannual compounding dates, original issuediscount which would have been accrued for that semiannual compounding period for federal income tax purposes is tobe apportioned in equal amounts among the days in such compounding period.Owners <strong>of</strong> Discounted <strong>Bonds</strong> should consult their tax advisors with respect to the determination <strong>and</strong> treatment<strong>of</strong> original issue discount accrued as <strong>of</strong> any date <strong>and</strong> with respect to the state <strong>and</strong> local tax consequences <strong>of</strong> owning aDiscount Bond.Market Discount. A purchaser (other than a person who purchases a Tax-Exempt Bond upon issuance at theissue price) who buys a Tax-Exempt Bond at a discount from its principal amount (or its adjusted issue price if issuedwith original issue discount) will be subject to the market discount rules <strong>of</strong> the Code. In general, the market discountrules <strong>of</strong> the Code treat principal payments <strong>and</strong> gain on disposition <strong>of</strong> a debt instrument as ordinary income to the extent<strong>of</strong> accrued market discount. Each potential investor should consult his tax advisor concerning the application <strong>of</strong> themarket discount rules to the Tax-Exempt <strong>Bonds</strong>.Original Issue Premium. Certain maturities <strong>of</strong> the Tax-Exempt <strong>Bonds</strong> may be issued at an initial public<strong>of</strong>fering price which is in excess <strong>of</strong> the stated redemption price <strong>of</strong> such Tax-Exempt <strong>Bonds</strong> at maturity (collectively, the“Premium <strong>Bonds</strong>”). An amount equal to the excess <strong>of</strong> the issue price <strong>of</strong> a Premium Bond over its stated redemptionprice at maturity constitutes premium on such Premium Bond. An initial purchaser <strong>of</strong> a Premium Bond must amortizeany premium over such Premium Bond’s term using constant yield principles, based on the purchaser’s yield tomaturity (or, in the case <strong>of</strong> Premium <strong>Bonds</strong> callable prior to their maturity, by amortizing the premium to the call date,based on the purchaser’s yield to the call date <strong>and</strong> giving effect to the call premium, if any). As premium is amortized,the amount <strong>of</strong> the amortization <strong>of</strong>fsets a corresponding amount <strong>of</strong> interest for the period <strong>and</strong> the purchaser’s basis insuch Premium Bond is reduced by a corresponding amount resulting in an increase in the gain (or decrease in the loss)to be recognized for federal income tax purposes upon a sale or disposition <strong>of</strong> such Premium Bond prior to its maturity.Even though the purchaser’s basis may be reduced, no federal income tax deduction is allowed. Purchasers <strong>of</strong> thePremium <strong>Bonds</strong> should consult with their tax advisors with respect to the determination <strong>and</strong> treatment <strong>of</strong> premium forfederal income tax purposes <strong>and</strong> with respect to the state <strong>and</strong> local tax consequences <strong>of</strong> owning a Premium Bond.Backup Withholding. As a result <strong>of</strong> the enactment <strong>of</strong> the Tax Increase Prevention <strong>and</strong> Reconciliation Act <strong>of</strong>2005, interest on tax-exempt obligations such as the Tax-Exempt <strong>Bonds</strong> is subject to information reporting in a mannersimilar to interest paid on taxable obligations. Backup withholding may be imposed on payments made after March 31,2007 to any bondholder who fails to provide certain required information including an accurate taxpayer identificationnumber to any person required to collect such information pursuant to Section 6049 <strong>of</strong> the Code. The new reporting50
equirement does not in <strong>and</strong> <strong>of</strong> itself affect or alter the excludability <strong>of</strong> interest on the Tax-Exempt <strong>Bonds</strong> from grossincome for federal income tax purposes or any other federal tax consequence <strong>of</strong> purchasing, holding or selling taxexemptobligations.Federally Taxable Build America <strong>Bonds</strong> - Second Series C <strong>Bonds</strong>The Second Series C <strong>Bonds</strong> are being issued as Build America <strong>Bonds</strong> authorized by the American Recovery<strong>and</strong> Reinvestment Act <strong>of</strong> <strong>2009</strong> (“ARRA”).In <strong>General</strong>. The <strong>State</strong> has elected to designate the Second Series C <strong>Bonds</strong> as taxable “Build America <strong>Bonds</strong>”pursuant to Section 54AA(d) <strong>of</strong> the Code <strong>and</strong> as “Qualified <strong>Bonds</strong>” pursuant to Section 54AA(g) <strong>of</strong> the Code.Although the Second Series C <strong>Bonds</strong> are issued by the <strong>State</strong>, interest on the Second Series C <strong>Bonds</strong> (including originalissue discount, as discussed below) is not excludable from gross income for federal income tax purposes underSection 103 <strong>of</strong> the Code. Interest on the Second Series C <strong>Bonds</strong> will be fully subject to federal income taxation. Thus,owners <strong>of</strong> the Second Series C <strong>Bonds</strong> generally must include interest (including original issue discount) on the SecondSeries C <strong>Bonds</strong> in gross income for federal income tax purposes.Build America <strong>Bonds</strong>. The Second Series C <strong>Bonds</strong> are being issued as taxable Build America <strong>Bonds</strong> asauthorized by ARRA. Pursuant to ARRA, the <strong>State</strong> will receive cash subsidy payments from the United <strong>State</strong>sTreasury equal to 35% <strong>of</strong> the interest payable on the Second Series C <strong>Bonds</strong>. The Code imposes requirements on theSecond Series C <strong>Bonds</strong> that the <strong>State</strong> must continue to meet after the Second Series C <strong>Bonds</strong> are issued in order toreceive the cash subsidy payments. These requirements generally involve the way that Second Series C Bond proceedsmust be invested <strong>and</strong> ultimately used. If the <strong>State</strong> does not meet these requirements, it is possible that the <strong>State</strong> may notreceive the cash subsidy payments <strong>and</strong> the Second Series C <strong>Bonds</strong> may fail to be “Build America <strong>Bonds</strong>” underSection 54AA(d) <strong>of</strong> the Code <strong>and</strong> “Qualified <strong>Bonds</strong>” under Section 54AA(g) <strong>of</strong> the Code retroactively to the date <strong>of</strong>issuance <strong>of</strong> the Second Series C <strong>Bonds</strong>. Any such failure to qualify as Build America <strong>Bonds</strong> will not alter the <strong>State</strong>’sobligation to pay the principal <strong>and</strong> interest due on the Second Series C <strong>Bonds</strong>.In certain circumstances, the cash subsidy payments to be made to the <strong>State</strong> may be reduced (<strong>of</strong>fset) byamounts determined to be applicable under the Code <strong>and</strong> Regulations. For example, <strong>of</strong>fsets may occur by reason <strong>of</strong> anypast-due legally enforceable debt <strong>of</strong> the <strong>State</strong> to any Federal agency. The amount <strong>of</strong> any such <strong>of</strong>fset is not predictable,<strong>and</strong> the <strong>State</strong> does not currently expect that any such <strong>of</strong>fsets will apply to the credits the <strong>State</strong> expects to receive. Anysuch <strong>of</strong>fset does not alter the <strong>State</strong>’s obligation to pay principal <strong>and</strong> interest due on the Second Series C <strong>Bonds</strong>.Characterization <strong>of</strong> the <strong>Bonds</strong> as Indebtedness. Bond Counsel will render on the closing date, with respect tothe Second Series C <strong>Bonds</strong>, its opinion to the effect that the Second Series C <strong>Bonds</strong> will be characterized asindebtedness <strong>of</strong> the <strong>State</strong> rather than as an interest in the <strong>State</strong> or any assets <strong>of</strong> the <strong>State</strong> for federal income tax purposes.The owners <strong>of</strong> the Second Series C <strong>Bonds</strong>, by accepting such Second Series C <strong>Bonds</strong>, have agreed to treat the SecondSeries C <strong>Bonds</strong> as indebtedness <strong>of</strong> the <strong>State</strong> for federal income tax purposes. The <strong>State</strong> intends to treat the SecondSeries C Bond transaction as a financing reflecting the Second Series C <strong>Bonds</strong> as its indebtedness for tax <strong>and</strong> financialaccounting purposes.Taxation <strong>of</strong> Interest Income <strong>of</strong> the <strong>Bonds</strong>. Payments <strong>of</strong> interest with regard to the Second Series C <strong>Bonds</strong> willbe includible as ordinary income when received or accrued by the holders there<strong>of</strong> in accordance with their respectivemethods <strong>of</strong> accounting <strong>and</strong> applicable provisions <strong>of</strong> the Code. If the Second Series C <strong>Bonds</strong> are deemed to be issuedwith original issue discount, Section 1272 <strong>of</strong> the Code requires the current ratable inclusion in income <strong>of</strong> original issuediscount greater than a specified de minimis amount using a constant yield method <strong>of</strong> accounting. In general, originalissue discount is calculated, with regard to any accrual period, by applying the instrument’s yield to its adjusted issueprice at the beginning <strong>of</strong> the accrual period, reduced by any qualified stated interest (as defined below) allocable to theperiod. The aggregate original issue discount allocable to an accrual period is allocated to each day included in suchperiod. The holder <strong>of</strong> a debt instrument must include in income the sum <strong>of</strong> the daily portions <strong>of</strong> original issue discountattributable to the number <strong>of</strong> days he owned the instrument. The legislative history <strong>of</strong> the original issue discountprovisions indicates that the calculation <strong>and</strong> accrual <strong>of</strong> original issue discount should be based on the prepaymentassumptions used by the parties in pricing the transaction.Original issue discount is the stated redemption price at maturity <strong>of</strong> a debt instrument over its issue price. Thestated redemption price at maturity includes all payments with respect to an instrument other than interestunconditionally payable at a fixed rate or a qualified variable rate at fixed intervals <strong>of</strong> one year or less (“qualified stated51
interest”). Caps or floors may be ignored in determining whether an obligation bears interest at a qualified variablerate, if among other things, the cap or floor is fixed through the term <strong>of</strong> the obligation. The <strong>State</strong> expects that interestpayable with respect to the Second Series C <strong>Bonds</strong> will constitute qualified stated interest. The Second Series C <strong>Bonds</strong>are being issued with original issue discount, but such amount <strong>of</strong> original issue discount is less than the specified deminimis amount, <strong>and</strong> therefore holders <strong>of</strong> the Second Series C <strong>Bonds</strong> are not required to accrue such original issuediscount as discussed above. However, there can be no assurance that the Service would not assert that the interestpayable with respect to the Second Series C <strong>Bonds</strong> may not be qualified stated interest because such payments are notunconditional, <strong>and</strong> there can be no assurance that the Service would not assert that the Second Series C <strong>Bonds</strong>otherwise are issued with original issue discount in an amount greater than the specified de minimis amount. Potentialholders <strong>of</strong> the Second Series C <strong>Bonds</strong> should consult their own tax advisors regarding the determination <strong>of</strong> <strong>and</strong> taxtreatment <strong>of</strong> original issue discount.Payments <strong>of</strong> interest received with respect to the Second Series C <strong>Bonds</strong> will also constitute investmentincome for purposes <strong>of</strong> certain limitations <strong>of</strong> the Code concerning the deductibility <strong>of</strong> investment interest expense.Potential holders <strong>of</strong> the Second Series C <strong>Bonds</strong> should consult their own tax advisors concerning the treatment <strong>of</strong>interest payments with regard to the Second Series C <strong>Bonds</strong>.A purchaser (other than a person who purchases a Second Series C Bond upon issuance at the issue price) whobuys a Second Series C Bond at a discount from its principal amount (or its adjusted issue price if issued with originalissue discount) will be subject to the market discount rules <strong>of</strong> the Code. In general, the market discount rules <strong>of</strong> theCode treat principal payments <strong>and</strong> gain on disposition <strong>of</strong> a debt instrument as ordinary income to the extent <strong>of</strong> accruedmarket discount. In addition, absent an election to accrue market discount currently, the portion <strong>of</strong> any interest expenseincurred or continued to carry a market discount bond, that does not exceed the accrued market discount for any taxableyear, will be deferred. Each potential investor should consult his tax advisor concerning the application <strong>of</strong> the marketdiscount rules to the Second Series C <strong>Bonds</strong>.In the event that the Second Series C <strong>Bonds</strong> are considered to be purchased by a holder at a price greater thantheir remaining stated redemption price at maturity, they will be considered to have been purchased at a premium. Theholder <strong>of</strong> a Second Series C Bond may elect to amortize such premium (as an <strong>of</strong>fset to interest income), using aconstant yield method, over the remaining term <strong>of</strong> the Second Series C <strong>Bonds</strong>. Special rules apply to determine theamount <strong>of</strong> premium on a “variable rate debt instrument” <strong>and</strong> certain other debt instruments. Prospective holders <strong>of</strong> aSecond Series C Bond should consult their tax advisors regarding the amortization <strong>of</strong> bond premium.Sale or Exchange <strong>of</strong> Second Series C <strong>Bonds</strong>. If a Bondholder sells a Second Series C Bond, such person willrecognize gain or loss equal to the difference between the amount realized on such sale <strong>and</strong> the Bondholder’s basis insuch Bond. Ordinarily, such gain or loss will be treated as a capital gain or loss. At the present time, for individualtaxpayers, the maximum capital gain rate for certain assets held for more than twelve months is 15%. However, if aSecond Series C Bond was, subsequent to its initial issuance, purchased at a discount (i.e., market discount), a portion<strong>of</strong> such gain will be recharacterized as interest <strong>and</strong> therefore ordinary income. In February <strong>of</strong> <strong>2009</strong>, President BarackObama proposed increasing the long-term capital gains rate to 20%. The <strong>State</strong> <strong>and</strong> Bond Counsel cannot predictwhether this increase will receive Congressional approval. The federal income tax provisions that relate to capital gains<strong>and</strong> losses are complex <strong>and</strong> contain exceptions to the general rules stated herein. Therefore, any potential holders <strong>of</strong>Second Series C <strong>Bonds</strong> are advised to consult their tax advisors regarding the application <strong>of</strong> those tax provisions to theirownership, sale, or other disposition <strong>of</strong> a Second Series C Bond.If any term <strong>of</strong> a Second Series C Bond was materially modified, in certain circumstances, a new debtobligation would be deemed created <strong>and</strong> exchanged for the prior obligation in a taxable transaction. Among themodifications which may be treated as material are those which relate to redemption provisions. Each potential holder<strong>of</strong> a Second Series C Bond should consult its own tax advisor concerning the circumstances in which the SecondSeries C <strong>Bonds</strong> would be deemed reissued <strong>and</strong> the likely effects, if any, <strong>of</strong> such reissuance.Backup Withholding. Certain purchasers may be subject to backup withholding at the applicable ratedetermined by statute with respect to interest paid with respect to the Second Series C <strong>Bonds</strong> if the purchasers, uponissuance or subsequent purchase, fail to supply their brokers, or any other person required to collect such informationpursuant to the Code, with their taxpayer identification numbers, furnish incorrect taxpayer identification numbers, failto report interest, dividends or other “reportable payments” (as defined in the Code) properly, or, under certaincircumstances, fail to provide a certified statement, under penalty <strong>of</strong> perjury, that they are not subject to backup52
withholding. Information returns will be sent annually to the Service <strong>and</strong> to each purchaser setting forth the amount <strong>of</strong>interest paid with respect to the Second Series C <strong>Bonds</strong> <strong>and</strong> the amount <strong>of</strong> tax withheld thereon.<strong>State</strong>, <strong>Local</strong> or Foreign Taxation. The <strong>State</strong> makes no representations regarding the tax consequences <strong>of</strong>purchase, ownership or disposition <strong>of</strong> the Second Series C <strong>Bonds</strong> under the tax laws <strong>of</strong> any other state, locality orforeign jurisdiction. Investors considering an investment in the Second Series C <strong>Bonds</strong> should consult their own taxadvisors regarding such tax consequences.Tax-Exempt Investors. In general, an entity which is exempt from federal income tax under the provisions <strong>of</strong>Section 501 <strong>of</strong> the Code is subject to tax on its unrelated business taxable income. An unrelated trade or business is anytrade or business which is not substantially related to the purpose which forms the basis for such entity’s exemption.However, under the provisions <strong>of</strong> Section 512 <strong>of</strong> the Code, interest may be excluded from the calculation <strong>of</strong> unrelatedbusiness taxable income unless the obligation which gave rise to such interest is subject to acquisition indebtedness.However, as noted above, bond counsel has rendered its opinion that the Second Series C <strong>Bonds</strong> will be characterizedas debt for federal income tax purposes. Therefore, except to the extent any holder <strong>of</strong> a Second Series C Bond incursacquisition indebtedness with respect to a Second Series C Bond, interest paid or accrued with respect to suchBondholder may be excluded by such tax-exempt Bondholder from the calculation <strong>of</strong> unrelated business taxableincome. Each potential tax-exempt holder <strong>of</strong> a Second Series C Bond is urged to consult its own tax advisor regardingthe application <strong>of</strong> these provisions.European Union Directive on the Taxation <strong>of</strong> Savings Income. The European Union adopted a directive(2003/48/EC) (the “Directive”) regarding the taxation <strong>of</strong> savings income. The Directive requires a member state <strong>of</strong> theEuropean Union (a “Member <strong>State</strong>”) to provide to the tax authorities <strong>of</strong> another Member <strong>State</strong> details <strong>of</strong> payments <strong>of</strong>interest or other similar income payments made by a person within its jurisdiction for the immediate benefit <strong>of</strong> anindividual or to certain non-corporate entities resident in that other Member <strong>State</strong> (or for certain payments secured fortheir benefit). However, Austria, Belgium, <strong>and</strong> Luxembourg have opted out <strong>of</strong> the reporting requirements <strong>and</strong> areinstead applying a special withholding tax for a transitional period in relation to such payments <strong>of</strong> interest, deductingtax at rates increasing over time to 35% after July 1, 2011. The rate for <strong>2009</strong> is 20%.A number <strong>of</strong> non-European Union countries <strong>and</strong> certain dependent or associated territories <strong>of</strong> Member <strong>State</strong>shave adopted similar measures (either provision <strong>of</strong> information or transitional withholding) in relation to payments <strong>of</strong>interest or other similar income payments made by a person in that jurisdiction for the immediate benefit <strong>of</strong> anindividual or to certain non-corporate entities in any Member <strong>State</strong>. The Member <strong>State</strong>s have entered into reciprocalprovision <strong>of</strong> information or transitional special withholding tax arrangements with certain <strong>of</strong> those dependent orassociated territories. These apply in the same way to payments by persons in any Member <strong>State</strong> to individuals orcertain non-corporate residents in those territories.On November 13, 2008, the European Commission proposed changes to the Directive which extended itsscope so that it applies to interest payments to certain intermediate persons or structures interposed between the personmaking the payment <strong>and</strong> the individual who is the beneficial owner <strong>of</strong> the interest. It is proposed that a Member <strong>State</strong>intermediary that receives an interest payment be treated as a person making payment, so as to subject it to theexchange <strong>of</strong> information or withholding obligation in the Directive. Further, it is proposed that an interest paymentmade to an intermediary established outside the European Union be treated as a payment made directly to the individualbeneficiary if the person making the payment knows that the individual beneficiary is European Union resident.No additional amounts will be payable with respect to the Second Series C <strong>Bonds</strong> if a payment on such SecondSeries C Bond is reduced as a result <strong>of</strong> any tax, assessment or other governmental charge that is required to be madepursuant to any European Union directive on the taxation <strong>of</strong> savings income or any law implementing or complyingwith, or introduced in order to conform to, any such directive. Holders <strong>of</strong> Second Series C <strong>Bonds</strong> should consult theirtax advisers regarding the implications <strong>of</strong> the Directive in their particular circumstances.Foreign Investors. A holder <strong>of</strong> a Second Series C Bond which is not a U.S. person (“foreign holder”) will notbe subject to U.S. federal income or withholding tax in respect <strong>of</strong> interest income or gain on the such <strong>Bonds</strong> if certainconditions are satisfied, including: (1) the foreign holder provides an appropriate statement, signed under penalties <strong>of</strong>perjury, identifying the foreign holder as the beneficial owner <strong>and</strong> stating, among other things, that the foreign holder isnot a U.S. person, (2) the foreign holder is not a “10 percent shareholder” or “related controlled foreign corporation”with respect to the <strong>State</strong>, <strong>and</strong> (3) the interest income is not effectively connected with a United <strong>State</strong>s trade or business<strong>of</strong> the foreign holder. The foregoing exemption does not apply to contingent interest or market discount. To the extent53
these conditions are not met, a 30% withholding tax will apply to interest income on the Second Series C <strong>Bonds</strong>, unlessan income tax treaty reduces or eliminates such tax or the interest is effectively connected with the conduct <strong>of</strong> a trade orbusiness within the United <strong>State</strong>s by such foreign holder. In the latter case, such foreign holder will be subject to U.S.federal income tax with respect to all income from the Second Series C <strong>Bonds</strong> at regular rates applicable to U.S.taxpayers, <strong>and</strong> may be subject to the branch pr<strong>of</strong>its tax if it is a corporation. A “U.S. person” is: (i) a citizen or resident<strong>of</strong> the United <strong>State</strong>s, (ii) a corporation (or other entity that is treated as a corporation for U.S. federal tax purposes) thatis created or organized in or under the laws <strong>of</strong> the United <strong>State</strong>s or any state there<strong>of</strong> (including the District <strong>of</strong>Columbia), (iii) an estate the income <strong>of</strong> which is subject to U.S. federal income taxation regardless <strong>of</strong> its source, or(iv) a trust, if a court within the United <strong>State</strong>s is able to exercise primary supervision over its administration <strong>and</strong> one ormore United <strong>State</strong>s persons have the authority to control all <strong>of</strong> its substantial decisions.<strong>General</strong>ly, a foreign holder will not be subject to federal income tax on any amount which constitutes capitalgain upon the sale, exchange, retirement or other disposition <strong>of</strong> a Second Series C Bond unless such foreign holder is anindividual present in the United <strong>State</strong>s for 183 days or more in the taxable year <strong>of</strong> the sale, exchange, retirement orother disposition <strong>and</strong> certain other conditions are met, or unless the gain is effectively connected with the conduct <strong>of</strong> atrade or business in the United <strong>State</strong>s by such foreign holder. If the gain is effectively connected with the conduct <strong>of</strong> atrade or business in the United <strong>State</strong>s by such foreign holder, such holder will generally be subject to U.S. federalincome tax with respect to such gain in the same manner as U.S. holders, as described above, <strong>and</strong> a foreign holder thatis a corporation could be subject to a branch pr<strong>of</strong>its tax on such income as well.ERISA Considerations. The Employee Retirement Income Security Act <strong>of</strong> 1974, as amended (“ERISA”),imposes certain requirements on “employee benefit plans” (as defined in Section 3(3) <strong>of</strong> ERISA) subject to ERISA,including entities such as collective investment funds <strong>and</strong> separate accounts whose underlying assets include the assets<strong>of</strong> such plans (collectively, “ERISA Plans”) <strong>and</strong> on those persons who are fiduciaries with respect to ERISA Plans.Investments by ERISA Plans are subject to ERISA’s general fiduciary requirements, including the requirement <strong>of</strong>investment prudence <strong>and</strong> diversification <strong>and</strong> the requirement that an ERISA Plan’s investments be made in accordancewith the documents governing the ERISA Plan. The prudence <strong>of</strong> any investment by an ERISA Plan in the <strong>Bonds</strong> mustbe determined by the responsible fiduciary <strong>of</strong> the ERISA Plan by taking into account the ERISA Plan’s particularcircumstances <strong>and</strong> all <strong>of</strong> the facts <strong>and</strong> circumstances <strong>of</strong> the investment. Government <strong>and</strong> non-electing church plans aregenerally not subject to ERISA. However, such plans may be subject to similar or other restrictions under state or locallaw.In addition, ERISA <strong>and</strong> the Code generally prohibit certain transactions between an ERISA Plan or a qualifiedemployee benefit plan under the Code <strong>and</strong> persons who, with respect to that plan, are fiduciaries or other “parties ininterest” within the meaning <strong>of</strong> ERISA or “disqualified persons” within the meaning <strong>of</strong> the Code. In the absence <strong>of</strong> anapplicable statutory, class or administrative exemption, transactions between an ERISA Plan <strong>and</strong> a party in interest withrespect to an ERISA Plan, including the acquisition by one from the other <strong>of</strong> a Second Series C Bond could be viewedas violating those prohibitions. In addition, Code Section 4975 prohibits transactions between certain tax-favoredvehicles such as Individual Retirement Accounts <strong>and</strong> disqualified persons. Code Section 503 includes similarrestrictions with respect to governmental <strong>and</strong> church plans. In this regard, the <strong>State</strong> or any Dealer <strong>of</strong> the Second SeriesC <strong>Bonds</strong> might be considered or might become a “party in interest” within the meaning <strong>of</strong> ERISA or a “disqualifiedperson” within the meaning <strong>of</strong> the Code, with respect to an ERISA Plan or a plan or arrangement subject to CodeSections 4975 or 503. Prohibited transactions within the meaning <strong>of</strong> ERISA <strong>and</strong> the Code may arise if Second Series C<strong>Bonds</strong> are acquired by such plans or arrangements with respect to which the <strong>State</strong> or any Dealer is a party in interest ordisqualified person.In all events, fiduciaries <strong>of</strong> ERISA Plans <strong>and</strong> plans or arrangements subject to the above Code Sections, inconsultation with their advisors, should carefully consider the impact <strong>of</strong> ERISA <strong>and</strong> the Code on an investment in theSecond Series C <strong>Bonds</strong>. The sale <strong>of</strong> the Second Series C <strong>Bonds</strong> to a plan is in no respect a representation by the <strong>State</strong>or the underwriters that such an investment meets the relevant legal requirements with respect to benefit plans generallyor any particular plan. Any plan proposing to invest in the Series Second Series C <strong>Bonds</strong> should consult with itscounsel to confirm that such investment is permitted under the plan documents <strong>and</strong> will not result in a non-exemptprohibited transaction <strong>and</strong> will satisfy the other requirements <strong>of</strong> ERISA, the Code <strong>and</strong> other applicable law.Tax–Exemption - <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> TaxationIn the opinion <strong>of</strong> the Attorney <strong>General</strong> <strong>and</strong> <strong>of</strong> Bond Counsel, under existing law <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, the<strong>Bonds</strong>, their transfer, the interest payable thereon, <strong>and</strong> any income derived therefrom, including any pr<strong>of</strong>it realized in54
the sale or exchange there<strong>of</strong>, will be exempt from taxation within the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> by the <strong>State</strong> or by any <strong>of</strong> itspolitical subdivisions, municipal corporations, or public agencies; however, the law <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> does notexpressly refer to, <strong>and</strong> no opinion is expressed concerning, estate or inheritance taxes or any other taxes not levieddirectly on the <strong>Bonds</strong> or the interest thereon.Changes in Federal <strong>and</strong> <strong>State</strong> Tax LawFrom time to time, there are legislative proposals in the Congress <strong>and</strong> in the states that, if enacted, could alteror amend the federal <strong>and</strong> state tax matters referred to herein or adversely affect the market value <strong>of</strong> the <strong>Bonds</strong>. It cannotbe predicted whether or in what form any such proposal might be enacted or whether if enacted it would apply to bondsissued prior to enactment. In addition, regulatory actions are from time to time announced or proposed <strong>and</strong> litigation isthreatened or commenced which, if implemented or concluded in a particular manner, could adversely affect the marketvalue <strong>of</strong> the <strong>Bonds</strong>. It cannot be predicted whether any such regulatory action will be implemented, how any particularlitigation or judicial action will be resolved, or whether the <strong>Bonds</strong> or the market value there<strong>of</strong> would be impactedthereby. Purchasers <strong>of</strong> the <strong>Bonds</strong> should consult their tax advisors regarding any pending or proposed legislation,regulatory initiatives or litigation. The opinions expressed by Bond Counsel are based upon existing legislation <strong>and</strong>regulations as interpreted by relevant judicial <strong>and</strong> regulatory authorities as <strong>of</strong> the date <strong>of</strong> issuance <strong>and</strong> delivery <strong>of</strong> the<strong>Bonds</strong>, <strong>and</strong> Bond Counsel has expressed no opinion as <strong>of</strong> any date subsequent thereto or with respect to any pendinglegislation, regulatory initiatives or litigation.LitigationThe <strong>State</strong> <strong>and</strong> its units are parties to numerous legal proceedings, many <strong>of</strong> which normally occur ingovernmental operations. The legal proceedings are not, in the opinion <strong>of</strong> the Attorney <strong>General</strong>, likely to have amaterial adverse effect on the <strong>State</strong>’s financial position.UNDERWRITING – SECOND SERIES A BONDSThe Second Series A <strong>Bonds</strong> are being purchased by Citigroup Global Markets Inc., as representative <strong>of</strong> agroup <strong>of</strong> underwriters named in the Bond Purchase Agreement hereinafter referred to (the “Underwriters”). TheUnderwriters have agreed to purchase the Second Series A <strong>Bonds</strong> for a purchase price <strong>of</strong> $247,071,296 (which is equalto the aggregate principal amount <strong>of</strong> the Second Series A <strong>Bonds</strong> <strong>of</strong> $235,000,000, plus original issue premium <strong>of</strong>$13,275,721, less underwriters’ discount <strong>of</strong> $1,204,425). The Underwriters’ obligation to purchase the Second Series A<strong>Bonds</strong> is subject to certain terms <strong>and</strong> conditions set forth in the Bond Purchase Agreement, the approval <strong>of</strong> certainmatters by Bond Counsel, <strong>and</strong> certain other conditions. The price at which the Second Series A <strong>Bonds</strong> are <strong>of</strong>fered tothe public (<strong>and</strong> the yields resulting therefrom) may vary from the initial public <strong>of</strong>fering price appearing on the insidecover page <strong>of</strong> this Official <strong>State</strong>ment. In addition, the Underwriters may allow commissions or discounts from suchinitial <strong>of</strong>fering price to dealers <strong>and</strong> others.Certain matters will be passed upon for the Underwriters by Miles & Stockbridge P.C., Baltimore, <strong>Maryl<strong>and</strong></strong>.Citigroup Inc., the parent company <strong>of</strong> Citigroup Global Markets Inc., an underwriter <strong>of</strong> the Second SeriesA <strong>Bonds</strong>, has entered into a retail brokerage joint venture with Morgan Stanley. As part <strong>of</strong> the joint venture, CitigroupGlobal Markets Inc. will distribute municipal securities to retail investors through the financial advisor network <strong>of</strong> anew broker-dealer, Morgan Stanley Smith Barney LLC. This distribution arrangement became effective on June 1,<strong>2009</strong>. As part <strong>of</strong> this arrangement, Citigroup Global Markets Inc. will compensate Morgan Stanley Smith Barney LLCfor its selling efforts with respect to the Second Series A <strong>Bonds</strong>.J.P. Morgan Securities Inc. ("J.P. Morgan") has entered into an agreement with UBS Financial Services Inc.("UBS") for the retail distribution <strong>of</strong> certain municipal securities <strong>of</strong>ferings. J.P. Morgan will invite UBS to participatein the <strong>of</strong>fering <strong>of</strong> the Second Series A <strong>Bonds</strong> to its retail customers at the original issue prices. As compensation toUBS, J.P. Morgan will share a portion <strong>of</strong> its underwriting compensation with UBS.SALE AT COMPETITIVE BIDDING – SECOND SERIES B BONDS AND SECOND SERIES C BONDSThe Second Series B <strong>Bonds</strong> <strong>and</strong> the Second Series C <strong>Bonds</strong> were <strong>of</strong>fered by the <strong>State</strong> for sale at a competitivebidding on August 5, <strong>2009</strong>, in accordance with the respective forms <strong>of</strong> the Revised Official Notice <strong>of</strong> Sale set forth inAppendix E. The interest rates shown on the inside cover page <strong>of</strong> this Official <strong>State</strong>ment are the interest rates per55
annum payable by the <strong>State</strong> resulting from the award <strong>of</strong> the Second Series B <strong>Bonds</strong> <strong>and</strong> the Second Series C <strong>Bonds</strong> atthe competitive bidding. The yields or prices shown on the inside cover page <strong>of</strong> this Official <strong>State</strong>ment for the SecondSeries B <strong>Bonds</strong> <strong>and</strong> the Second Series C <strong>Bonds</strong> were furnished by the successful bidders for the Second Series B <strong>Bonds</strong><strong>and</strong> the Second Series C <strong>Bonds</strong>. All other information concerning the nature <strong>and</strong> terms <strong>of</strong> any re<strong>of</strong>fering <strong>of</strong> the SecondSeries B <strong>Bonds</strong> <strong>and</strong> the Second Series C <strong>Bonds</strong> should be obtained from the successful bidders for the Second Series B<strong>Bonds</strong> <strong>and</strong> the Second Series C <strong>Bonds</strong> <strong>and</strong> not from the <strong>State</strong>.Report <strong>of</strong> Independent Public AccountantsOTHER INFORMATIONThe <strong>General</strong> Purpose Financial <strong>State</strong>ments <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> for the year ended June 30, 2008, includedin the section Appendix A — “FINANCIAL STATEMENTS” <strong>of</strong> this Official <strong>State</strong>ment have been audited by Abrams,Foster, Nole & Williams, P.A., independent certified public accountants, as stated in their report appearing herein.Financial AdvisorPublic Financial Management, Inc. <strong>of</strong> Philadelphia, Pennsylvania served as financial advisor to the <strong>State</strong> forthe issuance <strong>of</strong> the <strong>Bonds</strong>. Public Financial Management, Inc. is a financial advisory <strong>and</strong> consulting organization <strong>and</strong> isnot engaged in the business <strong>of</strong> underwriting, marketing, or trading municipal securities or any other negotiableinstruments.RatingsAs noted on the cover page <strong>of</strong> this Official <strong>State</strong>ment, Moody’s Investors Service, Inc., St<strong>and</strong>ard & Poor’s, aDivision <strong>of</strong> the McGraw-Hill Companies, Inc., <strong>and</strong> Fitch Ratings have given the <strong>Bonds</strong> ratings <strong>of</strong> Aaa, AAA <strong>and</strong> AAA,respectively. An explanation <strong>of</strong> the significance <strong>of</strong> a particular rating may be obtained from the rating agency furnishingit. The <strong>State</strong> furnished to the rating agencies the information contained in a preliminary form <strong>of</strong> this Official <strong>State</strong>ment<strong>and</strong> other information. <strong>General</strong>ly, rating agencies base their ratings on such materials <strong>and</strong> information, as well as theirown investigations, studies, <strong>and</strong> assumptions. It should be noted that the ratings may be changed at any time <strong>and</strong> that noassurance can be given that they will not be revised downward or withdrawn by any or all rating agencies, if in thejudgment <strong>of</strong> any or all, circumstances should warrant such actions. Any downward revision or withdrawal <strong>of</strong> any <strong>of</strong> theratings could have an adverse effect on market prices for the <strong>Bonds</strong>.Book-Entry Only SystemBook-Entry Only System — <strong>General</strong>. The Depository Trust Company (“DTC”), New York, New York, will actas securities depository for the <strong>Bonds</strong>. The <strong>Bonds</strong> will be issued as fully-registered securities registered in the name <strong>of</strong>Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative <strong>of</strong>DTC. One fully-registered bond will be issued for each maturity <strong>of</strong> the <strong>Bonds</strong> in principal amount equal to theaggregate principal amount <strong>of</strong> the <strong>Bonds</strong> <strong>of</strong> such maturity, <strong>and</strong> will be deposited with DTC.DTC, the world’s largest depository, is a limited-purpose trust company organized under the New YorkBanking Law, a “banking organization” within the meaning <strong>of</strong> the New York Banking Law, a member <strong>of</strong> the FederalReserve System, a “clearing corporation” within the meaning <strong>of</strong> the New York Uniform Commercial Code, <strong>and</strong> a“clearing agency” registered pursuant to the provisions <strong>of</strong> Section 17A <strong>of</strong> the Securities Exchange Act <strong>of</strong> 1934. DTCholds <strong>and</strong> provides asset servicing for over 3.5 million issues <strong>of</strong> U.S. <strong>and</strong> non-U.S. equity issues, corporate <strong>and</strong>municipal debt issues, <strong>and</strong> money market instruments from over 100 countries that DTC’s participants (“DirectParticipants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants <strong>of</strong> sales <strong>and</strong>other securities transactions in deposited securities, through electronic computerized book-entry transfers <strong>and</strong> pledgesbetween Direct Participants’ accounts. This eliminates the need for physical movement <strong>of</strong> securities certificates. DirectParticipants include both U.S. <strong>and</strong> non-U.S. securities brokers <strong>and</strong> dealers, banks, trust companies, clearingcorporations, <strong>and</strong> certain other organizations. DTC is a wholly-owned subsidiary <strong>of</strong> The Depository Trust & ClearingCorporation (“DTCC”). DTCC is the holding company for DTC <strong>and</strong> Fixed Income Clearing Corporation, all <strong>of</strong> whichare registered clearing agencies. DTCC is owned by the users <strong>of</strong> its regulated subsidiaries, as well as by the New YorkStock Exchange, Inc., the American Stock Exchange, LLC, <strong>and</strong> the National Association <strong>of</strong> Securities Dealers, Inc.Access to the DTC system is also available to others such as both U.S. <strong>and</strong> non-U.S. securities brokers <strong>and</strong> dealers,banks, trust companies <strong>and</strong> clearing corporations that clear through or maintain a custodial relationship with a Direct56
Participant, either directly or indirectly (“Indirect Participants”). DTC has St<strong>and</strong>ard & Poor’s highest rating: AAA.The DTC Rules applicable to its Participants are on file with the Securities <strong>and</strong> Exchange Commission. Moreinformation about DTC can be found at www.dtcc.com.Purchases <strong>of</strong> <strong>Bonds</strong> under the DTC system must be made by or through Direct Participants, which will receivea credit for the <strong>Bonds</strong> on DTC’s records. The ownership interest <strong>of</strong> each actual purchaser <strong>of</strong> each Bond (“BeneficialOwner”) is in turn to be recorded on the Direct <strong>and</strong> Indirect Participants’ records. Beneficial Owners will not receivewritten confirmation from DTC <strong>of</strong> their purchase. Beneficial Owners are, however, expected to receive writtenconfirmations providing details <strong>of</strong> the transaction, as well as periodic statements <strong>of</strong> their holdings, from the Direct orIndirect Participant through which the Beneficial Owner entered into the transaction. Transfers <strong>of</strong> ownership interests inthe <strong>Bonds</strong> are to be accomplished by entries made on the books <strong>of</strong> Direct <strong>and</strong> Indirect Participants acting on behalf <strong>of</strong>Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in <strong>Bonds</strong>,except in the event that use <strong>of</strong> the book-entry system for the <strong>Bonds</strong> is discontinued.To facilitate subsequent transfers, all <strong>Bonds</strong> deposited by Direct Participants with DTC are registered in thename <strong>of</strong> DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorizedrepresentative <strong>of</strong> DTC. The deposit <strong>of</strong> <strong>Bonds</strong> with DTC <strong>and</strong> their registration in the name <strong>of</strong> Cede & Co. or such otherDTC nominee do not effect any change in beneficial ownership. DTC has no knowledge <strong>of</strong> the actual BeneficialOwners <strong>of</strong> the <strong>Bonds</strong>; DTC’s records reflect only the identity <strong>of</strong> the Direct Participants to whose accounts such <strong>Bonds</strong>are credited, which may or may not be the Beneficial Owners. The Direct <strong>and</strong> Indirect Participants will remainresponsible for keeping account <strong>of</strong> their holdings on behalf <strong>of</strong> their customers.Conveyance <strong>of</strong> notices <strong>and</strong> other communications by DTC to Direct Participants, by Direct Participants toIndirect Participants, <strong>and</strong> by Direct Participants <strong>and</strong> Indirect Participants to Beneficial Owners will be governed byarrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.Redemption notices shall be sent to DTC. If less than all <strong>of</strong> the <strong>Bonds</strong> are being redeemed, DTC’s practice isto determine by lot the amount <strong>of</strong> the interest <strong>of</strong> each Direct Participant in such <strong>Bonds</strong> to be redeemed.Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the <strong>Bonds</strong>.Under its usual procedures, DTC mails an Omnibus Proxy to the Issuer as soon as possible after the record date. TheOmnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the<strong>Bonds</strong> are credited on the record date (identified in a listing attached to the Omnibus Proxy).Principal <strong>and</strong> interest payments on the <strong>Bonds</strong> will be made to Cede & Co., or such other nominee as may berequested by an authorized representative <strong>of</strong> DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’sreceipt <strong>of</strong> funds <strong>and</strong> corresponding detail information from the <strong>State</strong> or the Paying Agent, on payable date in accordancewith their respective holdings shown on DTC’s. Payments by Direct <strong>and</strong> Indirect Participants to Beneficial Owners willbe governed by st<strong>and</strong>ing instructions <strong>and</strong> customary practices, as is the case with securities held for the accounts <strong>of</strong>customers in bearer form or registered in “street name,” <strong>and</strong> will be the responsibility <strong>of</strong> such Direct or IndirectParticipant <strong>and</strong> not <strong>of</strong> DTC, DTC’s nominee, the Paying Agent or the <strong>State</strong>, subject to any statutory or regulatoryrequirements as may be in effect from time to time. Payment <strong>of</strong> principal <strong>and</strong> interest to Cede & Co. (or such othernominee as may be requested by an authorized representative <strong>of</strong> DTC) is the responsibility <strong>of</strong> the <strong>State</strong> or its PayingAgent, disbursement <strong>of</strong> such payments to Direct Participants shall be the responsibility <strong>of</strong> DTC, <strong>and</strong> disbursement <strong>of</strong>such payments to the Beneficial Owners shall be the responsibility <strong>of</strong> Direct <strong>and</strong> Indirect Participants.Book-Entry Only System — Miscellaneous. The information in the Section “Book-Entry Only System —<strong>General</strong>” has been obtained from DTC. The <strong>State</strong> takes no responsibility for the accuracy or completeness there<strong>of</strong>. The<strong>State</strong> will have no responsibility or obligations to DTC Participants or the persons for whom they act as nominees withrespect to the payments to or the providing <strong>of</strong> notice to the DTC Participants, or the Indirect Participants, or BeneficialOwners. The <strong>State</strong> cannot <strong>and</strong> does not give any assurance that DTC Participants or others will distribute principal <strong>and</strong>interest payments paid to DTC or its nominees, as the registered owner, or any redemption or other notices, to theBeneficial Owners, or that they will do so on a timely basis or that DTC will serve <strong>and</strong> act in the manner described inthis Official <strong>State</strong>ment.Discontinuation <strong>of</strong> Book-Entry Only System. DTC may discontinue providing its services as securitiesdepository with respect to the <strong>Bonds</strong> at any time by giving reasonable notice to the <strong>State</strong>. Under such circumstances, inthe event that a successor securities depository is not obtained, bond certificates are required to be printed <strong>and</strong>57
delivered. The <strong>State</strong> may also decide to discontinue use <strong>of</strong> the system <strong>of</strong> book-entry transfers through DTC (or asuccessor securities depository). In that event, bond certificates will be printed <strong>and</strong> delivered.In the event that the Book-Entry Only System is discontinued, the <strong>Bonds</strong> in fully certificated form will beissued as fully registered bonds without coupons in the denomination <strong>of</strong> $5,000 each or any integral multiple there<strong>of</strong>.Such <strong>Bonds</strong> will be transferable only upon the registration books kept at the principal <strong>of</strong>fice <strong>of</strong> the Bond Registrar, bythe registered owner there<strong>of</strong> in person, or by an attorney duly authorized in writing, upon surrender there<strong>of</strong> togetherwith a written instrument <strong>of</strong> transfer in the form attached thereto <strong>and</strong> satisfactory to the Bond Registrar, <strong>and</strong> dulyexecuted by the registered owner or a duly authorized attorney. Within a reasonable time <strong>of</strong> such surrender, the <strong>State</strong>shall cause to be issued in the name <strong>of</strong> the transferee a new registered bond or bonds <strong>of</strong> any <strong>of</strong> the authorizeddenominations in an aggregate principal amount equal to the principal amount <strong>of</strong> the Bond surrendered <strong>and</strong> maturing onthe same date <strong>and</strong> bearing interest at the same rate. The new bond or bonds shall be delivered to the transferee only afterdue authentication by an authorized <strong>of</strong>ficer <strong>of</strong> the Bond Registrar. The <strong>State</strong> may deem <strong>and</strong> treat the person in whosename a bond is registered as the absolute owner there<strong>of</strong> for the purpose <strong>of</strong> receiving payment <strong>of</strong> or on account <strong>of</strong> theprincipal or redemption price there<strong>of</strong> <strong>and</strong> interest due thereon <strong>and</strong> for all other purposes.In the event that the Book-Entry Only System is discontinued, the <strong>Bonds</strong> may be transferred or exchanged atthe principal <strong>of</strong>fice <strong>of</strong> the Bond Registrar. Upon any such transfer or exchange, the <strong>State</strong> shall execute <strong>and</strong> the BondRegistrar shall authenticate <strong>and</strong> deliver a new registered bond or bonds without coupons <strong>of</strong> any <strong>of</strong> the authorizeddenominations in an aggregate principal amount equal to the principal amount <strong>of</strong> the bond exchanged or transferred,<strong>and</strong> maturing on the same date <strong>and</strong> bearing interest at the same rate. In each case, the Bond Registrar may requirepayment by any holder <strong>of</strong> <strong>Bonds</strong> requesting exchange or transfer <strong>of</strong> <strong>Bonds</strong> <strong>of</strong> any tax, fee or other governmental charge,shipping charges <strong>and</strong> insurance that may be required to be paid with respect to such exchange or transfer, but otherwiseno charge shall be made to the holder <strong>of</strong> <strong>Bonds</strong> for such exchange or transfer.The Bond Registrar shall not be required to transfer or exchange any Bond after the mailing <strong>of</strong> notice callingsuch Bond or portion there<strong>of</strong> for redemption as previously described; provided, however, that the foregoing limitationshall not apply to that portion <strong>of</strong> a Bond in excess <strong>of</strong> $5,000 which is not being called for redemption.Continuing DisclosureIn order to enable the Underwriters <strong>and</strong> successful bidders for the <strong>Bonds</strong> to comply with the requirements <strong>of</strong>paragraph (b)(5) <strong>of</strong> the Securities <strong>and</strong> Exchange Commission Rule 15c2-12, the Board <strong>of</strong> Public Works will execute<strong>and</strong> deliver, on or before the date <strong>of</strong> issuance <strong>and</strong> delivery <strong>of</strong> the <strong>Bonds</strong>, a Continuing Disclosure Agreement, the form<strong>of</strong> which is attached as Appendix F. Potential purchasers should note that certain <strong>of</strong> the eleven events listed in Section4(a) <strong>of</strong> the Continuing Disclosure Agreement have been included for purposes <strong>of</strong> compliance with Rule 15c2-12 but arenot relevant for the <strong>Bonds</strong>, specifically those events relating to debt service reserves, credit enhancements <strong>and</strong> liquidityproviders, <strong>and</strong> property or other collateral. The <strong>State</strong> believes it has complied with its obligations under its existingContinuing Disclosure Agreements executed pursuant to Rule 15c2-12(b)(5), <strong>and</strong> has in recent years filed its secondarymarket disclosures with the Central Post Office disclosure facility set up by the Municipal Advisory Council <strong>of</strong> Texas.The <strong>State</strong> will file its secondary market disclosures with the Electronic Municipal Market Access (“EMMA”) system,beginning July 1, <strong>2009</strong>, <strong>and</strong> thereafter.Official <strong>State</strong>mentThis Official <strong>State</strong>ment has been approved <strong>and</strong> authorized by the Board <strong>of</strong> Public Works <strong>of</strong> <strong>Maryl<strong>and</strong></strong> for usein connection with the sale <strong>of</strong> the <strong>Bonds</strong> representing the $485,000,000 <strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>, SecondSeries.The Board <strong>of</strong> Public Works has been advised by Kutak Rock LLP, Washington, D.C., as Bond Counsel inconnection with the issuance <strong>of</strong> the <strong>Bonds</strong>. See Appendix D to this Official <strong>State</strong>ment for the forms <strong>of</strong> the opinions <strong>of</strong>the Attorney <strong>General</strong> <strong>and</strong> Kutak Rock LLP, Washington, D.C., to be rendered at the time <strong>of</strong> delivery <strong>of</strong> the <strong>Bonds</strong>. Thestatement under “LEGAL MATTERS - Litigation” has been passed upon by the Honorable Douglas F. Gansler,Attorney <strong>General</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, <strong>and</strong> as to legal conclusions, is stated upon the authority <strong>of</strong> the Attorney <strong>General</strong>.The forms <strong>of</strong> the Revised Official Notice <strong>of</strong> Sale for the Second Series B <strong>Bonds</strong> <strong>and</strong> the Revised OfficialNotice <strong>of</strong> Sale for the Second Series C <strong>Bonds</strong> attached as Appendix E to this Official <strong>State</strong>ment, set forth the terms <strong>and</strong>conditions <strong>of</strong> the public sale <strong>and</strong> delivery <strong>of</strong> <strong>and</strong> payment for, respectively, the Second Series B <strong>Bonds</strong> <strong>and</strong> the Second58
Series C <strong>Bonds</strong>. Reference is particularly made to the Revised Official Notice <strong>of</strong> Sale for the Second Series B <strong>Bonds</strong><strong>and</strong> the Second Series C <strong>Bonds</strong> for a statement <strong>of</strong> the legal opinions as to the validity <strong>of</strong> the Second Series B <strong>Bonds</strong> <strong>and</strong>the Second Series C <strong>Bonds</strong>, the legal opinions <strong>and</strong> other certifications relating to the accuracy <strong>and</strong> completeness, in allmaterial respects, <strong>of</strong> the Official <strong>State</strong>ment, <strong>and</strong> the other signed documents to be delivered to the successful bidders forthe Second Series B <strong>Bonds</strong> <strong>and</strong> the Second Series C <strong>Bonds</strong> at or prior to closing as a condition to the bidders’obligations to accept delivery <strong>of</strong> <strong>and</strong> to pay for the Second Series B <strong>Bonds</strong> <strong>and</strong> the Second Series C <strong>Bonds</strong>. Thesuccessful bidders will be furnished without cost with up to 200 copies <strong>of</strong> this Official <strong>State</strong>ment <strong>and</strong> <strong>of</strong> any amendmentor supplement that may be issued.BOARD OF PUBLIC WORKSOF MARYLANDMARTIN O’MALLEYGovernorPETER FRANCHOTComptrollerAnnapolis, <strong>Maryl<strong>and</strong></strong>August 5, <strong>2009</strong>NANCY K. KOPPTreasurer59
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Appendix AFINANCIAL AND ACCOUNTING SYSTEMThe financial statements <strong>and</strong> other financial data contained in this Official <strong>State</strong>ment have been prepared bythe Office <strong>of</strong> the Comptroller. The financial statements <strong>and</strong> notes thereto contained on pages A-8 through A-91 havebeen prepared in accordance with accounting principles generally accepted in the United <strong>State</strong>s <strong>and</strong>, with respect tothe Basic Financial <strong>State</strong>ments for the year ended June 30, 2008, have been audited by Abrams, Foster, Nole &Williams, P.A., independent certified public accountants, whose report thereon is included in this Official <strong>State</strong>menton pages A-8 to A-9. Pagination references within the body <strong>of</strong> the financial statements in the CAFR refer to thepages in the CAFR.The Government Finance Officers Association <strong>of</strong> the United <strong>State</strong>s <strong>and</strong> Canada awarded a Certificate <strong>of</strong>Achievement for Excellence in Financial Reporting to the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> for its comprehensive annual financialreports for fiscal years 1979 through 2007. In order to be awarded a Certificate <strong>of</strong> Achievement, a governmental unitmust publish a comprehensive annual financial report, the contents <strong>of</strong> which conform to program st<strong>and</strong>ards. Suchreports must satisfy both generally accepted accounting principles <strong>and</strong> applicable legal requirements.Effective June 30, 2002, the <strong>State</strong> implemented the new reporting model required by GASB <strong>State</strong>ment No.34, “Basic Financial <strong>State</strong>ments – <strong>and</strong> Management’s Discussion <strong>and</strong> Analysis – for <strong>State</strong> <strong>and</strong> <strong>Local</strong>Governments.” These basic financial statements include Management’s Discussion <strong>and</strong> Analysis, which provides anarrative overview <strong>and</strong> analysis <strong>of</strong> the <strong>State</strong>’s financial activities. Furthermore, they include government-widefinancial statements, (i.e., the statement <strong>of</strong> net assets <strong>and</strong> the statement <strong>of</strong> activities), which provide both short-term<strong>and</strong> long-term information about the <strong>State</strong>’s financial position. The statement <strong>of</strong> activities demonstrates the degreeto which the direct expenses <strong>of</strong> a given function <strong>of</strong> the <strong>State</strong>’s activities are <strong>of</strong>fset by its program revenues. Thesestatements provide statewide financial information distinguished between governmental activities, business-typeactivities <strong>and</strong> component units. Included with these statements are reconciliations between the entity-widestatements, prepared on the full accrual basis, <strong>and</strong> the fund level statements prepared on the modified accrual basis.In addition, there are reconciliations between the fund level <strong>and</strong> budgetary statements. Detailed information on thenew reporting model is provided in the Management’s Discussion <strong>and</strong> Analysis section <strong>and</strong> in Note 1 <strong>of</strong> the “Notesto the Financial <strong>State</strong>ments.”<strong>State</strong> statutes require an audit <strong>of</strong> every unit <strong>of</strong> <strong>State</strong> government, including the Office <strong>of</strong> the Comptroller, bythe Legislative Auditor at least every three years or more as determined by the Legislative Auditor. The LegislativeAuditor is required to be, <strong>and</strong> is, a certified public accountant. The Legislative Auditor conducts fiscal, compliance,<strong>and</strong> performance audits <strong>of</strong> the various agencies <strong>and</strong> departments <strong>of</strong> the <strong>State</strong> <strong>and</strong> issues a separate report covering each<strong>of</strong> those audits. Although certain <strong>of</strong> those reports include presentations <strong>of</strong> detailed financial data <strong>and</strong> containexpressions <strong>of</strong> opinion thereon, the audits usually are not made for that purpose. The primary purpose <strong>of</strong> the reportsis to present the Legislative Auditor’s findings relative to the fiscal management <strong>of</strong> those agencies <strong>and</strong> departments.The <strong>State</strong> maintains accounts on a budgetary basis for each program within an agency, <strong>and</strong> places strongreliance upon the checks, balances, <strong>and</strong> controls inherent in the constitutional budgetary system. Underconstitutional <strong>and</strong> statutory requirements, a balanced <strong>State</strong> Budget must be adopted each year, <strong>and</strong> expenditures maynot be made in excess <strong>of</strong> appropriations. Agencies must report on an object <strong>and</strong> program basis to the Office <strong>of</strong> theComptroller which, in turn, reports to the Department <strong>of</strong> Budget <strong>and</strong> Management, which monitors compliance withthe Budget. See “STATE FINANCES – Budgetary System.” In addition, for year end reporting purposes, the <strong>State</strong>converts its financial statements prepared on a budgetary basis to financial statements prepared in accordance withgenerally accepted accounting principles.Although the accounts maintained by the <strong>State</strong> on a budgetary basis conform in many respects to accountingprinciples generally accepted in the United <strong>State</strong>s, there are certain departures from these principles that are dictatedby statutory requirements <strong>and</strong> historical practices. The principal departures are the classification <strong>of</strong> the <strong>State</strong>’sprincipal funds <strong>and</strong> the timing <strong>of</strong> recognition <strong>of</strong> certain revenues, expenditures, <strong>and</strong> expenses.The <strong>State</strong>’s accounting system is maintained by the Comptroller in compliance with <strong>State</strong> law <strong>and</strong> inaccordance with the <strong>State</strong>’s budgetary funds. In addition to the accounting systems maintained by the Comptroller,A-(i)A-(i)
certain individual agencies that are not subject to the <strong>State</strong> Budget maintain accounting systems that permit financialreporting on the basis <strong>of</strong> generally accepted accounting principles.For the purpose <strong>of</strong> reporting its financial activities in accordance with generally accepted accountingprinciples, at the fund level the <strong>State</strong> records its activities in Governmental, Proprietary, <strong>and</strong> Fiduciary Fund types.See Note 1 to “Notes to the Financial <strong>State</strong>ments.” On a budgetary basis, the <strong>State</strong> reports its financial activities inthe <strong>General</strong>, Special, Federal, Annuity Bond (Debt Service), Capital Projects, <strong>and</strong> Higher Education, CurrentUnrestricted <strong>and</strong> Current Restricted Funds.The <strong>General</strong> Fund is the fund in which all general transactions <strong>of</strong> the <strong>State</strong> are recorded unless otherwisedirected by law to be included in another fund. The <strong>General</strong> Fund includes most <strong>of</strong> the governmental operatingassets, liabilities, revenues, <strong>and</strong> expenditures. To the extent that the Budget enacted by the <strong>General</strong> Assembly usesan estimated fund balance at the end <strong>of</strong> the current fiscal year, in establishing the Budget for the next succeedingyear, that amount <strong>of</strong> <strong>General</strong> Fund balance existing at June 30 <strong>of</strong> the current fiscal year is recorded as designated tosupplement the new year’s Budget. See “STATE FINANCES – Budgetary System.”The Annuity Bond Fund (Debt Service Fund) is used to account for all payments <strong>of</strong> debt service on generalobligation bonds.The Capital Projects Fund is a group <strong>of</strong> accounts, each set up for a particular legislated authorization. Theproceeds <strong>of</strong> general obligation bonds, the transfers from the <strong>General</strong> Fund, <strong>and</strong> the expenditures <strong>of</strong> the funds obtainedthereby (which are almost entirely for capital projects) are accounted for in each <strong>of</strong> the accounts.The Federal Funds are used to account for most grants from the federal government.The Special Funds include the transportation activities <strong>of</strong> the <strong>State</strong>, including related indebtedness, except forfederal transportation grants, which are accounted for in Federal Funds. In addition to the transportation activities,transactions related to dedicated funds, such as fishery <strong>and</strong> wildlife funds <strong>and</strong> shared taxes, are recorded in SpecialFunds.The Higher Education, Current Unrestricted <strong>and</strong> Current Restricted Funds are used to account for highereducation activities. Higher Education, Current Unrestricted <strong>and</strong> Current Restricted Funds include all revenues usedor available for carrying out the current operations <strong>of</strong> the <strong>State</strong>’s universities <strong>and</strong> colleges.Under budgetary reporting, revenues generally are recognized when cash is received except for (i) significantself-assessed taxes, which are recorded in the period to which they apply, <strong>and</strong> (ii) federal grants, which are recordedwhen earned. Expenditures generally are recorded when cash is disbursed or upon the approval <strong>of</strong> encumbrancesagainst appropriations. At the fund level under generally accepted accounting principles, revenues generally arerecognized when earned, subject in certain cases to their availability to fund appropriations. Expenditures <strong>and</strong>expenses are recognized when liabilities are incurred, subject to certain modifications for interest <strong>and</strong> principal ongeneral long-term debt, retirement costs, compensated absences <strong>and</strong> claims <strong>and</strong> judgments. See Note 2 <strong>of</strong> “Notes tothe Financial <strong>State</strong>ments” for further information concerning the significant accounting policies employed by the<strong>State</strong> in preparing its financial statements in accordance with accounting principles generally accepted in the United<strong>State</strong>s.A-(ii)A-(ii)
A summary <strong>of</strong> the effects <strong>of</strong> fund structure <strong>and</strong> timing differences on the <strong>General</strong> Fund balances between thebudgetary basis <strong>and</strong> generally accepted accounting principles basis for fiscal years 2008 <strong>and</strong> 2007 follows.(in thous<strong>and</strong>s)2008 2007Year end fund balance on budgetary basis……………...……………………….. $ 1,387,060 $ 2,080,852Fund structure reclassifications……………………...……………………………. 1,394,749 1,203,808Adjustments to the budgetary accounting system:Cash <strong>and</strong> cash equivalents……………...…………………………………….. 57,914 52,996Investments……………………………...………………………………………. 6,696 (13,121)Other accounts receivable….….………….…………........………………….. 280,386 3,898Other assets…...…….………………………...………………………………… (150,268) (59,021)Accounts payable <strong>and</strong> accrued liabilities……...…..…………...……………. (117,326) (55,223)Deferred revenue………………………………………………………………… 26,377 44,778Year end fund balance on generally accepted accounting principles basis……. $ 2,885,588 $ 3,258,967(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)A-(iii)
FINANCIAL STATEMENTSReport <strong>of</strong> Independent Auditors.......................................................................................................................... A-8Management’s Discussion <strong>and</strong> Analysis ........................................................................................................... A-10Basic Financial <strong>State</strong>ments:Government-wide Financial <strong>State</strong>ments:<strong>State</strong>ment <strong>of</strong> Net Assets ......................................................................................................................... A-22<strong>State</strong>ment <strong>of</strong> Activities ........................................................................................................................... A-24Fund Financial <strong>State</strong>ments:Balance Sheet - Governmental Funds......................................................................................................... A-26Reconciliation <strong>of</strong> the Governmental Funds, Fund Balance to the<strong>State</strong>ment <strong>of</strong> Net Assets, Net Assets’ Balance..................................................................................... A-27<strong>State</strong>ment <strong>of</strong> Revenues, Expenditures, <strong>and</strong> Changes in FundBalances - Governmental Funds ............................................................................................................ A-28Reconciliation <strong>of</strong> the <strong>State</strong>ment <strong>of</strong> the Revenues, Expenditures, <strong>and</strong>Changes in Fund Balances <strong>of</strong> Governmental Funds to the <strong>State</strong>ment<strong>of</strong> Activities............................................................................................................................................. A-29<strong>State</strong>ment <strong>of</strong> Net Assets – Enterprise Funds .............................................................................................. A-32<strong>State</strong>ment <strong>of</strong> Revenues, Expenses <strong>and</strong> Changes in Fund Net Assets –Enterprise Funds ..................................................................................................................................... A-35<strong>State</strong>ment <strong>of</strong> Cash Flows – Enterprise Funds ............................................................................................ A-36<strong>State</strong>ment <strong>of</strong> Fiduciary Net Assets – Fiduciary Funds.............................................................................. A-38<strong>State</strong>ment <strong>of</strong> Changes in Fiduciary Net Assets – Fiduciary Funds.......................................................... A-39Combining <strong>State</strong>ment <strong>of</strong> Net Assets – Component Units ........................................................................ A-42Combining <strong>State</strong>ment <strong>of</strong> Activities– Component Units ........................................................................... A-44Notes to the Financial <strong>State</strong>ments .............................................................................................................. A-45Required Supplementary Information:Schedule <strong>of</strong> Revenues, Expenditures <strong>and</strong> Encumbrances, <strong>and</strong> Changesin Fund Balances – Budget <strong>and</strong> Actual – Budgetary <strong>General</strong> <strong>and</strong>Special Funds.......................................................................................................................................... A-86Reconciliation <strong>of</strong> the Budgetary <strong>General</strong> <strong>and</strong> Special Fund, FundBalances to the GAAP <strong>General</strong> <strong>and</strong> Special Revenue Fund, FundBalances................................................................................................................................................... A-88Notes to Required Supplementary Information .................................................................................... A-91Statistical Section:Combined Summary <strong>of</strong> Revenues, Expenditures, Other Sources <strong>and</strong> Uses <strong>of</strong>Financial Resources <strong>and</strong> Changes in Fund Balances, <strong>General</strong>, SpecialRevenue, Debt Service <strong>and</strong> Capital Projects Fund .............................................................................. A-93A-(iv)A-(ii)
(Pages A-1 through A-7 not used)A-(v)A-(i)
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STATE OF MARYLANDManagement’s Discussion <strong>and</strong> AnalysisManagement <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> provides this narrative overview <strong>and</strong> analysis <strong>of</strong> the financial activities <strong>of</strong> the <strong>State</strong> for the fiscal yearended June 30, 2008. Please read it in conjunction with the Comptroller’s letter <strong>of</strong> transmittal, which can be found in the Introductory Section<strong>of</strong> this report <strong>and</strong> the <strong>State</strong>’s financial statements which follow this section.Financial HighlightsGovernment–wide• <strong>Maryl<strong>and</strong></strong> reported net assets <strong>of</strong> $17.4 billion in fiscal year 2008 <strong>and</strong> $18.5 billion in fiscal year 2007.• Of the net assets in fiscal year 2008, a deficit balance <strong>of</strong> $1.0 billion was reported as total unrestricted net assets, which includes a $2.3billion deficit balance in governmental activities <strong>and</strong> a $1.3 billion balance in business-type activities.• The <strong>State</strong>’s total net assets decreased by $1.1 billion as a result <strong>of</strong> this year’s operations. The net assets for governmental activities decreasedby $1.3 billion (9.7%). Net assets <strong>of</strong> business-type activities increased by $182 million (3.5%).• The <strong>State</strong>’s governmental activities had total expenses <strong>of</strong> $26.8 billion, total revenues <strong>of</strong> $25.0 billion <strong>and</strong> net transfers from business-typeactivities <strong>of</strong> $478 million for a net decrease <strong>of</strong> $1.3 billion.• Business-type activities had total expenditures <strong>of</strong> $2.3 billion, program revenues <strong>of</strong> $3.0 billion, <strong>and</strong> transfers out <strong>of</strong> $478 million for a netincrease in net assets <strong>of</strong> $182 million.• Total <strong>State</strong> revenues were $28.0 billion, while total costs for all programs were $29.1 billion.Fund Level• Governmental funds reported a combined fund balance <strong>of</strong> $3.3 billion, a decrease <strong>of</strong> $618 million (15.8%) from the prior year.• The <strong>General</strong> Fund reported an unreserved fund balance <strong>of</strong> $1.5 billion <strong>and</strong> a reserved fund balance <strong>of</strong> $1.4 billion, compared to an unreservedfund balance <strong>of</strong> $885 million <strong>and</strong> a reserved fund balance <strong>of</strong> $2.4 billion last year. This represents a net decrease <strong>of</strong> $373 million in<strong>General</strong> Fund, fund balance. The total unreserved fund balance in the governmental funds was $1.4 billion, compared to the unreservedfund balance <strong>of</strong> $1.0 billion in the prior year.• Governmental funds reported a total reserved fund balance <strong>of</strong> $1.9 billion in 2008, compared to $2.9 billion in the prior year. Thisdecrease is primarily attributable to transfers from the <strong>State</strong> Reserve Fund used to help balance the <strong>General</strong> Fund budget during fiscalyear 2008.Long-term Debt• Total bonds, obligations under long-term leases <strong>and</strong> other nontraditional Transportation debt at year end was $13.0 billion, a net increase<strong>of</strong> $1.4 billion (11.7%) over the prior year.• $780 million <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> <strong>and</strong> $227 million Transportation <strong>Bonds</strong> were issued during the year.Overview <strong>of</strong> the Financial <strong>State</strong>mentsThis discussion <strong>and</strong> analysis is intended to serve as an introduction to the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>’s basic financial statements. The <strong>State</strong>’s basicfinancial statements comprise three components: 1) government-wide financial statements, 2) fund financial statements, <strong>and</strong> 3) notes to thefinancial statements. This report also contains additional required supplementary information <strong>and</strong> other supplementary information in additionto the basic financial statements.Government-wide Financial <strong>State</strong>ments (Reporting the <strong>State</strong> as a Whole)The government-wide financial statements provide a broad overview <strong>of</strong> the <strong>State</strong>’s operations in a manner similar to a private-sector business.The statements provide both short-term <strong>and</strong> long-term information about the <strong>State</strong>’s financial position, which assists readers in assessingthe <strong>State</strong>’s economic condition at the end <strong>of</strong> the fiscal year. The statements include all fiscal year revenues <strong>and</strong> expenses, regardless <strong>of</strong> whethercash has been received or paid. The government-wide financial statements include the following two statements.The <strong>State</strong>ment <strong>of</strong> Net Assets presents all <strong>of</strong> the <strong>State</strong>’s assets <strong>and</strong> liabilities, with the difference between the two reported as “net assets”. Overtime, increases <strong>and</strong> decreases in the <strong>State</strong>’s net assets may serve as a useful indicator <strong>of</strong> whether the financial position <strong>of</strong> the <strong>State</strong> is improvingor deteriorating.The <strong>State</strong>ment <strong>of</strong> Activities presents information showing how the <strong>State</strong>’s net assets changed during the most recent fiscal year. All changesin net assets are reported as soon as the underlying event giving rise to the change occurs, regardless <strong>of</strong> the timing <strong>of</strong> related cash flows. Thus,revenues <strong>and</strong> expenses are reported in this statement for some items that will not result in cash flows until future fiscal periods (such as uncol-10 www.maryl<strong>and</strong>taxes.comA-10
lected taxes <strong>and</strong> earned but unused vacation leave). This statement also presents a comparison between direct expenses <strong>and</strong> program revenuesfor each function <strong>of</strong> the <strong>State</strong>.The above financial statements distinguish between the following three types <strong>of</strong> state programs or activities:Governmental Activities - The activities in this section are typically supported by taxes <strong>and</strong> intergovernmental revenues, i.e., federal grants.Most services normally associated with <strong>State</strong> government fall into this category, including the Legislature, Judiciary <strong>and</strong> the general operations<strong>of</strong> the Executive Department.Business-Type Activities – These functions normally are intended to recover all or a significant portion <strong>of</strong> their costs through user fees <strong>and</strong>charges to external users <strong>of</strong> goods <strong>and</strong> services. These business-type activities <strong>of</strong> the <strong>State</strong> include insurance <strong>and</strong> loan programs for economicdevelopment, the Unemployment Insurance Program, the Lottery, the Transportation Authority <strong>and</strong> <strong>Maryl<strong>and</strong></strong> Correctional Enterprises, aprogram which constructs <strong>of</strong>fice furnishings utilizing the prisons’ inmate population.Discretely Presented Component Units – The government-wide statements include operations for which the <strong>State</strong> has financial accountability,but are legally separate entities. Financial information for these component units is reported separately from the financial information presentedfor the primary government. The component unit activities include Higher Education, the College Savings Plans <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, the <strong>Maryl<strong>and</strong></strong>Stadium Authority <strong>and</strong> other non-major proprietary activities. All <strong>of</strong> these entities operate similarly to private sector business <strong>and</strong> to thebusiness-type activities described above. The component unit Higher Education consists <strong>of</strong> the University System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, Morgan <strong>State</strong>University, St. Mary’s College <strong>and</strong> Baltimore City Community College <strong>and</strong> certain affiliated foundations. The non-major component unitsinclude the <strong>Maryl<strong>and</strong></strong> Food Center Authority, <strong>Maryl<strong>and</strong></strong> Environmental Service, <strong>Maryl<strong>and</strong></strong> Industrial Development Financing Authority <strong>and</strong>the <strong>Maryl<strong>and</strong></strong> Technology Development Corporation.Complete financial statements <strong>of</strong> the individual component units can be obtained from the Comptroller <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, LLG TreasuryBuilding, Annapolis, <strong>Maryl<strong>and</strong></strong> 21404.This report includes two schedules (pages 27 <strong>and</strong> 29) that reconcile the amounts reported on the governmental fund financial statements(modified accrual accounting) with governmental activities (accrual accounting) on the government-wide statements. The followingsummarizes the impact <strong>of</strong> transitioning from modified accrual to accrual accounting:• Capital assets used in governmental activities are not reported on governmental fund statements.• Certain tax revenues that are earned <strong>and</strong> other assets that are not available to pay for current period expenditures are deferred ingovernmental fund statements, but are recognized on the government-wide statements.• Deferred bond issuance costs are capitalized <strong>and</strong> amortized on the government-wide statements, but reported as expenditures ingovernmental funds.• Unless currently due <strong>and</strong> payable, long-term liabilities, such as capital lease obligations, compensated absences, litigation, <strong>and</strong> bonds <strong>and</strong>notes payable, only appear as liabilities in the government-wide statements.• Capital outlays result in capital assets on the government-wide statements, but are reported as expenditures on the governmental fundstatements.• Bond <strong>and</strong> note proceeds result in liabilities on the government-wide statements, but are recorded as other financing sources on thegovernmental fund statements.• Certain other transactions represent either increases or decreases in liabilities on the government-wide statements, but are reported asexpenditures on the governmental fund statements.The government-wide financial statements can be found on pages 22-25 <strong>of</strong> this report.Fund Financial <strong>State</strong>mentsA fund is a grouping <strong>of</strong> related accounts that is used to maintain control over resources that have been segregated for specific activities orobjectives. The <strong>State</strong>, like other state <strong>and</strong> local governments, uses fund accounting to ensure <strong>and</strong> demonstrate compliance with finance-relatedlegal requirements. The <strong>State</strong>’s funds can be divided into three categories: governmental, enterprise, <strong>and</strong> fiduciary. Each <strong>of</strong> these categoriesuses a different accounting approach.Governmental funds – Most <strong>of</strong> the basic services provided by the <strong>State</strong> are financed through governmental funds. Governmental funds areused to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However,unlike the government-wide financial statements, the governmental fund financial statements focus on near-term inflows <strong>and</strong> outflows<strong>of</strong> spendable resources <strong>and</strong> on the balances <strong>of</strong> spendable resources available at the end <strong>of</strong> the fiscal year. Such information may be useful inevaluating the <strong>State</strong>’s near-term financing requirements. These statements provide a detailed short-term view <strong>of</strong> the <strong>State</strong>’s finances that assistsin determining whether there will be adequate financial resources available to meet the current needs <strong>of</strong> the <strong>State</strong>.Because the focus <strong>of</strong> governmental funds is narrower than that <strong>of</strong> the government-wide financial statements, it is useful to compare theinformation presented for governmental funds with similar information presented for governmental activities in the government-wide financialA-11www.maryl<strong>and</strong>taxes.com 11
statements. By doing so, readers may better underst<strong>and</strong> the long-term impact <strong>of</strong> the <strong>State</strong>’s near-term financing decisions. Both the governmentalfund balance sheet <strong>and</strong> the governmental fund statement <strong>of</strong> revenues, expenditures <strong>and</strong> changes in fund balances provide a reconciliationto facilitate this comparison between governmental funds <strong>and</strong> governmental activities. These reconciliations are presented on the pagesimmediately following the governmental funds financial statements.The <strong>State</strong> maintains five governmental funds. Information is presented separately in the governmental fund balance sheet <strong>and</strong> in thegovernmental fund statement <strong>of</strong> revenues, expenditures <strong>and</strong> changes in fund balances for the <strong>General</strong> Fund <strong>and</strong> the Department <strong>of</strong> Transportation-specialrevenue fund, both <strong>of</strong> which are considered to be major funds. Data from the remaining three governmental funds are combinedinto a single, aggregated presentation. Data for the non-major governmental funds, namely, the debt service fund for general obligation bonds,the debt service fund for transportation revenue bonds <strong>and</strong> the capital projects fund, is provided in the form <strong>of</strong> combining statements elsewherein this report. These funds are reported using modified accrual accounting, which measures cash <strong>and</strong> all other assets which can be readily convertedto cash. The basic governmental funds financial statements can be found on pages 26 <strong>and</strong> 28 <strong>of</strong> this report.Enterprise funds – Enterprise funds are used to show activities that operate similar to activities <strong>of</strong> commercial enterprises. These fundscharge fees for services provided to outside customers including local governments. Enterprise funds provide the same type <strong>of</strong> information asthe government-wide financial statements, only in more detail. There is no reconciliation needed between the government-wide financial statementsfor business-type activities <strong>and</strong> the enterprise fund financial statements because they both utilize accrual accounting, the same methodused for businesses in the private sector.The <strong>State</strong> has six enterprise funds, four <strong>of</strong> which are considered to be major enterprise funds. These funds are: Economic Development -Loan Programs, the Unemployment Insurance Program, the Lottery Agency <strong>and</strong> the Transportation Authority. Data for the non-major enterprisefunds, Economic Development - Insurance Programs <strong>and</strong> <strong>Maryl<strong>and</strong></strong> Correctional Enterprises, are combined into a single aggregated presentation.Individual fund data for these non-major enterprise funds is provided in the form <strong>of</strong> combining statements elsewhere in this report.The basic enterprise funds financial statements can be found on pages 32-37 <strong>of</strong> this report.Fiduciary funds – Fiduciary funds are used to account for resources held for the benefit <strong>of</strong> parties outside the state government. Fiduciaryfunds are not reflected in the government-wide financial statements because the resources <strong>of</strong> these funds are restricted in purpose <strong>and</strong> are notavailable to support the <strong>State</strong>’s own programs. Fiduciary funds use accrual accounting.The <strong>State</strong>’s fiduciary funds include the Pension <strong>and</strong> Other Employee Benefits Trust Funds (Pension Trust), the Investment Trust Fund,the Postretirement Health Benefits Trust Fund (OPEB Trust) <strong>and</strong> Agency Funds. The Pension <strong>and</strong> Other Employee Benefits Trust Fundsconsist <strong>of</strong> the Retirement <strong>and</strong> Pension System, the <strong>Maryl<strong>and</strong></strong> Transit Administration Pension Plan <strong>and</strong> the Deferred Compensation Plan. ThePostretirement Health Benefits Trust Fund accumulates funds to assist with the costs <strong>of</strong> the <strong>State</strong>’s postretirement health insurance subsidy. TheInvestment Trust Fund accounts for the transactions, assets, liabilities <strong>and</strong> fund equity <strong>of</strong> an external investment pool. Agency funds accountfor the assets held for distribution by the <strong>State</strong> as an agent for other governmental units, organizations or individuals. Individual fund detail forthe fiduciary funds can be found in the combining financial statements.The basic fiduciary funds financial statements can be found on pages 38-39 <strong>of</strong> this report.Combining Financial <strong>State</strong>ments, Component Units – The government-wide financial statements present information for the componentunits in a single aggregated column in the <strong>State</strong>ment <strong>of</strong> Net Assets <strong>and</strong> the <strong>State</strong>ment <strong>of</strong> Activities. Combining <strong>State</strong>ment <strong>of</strong> Net Assets<strong>and</strong> Combining <strong>State</strong>ment <strong>of</strong> Activities have been provided for the Component Unit Proprietary Funds <strong>and</strong> provide detail for each majorproprietary component unit, with a combining column for the non-major component units. Individual financial statement information forthe non-major component units is provided elsewhere in this report.The combining financial statements for the component units can be found on pages 42-44 <strong>of</strong> this report.Notes to the Financial <strong>State</strong>mentsThe notes provide additional information that is essential to a full underst<strong>and</strong>ing <strong>of</strong> the data provided in the government-wide <strong>and</strong> thefund financial statements. The notes to the financial statements can be found on pages 46-83 <strong>of</strong> this report.Required Supplementary InformationThe required supplementary information includes budgetary comparison schedules for the budgetary general, special revenue <strong>and</strong> federalfunds, along with a reconciliation <strong>of</strong> the statutory <strong>and</strong> <strong>General</strong>ly Accepted Accounting Principles (GAAP) <strong>General</strong> <strong>and</strong> Special Revenue Fund,fund balances at fiscal year end. This report also presents certain required supplementary information concerning the <strong>State</strong>’s progress in fundingobligations to provide pension benefits <strong>and</strong> other post-employment benefits <strong>and</strong> includes a footnote concerning budgeting <strong>and</strong> budgetarycontrol. Required supplementary information immediately follows the notes to the financial statements.12 www.maryl<strong>and</strong>taxes.comA-12
Other Supplementary InformationCombining Financial <strong>State</strong>mentsThe combining financial statements referred to earlier in connection with non-major governmental, enterprise, <strong>and</strong> fiduciary funds <strong>and</strong>non-major component units are presented immediately following the required supplementary information.Government-Wide Financial AnalysisThe <strong>State</strong>’s combined net assets (government <strong>and</strong> business-type activities) totaled $17.4 billion at the end <strong>of</strong> 2008 <strong>and</strong> $18.5 billion at theend <strong>of</strong> 2007.Net Assets as <strong>of</strong> June 30, 2008(Expressed in Millions)GovernmentalBusiness-typeActivities Activities Total2008 2007 2008 2007 2008 2007Current <strong>and</strong> other assets $ 6,348 $13,600 $ 8,569 $7,576 $14,917 $21,176Capital assets 18,812 18,181 2,428 1,865 21,240 20,046Total assets 25,160 31,781 10,997 9,441 36,157 41,222Long-term liabilities 9,478 8,218 5,027 3,910 14,505 12,128Other liabilities 3,601 10,180 612 356 4,213 10,536Total liabilities 13,079 18,398 5,639 4,266 18,718 22,664Net assets:Invested in capitalassets, net <strong>of</strong> related debt 14,267 13,853 1,685 1,614 15,952 15,467Restricted 88 89 2,423 1,836 2,511 1,925Unrestricted (2,274) (559) 1,250 1,725 (1,024) 1,166Total net assets $12,081 $13,383 $ 5,358 $5,175 $17,439 $18,558The largest portion <strong>of</strong> the <strong>State</strong>’s net assets, $16.0 billion, reflects investment in capital assets such as l<strong>and</strong>, buildings, equipment, <strong>and</strong>infrastructure, less any related debt to acquire those assets that is still outst<strong>and</strong>ing. The <strong>State</strong> uses these capital assets to provide services tocitizens. Consequentially, these assets are not available for future spending. Although the <strong>State</strong>’s investment in capital assets is reported net<strong>of</strong> related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assetsthemselves cannot be used to liquidate these liabilities.In addition, a portion <strong>of</strong> the <strong>State</strong>’s net assets, $2.5 billion, represents resources that are subject to external restrictions or enabling legislationon how they may be used. The remaining balance for unrestricted net assets, a deficit <strong>of</strong> $1.0 billion, reflects the <strong>State</strong>’s expenses overrevenues.The following condensed financial information was derived from the government-wide <strong>State</strong>ment <strong>of</strong> Activities <strong>and</strong> reflects how the <strong>State</strong>’snet assets changed during the fiscal year.A-13www.maryl<strong>and</strong>taxes.com 13
Changes in Net AssetsFor the Year Ended June 30, 2008(Expressed in Millions)GovernmentalBusiness-typeActivities Activities Total2008 2007 2008 2007 2008 2007Revenues:Program revenues:Charges for services $ 2,067 $ 2,217 $2,886 $2,747 $ 4,953 $ 4,964Operating grants <strong>and</strong> contributions 5,925 5,725 58 26 5,983 5,751Capital grants <strong>and</strong> contributions 677 727 50 677 777<strong>General</strong> revenues:Income taxes 7,886 7,334 7,886 7,334Sales <strong>and</strong> use taxes 3,749 3,449 3,749 3,449Motor vehicle taxes 1,920 1,982 1,920 1,982Other taxes 2,445 2,244 2,445 2,244Unrestricted investment earnings 345 350 26 31 371 381Total revenues 25,014 24,028 2,970 2,854 27,984 26,882Expenses:<strong>General</strong> government 815 713 815 713Health <strong>and</strong> mental hygiene 7,649 7,400 7,649 7,400Education 6,835 6,470 6,835 6,470Aid for higher education 1,851 1,299 1,851 1,299Human resources 1,860 1,647 1,860 1,647Public safety 2,100 1,853 2,100 1,853Transportation 3,054 2,913 3,054 2,913Judicial 634 542 634 542Labor, licensing <strong>and</strong> regulation 186 168 186 168Natural resources <strong>and</strong> recreation 180 167 180 167Housing <strong>and</strong> community development 248 229 248 229Environment 108 93 108 93Agriculture 82 59 82 59Business <strong>and</strong> economic development 98 66 98 66Intergovernmental grants 742 739 742 739Interest 352 333 352 333Economic development insurance programs 5 2 5 2Economic development loan programs 254 249 254 249Unemployment insurance program 544 446 544 446<strong>State</strong> Lottery 1,133 1,094 1,133 1,094Transportation Authority 326 368 326 368<strong>Maryl<strong>and</strong></strong> Correctional Enterprises 47 46 47 46Total expenses 26,794 24,691 2,309 2,205 29,103 26,896Increase in net assetsbefore transfers <strong>and</strong> special items (1,780) (663) 661 649 (1,119) (14)Transfers <strong>and</strong> special items 478 350 (478) (350)Change in net assets (1,302) (313) 183 299 (1,119) (14)Net assets - beginning 13,383 13,696 5,175 4,876 18,558 18,572Net assets - ending $12,081 $13,383 $5,358 $5,175 $17,439 $18,55814 www.maryl<strong>and</strong>taxes.comA-14
Revenues by source — Governmental ActivitiesOperating grants <strong>and</strong>contributions23.7%Other1.3%Capital grants <strong>and</strong>contributions2.7%Income Taxes31.5%Sales <strong>and</strong> use Taxes15.0%Charges for services8.3%Other taxes9.8%Motor vehicle taxes<strong>and</strong> fees7.7%Expenditures by function — Governmental ActivitiesInterest1.3%Intergovernmental 2.8%Housing, Business <strong>and</strong>economic development1.3%Public safety7.8%Aid for higher education6.9%<strong>General</strong>government3.0%Judicial2.4%Education25.5%Licensing & regulation0.7%Human Resources6.9%Transportation11.4%Health <strong>and</strong> mental hygiene28.6%Governmental ActivitiesAgriculture, Environment<strong>and</strong> Natural resources1.4%Comparing current year activities to the prior year discloses that revenues increased by $986 million or 4.1%, while expenses increased by$2.1 billion or 8.5%. The revenue increase was primarily due to an increase <strong>of</strong> $552 million in income taxes, $300 million in sales <strong>and</strong> usetaxes, $201 million in other taxes <strong>and</strong> $200 million in operating grants. This increase was <strong>of</strong>fset by a $150 million decrease in charges forservices, a $50 million decrease in capital grants <strong>and</strong> a $62 million decrease in motor fuel taxes. The increase in expenses was primarily dueto $696 million in the new charges for other post employment benefits for healthcare (OPEB), the costs <strong>of</strong> which have been allocated to theappropriate functions, <strong>and</strong> an additional increase <strong>of</strong> $917 million in education.A-15www.maryl<strong>and</strong>taxes.com 15
The increase in tax revenues was primarily due to the increases in the tax rates passed during the special legislative session in October, 2007,which included increases in income, other <strong>and</strong> sales <strong>and</strong> use taxes. These increases were effective as <strong>of</strong> January 1, 2008. Accordingly, the increasedrevenue is reflective <strong>of</strong> only six months <strong>of</strong> the rate increase. Operating grants increased, primarily due to increased federal revenues forhealth <strong>and</strong> human resources. The increase in expenditures for education was primarily to fund the “Bridge to Excellence in Public Schools Act”,funding for which has been phased in over the last several years <strong>and</strong> to maintain the freeze on in state student higher education tuition costs.Business-type ActivitiesBusiness-type activities increased the <strong>State</strong>’s net assets by $661 million before transfers <strong>of</strong> $478 million to governmental activities. Thisincrease compares to an increase <strong>of</strong> $649 million before transfers <strong>of</strong> $350 million in the prior year. Key elements <strong>of</strong> this increase are as follows:• The change in net assets for the Unemployment Insurance Program was a decrease <strong>of</strong> $101 million compared to a net increase <strong>of</strong>$23 million in the prior year. Operating activities produced a deficit <strong>of</strong> $153 million compared to the prior year’s operating deficit <strong>of</strong>$30 million. The Program had a decrease <strong>of</strong> $24 million (5.9%) in charges for services from the prior year, due to a reduction in theminimum tax rate for the calendar year 2008, while benefit payments increased $98 million (22.0%) over the prior year. In addition,the Program, in accordance with federal regulations, transferred $11.4 million to the governmental funds due to an excess fund balance.• Economic Development Loan Programs had an increase <strong>of</strong> $128 million (6.3%) in net assets compared to an increase <strong>of</strong> $172 million inthe prior year. The difference between years is due to smaller increases in the housing loan programs <strong>and</strong> the water quality loan programs.• Lottery ticket sales were $1.7 billion, an increase <strong>of</strong> $96 million (6.1%) over last year. Operating expenses increased by $40 million <strong>and</strong>transfers to the governmental funds increased to $529 million in 2008, from $494 million in 2007.Financial Analysis <strong>of</strong> the <strong>State</strong>’s FundsAs <strong>of</strong> the end <strong>of</strong> the current fiscal year, the <strong>State</strong>’s governmental funds reported a combined fund balance <strong>of</strong> $3.3 billion, a decrease <strong>of</strong>$618 million from the prior year. The combined fund balance includes $856 million in unreserved, undesignated for governmental funds<strong>and</strong> $538 million in unreserved, designated fund balance for the <strong>General</strong> Fund. In addition, it includes a deficit <strong>of</strong> $29 million in unreserved,undesignated fund balance for the special revenue fund <strong>and</strong> a deficit <strong>of</strong> $74 million for the other governmental funds. The remainder <strong>of</strong> thefund balance is reserved because it has been committed to: 1) liquidate contracts <strong>and</strong> purchase orders <strong>of</strong> the prior period, ($629 million); 2)fund prepaid <strong>and</strong> inventory items, ($517 million); 3) restrict revenues, ($13 million); <strong>and</strong> 4) reserve for various loans, construction projects,<strong>and</strong> debt service, ($28 million). In addition, $720 million <strong>of</strong> the reserved fund balance is in the “<strong>State</strong> Reserve Fund,” <strong>and</strong> is set aside to meetfuture financial needs. By law, the governor must appropriate to the <strong>State</strong> Reserve Fund, the <strong>General</strong> Fund surplus <strong>of</strong> the second precedingfiscal year that exceeds $10,000,000. The unreserved <strong>General</strong> Fund, fund balance, plus the amount in the <strong>State</strong> Reserve Fund, is approximately8.1 % <strong>of</strong> the total annual expenditures in governmental funds, compared with 9.7% for the prior year.Expenses <strong>and</strong> Program Revenues — Business-type Activities(Expressed in millions)$1,800$1,600$1,400$1,200$1,000$800$600$400$200Program expensesProgram revenues$0EconomicDevelopmentProgramsUnemploymentInsuranceProgram<strong>Maryl<strong>and</strong></strong><strong>State</strong>Lottery<strong>Maryl<strong>and</strong></strong>TransportationAuthority<strong>Maryl<strong>and</strong></strong>CorrectionalEnterprises16 www.maryl<strong>and</strong>taxes.comA-16
<strong>General</strong> FundThe <strong>General</strong> Fund is the major operating fund <strong>of</strong> the <strong>State</strong>. At the end <strong>of</strong> the current fiscal year, the (i.e., undesignated, $959 million <strong>and</strong>designated $538 million) fund balance <strong>of</strong> the <strong>General</strong> Fund was $1.5 billion, while total fund balance reached $2.9 billion. The fund balance<strong>of</strong> the <strong>State</strong>’s <strong>General</strong> Fund decreased by $373 million during 2008, compared to a decrease <strong>of</strong> $274 million for 2007. The reason for thedecrease in <strong>General</strong> Fund, fund balance is due to continued increases in expenditures, $1.3 billion (6.6%), greater than increases in revenues,$1.1 billion (5.7%).Revenues increased by $1.1 billion over the prior year, primarily due to increases in income taxes, $544 million (7.4%), sales <strong>and</strong> use taxes,$301 million (8.7%), <strong>and</strong> other taxes, $129 million (7.7%). A special legislative session was convened in October 2007, that raised thesevarious taxes, including income <strong>and</strong> sales taxes, effective January 1, 2008. Accordingly, the increased rates were effective for six months for thefiscal year ended June 30, 2008 <strong>and</strong> are reflected in the increased revenue.<strong>General</strong> Fund expenditures increased by $1.3 billion. Expenditures for education, health <strong>and</strong> mental hygiene <strong>and</strong> human resourcesincreased by $846 million (11.8%), $285 million (3.9%) <strong>and</strong> $118 million (7.2%), respectively. These increases were the result <strong>of</strong> continuedincreased funding for education, continued increases in Medicaid costs <strong>and</strong> increased funding for food stamps, temporary assistance <strong>and</strong> communitygrants.Transfers out from the <strong>General</strong> Fund were $441 million this year compared to $533 million for the prior year. This decrease was due primarilyto a decrease in transfers to the Department <strong>of</strong> Transportation <strong>and</strong> the <strong>Maryl<strong>and</strong></strong> Transportation Authority.Special Revenue FundThe <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Transportation special revenue fund accounts for resources used for operation <strong>of</strong> the <strong>State</strong>’s transportationactivities, not including debt service <strong>and</strong> pension activities. The fund balance <strong>of</strong> the Department’s special revenue fund was $150 million as <strong>of</strong>June 30, 2008, a decrease <strong>of</strong> $177 million (54.1%) from the prior fiscal year. This decrease was primarily due to an increase in expenditures<strong>of</strong> $78 million <strong>and</strong> decrease in revenues <strong>of</strong> $137 million. The increase in expenditures was for increased operating costs <strong>and</strong> revenues declinedprimarily from decreases in motor vehicle fuel taxes, federal reimbursements <strong>and</strong> charges for services.Budgetary Highlights<strong>General</strong> FundDifferences between the original budget <strong>and</strong> final amended budget, <strong>and</strong> the final budget <strong>and</strong> actual expenditures for the year are summarizedas follows. The budgetary schedule may be found in the Required Supplementary Information section.Overall, the change between the original <strong>and</strong> final <strong>General</strong> Fund budget was a decrease <strong>of</strong> $56.0 million or (0.4) %. Juvenile services’ appropriationsincreased by $35.4 million for juvenile residential facilities <strong>and</strong> increased costs <strong>of</strong> placements for committed youth. This increasewas <strong>of</strong>fset by various decreases. In the Department <strong>of</strong> Health <strong>and</strong> Mental Hygiene there was a decrease in appropriations <strong>of</strong> $39 million,primarily for medical care services. In addition, there was a decrease in the Department <strong>of</strong> Budget <strong>and</strong> Management appropriations <strong>of</strong> $59.5million which was primarily due to the reallocation <strong>of</strong> the original appropriation for salary cost <strong>of</strong> living adjustments from that department tothe affected <strong>State</strong> agencies, with no effect on the overall appropriations.The difference between the final budget, $14.7 billion <strong>and</strong> actual expenditures, $14.5 billion, was $245.6 million or 1.7%. Of thisamount, $95.9 million was returned to the <strong>General</strong> Fund, <strong>and</strong> the remaining $179.7 million was encumbered for future spending. The variancewithin the Department <strong>of</strong> Housing <strong>and</strong> Community Development was primarily due to encumbrances for capital items for neighborhoodrevitalization <strong>and</strong> housing programs. The Department <strong>of</strong> Business <strong>and</strong> Economic Development’s variance was due to encumbered funds fortourism related projects <strong>and</strong> the <strong>Maryl<strong>and</strong></strong> Stem Cell Research Program. Legislative differences were the result <strong>of</strong> encumbrances for additions<strong>and</strong> improvements to buildings <strong>and</strong> information technology equipment. The variance in executive <strong>and</strong> administrative control was due toencumbrances for the Aging <strong>of</strong> Public Schools Program. The variance for the Department <strong>of</strong> Environment was primarily due to encumbrancesfor delayed projects <strong>and</strong> the Drinking Water Revolving Loan Fund program.Special Revenue Fund:Overall, the change between the original <strong>and</strong> final special revenue fund budget was an increase <strong>of</strong> $112.0 million or (1.8) %. The increasewas primarily to provide additional funds for the heritage tax program, energy assistance <strong>and</strong> information technology projects for public safety.The difference between the final budget, $6.3 million <strong>and</strong> actual expenditures, $5.4 million, was $.9 million or 14.1%. The variance wasprimarily due to reduced appropriations in the <strong>Maryl<strong>and</strong></strong> Insurance Administration <strong>and</strong> the Department <strong>of</strong> Transportation <strong>and</strong> encumbrancesfor the <strong>Maryl<strong>and</strong></strong> Agricultural L<strong>and</strong> Program, capital loan <strong>and</strong> financing programs <strong>and</strong> capital projects such as water quality systems, drinkingwater systems <strong>and</strong> l<strong>and</strong>fill projects.A-17www.maryl<strong>and</strong>taxes.com 17
Capital Asset <strong>and</strong> Debt AdministrationCapital assetsAt June 30, 2008, the <strong>State</strong> had invested $21.2 billion (net <strong>of</strong> accumulated depreciation) in a broad range <strong>of</strong> capital assets (see table below).Depreciation expense for the fiscal year totaled $979 million ($942 million for governmental activities <strong>and</strong> $37 million for business-type activities).The increase in the <strong>State</strong>’s investment in capital assets, net <strong>of</strong> depreciation expense, for the current fiscal year was $1.2 billion,($631 million for governmental activities <strong>and</strong> $563 million for business-type activities).Capital Assets as <strong>of</strong> June 30, 2008(Net <strong>of</strong> Depreciation, Expressed in Millions)GovernmentalBusiness-typeActivities Activities Total2008 2007 2008 2007 2008 2007L<strong>and</strong> <strong>and</strong> improvements $ 2,877 $ 2,775 $ 305 $ 253 $ 3,182 $ 3,028Art <strong>and</strong> historical treasures 28 28 28 28Construction in progress 3,216 2,751 557 3,773 2,751Structures <strong>and</strong> improvements 3,528 3,383 28 24 3,556 3,407Equipment 806 802 12 11 818 813Infrastructure 8,357 8,442 1,526 1,577 9,883 10,019Total $ 18,812 $18,181 $ 2,428 $ 1,865 $ 21,240 $20,046Major capital asset events during the current fiscal year for governmental activities include continued construction at the Baltimore WashingtonInternational Thurgood Marshall Airport, widening <strong>and</strong>/or expansion <strong>of</strong> existing highways <strong>and</strong> bridges, the start <strong>of</strong> various transit,port <strong>and</strong> motor vehicle administration construction projects, the preservation <strong>of</strong> agricultural <strong>and</strong> open space l<strong>and</strong> through the purchase <strong>of</strong>easements, the construction <strong>of</strong> a new school <strong>and</strong> family education center for the hearing impaired, improvements to the statewide telecommunicationsnetwork, energy efficiency improvements in <strong>State</strong> buildings <strong>and</strong> building improvements in <strong>State</strong> prisons. Elements <strong>of</strong> the increasesin capital assets <strong>of</strong> business-type activities include the Inter-County Connector <strong>and</strong> electronic toll lane projects, which resulted in increasesin l<strong>and</strong> <strong>and</strong> improvements <strong>and</strong> construction in progress, <strong>and</strong> the restoration <strong>of</strong> existing facilities such as the re-decking <strong>of</strong> the William PrestonLane Jr. Memorial Bridge.Additional information on the <strong>State</strong>’s capital assets can be found in footnote 10 <strong>of</strong> this report.Long-term debtThe <strong>State</strong> is empowered by law to authorize, issue <strong>and</strong> sell general obligation bonds, which are backed by the full faith <strong>and</strong> credit <strong>of</strong> the<strong>State</strong>. The <strong>State</strong> also issues dedicated revenue bonds for the Department <strong>of</strong> Transportation <strong>and</strong> various business-type activities. The payment<strong>of</strong> principal <strong>and</strong> interest on revenue bonds comes solely from revenues received from the respective activities. This dedicated revenue debt isnot backed by the <strong>State</strong>’s full faith <strong>and</strong> credit.At June 30, 2008, the <strong>State</strong> had outst<strong>and</strong>ing bonds totaling $11.8 billion. Of this amount $5.5 billion were general obligation bonds,backed by the full faith <strong>and</strong> credit <strong>of</strong> the <strong>State</strong>. The remaining $6.3 billion was secured solely by the specified revenue sources.Outst<strong>and</strong>ing Bond Debt as <strong>of</strong> June 30, 2008(Expressed in Millions)GovernmentalBusiness-typeActivities Activities Total2008 2007 2008 2007 2008 2007<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>(backed by the <strong>State</strong>) $5,494 $5,142 $ 5,494 $ 5,142Transportation <strong>Bonds</strong>(backed by specific revenues) 1,269 1,111 1,269 1,111Revenue <strong>Bonds</strong>(backed by specific revenues) $5,041 $ 4,140 5,041 4,140Total $6,763 $6,253 $5,041 $ 4,140 $11,804 $10,39318 www.maryl<strong>and</strong>taxes.comA-18
The total increase in bonded debt in the current fiscal year was $1.4 billion ($352 million increase related to general obligation bonds, <strong>and</strong>$158 <strong>and</strong> $901 million increase related to transportation <strong>and</strong> revenue bonds, respectively). The <strong>State</strong>’s general obligation bonds are rated Aaaby Moody’s <strong>and</strong> AAA by St<strong>and</strong>ard <strong>and</strong> Poors <strong>and</strong> Fitch. During fiscal year 2008, the <strong>State</strong> issued general obligation debt totaling $780 millionat a premium <strong>of</strong> $42 million. On July 28, 2008, (fiscal year <strong>2009</strong>), the <strong>State</strong> issued general obligation bonds aggregating $415 million forcapital improvements.<strong>State</strong> law limits the amount <strong>of</strong> Consolidated Transportation <strong>Bonds</strong>, dedicated revenue debt that may be outst<strong>and</strong>ing as <strong>of</strong> June 30 to theamount authorized in the budget, <strong>and</strong> this amount may not exceed $2.6 billion. The aggregate principal amount <strong>of</strong> these bonds that wasauthorized to be outst<strong>and</strong>ing as <strong>of</strong> June 30, 2008, was $1.5 billion. The actual amount in Consolidated Transportation <strong>Bonds</strong> outst<strong>and</strong>ing was$1.3 billion.Additional information on the <strong>State</strong>’s long-term debt can be found in footnote 11 <strong>of</strong> this report.Economic Factors <strong>and</strong> Next Year’s BudgetThe <strong>State</strong>’s budget for fiscal year <strong>2009</strong> provides $31.2 billion in appropriations for fiscal <strong>2009</strong>, an increase <strong>of</strong> $1.2 billion, 4.0%, over thecurrent year. The special legislative session, which convened in October, 2007, passed increases in various taxes, including the personal <strong>and</strong>corporate income, sales <strong>and</strong> other taxes. This action along with spending reductions reduced the projected $1.7 billion structural deficit byapproximately $1.4 billion. In addition, reductions adopted at the 2008 session largely <strong>of</strong>fset downward revenue revisions that were received inMarch, 2008.<strong>Maryl<strong>and</strong></strong>’s economy has continued to slow along with the national economy. As with the national economy, signs <strong>of</strong> weakness are widespread,<strong>and</strong> there are few positive indicators. Sales <strong>of</strong> existing homes have declined for 36 <strong>of</strong> the 37 last months, prices have dropped for 12months <strong>and</strong> inventories are at a record high. Business bankruptcies have doubled over last year, <strong>and</strong> personal bankruptcies have increased by36%. The little good news is that two <strong>of</strong> <strong>Maryl<strong>and</strong></strong>’s largest <strong>and</strong> highest paying industries, pr<strong>of</strong>essional <strong>and</strong> business services <strong>and</strong> education<strong>and</strong> health services, are performing relatively well, <strong>and</strong> government employment continues to grow. However, predictions <strong>of</strong> future economicrevenues continue to be revised downward.In September, 2008, revised revenue estimates were provided that further reduced estimated <strong>General</strong> Fund revenues by $431.9 million.Write downs to the sales tax <strong>and</strong> individual income tax are primarily responsible for the changes. Based on continued revised revenue forecasts,the <strong>State</strong> adopted budgetary reductions <strong>of</strong> $75.2 million on June 25 <strong>and</strong> $347.8 million on October 15, 2008.Requests for InformationThis financial report is designed to provide a general overview <strong>of</strong> the <strong>State</strong>’s finances for all those with an interest in the <strong>State</strong>’s finances.Questions concerning any <strong>of</strong> the information provided in this report or requests for additional financial information should be addressed to the<strong>General</strong> Accounting Division, Office <strong>of</strong> the Comptroller, P.O. Box 746, Annapolis, <strong>Maryl<strong>and</strong></strong> 21404.A-19www.maryl<strong>and</strong>taxes.com 19
20 www.maryl<strong>and</strong>taxes.comA-20
<strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>Comprehensive Annual Financial ReportBasic Financial<strong>State</strong>mentsA-21www.maryl<strong>and</strong>taxes.com 21
STATE OF MARYLAND<strong>State</strong>ment <strong>of</strong> Net AssetsJune 30, 2008(Expressed in Thous<strong>and</strong>s)Primary GovernmentGovernmental Business-type ComponentActivities Activities Total UnitsAssetsCash <strong>and</strong> cash equivalents........................................ $ 163,164 $ 78,186 $ 241,350 $ 87,790Equity in pooled invested cash ................................. 2,791,963 660,257 3,452,220 1,114,296Investments ............................................................. 9,401 266,289 275,690 561,420Endowment investments ......................................... 241,669Foundation investments .......................................... 930,344Inventories ............................................................... 99,463 16,566 116,029 11,658Prepaid items ........................................................... 418,101 418,101 7,889Deferred charges ...................................................... 11,266 11,266 5,089Taxes receivable, net ................................................ 1,049,004 1,049,004Intergovernmental receivables .................................. 892,254 892,254Tuition contracts receivable ..................................... 216,459Due from primary government ................................ 3,703Due from component units ..................................... 551 551Other accounts receivable ........................................ 495,009 190,006 685,015 458,850Loans <strong>and</strong> notes receivable, net ................................ 12,252 546,368 558,620 77,935Investment in direct financing leases ........................ 442,476 442,476 265,767Other assets ............................................................. 6,589 20,185 26,774 21,371Collateral for lent securities ..................................... 358,709 358,709Restricted assets:Cash <strong>and</strong> cash equivalents ................................... 34,228 1,928,522 1,962,750 69,608Investments ........................................................ 1,337,862 1,337,862 102,455Deferred charges ................................................. 15,948 15,948Loans <strong>and</strong> notes receivable, net ........................... 5,653 3,032,809 3,038,462Other .................................................................. 33,345 33,345 27Capital assets, net <strong>of</strong> accumulated depreciation:L<strong>and</strong> ................................................................... 2,877,333 305,062 3,182,395 149,576Art <strong>and</strong> historical treasures .................................. 27,795 27,795 392Structures <strong>and</strong> other improvements .................... 3,528,560 27,344 3,555,904 3,160,508Equipment ......................................................... 805,775 12,209 817,984 374,698Infrastructure ...................................................... 8,356,757 1,526,122 9,882,879 143,060Construction in progress ..................................... 3,215,853 557,194 3,773,047 405,381Total capital assets .......................................... 18,812,073 2,427,931 21,240,004 4,233,615Total assets ................................................. 25,159,680 10,996,750 36,156,430 8,409,94522 www.maryl<strong>and</strong>taxes.comA-22
Primary GovernmentGovernmental Business-type ComponentActivities Activities Total UnitsLiabilitiesSalaries payable ........................................................ 162,498 162,498 85,650Vouchers payable ..................................................... 419,982 419,982Accounts payable <strong>and</strong> accrued liabilities .................. 1,435,167 320,477 1,755,644 192,237Internal balances ...................................................... (30,554) 30,554Due to component units.................................…….. 3,703 3,703Due to primary government .................................... 551Accounts payable to political subdivisions .............. 269,899 269,899Unearned revenue .................................................... 28,897 20,276 49,173 197,205Matured bonds <strong>and</strong> interest coupons payable .......... 158 158Accrued insurance on loan losses ............................. 8,407 8,407 5,370Other liabilities ........................................................ 1,852Collateral obligations for lent securities ................... 358,709 358,709<strong>Bonds</strong> <strong>and</strong> notes payable:Due within one year ........................................... 540,935 186,801 727,736 94,220Due in more than one year ................................. 6,614,438 4,854,538 11,468,976 1,273,932Other noncurrent liabilities:Due within one year ........................................... 410,956 45,928 456,884 150,085Due in more than one year ................................. 2,863,795 172,330 3,036,125 791,950Total liabilities ............................................... 13,078,583 5,639,311 18,717,894 2,793,052Net AssetsInvested in capital assets, net <strong>of</strong> related debt ............ 14,267,201 1,685,176 15,952,377 3,238,123Restricted for:Human resources ................................................ 12,351 12,351Debt service ........................................................ 66,693 133,214 199,907 8,296Capital improvements <strong>and</strong> deposits .................... 2,768 96,994 99,762 20,379Higher education-nonexpendable ...................... 647,202Higher education-expendable ............................ 512,549Unemployment compensation benefits ............... 1,052,803 1,052,803Loan programs .................................................... 5,653 1,035,596 1,041,249 74,431Insurance programs............................................. 103,332 103,332Other .................................................................. 414 414Unrestricted (deficit) .............................................. (2,273,983) 1,250,324 (1,023,659) 1,115,913Total net assets ............................................... $12,081,097 $5,357,439 $17,438,536 $5,616,893The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.A-23www.maryl<strong>and</strong>taxes.com 23
STATE OF MARYLAND<strong>State</strong>ment <strong>of</strong> ActivitiesFor the Year Ended June 30, 2008(Expressed in Thous<strong>and</strong>s)Net (Expense) Revenues <strong>and</strong>Program Revenues Changes in Net AssetsOperating Capital Primary Government24 www.maryl<strong>and</strong>taxes.comCharges for Grants <strong>and</strong> Grants <strong>and</strong> Governmental Business-Type ComponentFunctions/Programs Expenses Services Contributions Contributions Activities Activities Total UnitsPrimary government -Governmental activities:<strong>General</strong> government .................................................... $ 815,107 $ 359,589 $ 67,555 $ 6,912 $ (381,051) $ (381,051)Health <strong>and</strong> mental hygiene .......................................... 7,648,495 458,706 3,314,389 (3,875,400) (3,875,400)Education .................................................................... 6,834,608 67,106 912,908 (5,854,594) (5,854,594)Aid for higher education .............................................. 1,851,379 15,589 3,644 (1,832,146) (1,832,146)Human resources ......................................................... 1,859,485 39,165 1,098,250 (722,070) (722,070)Public safety ................................................................. 2,100,098 80,936 73,563 (1,945,599) (1,945,599)Transportation ............................................................. 3,054,406 611,002 79,228 667,219 (1,696,957) (1,696,957)Judicial ......................................................................... 633,844 260,145 5,902 (367,797) (367,797)Labor, licensing <strong>and</strong> regulation ..................................... 186,470 40,034 111,676 (34,760) (34,760)Natural resources <strong>and</strong> recreation .................................. 179,682 43,855 22,925 2,566 (110,336) (110,336)Housing <strong>and</strong> community development ........................ 247,515 21,122 207,193 (19,200) (19,200)Environment ................................................................ 108,273 34,491 21,079 (52,703) (52,703)Agriculture ................................................................... 82,163 33,658 5,273 291 (42,941) (42,941)Business <strong>and</strong> economic development ............................ 97,991 1,949 1,231 (94,811) (94,811)Intergovernmental grants <strong>and</strong>revenue sharing. ....................................................... 742,398 (742,398) (742,398)Interest ......................................................................... 351,952 (351,952) (351,952)Total governmental activities .................................... 26,793,866 2,067,347 5,924,816 676,988 (18,124,715) (18,124,715)Business-type activities:Economic development - insurance programs .............. 4,759 7,588 $ 2,829 2,829Economic development - general loan programs .......... 21,548 4,511 (17,037) (17,037)Economic development - water quality loan programs 42,409 83,019 44,205 84,815 84,815Economic development - housing loan programs ......... 189,906 199,520 9,614 9,614Unemployment insurance program .............................. 544,109 440,848 13,430 (89,831) (89,831)A-24
<strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery ................................................ 1,133,587 1,673,038 539,451 539,451<strong>Maryl<strong>and</strong></strong> Transportation Authority ............................. 325,721 425,504 99,783 99,783<strong>Maryl<strong>and</strong></strong> Correctional Enterprises ............................... 46,906 51,857 4,951 4,951Total business-type activities .................................... 2,308,945 2,885,885 57,635 634,575 634,575Total primary government ................................... $29,102,811 $4,953,232 $5,982,451 $676,988 (18,124,715) 634,575 (17,490,140)Component units:Higher education ......................................................... $ 4,024,359 $1,778,954 $1,205,508 $213,209 $(826,688)<strong>Maryl<strong>and</strong></strong> Prepaid College Trust ................................... 51,665 54,406 2,741<strong>Maryl<strong>and</strong></strong> Stadium Authority ....................................... 67,415 34,245 20,536 (12,634)Other component units ............................................... 168,018 134,834 29,977 (3,207)Total component units ........................................ $ 4,311,457 $2,002,439 $1,256,021 $213,209 (839,788)<strong>General</strong> revenues:Income taxes ........................................................................... 7,885,639 7,885,639Sales <strong>and</strong> use taxes .................................................................. 3,748,724 3,748,724Motor vehicle taxes ................................................................. 1,920,460 1,920,460Other taxes ............................................................................. 2,444,883 2,444,883Grants <strong>and</strong> contributions not restricted tospecific programs ................................................................ 1,132,912Unrestricted investment earnings ............................................ 345,578 25,804 371,382 46,769Additions to permanent endowments ......................................... 1,304Transfers..................................................................................... 477,936 (477,936)Total general revenues,additions to permanent endowments, <strong>and</strong> transfers ........ 16,823,220 (452,132) 16,371,088 1,180,985Changes in net assets ............................................... (1,301,495) 182,443 (1,119,052) 341,197Net assets - beginning <strong>of</strong> the year ............................................... 13,382,592 5,174,996 18,557,588 5,275,696Net assets - end <strong>of</strong> the year ......................................................... $12,081,097 $5,357,439 $17,438,536 $5,616,893A-25The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.www.maryl<strong>and</strong>taxes.com 25
26 www.maryl<strong>and</strong>taxes.comSTATE OF MARYLANDBalance SheetGovernmental FundsJune 30, 2008(Expressed in Thous<strong>and</strong>s)Special Revenue<strong>Maryl<strong>and</strong></strong> Other TotalDepartment <strong>of</strong> Governmental Governmental<strong>General</strong> Transportation Funds FundsAssets:Cash <strong>and</strong> cash equivalents ........................................ $ 161,524 $ 1,640 $ 163,164Cash <strong>and</strong> cash equivalents – restricted ...................... 26,004 26,004Cash with fiscal agent – restricted ............................. $ 8,224 8,224Equity in pooled invested cash ................................. 2,462,790 12,199 316,974 2,791,963Investments .............................................................. 9,401 9,401Prepaid items ............................................................ 343,531 74,570 418,101Taxes receivable, net ................................................. 951,242 82,432 15,329 1,049,003Intergovernmental receivables ................................... 676,252 216,002 892,254Other accounts receivable ......................................... 418,036 76,566 407 495,009Due from other funds .............................................. 51,794 99,880 15,752 167,426Due from component units ...................................... 551 551Inventories ............................................................... 25,005 74,458 99,463Loans <strong>and</strong> notes receivable, net ................................. 3,778 3,760 4,714 12,252Loans <strong>and</strong> notes receivable – restricted ..................... 5,653 5,653Collateral for lent securities ...................................... 358,709 358,709Total assets .................................................... $5,462,613 $667,511 $367,053 $6,497,177Liabilities:Salaries payable ......................................................... $144,966 $17,532 $ 162,498Vouchers payable ...................................................... 300,745 49,991 $ 69,246 419,982Accounts payable <strong>and</strong> accrued liabilities ................... 1,001,489 309,707 25,073 1,336,269Due to other funds ................................................... 119,126 17,746 136,872Due to component units .......................................... 3,703 3,703Accounts payable to political subdivisions ............... 187,619 75,517 6,763 269,899Deferred revenue ...................................................... 363,481 46,767 69 410,317Matured bonds <strong>and</strong> interest coupons payable ........... 158 158Accrued self-insurance costs...................................... 97,187 97,187Collateral obligations for lent securities .................... 358,709 358,709Total liabilities ................................................ 2,577,025 517,260 101,309 3,195,594Fund balances:Reserved for:<strong>State</strong> reserve fund ................................................... 720,298 720,298Encumbrances ........................................................ 283,379 23,931 321,443 628,753Prepaid items <strong>and</strong> inventories ................................. 368,306 149,028 517,334Loans <strong>and</strong> notes receivable ..................................... 3,445 3,760 9,955 17,160Construction projects ............................................. 2,768 2,768Restricted revenues ................................................. 12,764 12,764Debt service ........................................................... 8,128 8,128Unreserved:Designated ............................................................. 537,984 537,984Undesignated (deficit), reported in:<strong>General</strong> fund ...................................................... 959,412 959,412Special revenue fund ........................................... (29,236) (29,236)Non-major debt service funds ............................ 54,263 54,263Non-major capital projects fund ......................... (128,045) (128,045)Total fund balances ......................................... 2,885,588 150,251 265,744 3,301,583Total liabilities <strong>and</strong> fund balances ................. $5,462,613 $667,511 $367,053 $6,497,177The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.A-26
STATE OF MARYLANDReconciliation <strong>of</strong> the Governmental Funds’ Fund Balanceto the <strong>State</strong>ment <strong>of</strong> Net Assets’ Net Assets BalanceJune 30, 2008(Expressed in Thous<strong>and</strong>s)Amounts reported for governmental activities in the <strong>State</strong>ment <strong>of</strong> Net Assets (pages 22-23)differ from the amounts for the governmental funds’ fund balances because <strong>of</strong>:Amount in governmental funds, fund balance (page 26) ................................................................................. $ 3,301,583Capital assets used in governmental activities are not financial resources<strong>and</strong>, therefore, are not reported in the funds ................................................................................................ 18,812,073Taxes <strong>and</strong> other receivables that will not be available to pay for current-periodexpenditures <strong>and</strong>, therefore, are deferred in the funds .................................................................................. 381,420Accrued interest payable on bonds <strong>and</strong> capital leases are not liquidatedwith current financial resources in the governmental funds .......................................................................... (128,698)Deferred charges not available to pay for current period expenditures .......................................................... 11,266Other assets not available to pay for current period expenditures. ................................................................ 6,589Long-term liabilities are not due <strong>and</strong> payable in the current period<strong>and</strong>, therefore, are not reported in the funds:<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> ........................................................................................................................ (5,493,830)Deferred charges to be amortized over the life <strong>of</strong> the debt ................................................................... 40,603Premiums to be amortized over the life <strong>of</strong> the debt .............................................................................. (353,291)Transportation <strong>Bonds</strong> ............................................................................................................................... (1,268,815)Deferred charges to be amortized over the life <strong>of</strong> the debt ................................................................... 5,350Premiums to be amortized over the life <strong>of</strong> the debt .............................................................................. (85,390)Accrued self-insurance costs...................................................................................................................... (220,512)Accrued annual leave ................................................................................................................................ (276,372)Pension liabilities ...................................................................................................................................... (800,015)Other post-employment benefits liability ................................................................................................. (695,921)Other long term liabilities ........................................................................................................................ (374,042)<strong>Obligation</strong> under capital leases ................................................................................................................. (515,134)<strong>Obligation</strong>s under capital leases with component units ............................................................................ (265,767)Net assets <strong>of</strong> governmental activities (page 23) .................................................................................... $12,081,097The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.A-27www.maryl<strong>and</strong>taxes.com 27
STATE OF MARYLAND<strong>State</strong>ment <strong>of</strong> Revenues, Expenditures, <strong>and</strong> Changes in FundBalances, Governmental Funds, For the Year Ended June 30, 2008(Expressed in Thous<strong>and</strong>s)28 www.maryl<strong>and</strong>taxes.comSpecial Revenue<strong>Maryl<strong>and</strong></strong> Other TotalDepartment <strong>of</strong> Governmental Governmental<strong>General</strong> Transportation Funds FundsRevenues:Income taxes ............................................................ $ 7,868,899 $ 7,868,899Sales <strong>and</strong> use taxes .................................................... 3,748,933 3,748,933Motor vehicle taxes <strong>and</strong> fees ..................................... $1,920,460 1,920,460Other taxes ............................................................... 1,816,652 $ 628,231 2,444,883Other licenses <strong>and</strong> fees ............................................. 651,079 651,079Charges for services .................................................. 732,103 376,563 1,108,666Revenues pledged as security for bonds..................... 77,541 77,541Interest <strong>and</strong> other investment income ....................... 296,636 3,736 7,031 307,403Federal revenue......................................................... 5,846,077 746,447 11,824 6,604,348Other ....................................................................... 188,575 25,666 514 214,755Total revenues ...................................................... 21,148,954 3,150,413 647,600 24,946,967Expenditures:Current:<strong>General</strong> government .............................................. 727,119 727,119Health <strong>and</strong> mental hygiene .................................... 7,536,747 7,536,747Education .............................................................. 6,416,930 369,894 6,786,824Aid to higher education ......................................... 1,581,016 270,363 1,851,379Human resources ................................................... 1,761,284 1,761,284Public safety .......................................................... 1,835,652 1,835,652Transportation ....................................................... 1,262,973 1,262,973Judicial .................................................................. 556,056 556,056Labor, licensing <strong>and</strong> regulation .............................. 166,848 166,848Natural resources <strong>and</strong> recreation ............................ 188,675 188,675Housing <strong>and</strong> community development.................. 244,581 244,581Environment ......................................................... 95,918 95,918Agriculture ............................................................ 147,494 147,494Business <strong>and</strong> economic development ..................... 94,503 94,503Intergovernmental grants <strong>and</strong> revenue sharing ....... 408,208 855,336 334,190 1,597,734Capital outlays ......................................................... 1,400,238 76,268 1,476,506Debt service:Principal retirement ............................................... 497,300 497,300Interest .................................................................. 315,010 315,010Bond issuance costs ............................................... 450 2,219 2,669Total expenditures ............................................... 21,761,481 3,518,547 1,865,244 27,145,272Deficiency <strong>of</strong> revenues underexpenditures .................................................. (612,527) (368,134) (1,217,644) (2,198,305)Other financing sources (uses):Capital leases ............................................................ 31,185 31,185Other long-term liabilities ........................................ 102 102<strong>Bonds</strong> issued ............................................................ 226,755 779,986 1,006,741Bond premium ......................................................... 22,638 42,024 64,662Transfers in ............................................................... 648,718 190,761 340,956 1,180,435Transfers out ............................................................. (440,755) (248,908) (12,836) (702,499)Total other sources <strong>of</strong> financial resources .............. 239,148 191,348 1,150,130 1,580,626Net changes in fund balances ......................... (373,379) (176,786) (67,514) (617,679)Fund balances, beginning <strong>of</strong> the year ............................ 3,258,967 327,037 333,258 3,919,262Fund balances, end <strong>of</strong> the year ...................................... $ 2,885,588 $ 150,251 $265,744 $ 3,301,583The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.A-28
STATE OF MARYLANDReconciliation <strong>of</strong> the <strong>State</strong>ment <strong>of</strong> the Revenues, Expenditures,<strong>and</strong> Changes in Fund Balances <strong>of</strong> Governmental Funds to the<strong>State</strong>ment <strong>of</strong> Activities, For the Year Ended June 30, 2008(Expressed in Thous<strong>and</strong>s)Amounts reported for governmental activities in the <strong>State</strong>ment <strong>of</strong> Activities (pages 24-25) aredifferent from the amounts reported in the <strong>State</strong>ment <strong>of</strong> Revenues, Expenditures,<strong>and</strong> Changes in Fund Balances <strong>of</strong> Governmental Funds because <strong>of</strong> the following:Net change in fund balances - total governmental funds (page 28) ................................................... $ (617,679)Governmental funds report capital outlays as expenditures. However, in the <strong>State</strong>ment <strong>of</strong>Activities, the cost <strong>of</strong> those assets is allocated over their estimated useful lives <strong>and</strong>reported as depreciation expense. This is the amount by which capital outlays exceeddepreciation in the current period.Capital outlays .......................................................................................................................... $1,698,837Depreciation expense................................................................................................................. (942,187) 756,650The net effect <strong>of</strong> various miscellaneous transactions involving capital assets(i.e., sales, trade-ins, <strong>and</strong> donations) is to decrease net assets.Net loss on disposals <strong>and</strong> trade-ins ............................................................................................ (125,889) (125,889)Revenues in the <strong>State</strong>ment <strong>of</strong> Activities that do not provide current financial resources arenot reported as revenues in the governmental funds:Deferred revenues for taxes are recognized,net <strong>of</strong> revenue already recognized in the prior year .................................................................. 16,531Deferred revenues for other revenues are recognized,net <strong>of</strong> revenue already recognized in the prior year .................................................................. 15,645Revenues from other assets are recognized, net <strong>of</strong> revenue recognized in the prior year .............. (2,257) 29,919The issuance <strong>of</strong> long term debt (e.g. bonds, leases) provides current financial resources togovernmental funds, while the repayment <strong>of</strong> the principal <strong>of</strong> long term debt consumescurrent financial resources <strong>of</strong> governmental funds. Neither transaction, however, has anyeffect on net assets. Also, the governmental funds report the effect <strong>of</strong> issuance costs,premiums, discounts <strong>and</strong> similar items when debt is first issued, whereas these amountsare deferred <strong>and</strong> amortized in the <strong>State</strong>ment <strong>of</strong> Activities. This amount is the neteffect <strong>of</strong> these differences in the treatment <strong>of</strong> long term debt <strong>and</strong> related items.Debt issued, <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>..................................................................................... (779,986)Debt issued, Transportation <strong>Bonds</strong> ............................................................................................ (226,755)Capital lease financing ............................................................................................................... (31,185)Other long-term financing ........................................................................................................ (102)Premiums, discounts <strong>and</strong> issuance costs ..................................................................................... (27,361)Principal repayments:<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> ....................................................................................................... 428,310Transportation <strong>Bonds</strong> .............................................................................................................. 68,990Capital leases ........................................................................................................................... 64,031Other long-term financing ...................................................................................................... 22,296 (481,762)Some expenses reported in the <strong>State</strong>ment <strong>of</strong> Activities do not require the use <strong>of</strong> currentfinancial resources <strong>and</strong>, therefore, are not reported as expenditures in the governmental funds:Accrued interest......................................................................................................................... (8,510)Compensated absences .............................................................................................................. 1,550Self-insurance ............................................................................................................................ (16,509)Net pension obligation .............................................................................................................. (153,975)Other post-employment benefits liability .................................................................................. (695,921)Other long term liabilities ........................................................................................................ 10,631 (862,734)Change in net assets <strong>of</strong> governmental activities (page 25) ................................................................. $(1,301,495)The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.A-29www.maryl<strong>and</strong>taxes.com 29
30 www.maryl<strong>and</strong>taxes.comA-30
STATE OF MARYLANDEnterprise FundFinancial <strong>State</strong>mentsMajor FundsEconomic Development Loan ProgramsThis fund includes the direct loan programs <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Departments <strong>of</strong> Housing <strong>and</strong>Community Development, Business <strong>and</strong> Economic Development <strong>and</strong> Environment.Unemployment Insurance ProgramThis fund reflects the transactions, assets, liabilities <strong>and</strong> net assets <strong>of</strong> the Unemployment InsuranceProgram <strong>and</strong> is used to account for the unemployment assessments collected from employers,Federal revenue received <strong>and</strong> remittance <strong>of</strong> benefits to the unemployed.<strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery AgencyThis fund accounts for the operation <strong>of</strong> the <strong>State</strong> Lottery.<strong>Maryl<strong>and</strong></strong> Transportation AuthorityThis fund accounts for the activity <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Transportation Authority, which isresponsible for the operation <strong>and</strong> maintenance <strong>of</strong> toll roads, bridges <strong>and</strong> tunnels in the <strong>State</strong>.Non-major FundsOther Enterprise FundsIndividual non-major enterprise funds are presented in the combining sectionfollowing the footnotes.A-31www.maryl<strong>and</strong>taxes.com 31
STATE OF MARYLAND<strong>State</strong>ment <strong>of</strong> Fund Net AssetsEnterprise FundsJune 30, 2008(Expressed in Thous<strong>and</strong>s)Economic<strong>Maryl<strong>and</strong></strong>Development Unemployment <strong>State</strong> <strong>Maryl<strong>and</strong></strong> OtherLoan Insurance Lottery Transportation EnterprisePrograms Program Agency Authority Funds TotalAssets-Current assets:Cash <strong>and</strong> cash equivalents.................. $ 1,907 $ 76,269 $ 10 $ 78,186Equity in pooled invested cash ........... $ 484,525 59,144 116,588 660,257Investments ....................................... 5,022 181,751 186,773Other accounts receivable .................. 6,113 $ 105,550 34,920 35,523 7,900 190,006Due from other funds ........................ 37,799 1,632 820 40,251Inventories ......................................... 4,576 11,990 16,566Loans <strong>and</strong> notes receivable, net .......... 22,980 127 23,107Investment in direct financing leases .. 45,921 45,921Other assets ....................................... 47 241 288Current restricted assets:Cash <strong>and</strong> cash equivalents.............. 470,309 471,897 942,206Cash on deposit with U.S. Treasury .. 986,316 986,316Investments ................................... 175,103 33,425 460,846 669,374Loans <strong>and</strong> notes receivable, net ...... 99,119 99,119Other accounts receivable .............. 33,024 33,024Total current assets.................... 1,333,994 1,093,498 129,443 1,277,603 136,856 3,971,394Non-current assets:Investments ....................................... 70,533 7,778 1,205 79,516Due from other funds ........................ 7,908 7,908Loans <strong>and</strong> notes receivable, net .......... 522,848 413 523,261Investment in direct financing leases .. 396,555 396,555Other assets ....................................... 19,897 19,897Restricted non-current assets:Investments ................................... 541,050 127,438 668,488Deferred charges ............................ 15,948 15,948Loans <strong>and</strong> notes receivable, net ...... 2,933,690 2,933,690Other accounts receivable .............. 321 321Capital assets, net <strong>of</strong> accumulateddepreciation:L<strong>and</strong> ............................................... 305,062 305,062Structures <strong>and</strong> improvements ......... 26,414 930 27,344Equipment ..................................... 64 837 4,379 6,929 12,209Infrastructure .................................. 1,526,053 69 1,526,122Construction in progress ................ 557,194 557,194Total non-current assets ............ 4,084,454 128,275 2,851,240 9,546 7,073,515Total assets ........................... 5,418,448 1,093,498 257,718 4,128,843 146,402 11,044,90932 www.maryl<strong>and</strong>taxes.comA-32
Economic<strong>Maryl<strong>and</strong></strong>Development Unemployment <strong>State</strong> <strong>Maryl<strong>and</strong></strong> OtherLoan Insurance Lottery Transportation EnterprisePrograms Program Agency Authority Funds TotalLiabilities-Current liabilities:Accounts payable <strong>and</strong> accrued liabilities ... 86,544 40,695 40,598 150,285 2,355 320,477Due to other funds ............................... 1,600 39,418 35,937 350 77,305Accrued insurance on loan losses .......... 676 7,731 8,407Other liabilities ..................................... 9,310 33,673 1,659 1,286 45,928Unearned revenue ................................. 27 2,627 16,139 1,483 20,276Revenue bonds payable - current .......... 137,355 49,446 186,801Total current liabilities ..................... 235,512 40,695 116,316 253,466 13,205 659,194Non-current liabilities:Due to other funds ............................... 1,408 1,408Other liabilities ..................................... 24,698 112,473 33,101 2,058 172,330Revenue bonds payable ......................... 2,995,135 1,859,403 4,854,538Total non-current liabilities .............. 3,019,833 112,473 1,892,504 3,466 5,028,276Total liabilities ........................... 3,255,345 40,695 228,789 2,145,970 16,671 5,687,470Net Assets-Invested in capital assets, net <strong>of</strong> relateddebt ....................................................... 64 189 1,678,752 6,171 1,685,176Restricted for:Debt service .......................................... 3,464 129,750 133,214Capital improvements .......................... 96,994 96,994Unemployment compensation benefits . 1,052,803 1,052,803Loan programs ..................................... 1,035,596 1,035,596Insurance programs .............................. 103,332 103,332Unrestricted ............................................. 1,123,979 28,740 77,377 20,228 1,250,324Total net assets ................................. $2,163,103 $1,052,803 $ 28,929 $1,982,873 $129,731 $5,357,439The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.A-33www.maryl<strong>and</strong>taxes.com 33
34 www.maryl<strong>and</strong>taxes.comA-34
STATE OF MARYLAND<strong>State</strong>ment <strong>of</strong> Revenues, Expenses<strong>and</strong> Changes in Fund Net AssetsEnterprise FundsFor the Year Ended June 30, 2008(Expressed in Thous<strong>and</strong>s)Economic<strong>Maryl<strong>and</strong></strong>Development Unemployment <strong>State</strong> <strong>Maryl<strong>and</strong></strong> OtherLoan Insurance Lottery Transportation EnterprisePrograms Program Agency Authority Funds TotalOperating revenues:Lottery ticket sales ................................ $1,673,038 $1,673,038Charges for services <strong>and</strong> sales ................ $ 72,038 $ 391,212 $ 353,125 $ 53,403 869,778Loan <strong>and</strong> grant recoveries ..................... 2,140 2,140Unrestricted interest on loan income .... 19,083 541 19,624Restricted interest on loan income ........ 133,246 133,246Other ................................................... 3,385 12,501 42 15,928Total operating revenues .................. 229,892 391,212 1,673,038 365,626 53,986 2,713,754Operating expenses:Prizes <strong>and</strong> claims................................... 956,887 956,887Commissions <strong>and</strong> bonuses .................... 117,824 117,824Cost <strong>of</strong> sales <strong>and</strong> services ...................... 22,525 37,614 60,139Operation <strong>and</strong> maintenance <strong>of</strong> facilities 184,259 184,259<strong>General</strong> <strong>and</strong> administrative ................... 32,012 35,693 32,692 10,754 111,151Benefit payments .................................. 544,109 544,109Capital grant distributions .................... 34,593 34,593Depreciation <strong>and</strong> amortization ............. 1,532 628 59,616 1,351 63,127Provision forinsurance on loan losses ................... 17,478 1,946 19,424Other ................................................... 19,960 19,960Total operating expenses .................. 105,575 544,109 1,133,557 276,567 51,665 2,111,473Operating income (loss).............. 124,317 (152,897) 539,481 89,059 2,321 602,281Non-operating revenues (expenses):Unrestricted interest <strong>and</strong> otherinvestment income........................... 13,377 4,710 7,717 25,804Restricted interest <strong>and</strong> otherinvestment income........................... 57,158 49,636 47,362 5,471 159,627Interest expense .................................... (147,754) (30) (49,154) (196,938)Federal grants <strong>and</strong> distributions ............ 44,205 13,430 57,635Other ................................................... (534) 12,516 (12) 11,970Total non-operating revenues(expenses) ................................... (33,548) 63,066 4,680 18,441 5,459 58,098Income (loss) before transfers ........... 90,769 (89,831) 544,161 107,500 7,780 660,379Transfers in ................................................ 40,854 36,000 76,854Transfers out ............................................. (3,996) (11,390) (529,404) (10,000) (554,790)Changes in net assets ................... 127,627 (101,221) 14,757 143,500 (2,220) 182,443Total net assets - beginning <strong>of</strong> the year ...... 2,035,476 1,154,024 14,172 1,839,373 131,951 5,174,996Total net assets - end <strong>of</strong> the year ................ $2,163,103 $1,052,803 $ 28,929 $1,982,873 $129,731 $5,357,439The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.A-35www.maryl<strong>and</strong>taxes.com 35
STATE OF MARYLAND<strong>State</strong>ment <strong>of</strong> Cash FlowsEnterprise FundsFor the Year Ended June 30, 2008(Expressed in Thous<strong>and</strong>s)Economic<strong>Maryl<strong>and</strong></strong>Development Unemployment <strong>State</strong> <strong>Maryl<strong>and</strong></strong> OtherLoan Insurance Lottery Transportation EnterprisePrograms Program Agency Authority Funds TotalCash flows from operating activities:Receipts from customers ....................... $ 420,629 $ 392,003 $1,663,972 $ 342,371 $ 52,192 $2,871,167Payments to suppliers ........................... (1,748) (48,756) (111,161) (33,607) (195,272)Payments to employees ......................... (11,316) (12,254) (81,380) (16,487) (121,437)Other receipts (payments) .................... (1,072,560) (546,103) (115,989) 20,258 4,206 (1,710,188)Lottery prize payments ......................... (951,186) (951,186)Net cash from operating activities .... (664,995) (154,100) 535,787 170,088 6,304 (106,916)Cash flows from non-capitalfinancing activities:Proceeds from the sale <strong>of</strong>revenue bonds .................................. 557,489 557,489Payment on revenue bonds ................... (509,060) (14,880) (523,940)Interest payments ................................. (142,108) (24,376) (166,484)Transfers in ........................................... 6,122 36,000 42,122Transfers out ......................................... (3,996) (11,390) (534,014) (10,000) (559,400)Grants .................................................. 44,205 13,430 57,635Lottery installment payments ............... (93,087) (93,087)Other ................................................... (3,519) 7,750 55,113 59,344Net cash fromnon-capital financing activities .... (50,867) 9,790 (571,988) (3,256) (10,000) (626,321)Cash flows from capital <strong>and</strong> relatedfinancing activities:Proceeds from interfund borrowings ..... 1,758 1,758Proceeds from notes payable <strong>and</strong>revenue bonds .................................. 859,123 859,123Principal paid on notes payable <strong>and</strong>revenue bonds .................................. (31,542) (31,542)Interest payments ................................. (30) (32,849) (32,879)Acquisition <strong>of</strong> capital assets................... (22) (548,288) (3,533) (551,843)Payments <strong>of</strong> capital lease obligations ..... (476) (476)Net cash from capital<strong>and</strong> related financing activities .... (22) (506) 246,444 (1,775) 244,141Cash flows from investing activities:Purchase <strong>of</strong> investments ........................ (312,631) (1,311) (5,392,426) (5,706,368)Proceeds from maturity <strong>and</strong>sale <strong>of</strong> investments ........................... 751,480 37,974 4,970,277 5,759,731Interest on investments ......................... 62,714 49,636 84,587 5,471 202,408Receipts from investment in directfinancing leases ................................ 18,023 18,023Net cash from investing activities ..... 501,563 49,636 36,663 (319,539) 5,471 273,794Net changes in cash <strong>and</strong> cashequivalents .................................. (214,321) (94,674) (44) 93,737 (215,302)Balance - beginning <strong>of</strong> the year ........ 684,630 1,080,990 1,951 454,429 10 2,222,010Balance - end <strong>of</strong> the year .................. $ 470,309 $ 986,316 $ 1,907 $ 548,166 $ 10 $2,006,70836 www.maryl<strong>and</strong>taxes.comA-36
Economic<strong>Maryl<strong>and</strong></strong>Development Unemployment <strong>State</strong> <strong>Maryl<strong>and</strong></strong> OtherLoan Insurance Lottery Transportation EnterprisePrograms Program Agency Authority Funds TotalReconciliation <strong>of</strong> operating income (loss)to net cash provided by operatingactivities:Operating income (loss) ........................... $ 124,317 $(152,897) $539,481 $ 89,059 $2,321 $ 602,281Adjustments to reconcile operatingincome (loss) to net cash fromoperating activities:Depreciation <strong>and</strong> amortization ............. 1,532 628 59,616 1,351 63,127Effect <strong>of</strong> changes in non-cash operatingassets <strong>and</strong> liabilities:Equity in pooled invested cash .............. (228,134) 1,699 4,678 (221,757)Investments .......................................... (476) (476)Other accounts receivable ..................... (8,052) 908 (5,897) (312) (952) (14,305)Due from other funds ........................... 11,031 (117) 929 11,843Inventories ............................................ 547 (1,562) (3,164) (4,179)Loans <strong>and</strong> notes receivable .................... (573,297) 32 (573,265)Other assets .......................................... 176 (237) (61)Accounts payable <strong>and</strong> accruedliabilities .......................................... 14,386 (1,994) 1,110 16,734 288 30,524Due to other funds ............................... (146) 763 617Accrued insurance on loan losses .......... 200 1,558 1,758Other liabilities ..................................... (6,352) 1,213 2,369 300 (2,470)Unearned revenue ................................. (4) (3,170) 2,492 129 (553)Total adjustments ............................ (789,312) (1,203) (3,694) 81,029 3,983 (709,197)Net cash from operating activities .............. $(664,995) $(154,100) $535,787 $170,088 $6,304 $(106,916)Noncash transactions (amountsexpressed in thous<strong>and</strong>s):Unrealized gain (loss) on investments ........ $ (7,801) $ 4,708 $ (4,735)Additions to leased capital assets ................ 37,492The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.A-37www.maryl<strong>and</strong>taxes.com 37
STATE OF MARYLAND<strong>State</strong>ment <strong>of</strong> Fiduciary Net AssetsFiduciary FundsJune 30, 2008(Expressed in Thous<strong>and</strong>s)PostretirementPension <strong>and</strong> Other Investment HealthEmployee Benefits Trust Benefits AgencyTrust Funds Fund Trust Fund FundsAssets:Cash <strong>and</strong> cash equivalents..................................... $ 1,743,294 $118,802 $ 101,196Equity in pooled invested cash .............................. 1,669,571Investments:U.S. Treasury <strong>and</strong> agency obligations ............... 637,011 $1,299,427Repurchase agreements .................................... 409,353<strong>Bonds</strong> .............................................................. 1,623,715Corporate equity securities............................... 8,122,414Commercial paper ........................................... 172,282Bankers acceptances ......................................... 107,662Mortgage related securities ............................... 2,226,345Mutual funds ................................................... 21,579,592 269,262Guaranteed investment contracts ..................... 629,093Real estate ........................................................ 1,249,452Annuity contracts ............................................ 129,460Private equity ................................................... 830,433Investments held by borrowers undersecurities lent with cash collateral ................ 1,768,886Total investments ........................................ 38,796,401 2,257,986Taxes receivable, net ............................................. 239,559Other receivables .................................................. 894,125 3,817 5,634 2,200Collateral for lent securities .................................. 1,826,516Total assets .................................................. 43,260,336 2,261,803 124,436 2,012,526Liabilities:Accounts payable <strong>and</strong> accrued liabilities ............... 2,168,465 5,180 182,748Accounts payable to political subdivisions ........... 1,829,778Collateral obligation for lent securities .................. 1,826,516Total liabilities ............................................ 3,994,981 5,180 2,012,526Net assets:Held in trust for:Pension benefits (A schedule <strong>of</strong> fundingprogress for each <strong>of</strong> the plans may be foundon pages 89 & 90) ...................................... 36,739,767Deferred compensation benefits ....................... 2,525,588<strong>Local</strong> Government InvestmentPool participants ......................................... 2,256,623Postretirement health benefits .......................... 124,436Total net assets ............................................ $39,265,355 $2,256,623 $124,436 $ –The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.38 www.maryl<strong>and</strong>taxes.comA-38
STATE OF MARYLAND<strong>State</strong>ment <strong>of</strong> Changes in Fiduciary Net AssetsFiduciary FundsFor the Year Ended June 30, 2008(Expressed in Thous<strong>and</strong>s)Pension <strong>and</strong> OtherPostretirementEmployee Benefits Investment Health BenefitsTrust Funds Trust Fund Trust FundAdditions:Contributions:Employers ....................................................................... $ 488,174 $100,000Members ........................................................................ 584,695 $4,840,601Sponsors ......................................................................... 604,756On behalf payments........................................................ 24,385Total contributions .................................................... 1,677,625 4,840,601 124,385Investment earnings:Net decrease in fair value<strong>of</strong> investments ............................................................ (2,599,461)Interest ........................................................................... 481,574 83,761 82Dividends ....................................................................... 237,938Real estate operating net earnings ................................... 25,096Net change in annuity reserves ........................................ 2,592Total investment earnings ......................................... (1,852,261) 83,761 82Less: investment expense ................................................. 166,430 639Net investment earnings ........................................... (2,018,691) 83,122 82Total additions ...................................................... (341,066) 4,923,723 124,467Deductions:Benefit payments ................................................................. 2,305,551Distributions to participants ................................................ 83,082Redemptions (unit transactions at $1.00 per unit) ............... 4,509,411Refunds ............................................................................... 16,223Administrative expenses ....................................................... 30,493 31Total deductions ........................................................ 2,352,267 4,592,493 31Changes in net assets ............................................. (2,693,333) 331,230 124,436Net assets - beginning <strong>of</strong> the year ............................................. 41,958,688 1,925,393Net assets - end <strong>of</strong> the year ....................................................... $39,265,355 $2,256,623 $124,436The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.A-39www.maryl<strong>and</strong>taxes.com 39
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STATE OF MARYLANDComponent UnitFinancial <strong>State</strong>mentsMajor Component UnitsHigher EducationHigher education consists <strong>of</strong> the University System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, Morgan <strong>State</strong> University, St. Mary’sCollege <strong>of</strong> <strong>Maryl<strong>and</strong></strong> <strong>and</strong> Baltimore City Community College <strong>and</strong> certain <strong>of</strong> their foundations.Because the universities <strong>and</strong> colleges are similar in nature <strong>and</strong> function, they have been combined<strong>and</strong> presented as a single component unit. The financial information for certain foundations affiliatedwith the universities <strong>and</strong> colleges has not been included in this fund in accordance with GASB<strong>State</strong>ment No. 14 as amended by GASB <strong>State</strong>ment No. 39.<strong>Maryl<strong>and</strong></strong> Prepaid College TrustThe <strong>Maryl<strong>and</strong></strong> Prepaid College Trust is a program <strong>of</strong> the College Savings Plans <strong>of</strong> <strong>Maryl<strong>and</strong></strong><strong>and</strong> directed by the Board to provide a means for payment <strong>of</strong> the cost <strong>of</strong> tuition <strong>and</strong> m<strong>and</strong>atoryfees in advance <strong>of</strong> enrollment at eligible institutions <strong>of</strong> higher education.<strong>Maryl<strong>and</strong></strong> Stadium AuthorityThe <strong>Maryl<strong>and</strong></strong> Stadium Authority was created as a body corporate <strong>and</strong> politic <strong>and</strong> as an independentunit <strong>of</strong> the Executive Department <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>. The Authority’s purpose is to acquirel<strong>and</strong> <strong>and</strong> to construct, operate <strong>and</strong>/or manage various capital facilities in the <strong>State</strong>.Non-major Component UnitsOther Component UnitsNon-major component units are presented individually in the combining section following thefootnotes.A-41www.maryl<strong>and</strong>taxes.com 41
STATE OF MARYLANDCombining <strong>State</strong>ment <strong>of</strong> Net AssetsComponent UnitsJune 30, 2008(Expressed in Thous<strong>and</strong>s)<strong>Maryl<strong>and</strong></strong>PrepaidOtherHigher College Stadium ComponentEducation Trust Authority Units TotalAssets:Cash <strong>and</strong> cash equivalents .................................... $ 66,941 $ 12,862 $ 295 $ 7,692 $ 87,790Equity in pooled invested cash .............................. 1,069,758 403 1,046 43,089 1,114,296Investments .......................................................... 534 532,662 28,224 561,420Endowment investments ...................................... 241,669 241,669Foundation investments ....................................... 930,344 930,344Tuition contracts receivable .................................. 52,278 164,181 216,459Other accounts receivable ..................................... 419,189 1,665 8,708 29,288 458,850Due from primary government ............................. 94 3,609 3,703Inventories ............................................................ 11,658 11,658Prepaid items ........................................................ 7,889 7,889Deferred charges ................................................... 1,748 3,341 5,089Loans <strong>and</strong> notes receivable, net ............................. 73,394 3,913 628 77,935Investments in direct financing leases.................... 258,148 7,619 265,767Other assets .......................................................... 15,948 1 5,422 21,371Restricted assets:Cash <strong>and</strong> cash equivalents ................................ 69,533 75 69,608Investments ..................................................... 81,424 11,470 9,561 102,455Other ............................................................... 27 27Capital assets, net <strong>of</strong> accumulated depreciation:L<strong>and</strong> ................................................................ 143,403 6,173 149,576Art <strong>and</strong> historical treasures ............................... 392 392Structures <strong>and</strong> improvements ........................... 2,942,577 195,963 21,968 3,160,508Infrastructure ................................................... 142,828 232 143,060Equipment ...................................................... 356,961 136 8,335 9,266 374,698Construction in progress .................................. 402,217 3,164 405,381Total assets .................................................. 7,030,806 711,909 494,904 172,326 8,409,945Liabilities:Salaries payable .................................................... 85,650 85,650Accounts payable <strong>and</strong> accrued liabilities ............... 152,641 406 5,381 33,809 192,237Due to primary government ................................. 551 551Unearned revenue ................................................. 176,490 7,045 10,893 2,777 197,205Accrued insurance on loan losses .......................... 613 4,757 5,370Other liabilities ..................................................... 1,546 306 1,852<strong>Bonds</strong> <strong>and</strong> notes payable:Due within one year ........................................ 75,617 15,557 3,046 94,220Due in more than one year .............................. 1,010,374 256,000 7,558 1,273,932Other noncurrent liabilities:Due within one year ........................................ 89,731 39,183 58 21,113 150,085Due in more than one year .............................. 166,708 603,954 818 20,470 791,950Total liabilities ............................................ 1,759,921 650,588 288,707 93,836 2,793,05242 www.maryl<strong>and</strong>taxes.comA-42
<strong>Maryl<strong>and</strong></strong>PrepaidOtherHigher College Stadium ComponentEducation Trust Authority Units TotalNet Assets:Invested in capital assets, net <strong>of</strong> related debt ......... 3,010,319 136 193,311 34,357 3,238,123Restricted:Debt service ..................................................... 2,524 2,524Capital improvements <strong>and</strong> deposits ................. 773 9,021 298 10,092Nonexpendable:Scholarships <strong>and</strong> fellowships ....................... 253,801 253,801Research ...................................................... 8,194 8,194Other .......................................................... 385,207 385,207Expendable:Debt service ................................................ 5,772 5,772Capital projects ........................................... 10,287 10,287Loans <strong>and</strong> notes receivable .......................... 74,431 74,431Scholarships <strong>and</strong> fellowships ....................... 126,305 126,305Research ...................................................... 107,557 107,557Other .......................................................... 278,687 278,687Unrestricted .......................................................... 1,010,325 60,412 1,341 43,835 1,115,913Total net assets ........................................... $5,270,885 $61,321 $206,197 $78,490 $5,616,893The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statement.A-43www.maryl<strong>and</strong>taxes.com 43
STATE OF MARYLANDCombining <strong>State</strong>ment <strong>of</strong> ActivitiesComponent UnitsFor the Year Ended June 30, 2008(Expressed in Thous<strong>and</strong>s)<strong>Maryl<strong>and</strong></strong>PrepaidOtherHigher College Stadium ComponentEducation Trust Authority Units TotalExpenses:<strong>General</strong> <strong>and</strong> administrative .................................. $ 1,921 $ 7,296 $ 13,163 $ 22,380Operation <strong>and</strong> maintenance <strong>of</strong> facilities ............... $ 307,386 19,893 143,849 471,128Provision for insurance on loan losses, net ........... 2,837 2,837Instruction........................................................... 1,043,661 1,043,661Research .............................................................. 861,471 861,471Public service ....................................................... 137,991 137,991Academic support ................................................ 342,383 342,383Student services ................................................... 172,072 172,072Institutional support ............................................ 370,546 370,546Scholarships <strong>and</strong> fellowships ................................ 91,732 91,732Tuition benefits ................................................... 49,676 49,676Auxiliary .............................................................. 450,198 450,198Hospitals ............................................................. 111,225 111,225Interest on long-term debt ................................... 45,081 17,635 959 63,675Depreciation <strong>and</strong> amortization ............................ 52 14,505 3,074 17,631Foundation expenses ........................................... 89,281 89,281Other .................................................................. 1,332 16 8,086 4,136 13,570Total expenses ................................................. 4,024,359 51,665 67,415 168,018 4,311,457Program revenues:Charges for services:Student tuition <strong>and</strong> fees (net <strong>of</strong> $187,902in allowances) ............................................ 1,010,058 1,010,058Auxiliary enterprises (net <strong>of</strong> $24,579in allowances) ............................................ 474,778 474,778Restricted investment earnings (loss)............... (4,758) 2,209 423 (2,126)Other .............................................................. 298,876 54,406 32,036 134,411 519,729Total charges for services ............................ 1,778,954 54,406 34,245 134,834 2,002,439Operating grants <strong>and</strong> contributions ..................... 1,205,508 20,536 29,977 1,256,021Capital grants <strong>and</strong> contributions ......................... 213,209 213,209Total program revenues .............................. 3,197,671 54,406 54,781 164,811 3,471,669Net program revenue (expense)............. (826,688) 2,741 (12,634) (3,207) (839,788)<strong>General</strong> revenues:Grants <strong>and</strong> contributions not restricted tospecific programs ............................................ 1,132,291 621 1,132,912Unrestricted investment earnings (loss)................ 75,057 (31,861) 107 3,466 46,769Additions to permanent endowments ....................... 1,304 1,304Total general revenues, additions <strong>and</strong>deductions to permanent endowments ... 1,208,652 (31,861) 107 4,087 1,180,985Changes in net assets .......................... 381,964 (29,120) (12,527) 880 341,197Net assets - beginning <strong>of</strong> the year ............................. 4,888,921 90,441 218,724 77,610 5,275,696Net assets - end <strong>of</strong> the year ....................................... $5,270,885 $61,321 $206,197 $ 78,490 $5,616,893The accompanying notes to the financial statements are an integral part <strong>of</strong> this financial statements.44 www.maryl<strong>and</strong>taxes.comA-44
STATE OF MARYLANDIndex forNotes to the Financial <strong>State</strong>mentsFor the Year Ended June 30, 2008Note 1 - Summary <strong>of</strong> Significant Accounting Policies ................................................................................................................ 46Note 2 - Significant Accounting Policies - Assets, Liabilities <strong>and</strong> Net Assets or Equity ............................................................... 48Note 3 - Deposits with Financial Institutions <strong>and</strong> the U.S. Treasury, Equity in PooledInvested Cash <strong>and</strong> Investments .................................................................................................................................... 52Note 4 - Receivables .................................................................................................................................................................. 59Note 5 - Deferred Revenue ........................................................................................................................................................ 60Note 6 - Loans <strong>and</strong> Notes Receivable <strong>and</strong> Investment in Direct Financing Leases ..................................................................... 60Note 7 - Restricted Assets .......................................................................................................................................................... 62Note 8 - Interfund Receivables <strong>and</strong> Payables ............................................................................................................................. 62Note 9 - Interfund Transfers ...................................................................................................................................................... 63Note 10 - Capital Assets ............................................................................................................................................................. 64Note 11 - Long-Term <strong>Obligation</strong>s .............................................................................................................................................. 65Note 12 - Insurance.................................................................................................................................................................... 73Note 13 - Fund Equity ............................................................................................................................................................... 74Note 14 - Segment Information ................................................................................................................................................. 75Note 15 - Retirement Benefits .................................................................................................................................................... 76Note 16 - Other Postemployment Benefits, Health Benefits (OPEB) ......................................................................................... 80Note 17 - Commitments ............................................................................................................................................................ 82Note 18 - Contingencies ............................................................................................................................................................ 82Note 19 - Tobacco Settlement .................................................................................................................................................... 83Note 20 - L<strong>and</strong>fill Closure <strong>and</strong> Postclosure Care Costs ............................................................................................................... 83Note 21 - Subsequent Event ....................................................................................................................................................... 83Notes to Required Supplementary InformationNote 1 - Budgeting <strong>and</strong> Budgetary Control ............................................................................................................................... 91A-45www.maryl<strong>and</strong>taxes.com 45
STATE OF MARYLANDNotes to the Financial <strong>State</strong>mentsFor the Year Ended June 30, 20081. Summary <strong>of</strong> Significant Accounting Policies:A. Reporting EntityThe accompanying financial statements include the various departments, agencies, <strong>and</strong> other organizational units governed by the <strong>General</strong>Assembly <strong>and</strong>/or Constitutional Officers <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (<strong>State</strong>).As required by accounting principles generally accepted in the United <strong>State</strong>s <strong>of</strong> America (GAAP), these financial statements present thestate government (primary government) <strong>and</strong> its component units (entities for which the <strong>State</strong> is considered to be financially accountable). TheGovernmental Accounting St<strong>and</strong>ards Board (GASB) has set forth criteria to be considered in determining financial accountability. These criteriainclude the <strong>State</strong> appointing a voting majority <strong>of</strong> an organization’s governing body <strong>and</strong> (1) the ability <strong>of</strong> the governing body to impose its will on thatorganization, or (2) the potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the <strong>State</strong>.Discrete Component UnitsThese component units are entities which are legally separate from the <strong>State</strong>, but are financially accountable to the <strong>State</strong>, or whoserelationships with the <strong>State</strong> are such that exclusion would cause the <strong>State</strong>’s financial statements to be misleading or incomplete. TheComponent Units column <strong>of</strong> the government-wide financial statements includes the financial data <strong>of</strong> the following major component units.Individual statements are presented for each component unit.Higher Education (Proprietary Fund Type) – Higher Education consists <strong>of</strong> the University System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, Morgan <strong>State</strong>University, St. Mary’s College <strong>of</strong> <strong>Maryl<strong>and</strong></strong> <strong>and</strong> Baltimore City Community College <strong>and</strong> certain <strong>of</strong> their foundations. Each entity isgoverned by its own Board <strong>of</strong> Regents, or Board <strong>of</strong> Trustees, whose members are appointed by the Governor. The universities <strong>and</strong> collegesare funded through <strong>State</strong> appropriations, tuition, Federal grants, <strong>and</strong> private donations <strong>and</strong> grants. Because the universities <strong>and</strong> collegesare similar in nature <strong>and</strong> function, they have been combined <strong>and</strong> presented as a single discretely presented component unit. Some <strong>of</strong> thefinancial information for foundations affiliated with the universities <strong>and</strong> colleges has not been included with the financial information <strong>of</strong> theuniversities <strong>and</strong> colleges in accordance with the requirements <strong>of</strong> GASB <strong>State</strong>ment No. 14 as amended by GASB <strong>State</strong>ment No. 39.The <strong>Maryl<strong>and</strong></strong> Prepaid College Trust (Proprietary Fund Type) is a program <strong>of</strong> the College Savings Plans <strong>of</strong> <strong>Maryl<strong>and</strong></strong> <strong>and</strong>directed by its Board. The Board consists <strong>of</strong> five <strong>State</strong> <strong>of</strong>ficials <strong>and</strong> five members <strong>of</strong> the public appointed by the Governor. The<strong>Maryl<strong>and</strong></strong> Prepaid College Trust provides a means for payment <strong>of</strong> the cost <strong>of</strong> tuition <strong>and</strong> m<strong>and</strong>atory fees in advance <strong>of</strong> enrollmentat eligible institutions <strong>of</strong> higher education. If the Trust’s contract obligations exceed the market value <strong>of</strong> Trust assets, <strong>State</strong>appropriations may be provided.<strong>Maryl<strong>and</strong></strong> Stadium Authority (Proprietary Fund Type) — The <strong>Maryl<strong>and</strong></strong> Stadium Authority (Authority) was created as a bodycorporate <strong>and</strong> politic <strong>and</strong> as an independent unit <strong>of</strong> the Executive Department <strong>of</strong> the <strong>State</strong>. The Authority’s purpose is to acquire l<strong>and</strong><strong>and</strong> to construct, operate <strong>and</strong>/or manage various capital facilities in the <strong>State</strong>. The Authority’s Board consists <strong>of</strong> seven members, <strong>of</strong>which, six are appointed by the Governor, with the advice <strong>and</strong> consent <strong>of</strong> the <strong>State</strong> Senate, <strong>and</strong> one whom is appointed by the Mayor<strong>of</strong> Baltimore City, with the advice <strong>and</strong> consent <strong>of</strong> the <strong>State</strong> Senate. The <strong>Maryl<strong>and</strong></strong> <strong>State</strong> Legislature <strong>and</strong> the Board <strong>of</strong> Public Works(consisting <strong>of</strong> the Governor, Comptroller <strong>and</strong> Treasurer) have approved all <strong>of</strong> the projects <strong>and</strong> bond issuances <strong>of</strong> the Authority.The non-major component units are comprised <strong>of</strong> the following proprietary fund type entities.The <strong>Maryl<strong>and</strong></strong> Food Center Authority (Authority) is a body corporate <strong>and</strong> politic, the governing board <strong>of</strong> which is composed <strong>of</strong>twelve members. Four members are <strong>State</strong> <strong>of</strong>ficials, <strong>and</strong> eight members are appointed by the Governor. The Authority has statewidejurisdiction to promote the <strong>State</strong>’s welfare by undertaking real estate development <strong>and</strong> management activities that facilitate thewholesale food industry activity in the public interest. It is subject to <strong>State</strong> regulations <strong>and</strong> approvals <strong>and</strong> has received <strong>State</strong> subsidies.The <strong>Maryl<strong>and</strong></strong> Environmental Service (Service) was created as a body corporate <strong>and</strong> politic <strong>and</strong> is governed by a nine-member Board <strong>of</strong>Directors. The Board <strong>of</strong> Directors <strong>and</strong> the <strong>of</strong>ficers <strong>of</strong> the Service are appointed <strong>and</strong>/or approved by the Governor. The Service helps privateindustry <strong>and</strong> local governments manage liquid, solid <strong>and</strong> hazardous wastes. In accordance with direction from the Governor, the Serviceplans <strong>and</strong> establishes major resource recovery facilities, solid waste management plans <strong>and</strong> hazardous waste management programs.The <strong>Maryl<strong>and</strong></strong> Industrial Development Financing Authority (MIDFA) was established as a body corporate <strong>and</strong> politic <strong>and</strong> apublic instrumentality <strong>of</strong> the <strong>State</strong>. The Authority consists <strong>of</strong> nine members, the Secretary <strong>of</strong> the Department <strong>of</strong> Business <strong>and</strong>Economic Development, or his designee, the <strong>State</strong> Treasurer or the <strong>State</strong> Comptroller, as designated by the Governor; <strong>and</strong> sevenmembers appointed by the Secretary <strong>of</strong> the Department <strong>of</strong> Business <strong>and</strong> Economic Development <strong>and</strong> approved by the Governor.The MIDFA is subject to the authority <strong>of</strong> the Secretary <strong>and</strong> subject to <strong>State</strong> finance regulations. It provides financial assistance toenterprises seeking to locate or exp<strong>and</strong> operations in <strong>Maryl<strong>and</strong></strong>.46 www.maryl<strong>and</strong>taxes.comA-46
The <strong>Maryl<strong>and</strong></strong> Technology Development Corporation (Corporation) was established as a body corporate <strong>and</strong> politic <strong>and</strong> a publicinstrumentality <strong>of</strong> the <strong>State</strong>. The Corporation’s Board <strong>of</strong> Directors consists <strong>of</strong> 15 individuals, the Secretary <strong>of</strong> the Department <strong>of</strong>Business <strong>and</strong> Economic Development <strong>and</strong> 14 members appointed by the Governor with the advice <strong>and</strong> consent <strong>of</strong> the Senate. Itsbudget is submitted to <strong>and</strong> approved by the <strong>State</strong>, <strong>and</strong> its major revenue source is <strong>State</strong> appropriations. The Corporation was createdto assist in transferring to the private sector <strong>and</strong> commercializing the results <strong>and</strong> products <strong>of</strong> scientific research <strong>and</strong> developmentconducted by the colleges <strong>and</strong> universities <strong>and</strong> to assist in the commercialization <strong>of</strong> technology developed in the private sector. TheCorporation administers the <strong>Maryl<strong>and</strong></strong> Technology Incubator Program <strong>and</strong> the <strong>Maryl<strong>and</strong></strong> Stem Cell Research Fund.Complete financial statements <strong>of</strong> the individual component units <strong>and</strong> the <strong>Local</strong> Government Investment Pool <strong>of</strong> the InvestmentTrust Fund may be requested from the Comptroller <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, LLG Treasury Building, Annapolis, <strong>Maryl<strong>and</strong></strong> 21404.Related OrganizationsThe <strong>Maryl<strong>and</strong></strong> Economic Development Corporation (MEDCO), Injured Workers’ Insurance Fund <strong>and</strong> the <strong>Maryl<strong>and</strong></strong> Automobile InsuranceFund are related organizations <strong>of</strong> the <strong>State</strong>. The Governor appoints a majority <strong>of</strong> the Board <strong>of</strong> Directors, but the <strong>State</strong> does not have the ability toimpose its will on the organizations, <strong>and</strong> there is no financial benefit/burden relationship. As <strong>of</strong> June 30, 2008, the Economic Development LoanPrograms, major enterprise funds, had transactions with MEDCO that included loans, investments <strong>and</strong> grants totaling $20,543,000.B. Government-wide <strong>and</strong> Fund Financial <strong>State</strong>mentsThe <strong>State</strong>’s government-wide financial statements (i.e., the statement <strong>of</strong> net assets <strong>and</strong> the statement <strong>of</strong> activities) report information on allnonfiduciary activities <strong>of</strong> the primary government <strong>and</strong> its component units. Interfund activity has been eliminated from these statements exceptfor certain charges for services between activities that would distort the direct costs <strong>and</strong> program revenues reported for the applicable functions.Governmental activities, which normally are supported by taxes <strong>and</strong> intergovernmental revenues, are reported separately from business-typeactivities, which rely to a significant extent on fees <strong>and</strong> charges for support. Likewise, the primary government is reported separately from certainlegally separate component units for which the primary government is financially accountable.The statement <strong>of</strong> activities demonstrates the degree to which the direct expenses <strong>of</strong> a given function or segment is <strong>of</strong>fset by program revenues.Direct expenses are those that are clearly identifiable with a specific function or segment. Expenses reported for functional activities includeallocated indirect expenses. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods,services or privileges provided by a given function or segment <strong>and</strong> 2) grants <strong>and</strong> contributions that are restricted to meeting the operational orcapital requirements <strong>of</strong> a particular function or segment. Taxes <strong>and</strong> other items not properly included among program revenues are reportedinstead as general revenues.Separate financial statements are provided for governmental funds, proprietary funds, <strong>and</strong> fiduciary funds, even though the latter are excludedfrom the government-wide financial statements as those assets are not available to liquidate current liabilities. Major individual governmentalfunds <strong>and</strong> major individual enterprise funds are reported as separate columns in the fund financial statements.C. Measurement Focus, Basis <strong>of</strong> Accounting, <strong>and</strong> Financial <strong>State</strong>ment PresentationThe government-wide financial statements are reported using the economic resources measurement focus <strong>and</strong> the accrual basis <strong>of</strong> accounting,as are the proprietary fund <strong>and</strong> fiduciary fund (other than the agency funds), financial statements. The agency funds are reported using the accrualbasis <strong>of</strong> accounting, but have no measurement focus. Revenues are recorded when earned <strong>and</strong> expenses are recorded when a liability is incurred,regardless <strong>of</strong> the timing <strong>of</strong> related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants <strong>and</strong> similaritems are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met.Governmental fund financial statements are reported using the current financial resources measurements focus <strong>and</strong> the modified accrual basis<strong>of</strong> accounting. Revenues are recognized as soon as they are both measurable <strong>and</strong> available. Revenues are considered to be available when theyare collectible within the current period or soon enough thereafter to pay liabilities <strong>of</strong> the current period. For this purpose, the <strong>State</strong> considersall revenues to be available if they are collected within 60 days <strong>of</strong> the end <strong>of</strong> the current fiscal period. Expenditures generally are recorded whena liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to retirement costs,compensated absences <strong>and</strong> claims <strong>and</strong> judgments, are recorded only when payment is due.Property taxes, franchise taxes, licenses <strong>and</strong> interest associated with the current fiscal period are all considered to be susceptible to accrual <strong>and</strong>so have been recognized as revenues <strong>of</strong> the current fiscal period. All other revenue items are considered to be measurable <strong>and</strong> available only whencash is received by the government.The <strong>State</strong> reports the following major governmental funds:<strong>General</strong> Fund:Transactions related to resources obtained <strong>and</strong> used for those services traditionally provided by a state government, which are notaccounted for in other governmental funds, are accounted for in the general fund. These services include, among other items, generalgovernment, health <strong>and</strong> mental hygiene, education (other than higher education institutions), human resources, public safety, judicial, labor,licensing <strong>and</strong> regulation, natural resources <strong>and</strong> recreation, housing <strong>and</strong> community development, environment, agriculture, <strong>and</strong> business<strong>and</strong> economic development. Resources obtained from Federal grants <strong>and</strong> used for general fund activities consistent with applicable legalrequirements, are recorded in the general fund.A-47www.maryl<strong>and</strong>taxes.com 47
Special Revenue Fund, <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Transportation:Transactions related to resources obtained, the uses <strong>of</strong> which are restricted for specific purposes, are accounted for in the special revenuefund. The <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Transportation special revenue fund accounts for resources used for operations (other than debt service<strong>and</strong> pension activities) <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Transportation, including construction or improvement <strong>of</strong> transportation facilities <strong>and</strong>mass transit operations.Enterprise Funds:Transactions related to commercial types <strong>of</strong> activities operated by the <strong>State</strong> are accounted for in the enterprise funds. The enterprise fundsdiffer from governmental funds in that the focus is on the flow <strong>of</strong> economic resources, which, together with the maintenance <strong>of</strong> equity, is animportant financial indicator.The major enterprise funds are as follows.1. The Economic Development Loan Programs includes the direct loan programs <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Departments <strong>of</strong> Housing <strong>and</strong>Community Development, Business <strong>and</strong> Economic Development <strong>and</strong> Environment.2. The Unemployment Insurance Program reflects the transactions, assets, liabilities <strong>and</strong> net assets <strong>of</strong> the Unemployment InsuranceProgram <strong>and</strong> is used to account for the unemployment taxes collected from employers, Federal revenue received <strong>and</strong> remittance <strong>of</strong>benefits to the unemployed.3. The <strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery Agency operates the <strong>State</strong> Lottery.4. The <strong>Maryl<strong>and</strong></strong> Transportation Authority is responsible for the operation <strong>and</strong> maintenance <strong>of</strong> toll roads, bridges <strong>and</strong> tunnels in the <strong>State</strong>.Fiduciary Funds:1. The Pension <strong>and</strong> Other Employee Benefits Trust Fund (Pension Trust Fund) includes the <strong>State</strong> Retirement <strong>and</strong> Pension System<strong>of</strong> <strong>Maryl<strong>and</strong></strong>, the <strong>Maryl<strong>and</strong></strong> Transit Administration Pension Plan, <strong>and</strong> the Deferred Compensation Plan. The Pension Trust Fundreflects the transactions, assets, liabilities <strong>and</strong> net assets <strong>of</strong> the plans administered by the <strong>State</strong> <strong>and</strong> is accounted for using the flow <strong>of</strong>economic resources measurement focus. The Deferred Compensation Plan, which is reported as <strong>of</strong> <strong>and</strong> for its period ended December31, accounts for participant earnings deferred in accordance with Internal Revenue Code Sections 457, 403(b), 401(a), <strong>and</strong> 401(k).Amounts deferred are invested <strong>and</strong> are not subject to Federal income taxes until paid to participants upon termination or retirementfrom employment, death or for an unforeseeable emergency.2. The Investment Trust Fund reflects the transactions, assets, liabilities <strong>and</strong> net assets <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> <strong>Local</strong> Government Investment Pool<strong>and</strong> is accounted for using the flow <strong>of</strong> economic resources measurement focus.3. The Postretirement Health Benefits Trust Fund (OPEB Trust) accumulates funds to assist the <strong>State</strong>’s Employee <strong>and</strong> Retiree Health <strong>and</strong> WelfareBenefits Program finance the <strong>State</strong>’s postretirement health insurance subsidy. The OPEB Trust is administered by the Board <strong>of</strong> Trustees forthe <strong>State</strong> Retirement <strong>and</strong> Pension System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, <strong>and</strong> its transactions, assets, liabilities <strong>and</strong> net assets are accounted for using the flow<strong>of</strong> economic resources measurement focus. The assets <strong>of</strong> the Pension <strong>and</strong> OPEB Trusts are not pooled for investment purposes, <strong>and</strong> eachtrust’s assets may be used only for the payment <strong>of</strong> benefits to the trust’s members in accordance with the terms <strong>of</strong> the trust.4. The agency funds are custodial in nature <strong>and</strong> do not present the results <strong>of</strong> operations or have a measurement focus. The <strong>State</strong> uses agencyfunds to account for the receipt <strong>and</strong> disbursement <strong>of</strong> litigants, patient <strong>and</strong> prisoner accounts, various taxes collected by the <strong>State</strong> fordistribution to political subdivisions <strong>and</strong> amounts withheld from employees’ payroll.D. New Pronouncements:<strong>State</strong>ment No. 49, Accounting <strong>and</strong> Financial Reporting for Pollution Remediation <strong>Obligation</strong>s, effective for periods beginning afterDecember 15, 2007, was issued by the GASB in November 2006. In addition, GASB issued <strong>State</strong>ment No. 51, Accounting <strong>and</strong> FinancialReporting for Intangible Assets, in June, 2007, effective for financial statements for periods beginning after June 15, <strong>2009</strong> <strong>and</strong> <strong>State</strong>ment No. 52,L<strong>and</strong> <strong>and</strong> Other Real Estate Held as Investments by Endowments, in November 2007, effective for periods beginning after June 15, 2008. The<strong>State</strong> will implement each <strong>of</strong> these as <strong>of</strong> their effective dates. While the <strong>State</strong> is still in the process <strong>of</strong> determining the effect <strong>of</strong> implementingthese GASB statements, they are not expected to have a material effect on the financial position <strong>of</strong> the <strong>State</strong>.2. Significant Accounting Policies - Assets, Liabilities <strong>and</strong> Net Assets or Equity:A. All Funds:Deposits with Financial Institutions <strong>and</strong> Investments:The <strong>State</strong> Treasurer’s Office operates a centralized cash receipt, investment <strong>and</strong> disbursement function for the majority <strong>of</strong> the <strong>State</strong>’s fundsas required by statute. Certain enterprise activities, pension funds, agency funds <strong>and</strong> component units are specifically exempted from thisfunction in the law. Individual fund equity in pooled invested cash is reported as an asset on the balance sheets <strong>of</strong> those funds participatingin the centralized cash receipt <strong>and</strong> disbursement function. Investment earnings accrue to those funds reporting equity in pooled invested cashonly if the law specifically provides for the fund’s accrual <strong>of</strong> interest earnings.The <strong>State</strong> Treasurer’s Office invests short-term cash balances on a daily basis primarily in repurchase agreements, U.S. Governmentobligations <strong>and</strong> money market mutual funds. Under the <strong>State</strong> Finance <strong>and</strong> Procurement Article <strong>of</strong> the Annotated Code <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, Title 6,Subtitle 2, the <strong>State</strong> Treasurer may only invest in the following:48 www.maryl<strong>and</strong>taxes.comA-48
• Any obligation for which the United <strong>State</strong>s Government has pledged its faith <strong>and</strong> credit for the payment <strong>of</strong> principal <strong>and</strong> interest.• Any obligation that a United <strong>State</strong>s agency issues in accordance with an act <strong>of</strong> Congress.• Repurchase agreements that any <strong>of</strong> the above obligations secure.• Certificates <strong>of</strong> deposits <strong>of</strong> <strong>Maryl<strong>and</strong></strong> financial institutions.• Banker’s acceptances.• Money market mutual funds.• Commercial paper.• <strong>Maryl<strong>and</strong></strong> <strong>Local</strong> Government Investment Pool.• Securities Lending Collateral.In addition, bond sale proceeds may be invested in Municipal securities. A significant portion <strong>of</strong> the investments maintained by the <strong>State</strong>Treasurer consists <strong>of</strong> repurchase agreements. Collateral must be at least 102% <strong>of</strong> the book value <strong>of</strong> the repurchase agreements <strong>and</strong> must bedelivered to the <strong>State</strong> Treasurer’s custodian for safekeeping.Investments are recorded at fair value <strong>and</strong> changes in fair value are recognized as revenue. Fair values are based on quotations fromnational security exchanges <strong>and</strong> security pricing services, or by the respective fund managers for securities which are not actively traded.Investments maturing within 90 days <strong>of</strong> purchase are reported in the financial statements as cash <strong>and</strong> cash equivalents.The <strong>State</strong> Retirement <strong>and</strong> Pension System <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (System), in accordance with <strong>State</strong> Personnel <strong>and</strong> Pensions Article Section 21-123<strong>of</strong> the Annotated Code <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, is permitted to make investments subject to the terms, conditions, limitations <strong>and</strong> restrictions imposedby the Board <strong>of</strong> Trustees <strong>of</strong> the System. The law further provides that no more than 25% <strong>of</strong> the assets that are invested in common stocks maybe invested in nondividend paying common stocks. In addition, no investment in any one organization may constitute more than 5% <strong>of</strong> thetotal assets <strong>of</strong> the System. The System is authorized by Section 21-116 <strong>of</strong> the <strong>State</strong> Personnel <strong>and</strong> Pensions Article to establish <strong>and</strong> maintainthe investment policy manual, which authorizes investing in all major sectors <strong>of</strong> the capital market in order to diversify <strong>and</strong> minimize totalinvestment program risk. Such sectors include, but are not limited to, common stock, preferred stock, convertible securities, warrants <strong>and</strong>similar rights <strong>of</strong> U.S. <strong>and</strong> non-U.S. companies; private equity - direct/partnership/funds; real estate investment trusts; commingled real estatefunds; directly owned real estate; fixed income obligations <strong>of</strong> the U.S. government <strong>and</strong> its states <strong>and</strong> local subdivisions, non-U.S. governments<strong>and</strong> their states <strong>and</strong> local subdivisions, U.S. <strong>and</strong> non-U.S. companies, <strong>and</strong> supra-national organizations; futures <strong>and</strong> options; foreign exchangeforward <strong>and</strong> future contracts <strong>and</strong> options; equity index futures; <strong>and</strong> equity options.Investments <strong>of</strong> the System, the Postretirement Health Benefits Trust Fund (OPEB Trust) <strong>and</strong> the <strong>Maryl<strong>and</strong></strong> Transit Administration (MTA)Pension Plan are stated at fair value. The investments <strong>of</strong> the OPEB Trust <strong>and</strong> the MTA Pension Plan are held <strong>and</strong> invested on their behalf bythe System. For fixed income securities, fair value is based on quoted market prices provided by independent pricing services. Securities tradedon a national or international exchange are valued at the last reported sales price at current exchange rates. Mortgages <strong>and</strong> mortgage relatedsecurities are valued on the basis <strong>of</strong> future principal <strong>and</strong> interest payments <strong>and</strong> are discounted at prevailing interest rates for similar instruments.Fair value for real estate investments is based on estimated current values <strong>and</strong> independent appraisals. Fair value for private equity investments<strong>and</strong> mutual funds (other than those funds traded on a national or international exchange) is based on information provided by the applicablefund managers.<strong>State</strong> employees are <strong>of</strong>fered participation in deferred compensation plans created in accordance with the Internal Revenue Code, Sections401(a), 401(k), 403(b) <strong>and</strong> 457. The Board <strong>of</strong> Trustees <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Teachers <strong>and</strong> <strong>State</strong> Employees Supplemental Retirement Plans is responsiblefor the implementation, maintenance <strong>and</strong> administration <strong>of</strong> the Plans. The Board has appointed a private company as the Plans’ administrator.Assets <strong>of</strong> the Plans are held in trusts for the exclusive benefit <strong>of</strong> participating employees <strong>and</strong> their beneficiaries. Investments <strong>of</strong> the Plans are stated atfair value. Fair value <strong>of</strong> the investments is valued at cost plus interest credited for fixed earnings investment contract pools <strong>and</strong> at fair value based onpublished quotations at each December 31, or net asset value as provided by the investment custodian, for variable earnings investments.Retirement Costs:Substantially all <strong>State</strong> employees participate in one <strong>of</strong> several <strong>State</strong> retirement systems. (See footnote 15.) The <strong>State</strong> also providesretirement benefits to teachers <strong>and</strong> certain other employees <strong>of</strong> its political subdivisions. Retirement costs have been provided on the accrualbasis, based upon actuarial valuations, except that retirement expenditures for governmental funds represent amounts contributed by the <strong>State</strong>for the fiscal year.Other Post-Employment Benefit Costs:Substantially all <strong>State</strong> retirees may participate in the various health care plans <strong>of</strong>fered by the <strong>State</strong>. (See footnote 16.) Post-employmenthealth care costs have been provided on the accrual basis, based upon actuarial valuations, except that other post-employment expenditures forgovernmental funds represent amounts contributed by the <strong>State</strong> <strong>and</strong> plan members for the fiscal year.Accrued Self-Insurance Costs:The accrued self-insurance costs represent the <strong>State</strong>’s liability for its various self-insurance programs. The <strong>State</strong> is self-insured for generalliability, property <strong>and</strong> casualty, workers’ compensation, environmental <strong>and</strong> anti-trust liabilities <strong>and</strong> certain employee health benefits. The <strong>State</strong>records self-insurance expenses in the proprietary funds <strong>and</strong> discretely presented component units on an accrual basis <strong>and</strong> the modified accrualbasis for the governmental funds. The long-term accrued self-insurance costs <strong>of</strong> the governmental funds, which are not expected to be fundedwith current resources, are reported in the government-wide financial statements.A-49www.maryl<strong>and</strong>taxes.com 49
Annual Leave Costs:Principally all full-time employees accrue annual leave based on the number <strong>of</strong> years employed up to a maximum <strong>of</strong> 25 days per calendaryear. Earned annual leave may be accumulated up to a maximum <strong>of</strong> 50 days as <strong>of</strong> the end <strong>of</strong> each calendar year. Accumulated earnedbut unused annual leave for general government employees is accounted for in the government-wide financial statements. Liabilities foraccumulated earned but unused annual leave applicable to proprietary funds <strong>and</strong> component units are reported in the respective funds.Capital Assets:Capital assets, which include property, plant, art <strong>and</strong> historical treasures, equipment, <strong>and</strong> infrastructure assets (e.g., roads, bridges,sidewalks, <strong>and</strong> similar items), are reported in the applicable governmental or business-type activities columns in the government-wide financialstatements. Infrastructure acquired prior to June 30, 1980, is not reported. Capital assets are defined by the government as assets with aninitial, individual cost <strong>of</strong> more than $50,000 <strong>and</strong> an estimated useful life in excess <strong>of</strong> two years. Such assets are recorded at historical cost orestimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date <strong>of</strong> donation.The costs <strong>of</strong> normal maintenance <strong>and</strong> repairs that do not add to the value <strong>of</strong> the asset or materially extend asset lives are not capitalized. Majoroutlays for capital assets <strong>and</strong> improvements are capitalized as projects are constructed.Capital assets <strong>of</strong> the primary government, as well as the component units, are depreciated using the straight line method over thefollowing estimated useful lives:AssetsYearsBuildings 5-50Building improvements 5-50Vehicles 3-25Office equipment 3-10Computer equipment 3-10Computer s<strong>of</strong>tware 5-10Infrastructure 10-50Long-term <strong>Obligation</strong>s:In the government-wide financial statements, <strong>and</strong> for proprietary fund types in the fund financial statements, long-term debt <strong>and</strong> otherlong-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund typestatement <strong>of</strong> net assets. Bond premiums <strong>and</strong> discounts, as well as issuance costs, are deferred <strong>and</strong> amortized over the life <strong>of</strong> the bonds. <strong>Bonds</strong>payable are reported net <strong>of</strong> the applicable bond premium or discount. Bond issuance costs are reported as deferred charges <strong>and</strong> amortized overthe term <strong>of</strong> the related debt.In the fund financial statements, governmental fund types recognize bond premiums <strong>and</strong> discounts, as well as bond issuance costs, duringthe current period. The face amount <strong>of</strong> debt issued is reported as other financing sources. Premiums received on debt issuances are reportedas other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld fromthe actual debt proceeds received, are reported as debt service expenditures.Restricted Resources:When both restricted <strong>and</strong> unrestricted resources are available for use, it is the <strong>State</strong>’s policy to use restricted resources first, <strong>and</strong> thenunrestricted resources as they are needed.Debt Refinancing:The gain or loss associated with debt refinanced is deferred <strong>and</strong> amortized to interest expense over the remaining life <strong>of</strong> the old debt or thelife <strong>of</strong> the new debt whichever is shorter.Net Assets:Net assets are divided into three categories. Net assets invested in capital assets net <strong>of</strong> related debt is the capital assets less accumulateddepreciation <strong>and</strong> outst<strong>and</strong>ing principal <strong>of</strong> the related debt. Restricted net assets reflect restrictions on assets imposed by parties outside the<strong>State</strong> or imposed by the <strong>State</strong> by constitutional provisions or enabling legislation. Unrestricted net assets are total net assets <strong>of</strong> the <strong>State</strong> less netassets invested in capital assets net <strong>of</strong> related debt <strong>and</strong> restricted net assets. Unrestricted net assets are comprised mainly <strong>of</strong> cash, investments,loans <strong>and</strong> receivables.B. Governmental Funds:Inventories <strong>and</strong> Prepaid Items:All inventories are valued at cost using the first-in/first-out (FIFO) method. Inventories <strong>of</strong> governmental funds are recorded asexpenditures when consumed rather than when purchased.Certain payments to vendors reflect costs applicable to future accounting periods <strong>and</strong> are recorded as prepaid items in the fund financialstatements under the consumption method.Grants:Revenues from Federal reimbursement type grants are recognized when the related expenditures are incurred <strong>and</strong> the revenues are bothmeasurable <strong>and</strong> available. The government considers all grant revenues to be available if they are collected within 60 days <strong>of</strong> the current fiscalperiod. Distributions <strong>of</strong> food stamp benefits are recognized as revenues <strong>and</strong> expenditures when the benefits are distributed to individual recipients.50 www.maryl<strong>and</strong>taxes.comA-50
Lottery Revenues, Prizes <strong>and</strong> Related Transfers:Revenues <strong>and</strong> prizes <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery Agency (Lottery) are primarily recognized when drawings are held. Certain prizesare payable in deferred installments. Such liabilities are recorded at the present value <strong>of</strong> amounts payable in the future. <strong>State</strong> law requiresthe Lottery to transfer to the <strong>State</strong> revenues in excess <strong>of</strong> amounts allocated to prize awards, operating expenses <strong>and</strong> capital expenditures. Theexcess revenues from certain select games are transferred to the <strong>State</strong>’s general fund, which then transfers the amounts to the <strong>Maryl<strong>and</strong></strong> StadiumAuthority for operations <strong>and</strong> to cover the <strong>State</strong>’s capital lease payments to the <strong>Maryl<strong>and</strong></strong> Stadium Authority.Provisions for Insurance <strong>and</strong> Loan Losses:Current provisions are made for estimated losses resulting from insuring loans <strong>and</strong> uncollectible loans. Loss provisions are based on thecurrent status <strong>of</strong> insured <strong>and</strong> direct loans, including delinquencies, economic conditions, loss experience, estimated value <strong>of</strong> collateral <strong>and</strong> otherfactors which may affect their realization. Reductions required to the reserve for loan or insured loan reserves are recorded as negative expenses.Inventories:Inventories are stated at the lower <strong>of</strong> cost or market, using the first-in, first-out method.3. Deposits with Financial Institutions <strong>and</strong> the U.S. Treasury, Equity in PooledInvested Cash <strong>and</strong> Investments:Cash <strong>and</strong> cash equivalents, equity in pooled invested cash <strong>and</strong> investments as shown on the basic financial statements as <strong>of</strong> June 30, 2008,reconcile to cash deposit <strong>and</strong> investment disclosures as follows (amounts expressed in thous<strong>and</strong>s).Government-wide statement <strong>of</strong> net assets:Cash <strong>and</strong> cash equivalents ...................................................................................................................................................... $ 329,140Equity in pooled invested cash ............................................................................................................................................... 4,566,516Investments ............................................................................................................................................................................ 2,009,123Collateral for lent securities .................................................................................................................................................... 358,709Restricted cash <strong>and</strong> cash equivalents ....................................................................................................................................... 2,032,358Restricted investments ........................................................................................................................................................... 1,440,317<strong>State</strong>ment <strong>of</strong> fiduciary net assets:Cash <strong>and</strong> cash equivalents ...................................................................................................................................................... 1,963,292Equity in pooled invested cash ............................................................................................................................................... 1,669,571Investments ............................................................................................................................................................................ 41,054,387Collateral for lent securities .................................................................................................................................................... 1,826,516Total cash <strong>and</strong> cash equivalents, equity in pooled invested cash<strong>and</strong> investments per basic financial statements ....................................................................................................... 57,249,929Less: Cash <strong>and</strong> cash equivalents <strong>and</strong> investments <strong>of</strong> higher educationfoundations not subject to disclosure .................................................................................................................... 962,533Total cash deposits <strong>and</strong> investments per Note 3 ........................................................................................................... $56,287,396Note 3 <strong>of</strong> the financial statements:Cash deposits:Governmental funds ......................................................................................................................................................... $ 172,565Enterprise funds ............................................................................................................................................................... 1,044,920Fiduciary funds ................................................................................................................................................................. 185,854Component units ............................................................................................................................................................. 58,849Investments:Governmental funds ......................................................................................................................................................... 6,629,024Enterprise funds ............................................................................................................................................................... 2,565,940Fiduciary funds ................................................................................................................................................................. 44,658,342Component units ............................................................................................................................................................. 971,902Total cash deposits <strong>and</strong> investments ............................................................................................................................. $56,287,396Cash <strong>and</strong> cash equivalents for financial statement presentation include short-term investments maturing within 90 days <strong>of</strong> purchase.Investments for financial statement presentation include certificates <strong>of</strong> deposit maturing 90 days or more from date <strong>of</strong> purchase.A. Cash Deposits:As <strong>of</strong> June 30, 2008, the carrying value for the bank deposits <strong>of</strong> the governmental funds, enterprise funds, fiduciary funds <strong>and</strong>component units were $172,565,000, $1,044,920,000, $185,854,000 <strong>and</strong> $58,849,000, respectively. The bank balances were $172,565,000,$1,044,801,000, $185,854,000, <strong>and</strong> $107,714,000, respectively.Custodial Credit Risk. Custodial credit risk is the risk that, in the event <strong>of</strong> a bank failure, the government’s deposits may not be returned.Deposits are exposed to custodial credit risk if they are not covered by depository insurance <strong>and</strong> the deposits are (a) uncollateralized, (b)collateralized with securities held by the pledging financial institution, or (c) collateralized with securities held by the pledging financial52 www.maryl<strong>and</strong>taxes.comA-52
institution’s trust department or agent but not in the government’s name. <strong>State</strong> law permits the Treasurer to deposit in a financial institutionin the <strong>State</strong>, unexpended or surplus money in which the Treasurer has custody if (a) the deposit is interest bearing; (b) the financial institutionprovides collateral that has a market value that exceeds the amount by which a deposit exceeds the deposit insurance; <strong>and</strong> (c) a custodian holdsthe collateral.The Economic Development Loan Programs, Higher Education component unit, <strong>Maryl<strong>and</strong></strong> Stadium Authority, <strong>and</strong> certain othercomponent units do not have a deposit policy for custodial credit risk. As <strong>of</strong> June 30, 2008, $642,000, $5,227,000, $75,000, <strong>and</strong> $7,107,000,respectively, <strong>of</strong> their bank balances were exposed to custodial credit risk as uninsured <strong>and</strong> uncollateralized. The <strong>Maryl<strong>and</strong></strong> Prepaid College Trustdoes not have a policy for custodial credit risk. As <strong>of</strong> June 30, 2008, $15,827,000, <strong>of</strong> its bank balances were exposed to custodial credit risk asuninsured <strong>and</strong> collateralized with securities held by the pledging financial institution’s trust department or agent but not in the Trust’s name.B. Investments:The <strong>State</strong> discloses investment risks as follows:Interest Rate Risk. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value <strong>of</strong> an investment.Credit Risk. Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations.Concentration <strong>of</strong> Credit Risk. Concentration <strong>of</strong> credit risk is the risk <strong>of</strong> loss attributed to the magnitude <strong>of</strong> a government’s investment in asingle issuer.Custodial Credit Risk. Custodial credit risk is the risk that, in the event <strong>of</strong> the failure <strong>of</strong> the counterparty, the government will not be ableto recover the value <strong>of</strong> its investments or collateral securities that are in the possession <strong>of</strong> an outside party. Investment securities areexposed to custodial credit risk if the securities are uninsured, are not registered in the name <strong>of</strong> the government <strong>and</strong> are held by either(a) the counterparty or (b) the counterparty’s trust department or agent but not in the government’s name.Foreign Currency Risk. Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair value <strong>of</strong> an investment.1. Investments-Governmental Funds:The <strong>State</strong> Treasurer’s Office is authorized to make investments as stated in footnote 2.A.Investments are stated at fair value that is based on quoted market prices. The investments <strong>and</strong> maturities as <strong>of</strong> June 30, 2008, for thegovernmental funds <strong>of</strong> the primary government are as follows (amounts expressed in thous<strong>and</strong>s).Investment Maturities (in Years)Fair Less MoreInvestment Type Value than 1 1-3 than 3U.S. Government agency obligations (a) $5,623,563 $117,317 (b) $5,506,246 (c)Repurchase agreements .................... 260,202 $260,202Guaranteed investment contracts..... 8,065 8,065Total investments ..................... 5,891,830 260,202 117,317 5,514,311Collateral for lent securities ............. 358,709 358,709Total investments <strong>and</strong>collateral for lent securities .... $6,250,539 $618,911 $117,317 $5,514,311(a) Investments held by broker dealers under securities lending program are $241,816,000.(b) <strong>Bonds</strong> in the amount <strong>of</strong> $117,317,000, mature July 2010 to June 2011, but are callable July 2008 to June <strong>2009</strong>.(c) <strong>Bonds</strong> in the amount <strong>of</strong> $3,736,909,000, mature July 2011 to June 2013, but are callable July 2008 to February 2010.In addition to the investments scheduled above, as <strong>of</strong> June 30, 2008, the governmental funds had investments <strong>of</strong> $214,691,000 in moneymarket mutual funds <strong>and</strong> $163,794,000 in the <strong>Local</strong> Government Investment Pool. These investments are operated in accordance with Rule2a-7 <strong>of</strong> the Investment Company Act <strong>of</strong> 1940, as amended. Their fair values are based on a share price <strong>of</strong> $1.00 per share.Interest Rate Risk. The <strong>State</strong> Treasurer’s Office’s investment policy states that to the extent possible, it will attempt to match its investmentswith anticipated cash flow requirements. Unless matched to a specific cash flow, the Treasurer’s Office will not directly invest in securitiesmaturing more than five years from the date <strong>of</strong> purchase. In addition, investments <strong>of</strong> the non-major governmental funds are subject to theprovisions <strong>of</strong> the 2002, 2005, <strong>and</strong> 2007 Qualified Zone Academy Bond covenants requiring that annual sinking fund deposits be made toredeem the bonds in 2016, 2020, <strong>and</strong> 2022, respectively. These funds, totaling $8,065,000, are invested in guaranteed investment contracts.Credit Risk. <strong>State</strong> law requires that the governmental funds’ repurchase agreements be collateralized by U.S. Treasury <strong>and</strong> agencyobligations. In addition, investments are made directly in U.S. agency obligations. These agency obligations are rated Aaa by Moody’s <strong>and</strong>AAA by St<strong>and</strong>ard <strong>and</strong> Poor’s. <strong>State</strong> law also requires that money market mutual funds have the highest possible rating from at least onenationally recognized securities rating organization. The money market mutual funds are rated Aaa/AAA. The <strong>Local</strong> Government InvestmentPool is rated AAAm by St<strong>and</strong>ard & Poor’s. The guaranteed investment contracts are collateralized by U.S. agency obligations. They are notrequired to be <strong>and</strong> are not rated.A-53www.maryl<strong>and</strong>taxes.com 53
Concentration <strong>of</strong> Credit Risk. The <strong>State</strong> Treasurer’s Office’s investment policy limits the amount <strong>of</strong> repurchase agreements to be investedwith a particular institution to 30% <strong>of</strong> the portfolio. There is no other limit on the amount that may be invested in any one issuer. Morethan 5 percent <strong>of</strong> the governmental funds’ investments are in the Federal National Mortgage Association, the Federal Home Loan MortgageCorporation, the Federal Home Loan Bank, <strong>and</strong> the Federal Farm Credit Bank. These investments are 32.8%, 27.8%, 16.9% <strong>and</strong> 15.4% <strong>of</strong>the governmental funds’ total investments, respectively.2. Investments - Enterprise Funds:The enterprise funds’ bond indentures <strong>and</strong> investment policies, with the exception <strong>of</strong> the Economic Development Loan Programs,authorize the investment <strong>of</strong> assets related to the indentures <strong>and</strong> other funds in obligations in which the <strong>State</strong> Treasurer may invest. TheEconomic Development Loan Programs are authorized to invest in obligations <strong>of</strong> the U.S. Treasury, U.S. government agencies, obligations <strong>of</strong>U.S. political subdivisions, bankers’ acceptances, commercial paper, repurchase agreements, guaranteed investment contracts, corporate debtsecurities <strong>and</strong> mutual funds.Investments <strong>of</strong> the enterprise funds are stated at fair value, which is based on quoted market prices.The investments <strong>and</strong> maturities as <strong>of</strong> June 30, 2008, for the enterprise funds <strong>of</strong> the primary government are as follows (amounts expressedin thous<strong>and</strong>s).Investment Maturities (in Years)Fair Less MoreInvestment Type Value than 1 1 - 5 6-10 11-15 than 15U.S. Treasury obligations (a)....................... $ 500,598 $ 14,845 $16,469 $20,431 $448,853U.S. Government agency obligations .......... 798,057 538,475 $249,948 1,764 2,200 5,670Repurchase agreements ............................... 51,383 33,738 17,645Commercial paper ...................................... 2,996 2,996Guaranteed investment contracts................ 18,996 18,996Total .................................................. $1,372,030 $556,316 $249,948 $70,967 $22,631 $472,168(a) Investments held by broker dealers under securities lending program are $1,230,000.In addition to the investments scheduled above, as <strong>of</strong> June 30, 2008, the enterprise funds had investments <strong>of</strong> $967,075,000 in moneymarket mutual funds operated in accordance with Rule 2a-7 <strong>of</strong> the Investment Company Act <strong>of</strong> 1940, as amended. The funds’ fair valuesare based on a share price <strong>of</strong> $1.00 per share. The enterprise funds’ investments also include the fair value <strong>of</strong> direct equity investments,$65,972,000.The <strong>State</strong> Lottery Agency, a major enterprise fund, invests in U.S. Treasury obligations <strong>and</strong> annuity contracts that provide for guaranteedpayouts to jackpot prize winners <strong>and</strong>, therefore, have no interest rate risk to the Lottery. As <strong>of</strong> June 30, 2008, the fair value <strong>of</strong> theseinvestments was $160,444,000 <strong>and</strong> $419,000, respectively. Of these investments, U.S. Treasury obligations held by broker dealers under thesecurities lending program were $110,754,000.Interest Rate Risk. The enterprise funds’ policy for managing their exposure to fair value loss arising from increasing interest rates is tomanage investment maturities so that they precede or coincide with the expected need for funds.Credit Risk. The investment policies <strong>of</strong> the enterprise funds require that repurchase agreements are collateralized by U.S. Treasury<strong>and</strong> agency obligations. The policies also require that money market mutual funds contain only U.S. Treasuries or agencies or repurchaseagreements secured by these or that they receive the highest possible rating from at least one nationally recognized securities rating organization.According to the indenture <strong>and</strong> investment policy <strong>of</strong> the Economic Development Loan Programs, investments must be rated no lower than therating on the Loan Programs’ bonds or F1/P1 for the issuer’s short-term accounts or securities. The rating on the Loan Programs’ bonds as <strong>of</strong>June 30, 2008, was Aa by Moody’s <strong>and</strong> AA by Fitch. The guaranteed investment contracts are not required to be <strong>and</strong> are not rated.As <strong>of</strong> June 30, 2008, the enterprise funds had the following investments <strong>and</strong> quality ratings (amounts expressed in thous<strong>and</strong>s).PercentageQuality Rating <strong>of</strong> TotalInvestment Type Fair Value Rating Organization InvestmentsU.S. Government agency obligations ................................ $ 798,057 AAA/Aaa S&P/Moody’s 31.10%Money market mutual funds ............................................ 967,075 AAAm/Aaa S&P/Moody’s 37.69Repurchase agreements-underlying securities .................... 51,383 AAA/Aaa S&P/Moody’s 2.00Commercial paper ............................................................ 2,996 A-1/P-1 S&P/Moody’s 0.12Guaranteed investment contracts...................................... 18,996 Not rated 0.74Total ......................................................................... $1,838,507 71.65%54 www.maryl<strong>and</strong>taxes.comA-54
Concentration <strong>of</strong> Credit Risk. The enterprise funds place no limit on the amount they may invest in any one issuer. More than 5% <strong>of</strong>the enterprise funds’ investments are in obligations <strong>of</strong> the Federal Home Loan Bank <strong>and</strong> Federal Home Loan Mortgage Corporation. Theseinvestments are 21.3% <strong>and</strong> 7.4%, respectively, <strong>of</strong> the enterprise funds’ total investments.3. Investments - Fiduciary Funds:The Pension <strong>and</strong> OPEB Trust Funds are authorized to make investments as stated in footnote 2.A.The <strong>Maryl<strong>and</strong></strong> <strong>Local</strong> Government Investment Pool is authorized by Article 95, Section 22G, <strong>of</strong> the Annotated Code <strong>of</strong> <strong>Maryl<strong>and</strong></strong> to invest inany instrument in which the <strong>State</strong> Treasurer may invest. Investments <strong>of</strong> the Pool are stated at fair value. Securities are valued daily on an amortizedcost basis which approximates market value. Money market funds are valued at the closing net asset value per share on the day <strong>of</strong> valuation.The investments <strong>and</strong> maturities as <strong>of</strong> June 30, 2008, for the fiduciary funds <strong>of</strong> the primary government are as follows (amounts expressedin thous<strong>and</strong>s).Investment Maturities (in Years)Fair Less MoreInvestment Type Value than 1 1-5 6-10 than 10U.S. Treasury notes <strong>and</strong> bonds ................................. $ 979,656 $ 13,536 $ 248,422 $ 416,232 $ 301,466U.S. Treasury strips .................................................. 14,126 14,126U.S. Government agency obligations ........................ 1,389,341 1,113,148 252,856 12,084 11,253Repurchase agreements ............................................. 409,417 409,417Bankers’ acceptances ................................................. 107,662 107,662Commercial paper .................................................... 172,282 172,282Guaranteed investment contracts.............................. 629,094 624,401 4,693Corporate bonds ...................................................... 697,073 22,536 247,509 242,996 184,032International bonds .................................................. 67,250 12,958 17,931 36,361Other government bonds ......................................... 140,696 1,000 39,657 53,302 46,737Mortgage-backed securities ....................................... 2,226,344 3,482 21,468 2,201,394Asset-backed securities .............................................. 233,990 56,055 22,039 155,896Bond mutual funds .................................................. 6,446,436 20,936 898,332 4,935,868 591,300Swaps ....................................................................... (49,472) 2,128 (38,140) (2,562) (10,898)Alternative investments ............................................ 591,947 429,743 162,204Total investments .............................................. 14,055,842 2,292,388 2,345,532 5,886,255 3,531,667Collateral for lent securities ...................................... 1,826,516 1,826,516Total investments <strong>and</strong> collateral for lent securities .... $15,882,358 $4,118,904 $2,345,532 $5,886,255 $3,531,667In addition to the investments scheduled above, as <strong>of</strong> June 30, 2008, the fiduciary funds had investments <strong>of</strong> $2,043,045,000 in moneymarket mutual funds operated in accordance with Rule 2a-7 <strong>of</strong> the Investment Company Act <strong>of</strong> 1940, as amended. The fair value <strong>of</strong>the funds is based on a share price <strong>of</strong> $1.00 per share. The fiduciary funds’ investments also include the fair value <strong>of</strong> stock mutual funds,$15,133,157,000, corporate equity securities, $9,386,845,000, private equity, $830,433,000, real estate, $1,249,452,000, annuity contracts,$129,461,000, <strong>and</strong> insurance contracts, $3,591,000.Interest Rate Risk. The <strong>State</strong> Retirement <strong>and</strong> Pension System (System) may invest in derivatives as permitted by guidelines established bythe Board <strong>of</strong> Trustees. Compliance with these guidelines is monitored by the System’s staff. Derivatives are used to improve yield, adjust theduration <strong>of</strong> the fixed income portfolio, or hedge against changes in interest rates. At times, the System invests in mortgage-backed securitiesthat are subject to changes in value due to changes in interest rates. The values <strong>of</strong> mortgage-backed securities are generally based on the futurecash flows associated with the underlying pools <strong>of</strong> assets. Therefore, they are sensitive to prepayments by mortgagors which may result froma decline in interest rates. At June 30, 2008, mortgage-backed securities which are highly interest rate sensitive are collateralized mortgageobligations, including interest-only, principal-only, <strong>and</strong> inverse floater securities in the amount <strong>of</strong> $1,800,000. Mortgage pass-throughsecurities which are moderately interest rate sensitive are $1.7 billion at June 30, 2008. Substantially all derivatives are recorded at fair valuein the <strong>State</strong>ment <strong>of</strong> Net Assets.The Deferred Compensation Plans (Plans) invest in annuity contracts <strong>and</strong> insurance contracts that provide for guaranteed payouts toparticipants <strong>and</strong>, therefore, have no interest rate risk to the Plans. As <strong>of</strong> June 30, 2008, the fair value <strong>of</strong> these investments was $129,461,000<strong>and</strong> $3,591,000, respectively.The <strong>State</strong> Treasurer’s Office manages the <strong>Local</strong> Government Investment Pool. The <strong>State</strong> Treasurer’s investment policies state that no directinvestment by the Pool may have a maturity date <strong>of</strong> more than 13 months after its acquisition.Credit Risk. The investment policy <strong>of</strong> the System requires each fixed income investment manager to maintain a minimum averagecredit quality <strong>of</strong> “A” for the total account. The <strong>Local</strong> Government Investment Pool may invest in instruments rated only Tier 1 by at leastone nationally recognized securities rating organization. The money market mutual funds, bond mutual funds, <strong>and</strong> guaranteed investmentcontracts <strong>of</strong> the fiduciary funds are not required to be rated. As <strong>of</strong> June 30, 2008, the fiduciary funds’ investments were rated by St<strong>and</strong>ard <strong>and</strong>Poor’s <strong>and</strong>/or an equivalent national rating organization <strong>and</strong> the ratings are presented on the next page using the St<strong>and</strong>ard <strong>and</strong> Poor’s ratingscale (amounts expressed in thous<strong>and</strong>s).A-55www.maryl<strong>and</strong>taxes.com 55
Percentage <strong>of</strong> TotalInvestment Type Fair Value Quality Rating InvestmentsU.S. Government agency obligations ............................... $ 1,368,177 AAA 3.19%U.S. Government agency obligations ............................... 310 BBB 0.00U.S. Government agency obligations ............................... 20,853 Unrated 0.05Repurchase agreements-underlying securities ................... 409,353 AAA 0.96Repurchase agreements-underlying securities ................... 64 Unrated 0.00Money market mutual funds ........................................... 559,790 AAA 1.31Money market mutual funds ........................................... 200 AA 0.00Money market mutual funds ........................................... 1,151,789 A 2.69Money market mutual funds ........................................... 331,266 Unrated 0.77Bankers’ acceptances ........................................................ 107,662 A1/P1 0.25Commercial paper ........................................................... 172,282 AAA 0.40Guaranteed investment contracts..................................... 624,401 AA 1.46Guaranteed investment contracts..................................... 4,693 Unrated 0.01Corporate bonds ............................................................. 42,926 AAA 0.10Corporate bonds ............................................................. 92,280 AA 0.22Corporate bonds ............................................................. 145,642 A 0.34Corporate bonds ............................................................. 17,332 BAA 0.04Corporate bonds ............................................................. 276,714 BBB 0.65Corporate bonds ............................................................. 49,319 BB 0.12Corporate bonds ............................................................. 32,312 B 0.08Corporate bonds ............................................................. 15,313 CAA 0.04Corporate bonds ............................................................. 19 CA 0.00Corporate bonds ............................................................. 16,050 CCC 0.04Corporate bonds ............................................................. 9,167 Unrated 0.02International bonds ......................................................... 28,965 AAA 0.07International bonds ......................................................... 3,093 A 0.01International bonds ......................................................... 35,192 Unrated 0.08Other government bonds ................................................ 3,468 AAA 0.01Other government bonds ................................................ 18,264 AA 0.04Other government bonds ................................................ 47,334 A 0.11Other government bonds ................................................ 66,326 BBB 0.15Other government bonds ................................................ 4,419 BB 0.01Other government bonds ................................................ 43 CCC 0.00Other government bonds ................................................ 842 Unrated 0.00Mortgage-backed securities .............................................. 2,196,620 AAA 5.13Mortgage-backed securities .............................................. 5,001 AA 0.01Mortgage-backed securities .............................................. 1,647 A 0.00Mortgage-backed securities .............................................. 177 BAA 0.00Mortgage-backed securities .............................................. 778 BA 0.00Mortgage-backed securities .............................................. 12,383 BBB 0.03Mortgage-backed securities .............................................. 3,461 B 0.01Mortgage-backed securities .............................................. 167 CAA 0.00Mortgage-backed securities .............................................. 386 CA 0.00Mortgage-backed securities .............................................. 86 CCC 0.00Mortgage-backed securities .............................................. 5,639 Not rated 0.01Asset-backed securities-other ........................................... 173,532 AAA 0.41Asset-backed securities-other ........................................... 32,831 AA 0.08Asset-backed securities-other ........................................... 5,724 A 0.01Asset-backed securities-other ........................................... 3,344 BAA 0.01Asset-backed securities-other ........................................... 13,397 BBB 0.03Asset-backed securities-other ........................................... 1,837 BB 0.00Asset-backed securities-other ........................................... 2,740 B 0.01Asset-backed securities-other ........................................... 579 CCC 0.00Asset-backed securities-other ........................................... 6 D 0.00Bond mutual funds ......................................................... 6,446,436 Not rated 15.05Swaps .............................................................................. (49,472) Not rated (0.12)Alternative investments ................................................... 591,947 Not rated 1.38Total ........................................................................ $ 15,105,106 35.27%Foreign Currency Risk. The majority <strong>of</strong> the System’s foreign currency-denominated investments are in equities, which the System’s assetallocation policy limits to 15%.56 www.maryl<strong>and</strong>taxes.comA-56
The System’s exposure to foreign currency risk as <strong>of</strong> June 30, 2008, is as follows (amounts expressed in thous<strong>and</strong>s).Currency Equity Fixed Income Cash Alternative Investments Mutual Funds TotalAustralian dollar ............................... $ 117,331 $ (423) $ 940 $ 117,848Brazilian real .................................... 40,737 (1,870) 966 39,833Canadian dollar ................................ 31,808 416 32,224Danish krone ................................... 55,063 35 55,098Euro currency ................................... 1,197,460 33,454 12,855 $123,957 1,367,726Hong Kong dollar ............................ 331,506 1,545 333,051Israeli shekel ..................................... 4,675 5 4,680Japanese yen ..................................... 574,872 3,459 9,239 587,570Malaysian ringgit .............................. 291 5 296Mexican peso ................................... 25,207 (236) 70 25,041New Taiwan dollar ........................... 10,308 10,308New Turkish lira .............................. 18,624 11 18,635Norwegian krone .............................. 95,583 2,414 97,997Pound sterling .................................. 516,182 25,840 4,915 65,683 612,620Singapore dollar ............................... 33,258 471 33,729South African r<strong>and</strong> ........................... 82,231 5 82,236South Korean won............................ 43,344 6 43,350Swedish krona .................................. 116,949 160 117,109Swiss franc ........................................ 237,138 619 237,757Thail<strong>and</strong> baht ................................... 44 44Multiple………..…......... ................ 5 93,437 $4,611,279 4,704,721Total ...................................... $3,522,259 $60,224 $45,034 $283,077 $4,611,279 $8,521,8734. Investments - Component Units:Investment accounts established by higher education institutions relate principally to endowments <strong>and</strong> trust accounts required by debtinstruments <strong>and</strong> are invested in accordance with the investment policies adopted by the Board <strong>of</strong> Trustees. In general, endowment resourcescan be invested in debt <strong>and</strong> equity securities, <strong>and</strong> trust accounts can be invested only in debt securities. These investments include U.S.Treasury <strong>and</strong> agency obligations, corporate debt <strong>and</strong> equity securities, asset-backed securities <strong>and</strong> mutual funds that invest in governmentsecurities. The investments <strong>of</strong> the higher education foundations are not included in the GASB <strong>State</strong>ment No. 40 disclosures below because thefoundations are not required to <strong>and</strong> do not follow the GASB.In July 2005, one <strong>of</strong> the institutions, the University System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, transferred title to its endowment investments to its foundationin exchange for an equivalent proportionate interest in the long-term investment portfolio managed by the foundation. The agreement is fora term <strong>of</strong> five years, with renewable two-year extensions at the option <strong>of</strong> the institution, unless notice <strong>of</strong> intent to terminate the arrangementis provided prior to the expiration <strong>of</strong> the term. If the agreement is terminated, funds invested with individual investment managers that havecommitments from the foundation to maintain investments for certain minimum time periods may not be returned to the institution untilthose constraints have been satisfied. For reporting purposes, the foundation’s investments have been reduced by the amount <strong>of</strong> the institution’sinvestments with the foundation.The <strong>Maryl<strong>and</strong></strong> Stadium Authority is restricted by the trust indenture for each bond issue as to the investments which can be made.Authorized investments under the indentures include U.S. Treasury <strong>and</strong> agency obligations, municipal obligations, banker’s acceptances, <strong>and</strong>repurchase agreements.Investments <strong>of</strong> the component units are stated at fair value, which is based on quoted market prices.The investments <strong>and</strong> maturities as <strong>of</strong> June 30, 2008, for the component units are as follows (amounts expressed in thous<strong>and</strong>s).Investment Maturities (in Years)LessMoreInvestment Type Fair Value than 1 1-5 6-10 11-15 than 15U.S. Treasury obligations ............................ $ 20,088 $ 1,905 $ 5,174 $ 6,556 $1,618 $ 4,835U.S. Government agency obligations .......... 122,960 50,063 38,165 148 5,958 28,626Bond mutual funds .................................... 14,995 14,995Corporate debt securities ............................ 107,697 2,374 24,195 7,528 1,032 72,568Municipal bonds ........................................ 6,672 1,445 1,366 1,480 484 1,897Total ................................................ $272,412 $70,782 $68,900 $15,712 $9,092 $107,926A-57www.maryl<strong>and</strong>taxes.com 57
In addition to the investments scheduled above, as <strong>of</strong> June 30, 2008, the component units had investments <strong>of</strong> $117,991,000 in moneymarket mutual funds operated in accordance with Rule 2a-7 <strong>of</strong> the Investment Company Act <strong>of</strong> 1940, as amended. The funds’ fair valuesare based on a share price <strong>of</strong> $1.00 per share. In addition, as <strong>of</strong> June 30, 2008, the component units’ investments include the fair value <strong>of</strong>stock mutual funds, $185,861,000, corporate equity securities, $152,821,000, real estate $7,356,000, <strong>and</strong> the share <strong>of</strong> assets invested with thefoundation, $235,461,000.Interest Rate Risk. The policy <strong>of</strong> the higher education institutions for managing their exposure to fair value loss arising from increasinginterest rates is to comply with their investment policy, which sets maximum maturities for various fixed income securities.Credit Risk. The policies <strong>of</strong> the higher education institutions for reducing their exposure to credit risk is to require minimum qualityratings for fixed income securities. The investment policy <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Prepaid College Trust requires the average rating in each portfolio tobe “A” or better. Money market mutual funds <strong>and</strong> bond mutual funds <strong>of</strong> the component units are not required to be rated.As <strong>of</strong> June 30, 2008, the component units had the following investments <strong>and</strong> quality ratings (amounts expressed in thous<strong>and</strong>s).PercentageRating<strong>of</strong> TotalInvestment Type Fair Value Rating Organization InvestmentsU.S. agencies ..................................................................... $122,125 AAA/Aaa S&P & Moody’s 12.55%U.S. Agencies .................................................................... 835 Not rated 0.09Money market mutual funds……….. ............................... 79,344 Aaa Moody’s 8.16Money market mutual funds………. ................................ 38,647 Not rated 3.98Bond Mutual Funds .......................................................... 14,995 Not rated 1.54Corporate debt securities ................................................... 33,295 AAA/Aaa S&P & Moody’s 3.43Corporate debt securities…………… ............................... 9,525 AA/Aa S&P & Moody’s 0.98Corporate debt securities……………. .............................. 16,387 A S&P & Moody’s 1.69Corporate debt securities……………. .............................. 19,644 Less than A Moody’s 2.02Corporate debt securities……………. .............................. 77 BBB S&P & Moody’s 0.01Corporate debt securities…………….. ............................. 28,769 Not rated 2.96Municipal bonds…………………….... ........................... 6.672 Aaa Moody’s 0.69Total .......................................................................... $370,315 38.10%Concentration <strong>of</strong> Credit Risk. The component units place no limit on the amount they may invest in U.S. Government issuers. More than5% <strong>of</strong> the component units’ investments are in obligations <strong>of</strong> the Federal Home Loan Mortgage Corporation. These investments are 6.2% <strong>of</strong>the component units’ total investments.In addition to the <strong>Maryl<strong>and</strong></strong> Prepaid College Trust, the College Savings Plans <strong>of</strong> <strong>Maryl<strong>and</strong></strong> includes the <strong>Maryl<strong>and</strong></strong> College InvestmentPlan, a fiduciary component unit. As <strong>of</strong> June 30, 2008, the Plan has $1,566,497,000 <strong>of</strong> investments held in trust for individuals <strong>and</strong>organizations.C. Securities Lending Transactions:1. Governmental <strong>and</strong> Enterprise Fund Types:Under Section 2-603 <strong>of</strong> the <strong>State</strong>’s Finance <strong>and</strong> Procurement Article, the <strong>State</strong> lends U.S. Government securities to broker-dealers <strong>and</strong>other entities (borrowers). The <strong>State</strong> Treasurer’s Office controls the program <strong>and</strong> authorizes all transactions. These transactions may involvecertain investments held in the <strong>State</strong> treasury for the benefit <strong>of</strong> <strong>State</strong> agencies. The <strong>State</strong>’s custodial bank manages the securities lending programby contracting with a lending agent who receives cash as collateral. The lending agent may use or invest cash collateral in accordance with thereinvestment guidelines approved by the <strong>State</strong> Treasurer’s Office. Additionally, under the terms <strong>of</strong> the lending agreement, the lending agentindemnifies the <strong>State</strong> against any credit loss arising from investment <strong>of</strong> the collateral. The collateral will be returned for the same securities in thefuture. Cash collateral is initially pledged at greater than the market value <strong>of</strong> the securities lent <strong>and</strong> additional cash collateral has to be provided bythe next business day if the aggregate value <strong>of</strong> the collateral falls to less than 100 percent <strong>of</strong> the market value <strong>of</strong> the securities lent.Securities on loan at year-end are owned by the general fund, the <strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery Agency <strong>and</strong> the Economic Development LoanPrograms <strong>and</strong> are included in the preceding Investments Schedule in 3.B. At year-end, the <strong>State</strong> has no credit risk exposure to borrowersbecause the amounts the <strong>State</strong> owes the borrowers exceed the amounts the borrowers owe the <strong>State</strong>. As <strong>of</strong> June 30, 2008, the fair value <strong>of</strong> theloaned securities <strong>and</strong> the related collateral were as follows (amounts expressed in thous<strong>and</strong>s).58 www.maryl<strong>and</strong>taxes.comFair ValueLent Collateral PercentSecurities Received CollateralizedSecurities-<strong>General</strong> fund .................................................... $241,816 $244,800 101.2%Securities-Lottery Agency ................................................. 110,754 112,654 101.7Securities-Economic Development Loan Programs........... 1,230 1,255 102.0Total ........................................................................... $353,800 $358,709 101.4A-58
Either the <strong>State</strong> or the borrower may terminate the lending agreements on dem<strong>and</strong>. Lending agreements are usually short in duration.The duration <strong>of</strong> lending agreements is matched with the term to maturity <strong>of</strong> the investment <strong>of</strong> the cash collateral by investing only inrepurchase agreements. Such matching existed at year-end. Investments made with cash received as collateral are included in the precedingInvestments-Governmental Funds Schedule in 3.B.1.The <strong>State</strong>’s custodial bank is obligated to indemnify the <strong>State</strong> against liability for any suits, actions or claims <strong>of</strong> any character arising fromor relating to the performance <strong>of</strong> the bank under the contract, except for liability caused by acts or omissions <strong>of</strong> the <strong>State</strong>.The <strong>State</strong> did not experience any losses on their securities lending transactions for the year ended June 30, 2008.2. Fiduciary Funds:The Pension Trust Funds (Funds) participate in a securities lending program as permitted by the investment policies as approved bythe Board <strong>of</strong> Trustees. The Funds’ custodian lends specified securities to independent brokers in return for collateral <strong>of</strong> greater value. Thepreceding Investments – Fiduciary Funds Schedule in 3.B.3 includes (1) securities lent at year-end for cash collateral; (2) securities lent forsecurities collateral; <strong>and</strong> (3) investments purchased with cash collateral.Borrowing brokers must transfer in the form <strong>of</strong> cash or other securities, collateral valued at a minimum <strong>of</strong> 102% <strong>of</strong> the fair value <strong>of</strong>domestic securities <strong>and</strong> international fixed income securities, or 105% <strong>of</strong> the fair value <strong>of</strong> international equity securities on loan. Collateral ismarked to market daily. If the fair value <strong>of</strong> the pledged collateral falls below the specified levels, additional collateral is required to be pledgedby the close <strong>of</strong> the next business day. In the event <strong>of</strong> default by a borrowing broker, the Funds’ custodial bank is obligated to indemnify theFunds if, <strong>and</strong> to the extent that, the fair value <strong>of</strong> collateral is insufficient to replace the lent securities. The Funds have not experienced any lossdue to credit or interest rate risk on securities lending activity since inception <strong>of</strong> the program. As <strong>of</strong> June 30, 2008, the Funds had no creditrisk exposure to borrowers because the fair value <strong>of</strong> collateral held for securities lent exceeded the fair value <strong>of</strong> the related securities, as follows(amounts expressed in thous<strong>and</strong>s).Cash CollateralFair Received or Non-Cash PercentSecurities Lent Value Collateral Value CollateralizedLent for cash collateral:Fixed income securities ...................................................... $ 488,829 $ 498,828 102.0%Domestic equities .............................................................. 817,860 841,935 102.9International equities ......................................................... 462,197 485,753 105.1Subtotal ....................................................................... 1,768,886 1,826,516Lent for noncash collateral:Fixed income securities ...................................................... 20,167 20,590 102.1Domestic equities .............................................................. 60,304 61,705 102.3International equities ......................................................... 1,494 1,529 102.3Total securities lent ...................................................... $1,850,851 $1,910,340 103.2Although the average term <strong>of</strong> the Funds’ security loans is one week, each loan can be terminated at will by either the Funds or theborrower. Cash collateral is invested in one <strong>of</strong> the lending agent’s short-term investment pools, which as <strong>of</strong> June 30, 2008, had a weightedaverage maturity <strong>of</strong> 33 days <strong>and</strong> an average expected maturity <strong>of</strong> 177.5 days. Because the relationship between the maturities <strong>of</strong> the investmentpools <strong>and</strong> the Fund’s security loans is affected by the maturities <strong>of</strong> the loans made by other entities that use the agent’s pools, the Funds cannotmatch maturities. The Funds cannot pledge or sell collateral securities received unless <strong>and</strong> until a borrower defaults.4. Receivables:Taxes receivable, as <strong>of</strong> June 30, 2008, consist <strong>of</strong> the following (amounts expressed in thous<strong>and</strong>s).Major GovernmentalFunds Non-Major TotalSpecial Governmental Governmental<strong>General</strong> Revenue Funds FundsIncome taxes ................................................................. $534,456 $ 534,456Sales <strong>and</strong> use taxes ......................................................... 395,054 395,054Transportation taxes, principally motor vehicle fuel<strong>and</strong> excise .................................................................. $82,432 82,432Other taxes, principally alcohol <strong>and</strong> property ................ 54,220 $15,329 69,549Less: Allowance for uncollectibles ......................... 32,488 32,488Taxes receivable, net ........................................... $951,242 $82,432 $15,329 $1,049,003Tax revenues are reported net <strong>of</strong> uncollectible amounts. Total uncollectible amounts related to tax revenues <strong>of</strong> the current period are$3,864,000.A-59www.maryl<strong>and</strong>taxes.com 59
Other accounts receivable in the governmental funds <strong>of</strong> $495,009,000, including $87,804,000 due in excess <strong>of</strong> one year, consist <strong>of</strong> variousmiscellaneous receivables for transportation costs, collection <strong>of</strong> bills owed to the <strong>State</strong>’s collection unit, Medicaid reimbursements, <strong>and</strong> childsupport <strong>and</strong> public assistance overpayments <strong>and</strong> surcharges.Other accounts receivable for the enterprise funds <strong>of</strong> $223,351,000, primarily consist <strong>of</strong> $105,550,000 due to the <strong>Maryl<strong>and</strong></strong>Unemployment Trust Fund from employers <strong>and</strong> for benefit overpayments, <strong>and</strong> $34,920,000, due to the <strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery Agency forlottery ticket sale proceeds.5. Deferred Revenue:Governmental funds report deferred revenue in connection with receivables for revenues that are not considered to be available toliquidate liabilities <strong>of</strong> the current period. Governmental funds, enterprise funds <strong>and</strong> component units also defer revenue recognition inconnection with resources that have been received, but not yet earned.As <strong>of</strong> June 30, 2008, the various components <strong>of</strong> deferred revenue reported in the governmental funds <strong>and</strong> enterprise funds were as follows(amounts expressed in thous<strong>and</strong>s).Unavailable Unearned TotalTax receivables for revenues not considered available to liquidate liabilities <strong>of</strong> the currentperiod (general fund) ........................................................................................................ $148,694 $148,694Other receivables for revenues not considered available to liquidate liabilities <strong>of</strong> the currentperiod (general fund) ........................................................................................................ 194,237 194,237Other receivables for revenues not considered available toliquidate liabilities <strong>of</strong> the current period (special revenue fund) ........................................ 38,420 38,420Other receivables for revenues not considered available to liquidate liabilities <strong>of</strong> thecurrent period (other governmental funds) ....................................................................... 69 69Receipts that have been received, but not earned (general fund) .............................................. $20,550 20,550Revenue in connection with resources that have been received,but not earned (special revenue fund) ............................................................................... 8,347 8,347Revenue in connection with resources that have been received, but not earned(enterprise funds) ............................................................................................................. 20,276 20,276Total deferred/unearned revenue for governmental funds <strong>and</strong> enterprise funds ............ $381,420 $49,173 $430,5936. Loans <strong>and</strong> Notes Receivable <strong>and</strong> Investment in Direct Financing Leases:A. Loans <strong>and</strong> Notes Receivable:Loans <strong>and</strong> notes receivable, as <strong>of</strong> June 30, 2008, consist <strong>of</strong> the following (amounts expressed in thous<strong>and</strong>s).Primary GovernmentComponent UnitsSpecial Revenue Non-majorDepartment <strong>of</strong> Governmental Higher Stadium<strong>General</strong> Transportation Funds Enterprise Education Authority OtherNotes receivable:Political subdivisions:Water quality projects ............................ $ 3,795 $ 862,689Construction ......................................... $3,760 24Other .................................................... 545Hospitals <strong>and</strong> nursing homes................. 350Permanent mortgage loans ...................... 2,938,053Student <strong>and</strong> health pr<strong>of</strong>ession loans ......... $80,032Shore erosion loans .................................. 5,653Other ...................................................... $3,778 6,073 $3,913 823Total ................................................. 3,778 3,760 10,367 3,800,742 86,105 3,913 823Less: Allowance for possible loan losses. 221,565 12,711 195Loans <strong>and</strong> notes receivable, net ..... 3,778 3,760 10,367 3,579,177 73,394 3,913 628Due within one year .................................... 471 1,116 1,851 122,226 10,449 325 52Due in more than one year .......................... $3,307 $2,644 $ 8,516 $3,456,951 $62,945 $3,588 $57660 www.maryl<strong>and</strong>taxes.comA-60
Certain notes receivable for advances <strong>of</strong> general obligation bond proceeds bear interest at rates ranging from 4.4% to 8.8% <strong>and</strong> maturewithin 26 years.Water quality project loans consist <strong>of</strong> loans to various local governments <strong>and</strong> other governmental entities in the <strong>State</strong> for wastewater <strong>and</strong> drinkingwater projects under the United <strong>State</strong>s Environmental Protection Agency’s (EPA) Capitalization Grants for <strong>State</strong> Revolving Funds’ Federal assistanceprogram. The permanent mortgage loans consist <strong>of</strong> financing for single <strong>and</strong> multi-family projects, rental projects, small businesses, industrial sites <strong>and</strong>various other purposes. Student <strong>and</strong> health pr<strong>of</strong>ession loans are made pursuant to student loan programs funded through the U.S. Government.B. Investment in Direct Financing Leases:Enterprise Funds:As <strong>of</strong> June 30, 2008, the <strong>Maryl<strong>and</strong></strong> Transportation Authority (Authority) has direct financing leases with the <strong>State</strong>’s Department <strong>of</strong>Transportation <strong>and</strong> Washington Metropolitan Area Transit Authority (WMATA). The present value <strong>of</strong> the direct financing leases as <strong>of</strong> June30, 2008, was $442,476,000. As <strong>of</strong> June 30, 2008, the Authority held $41,928,000 to be spent to complete assets under these direct financingleases. Lease payments receivable, including unearned interest for each <strong>of</strong> the five succeeding fiscal years <strong>and</strong> thereafter, including repayment <strong>of</strong>amounts to be spent, consist <strong>of</strong> the following (expressed in thous<strong>and</strong>s).<strong>2009</strong>............................................................................................................................................................................................ $ 45,9212010............................................................................................................................................................................................ 46,1562011............................................................................................................................................................................................ 46,4012012............................................................................................................................................................................................ 46,7332013............................................................................................................................................................................................ 46,9452014-2018 .................................................................................................................................................................................. 188,0312019-2023 .................................................................................................................................................................................. 164,6862024-2028 .................................................................................................................................................................................. 139,5382029-2033 .................................................................................................................................................................................. 54,221Total ................................................................................................................................................................................... 778,632Less: Unearned interest income ......................................................................................................................................... 294,228Net lease payments ........................................................................................................................................................ 484,404Restricted investments related to unexpended bond proceeds ........................................................................................ 41,928Net investments in direct financing leases .............................................................................................................. $442,476Component Units:As <strong>of</strong> June 30, 2008, the <strong>Maryl<strong>and</strong></strong> Stadium Authority (Authority) has direct financing leases with the <strong>State</strong>. The present value <strong>of</strong> thedirect financing leases as <strong>of</strong> June 30, 2008, is $258,148,000. As <strong>of</strong> June 30, 2008, the Authority held $9,922,000 to be spent to completeassets under these direct financing leases. Lease payments receivable, including unearned interest for each <strong>of</strong> the five succeeding fiscal years<strong>and</strong> thereafter, including repayment <strong>of</strong> amounts to be spent, consist <strong>of</strong> the following (expressed in thous<strong>and</strong>s).<strong>2009</strong>............................................................................................................................................................................................ $ 31,5392010............................................................................................................................................................................................ 31,6032011............................................................................................................................................................................................ 31,6912012............................................................................................................................................................................................ 31,8612013............................................................................................................................................................................................ 31,8652014-2018 .................................................................................................................................................................................. 137,2672019-2023 .................................................................................................................................................................................. 80,1162024-2028 .................................................................................................................................................................................. 22,913Total ................................................................................................................................................................................... 398,855Less: Unearned interest income ......................................................................................................................................... 130,785Net lease payments ........................................................................................................................................................ 268,070Restricted investments related to unexpended bond proceeds ........................................................................................ 9,922Net investments in direct financing leases .............................................................................................................. $258,148A-61www.maryl<strong>and</strong>taxes.com 61
7. Restricted Assets:Certain assets <strong>of</strong> the governmental activities, business-type activities <strong>and</strong> component units are classified as restricted assets on the<strong>State</strong>ment <strong>of</strong> Net Assets. The purpose <strong>and</strong> amount <strong>of</strong> restricted assets as <strong>of</strong> June 30, 2008, are as follows (amounts expressed in thous<strong>and</strong>s).AmountPurposeGovernmental Activities:$ 26,004 Represents money restricted for completion <strong>of</strong> transportation construction projects maintained in a trust account perCertificates <strong>of</strong> Participation agreements159 Represents funds transmitted to bond paying agents <strong>and</strong> restricted for paymentsfor coupons <strong>and</strong> bonds that have not been presented8,065 Represents sinking fund deposits restricted for redemption <strong>of</strong> term bonds5,653 Consists <strong>of</strong> Shore Erosion Control Program loans, the repayments <strong>of</strong> which are restricted by statute for future loans$ 39,881Business-type Activities:$3,490,116 Assets <strong>of</strong> the Community Development Administration <strong>and</strong> the <strong>State</strong> Funded Loan Programs are restricted for variousmortgage loans for low-income housing <strong>and</strong> local governments’ public facilities778,448 The purpose <strong>of</strong> the restricted assets is to secure the revenue bonds <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Water Quality Administrationmade for waste-water treatment systems <strong>and</strong> bay restoration986,316 Restricted assets represent deposits with the U.S. Treasury to pay unemployment compensation benefits in accordancewith Federal statute160,863 This cash is held in separate annuity contracts <strong>and</strong> coupon bonds in the <strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery Agency for winninglottery ticket payouts932,743 Cash <strong>and</strong> investments have been restricted in accordance with revenue bond debt covenants <strong>of</strong> the <strong>Maryl<strong>and</strong></strong>Transportation Authority for completion <strong>of</strong> capital projects, facility operations <strong>and</strong> debt service$6,348,486Component Units:$ 150,984 Restricted assets <strong>of</strong> higher education include funds held by the trustee for future construction projects, cash restrictedfor endowment purposes <strong>and</strong> assets associated with student loans <strong>and</strong> loan repayments11,545 Restricted assets <strong>of</strong> <strong>Maryl<strong>and</strong></strong> Stadium Authority include cash <strong>and</strong> cash equivalents <strong>and</strong> investments that relate torevenue bond indentures9,561 Restricted assets include investments that relate to revenue bond indentures <strong>and</strong> to restricted project advances for theprovision <strong>of</strong> water supply <strong>and</strong> waste-water treatment by the <strong>Maryl<strong>and</strong></strong> Environmental Service__________$ 172,0908. Interfund Receivables <strong>and</strong> Payables:Interfund balances, as <strong>of</strong> June 30, 2008, consist <strong>of</strong> the following (amounts expressed in thous<strong>and</strong>s).Receivable Fund Payable Fund Amount<strong>General</strong> Fund Special Revenue Fund $ 9,018 (a)Enterprise Funds -Economic Development Loan Programs1,600 (b)<strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery Agency39,418 (a)Non-major enterprise funds1,758 (c)$ 51,794Special Revenue Fund <strong>General</strong> Fund $ 63,943 (d)Enterprise Funds -<strong>Maryl<strong>and</strong></strong> Transportation Authority35,937 (e)$ 99,880Non-major Governmental Funds <strong>General</strong> Fund $ 15,752 (g)Enterprise Funds –Economic Development Loan Programs <strong>General</strong> Fund $ 37,799 (g)Unemployment Insurance Program <strong>General</strong> Fund 1,632 (g)<strong>Maryl<strong>and</strong></strong> Transportation Authority Special Revenue Fund 8,728 (f)$ 48,15962 www.maryl<strong>and</strong>taxes.comA-62
The receivable <strong>and</strong> payable transactions between the Primary Government <strong>and</strong> Component Units, as <strong>of</strong> June 30, 2008, consist <strong>of</strong> thefollowing (amounts expressed in thous<strong>and</strong>s).Receivable Fund Payable Fund Amount<strong>General</strong> Fund Higher Education Fund $ 551Component Units -Higher Education Fund <strong>General</strong> Fund $ 94<strong>Maryl<strong>and</strong></strong> Stadium Authority <strong>General</strong> Fund 3,609$3,703(a) The amounts represent monies collected by the special revenue fund <strong>and</strong> the <strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery in June, 2008, <strong>and</strong> paid to thegeneral fund in July, 2008.(b) The amount represents short term advances from the general fund for principal <strong>and</strong> interest payments.(c) The non-major enterprise funds received a loan from the <strong>State</strong>’s general fund to finance the acquisition <strong>of</strong> the Department <strong>of</strong> PublicSafety’s laundry services.(d) The amount represents income tax subsides <strong>and</strong> return <strong>of</strong> health insurance costs from the general fund.(e) The <strong>Maryl<strong>and</strong></strong> Transportation Authority collects fees for the special revenue fund. The money will be used to build <strong>and</strong> maintainspecial revenue fund infrastructure, structures <strong>and</strong> other improvements.(f) The <strong>Maryl<strong>and</strong></strong> Transportation Authority lent funds to the Special Revenue Fund for a construction project at the Seagirt MarineTerminal. The balance outst<strong>and</strong>ing as <strong>of</strong> June 30, 2008, was $8,728,000. Payments will continue for 33 years after completion <strong>of</strong>the project.(g) These amounts represent receivable balances from general fund subsidies.All interfund balances except for (c) <strong>and</strong> (f), above, are expected to be repaid by June 30, 2008.9. Interfund Transfers:Interfund transfers, for the year ended June 30, 2008, consist <strong>of</strong> the following (amounts expressed in thous<strong>and</strong>s).Transfers In Transfers Out Amount<strong>General</strong> Fund Special Revenue Fund $ 93,921Non-major Governmental Funds 10,007Enterprise Funds -<strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery Agency 529,404Economic Development Loan Programs 3,996Unemployment Insurance Program 11,390$648,718Special Revenue Fund <strong>General</strong> Fund $190,761Non-major Governmental Funds <strong>General</strong> Fund $221,969Special Revenue Fund 118,987$340,956Enterprise Funds -Loan Programs <strong>General</strong> Fund $ 28,025Non-major Governmental Funds 2,829Non-major Enterprise Funds 10,000<strong>Maryl<strong>and</strong></strong> Transportation Authority Special Revenue Fund 36,000$ 76,854Transfers are primarily used to 1) transfer revenues from the fund required by statute or budget to collect the revenue to the fund requiredby statute or budget to expend them, 2) transfer receipts restricted to debt service from the funds collecting the receipts to the non-majorgovernmental funds as debt service payments become due, <strong>and</strong> 3) provide unrestricted revenues collected in the general fund to financevarious programs accounted for in other funds in accordance with budgetary authorizations. In addition, the non-major governmental fundstransferred $6,286,000 <strong>of</strong> interest earned on bonds, $415,000 for expenses for bond sales, $1,934,000 return <strong>of</strong> funds for rescinded pay-asyou-gocapital projects, $172,000 <strong>of</strong> Shore Erosion loan repayments <strong>and</strong> $1,200,000 for program open space park service operations to thegeneral fund. The general fund transferred $29,349,000 for redemptions <strong>and</strong> interest on state bonds, $173,401,000 for program open spacecapital projects, $7,122,000 for improvements at <strong>Maryl<strong>and</strong></strong> veteran cemeteries, <strong>and</strong> $11,810,000 for other capital projects, primarily publicschool construction, to the non-major governmental funds. The special revenue fund transferred $118,987,000 for redemptions <strong>and</strong> intereston transportation bonds.The <strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery transferred revenue in excess <strong>of</strong> funds allocated to prize awards, operating expenses <strong>and</strong> capital expenditurepayments in the amount <strong>of</strong> $529,404,000, to the general fund. The general fund transferred $28,025,000 to support the operations <strong>of</strong>A-63www.maryl<strong>and</strong>taxes.com 63
Enterprise Funds – Loan Programs, <strong>and</strong> the Enterprise Funds – Loan Programs transferred $3,996,000 <strong>of</strong> unused funds to the general fund. TheUnemployment Insurance Program transferred $11,390,000 <strong>of</strong> unused proceeds to the general fund. The special revenue fund also transferred$36,000,000 to the Enterprise Fund – <strong>Maryl<strong>and</strong></strong> Transportation Authority for design, planning <strong>and</strong> l<strong>and</strong> purchases for the Inter-County ConnectorProject. Expenditures for capital projects <strong>of</strong> $2,829,000 were transferred to Enterprise Funds – Loan Programs. The non-major enterprise fundstransferred $10,000,000 to the Economic Development Loan Funds to provide additional funding for Homeownership Programs, AffordableRental Housing <strong>and</strong> Special Loan Programs to low <strong>and</strong> moderate income families.During the year, the general fund <strong>and</strong> other governmental funds had expenditures <strong>of</strong> $1,581,016,000 <strong>and</strong> $270,363,000 respectively, thatwere for funds provided to supplement revenues <strong>and</strong> construction costs, respectively, <strong>of</strong> the higher education component units. The general fundalso had net expenditures <strong>of</strong> $19,100,000 that were for funds provided to supplement revenues <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Stadium Authority. The generalfund transferred $28,026,000 to the non-major component unit, the <strong>Maryl<strong>and</strong></strong> Technology Development Corporation, for stem cell research<strong>and</strong> other operating grants.10. Capital Assets:A. Capital Assets, Primary Government:Capital assets activity by asset classification net <strong>of</strong> accumulated depreciation, for the year ended June 30, 2008, was as follows (amountsexpressed in thous<strong>and</strong>s).Governmental activities:Balance Transfers BalanceClassification June 30, 2007 Additions Deletions In (Out) June 30, 2008Capital assets, not being depreciated,L<strong>and</strong> <strong>and</strong> improvements ................................................. $ 2,774,673 $ 93,317 $ 5,008 $ 14,351 $ 2,877,333Art <strong>and</strong> historical treasures ............................................ 27,795 27,795Construction in progress ................................................ 2,751,603 885,063 35,940 (384,873) 3,215,853Total capital assets, not being depreciated .................. 5,554,071 978,380 40,948 (370,522) 6,120,981Capital assets, being depreciated,Structures <strong>and</strong> improvements ......................................... 5,369,065 178,328 7,065 126,656 5,666,984Equipment ..................................................................... 2,325,169 130,540 31,436 29,918 2,454,191Infrastructure ................................................................. 15,602,578 411,590 88,753 213,948 16,139,363Total capital assets, being depreciated ......................... 23,296,812 720,458 127,254 370,522 24,260,538Less accumulated depreciation for,Structures <strong>and</strong> improvements ......................................... 1,986,119 155,684 3,379 2,138,424Equipment ..................................................................... 1,523,400 154,089 29,073 1,648,416Infrastructure ................................................................. 7,160,052 632,414 9,860 7,782,606Total accumulated depreciation .................................. 10,669,571 942,187 42,312 11,569,446Total capital assets, net ............................................ $18,181,312 $756,651 $125,890 $ – $ 18,812,073Business-type activities:BalanceBalanceClassification June 30, 2007 Additions Deletions June 30, 2008Capital assests, not being depreciated,L<strong>and</strong> <strong>and</strong> improvements .................................................... $ 253,238 $ 51,824 $ 305,062Construction in progress ................................................... 557,194 557,194Total capital assets, not being depreciated .................. 253,238 609,018 862,256Capital assets, being depreciated,Structures <strong>and</strong> improvements ............................................ 50,953 6,426 57,379Equipment ........................................................................ 35,816 3,059 $ 172 38,703Infrastructure .................................................................... 2,629,363 19,185 2,610,178Total capital assets, being depreciated ........................ 2,716,132 9,485 19,357 2,706,260Less accumulated depreciation for,Structures <strong>and</strong> improvements ............................................ 27,085 2,950 30,035Equipment ........................................................................ 24,722 1,944 172 26,494Infrastructure .................................................................... 1,052,383 31,673 1,084,056Total accumulated depreciation ................................. 1,104,190 36,567 172 1,140,585Total capital assets, net ........................................... $1,865,180 $581,936 $19,185 $2,427,93164 www.maryl<strong>and</strong>taxes.comA-64
B. Depreciation Expense, Primary Government:The depreciation expense for the year ended June 30, 2008, for the primary government was charged as follows (amounts expressed inthous<strong>and</strong>s).Governmental activities:FunctionAmount<strong>General</strong> government .................................................................................................................................................................... $ 33,857Education .................................................................................................................................................................................... 6,412Human resources ......................................................................................................................................................................... 9,870Health <strong>and</strong> mental hygiene .......................................................................................................................................................... 7,642Environment ............................................................................................................................................................................... 418Public safety ................................................................................................................................................................................ 39,154Housing <strong>and</strong> community development........................................................................................................................................ 785Natural resources <strong>and</strong> recreation .................................................................................................................................................. 16,075Transportation ............................................................................................................................................................................ 813,835Agriculture .................................................................................................................................................................................. 11,058Labor, licensing <strong>and</strong> regulation .................................................................................................................................................... 428Judicial ........................................................................................................................................................................................ 2,653Total depreciation expense – governmental activities ............................................................................................................. $942,187Business-type activities:FunctionAmount<strong>State</strong> Lottery ................................................................................................................................................................................ $ 628Transportation Authority ............................................................................................................................................................. 34,561<strong>Maryl<strong>and</strong></strong> Correctional Enterprises .............................................................................................................................................. 1,351Economic Development Loan Programs...................................................................................................................................... 27Total depreciation expense – business type activities ............................................................................................................... $36,56711. Long-Term <strong>Obligation</strong>s:A. Governmental Activities:Changes in governmental activities’ long-term debt, for the year ended June 30, 2008, are as follows (amounts expressed in thous<strong>and</strong>s).Balance Balance Amounts DueJune 30, 2007 Additions Reductions June 30, 2008 Within One Year<strong>Bonds</strong> <strong>and</strong> Notes Payable:<strong>General</strong> obligation bonds ...................................... $5,142,154 $ 779,986 $428,310 $5,493,830 $464,725Transportation bonds ............................................ 1,111,050 226,755 68,990 1,268,815 76,210Deferred amounts:Issuance premiums ............................................. 420,884 64,662 46,865 438,681On refunding ..................................................... (57,247) (11,294) (45,953)Total bonds <strong>and</strong> notes payable ....................... 6,616,841 1,071,403 532,871 7,155,373 540,935Other Liabilities:Compensated absences .......................................... 277,923 180,445 181,996 276,372 182,315Self insurance costs ................................................ 304,648 889,072 876,021 317,699 113,499Escheat property ................................................... 43,937 43,151 52,081 35,007 29,800Net pension obligation .......................................... 646,040 153,975 800,015Net other post employment benefits obligation ..... 695,921 695,921<strong>Obligation</strong>s under capital leases ............................. 535,482 26,681 47,029 515,134 48,783<strong>Obligation</strong>s undercapital leases with component units .................... 278,265 4,504 17,002 265,767 16,934Other long-term liabilities ..................................... 391,029 102 22,295 368,836 19,625Total other liabilities .......................................... 2,477,324 1,993,851 1,196,424 3,274,751 410,956Total long-term liabilitiesgovernmentalactivities .............................. $9,094,165 $3,065,254 $1,729,295 $10,430,124 $951,891A-65www.maryl<strong>and</strong>taxes.com 65
<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> -<strong>General</strong> obligation bonds are authorized <strong>and</strong> issued primarily to provide funds for <strong>State</strong> owned capital improvements, facilities forinstitutions <strong>of</strong> higher education <strong>and</strong> the construction <strong>of</strong> public schools in political subdivisions. <strong>Bonds</strong> have also been issued for local governmentimprovements, including grants <strong>and</strong> loans for water quality improvement projects <strong>and</strong> correctional facilities, <strong>and</strong> to provide funds for loans oroutright grants to private, not-for-pr<strong>of</strong>it cultural or educational institutions. Under constitutional requirements <strong>and</strong> practice, the <strong>Maryl<strong>and</strong></strong><strong>General</strong> Assembly, by a separate enabling act, authorizes loans for particular objects or purposes. Thereafter, the Board <strong>of</strong> Public Works, aconstitutional body comprised <strong>of</strong> the Governor, the Comptroller <strong>and</strong> the <strong>State</strong> Treasurer, by resolution, authorizes the issuance <strong>of</strong> bonds inspecified amounts. <strong>Bonds</strong> are issued <strong>and</strong> accounted for on a “cash flow” basis rather than a “project” basis <strong>and</strong> are not sold to specifically fund anenabling act. <strong>General</strong> obligation bonds are subject to arbitrage regulations. However, there are no major outst<strong>and</strong>ing liabilities in connection withthese regulations as <strong>of</strong> June 30, 2008. <strong>Bonds</strong> issued after January 1, 1988, are subject to redemption provisions at the option <strong>of</strong> the <strong>State</strong>.<strong>General</strong> obligation bonds, which are paid from the general obligation debt service fund, are backed by the full faith <strong>and</strong> credit <strong>of</strong> the<strong>State</strong> <strong>and</strong>, pursuant to the <strong>State</strong> Constitution, must be fully paid within 15 years from the date <strong>of</strong> issue. Property taxes, debt service fund loanrepayments <strong>and</strong> general fund <strong>and</strong> capital projects fund appropriations provide the resources for repayment <strong>of</strong> general obligation bonds. Duringfiscal year 2008, the <strong>State</strong> issued $779,986,000 <strong>of</strong> general obligations at a premium <strong>of</strong> $42,024,000 with related issuance costs <strong>of</strong> $2,669,000.Refunded bonds <strong>of</strong> $260,160,000 maturing in fiscal years 2011-2016 <strong>and</strong> callable in fiscal years <strong>2009</strong>-2011 were considered defeased as<strong>of</strong> June 30, 2008. Accordingly, the trust account assets <strong>and</strong> the liability for the defeased bonds are not included in these financial statements.<strong>General</strong> obligation bonds issued <strong>and</strong> outst<strong>and</strong>ing, as <strong>of</strong> June 30, 2008, are as follows (amounts expressed in thous<strong>and</strong>s).Interest Annual Principal Principal PrincipalIssue Maturity Rates Installments Issued Outst<strong>and</strong>ing8/14/97 2001-2013 4.8-5.0 % $ 20,855 $ 250,000 $ 20,8553/5/98 2001-2013 4.5-5.0 20,855 250,000 20,8557/22/98 2002-2014 5.0-5.3 19,860-20,855 250,000 40,7153/11/99 2002-2014 4.0-4.5 17,835-20,295 225,000 76,1907/29/99 2003-2015 4.3-5.3 9,490-10,345 125,000 29,7458/3/00 2004-2016 5.1-5.8 14,340-16,745 200,000 62,0853/8/01 2004-2016 4.0-5.5 14,355-20,535 200,000 138,2907/26/01 2005-2017 5.0-5.5 13,725-20,285 200,000 151,33511/21/01 2016 0(b) 18,098 18,098 18,0983/21/02(a) 2003-2017 4.0-5.5 13,900-31,050 309,935 166,6658/15/02(a) 2003-2018 3.0-5.5 16,000-60,095 515,830 247,8903/6/03(a) 2006-2018 5.0-5.3 34,540-57,480 586,120 431,2308/5/03 2007-2019 5.0 30,970-50,815 500,000 440,9408/10/04 2008-2020 5.0 23,545-40,820 400,000 377,60010/21/04 (a) 2005-2016 5.0 18,495-108,620 574,655 456,06511/30/04 2020 0 (b) 9,043 9,043 9,0433/17/05 (a) 2006-2020 4.0-5.3 20,745-105,235 631,185 596,8658/11/05 <strong>2009</strong>-2021 4.3-5.0 28,215-43,820 450,000 450,0003/23/06 <strong>2009</strong>-2021 4.0-5.0 20,060-27,955 300,000 300,0008/10/06 2010-2022 4.3-5.0 20,330-34,870 350,000 350,00012/20/06 2022 0 (b) 4,378 4,378 4,3783/15/07 2010-2022 5.0 18,520-31,975 325,000 325,0008/16/07 2011-2023 5.0 21,000-38,265 375,000 375,00012/18/07 2023 0 (b) 4,986 4,986 4,9863/12/08 2011-2023 4.0-5.0 22,585-40,555 400,000 400,000$7,454,230 $5,493,830(a) Includes refunding debt(b) Qualified Zone Academy <strong>Bonds</strong> are non-interest bearing.<strong>General</strong> obligation bonds authorized, but unissued, as <strong>of</strong> June 30, 2008, total $2,063,853,000.As <strong>of</strong> June 30, 2008, general obligation debt service requirements for principal <strong>and</strong> interest in future years are as follows (amounts expressedin thous<strong>and</strong>s).66 www.maryl<strong>and</strong>taxes.comYears EndingJune 30, Principal Interest<strong>2009</strong> .......................................................... $ 464,725 $ 268,5132010 .......................................................... 482,290 245,5252011 .......................................................... 514,670 221,1912012 .......................................................... 492,330 194,9972013 .......................................................... 471,325 170,0402014-2018 ................................................. 2,035,243 513,4722019-2023 ................................................. 1,033,247 101,604Total ...................................................... $ 5,493,830 $1,715,342A-66
Subsequent to June 30, 2008, on July 28, 2008, general obligation bonds aggregating $415,000,000 were issued for capital improvements.The interest rate on the new issue is 5.0%, <strong>and</strong> the bonds mature serially through 2024.Transportation <strong>Bonds</strong> -Transportation bonds outst<strong>and</strong>ing as <strong>of</strong> June 30, 2008, are as follows (amounts expressed in thous<strong>and</strong>s).Outst<strong>and</strong>ingConsolidated Transportation <strong>Bonds</strong> – 3.0% to 5.3%, due serially through 2023 in annual installments <strong>of</strong> originalprincipal ranging from $13,000 to $112,100 ...................................................................................................................... $1,176,455Consolidated Transportation <strong>Bonds</strong>, Refunding – 4.0% to 5.0%, due serially through 2014 in annual installments<strong>of</strong> original principal ranging from $8,040 to $26,890 ......................................................................................................... 92,360Total ............................................................................................................................................................................. $1,268,815Consolidated Transportation <strong>Bonds</strong> are limited obligations issued by the <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Transportation (Department) for highway,port, airport, rail, or mass transit facilities, or any combination <strong>of</strong> such facilities. The principal must be paid within 15 years from the date <strong>of</strong> issue.As provided by law, the <strong>General</strong> Assembly shall establish in the budget for any fiscal year a maximum outst<strong>and</strong>ing aggregate amount<strong>of</strong> these Consolidated Transportation <strong>Bonds</strong> as <strong>of</strong> June 30 <strong>of</strong> the respective fiscal year, that does not exceed $2,600,000,000 throughJune 30, 2008, <strong>and</strong> thereafter. The aggregate principal amount <strong>of</strong> those bonds that was allowed to be outst<strong>and</strong>ing as <strong>of</strong> June 30, 2008,was $1,497,060,000. The aggregate principal amount <strong>of</strong> Consolidated Transportation <strong>Bonds</strong> outst<strong>and</strong>ing as <strong>of</strong> June 30, 2008, was$1,268,815,000. Consolidated Transportation <strong>Bonds</strong> are paid from the transportation debt service fund. Principal <strong>and</strong> interest onConsolidated Transportation <strong>Bonds</strong> are payable from the proceeds <strong>of</strong> certain excise taxes levied by statute <strong>and</strong> a portion <strong>of</strong> the corporateincome tax credited to the Department. These amounts are available to the extent necessary for that exclusive purpose before being availablefor other uses by the Department. If those tax proceeds become insufficient to meet debt service requirements, other receipts <strong>of</strong> theDepartment are available for that purpose. The holders <strong>of</strong> such bonds are not entitled to look to other <strong>State</strong> resources for payment.Under the terms <strong>of</strong> the authorizing bond resolutions, additional Consolidated Transportation <strong>Bonds</strong> may be issued, provided, amongother conditions, that (1) total receipts (excluding Federal funds for capital projects, bond <strong>and</strong> note proceeds, <strong>and</strong> other receipts not availablefor debt service), less administration, operation <strong>and</strong> maintenance expenses for the preceding fiscal year, equal at least two times the maximumannual debt service on all Consolidated Transportation <strong>Bonds</strong> outst<strong>and</strong>ing <strong>and</strong> to be issued, <strong>and</strong> that (2) total proceeds from pledged taxesequal at least two times the maximum annual debt service on all Consolidated Transportation <strong>Bonds</strong> outst<strong>and</strong>ing <strong>and</strong> to be issued.The 2007 session <strong>of</strong> the <strong>General</strong> Assembly established a maximum outst<strong>and</strong>ing principal amount <strong>of</strong> $726,200,000 as <strong>of</strong> June 30, 2008,for all nontraditional debt <strong>of</strong> the Department. Nontraditional debt outst<strong>and</strong>ing is defined as any debt instrument that is not a ConsolidatedTransportation Bond or GARVEE bond (tax-exempt debt backed by annual federal appropriations for federal-aid transportation projects).This debt includes certificates <strong>of</strong> participation, debt backed by customer facility charges, passenger facility charges, or other revenues, <strong>and</strong> debtissued by the <strong>Maryl<strong>and</strong></strong> Economic Development Corporation or any other third party on behalf <strong>of</strong> the Department. As <strong>of</strong> June 30, 2008,the Department’s nontraditional debt outst<strong>and</strong>ing was $740,608,000 <strong>and</strong> is reported as obligations under capital leases <strong>and</strong> other long-termliabilities <strong>and</strong> includes funds held by the bond trustee under these agreements.Arbitrage regulations are applicable to the transportation bonds payable. The Department estimates there are no material liabilities forarbitrage rebates as <strong>of</strong> June 30, 2008.During fiscal year 2008, the Department issued $226,755,000 <strong>of</strong> Consolidated Transportation <strong>Bonds</strong> at a premium <strong>of</strong> $22,638,000.Refunded bonds <strong>of</strong> $46,500,000 were considered defeased as <strong>of</strong> June 30, 2008. Accordingly, the trust account assets <strong>and</strong> the liability forthe defeased bonds are not included in these financial statements.As <strong>of</strong> June 30, 2008, Department bond debt service requirements for principal <strong>and</strong> interest in future years are as follows (amountsexpressed in thous<strong>and</strong>s).Years EndingConsolidated Transportation <strong>Bonds</strong>June 30, Principal Interest<strong>2009</strong> .................................................................................. $ 76,210 $ 60,5192010 .................................................................................. 77,595 57,2842011 .................................................................................. 83,170 53,8382012 .................................................................................. 95,045 49,9602013 .................................................................................. 98,740 45,4592014-2018 ......................................................................... 591,200 146,4112019-2023 ......................................................................... 246,855 30,241Total .............................................................................. $1,268,815 $443,712A-67www.maryl<strong>and</strong>taxes.com 67
<strong>Obligation</strong>s Under Capital Leases -<strong>Obligation</strong>s under capital leases as <strong>of</strong> June 30, 2008, bore interest at annual rates ranging from 1.7% to 5.9%. Capital lease obligations withthird parties in fiscal year 2008 increased by $26,681,000 for master equipment <strong>and</strong> building leases entered into by the general fund <strong>and</strong> leasesfor various transportation related projects entered into by the <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Transportation. The capital leases with component unitsinclude the general fund’s capital leases with the <strong>Maryl<strong>and</strong></strong> Stadium Authority, which are being paid with the net proceeds transferred from certainLottery games, <strong>and</strong> with other non-major component units. Following is a schedule <strong>of</strong> annual future minimum payments under these obligations,along with the present value <strong>of</strong> the related net minimum payments as <strong>of</strong> June 30, 2008 (amounts expressed in thous<strong>and</strong>s).Years EndingCapital Lease <strong>Obligation</strong>s withJune 30, Third Parties Component Units<strong>2009</strong> ..................................................................... $72,027 $33,7712010 ..................................................................... 64,246 33,8232011 ..................................................................... 54,779 34,0872012 ..................................................................... 48,475 33,2482013 ..................................................................... 42,394 32,9862014-2018 ............................................................ 181,100 139,7222019-2023 ............................................................ 147,786 80,1162024-2028 ............................................................ 103,367 22,9132029-2033 ............................................................ 40,287Total future minimum payments ........................ 754,461 410,666Less: Amount representing interest ................ 239,327 132,544Less: Restricted cash <strong>and</strong> investments ............ 12,355Present value <strong>of</strong> net minimum payments .... $515,134 $265,767The reduction shown for restricted cash <strong>and</strong> investments in the amount <strong>of</strong> $12,355,000 is monies held by the bond trustee to be usedprimarily for construction expenditures.The assets acquired through capital leases are as follows (amounts expressed in thous<strong>and</strong>s).Third PartiesAssetAmountConstruction in progress .......................................................... $ 15,281L<strong>and</strong> <strong>and</strong> improvements .......................................................... 11,814Buildings <strong>and</strong> improvements .................................................... 636,157Machinery <strong>and</strong> equipment ....................................................... 304,938Infrastructure ........................................................................... 67,580Total acquired assets ................................................................. 1,035,770Less: Accumulated depreciation ............................................ 275,983Total capital assets - net ....................................................... $ 759,787Other Liabilities -The <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Transportation has entered into several financing agreements, primarily with the <strong>Maryl<strong>and</strong></strong> TransportationAuthority, for the financing <strong>of</strong> various transportation related projects, similar in nature to capital leases. The Department has obligations underother long-term liabilities <strong>of</strong> $368,836,000 as <strong>of</strong> June 30, 2008, bearing interest at annual rates ranging from 2.7% to 6.7%. Following is aschedule <strong>of</strong> annual future minimum payments under these obligations, along with the present value <strong>of</strong> the related net minimum payments as <strong>of</strong>June 30, 2008 (amounts expressed in thous<strong>and</strong>s).Years Ending June 30,Other Liabilities<strong>2009</strong> ........................................................................................ $39,3632010 ........................................................................................ 40,1152011 ........................................................................................ 40,3622012 ........................................................................................ 40,7052013 ........................................................................................ 40,9292014-2018 .............................................................................. 157,7822019-2023 .............................................................................. 139,5482024-2028 .............................................................................. 117,8962029-2033 .............................................................................. 44,107Total future minimum payments ............................................. 660,807Less: Amount representing interest ..................................... 251,901Less: Funds held by bond trustee ........................................ 40,070Present value <strong>of</strong> net minimum payments .......................... $368,83668 www.maryl<strong>and</strong>taxes.comA-68
The reduction shown for restricted cash <strong>and</strong> investments in the amount <strong>of</strong> $40,070,000 is monies held by the bond trustee on behalf <strong>of</strong>the <strong>Maryl<strong>and</strong></strong> Transportation Authority to be used primarily for construction expenditures.The assets acquired through other long-term liabilities are as follows (amounts expressed in thous<strong>and</strong>s).AssetAmountConstruction in progress ................................................ $ 16,889Buildings <strong>and</strong> improvements .......................................... 363,100Machinery <strong>and</strong> equipment ............................................. 7,867Infrastructure ................................................................. 247,231Total acquired assets ....................................................... 635,087Less: Accumulated depreciation ................................. 73,906Total capital assets – net .......................................... $561,181For the governmental activities, compensated absences, self insurance, escheat property claim payments, net pension obligations, net otherpost-employment benefits obligations, obligations under capital leases <strong>and</strong> other liabilities are generally liquidated by the general or specialrevenue fund as applicable.B. Long Term <strong>Obligation</strong>s – Business-type Activities:Changes in long-term obligations for business-type activities as <strong>of</strong> June 30, 2008, are as follows (amounts expressed in thous<strong>and</strong>s).Balance Balance Amounts DueJune 30, 2007 Additions Reductions June 30, 2008 Within One Year<strong>Bonds</strong> Payable:Revenue bonds payable .................................................... $4,140,383 $1,468,598 $567,642 $5,041,339 $186,801Other Liabilities:Lottery prizes .................................................................... 170,055 12,309 37,974 144,390 32,502Escrow deposits ................................................................. 50,705 10,141 18,768 42,078 7,188Rebate liability ................................................................. 11,101 2,868 1,303 12,666 2,032Compensated absences ..................................................... 9,416 2,208 1,511 10,113 2,421Self insurance costs ........................................................... 6,575 3,793 2,005 8,363 1,295<strong>Obligation</strong>s under capital leases ......................................... 1,124 476 648 490Total other liabilities .................................................... 248,976 31,319 62,037 218,258 45,928Total long-term liabilities-business type activities ...... $4,389,359 $1,499,917 $629,679 $5,259,597 $232,729Debt service requirements for business-type activities’ notes payable <strong>and</strong> revenue bonds to maturity are as follows (amounts expressed inthous<strong>and</strong>s).<strong>Maryl<strong>and</strong></strong>Community Water Quality <strong>Maryl<strong>and</strong></strong>Development Financing TransportationYears Ending Administration Administration AuthorityJune 30, Principal Interest Principal Interest Principal Interest<strong>2009</strong>.................................................................... $ 122,230 $ 133,292 $ 15,125 $ 5,569 $ 49,446 $ 81,3232010.................................................................... 74,745 129,576 13,915 6,076 51,123 86,2842011.................................................................... 83,035 126,331 14,465 5,499 52,960 84,3372012.................................................................... 82,415 123,019 15,660 4,890 55,033 82,2862013.................................................................... 82,905 119,554 13,400 4,240 67,003 79,8872014-2018 .......................................................... 432,044 543,594 39,535 14,957 363,820 348,6872019-2023 .......................................................... 346,270 453,090 35,975 7,157 258,540 266,2722024-2028 .......................................................... 324,200 369,204 7,685 535 265,745 200,4882029-2033 .......................................................... 462,740 280,075 246,585 134,4882034-2038 .......................................................... 542,210 171,471 226,980 74,0842039-2043 .......................................................... 276,805 67,787 193,535 18,2912044-2048 .......................................................... 112,780 8,7152049-2053 .......................................................... 1,940 85Total ............................................................... 2,944,319 2,525,793 155,760 48,923 1,830,770 1,456,427Discounts, premiums <strong>and</strong> other deferred costs..... 26,899 5,512 31,424Accumulated accreted interest ............................. 46,655Total ......................................................... $2,971,218 $2,525,793 $161,272 $48,923 $1,908,849 $1,456,427A-69www.maryl<strong>and</strong>taxes.com 69
Community Development Administration (Administration) - Revenue <strong>Bonds</strong>:The Administration, an agency <strong>of</strong> the Department <strong>of</strong> Housing <strong>and</strong> Community Development, has issued revenue bonds, proceeds <strong>of</strong>which were used for various mortgage loan programs. Assets aggregating approximately $3,489,271,000 <strong>and</strong> revenues <strong>of</strong> each mortgage loanprogram are pledged as collateral for the revenue bonds. Interest rates range from 1.9% to 6.8%, with the bonds maturing serially throughJune, 2049. The principal amount outst<strong>and</strong>ing as <strong>of</strong> June 30, 2008, is $2,971,218,000. Substantially all bonds are subject to redemptionprovisions at the option <strong>of</strong> the Administration. Redemptions are permitted at rates ranging from 100% to 102% <strong>of</strong> the outst<strong>and</strong>ing principalamount. During fiscal year 2008, the Administration issued $454,965,000 <strong>of</strong> revenue bonds with interest rates ranging from 2.2% to 6.6%<strong>and</strong> maturing serially through June, 2049.The Administration issues short-term tax-exempt bonds to preserve its allocation <strong>of</strong> the state volume ceiling until the issuance <strong>of</strong> longtermbonds to finance mortgages. In fiscal year 2008, the Administration issued 2007 Series L, which is still outst<strong>and</strong>ing as <strong>of</strong> June 30, 2008.<strong>Bonds</strong> <strong>of</strong> 2006 Series M, N, Q <strong>and</strong> R were issued in fiscal year 2007 <strong>and</strong> either were redeemed prior to maturity or matured in fiscal year 2008.The short-term debt that was issued in fiscal year 2008 was in the Residential Revenue Bond Program Fund.Short-term debt activity during fiscal year 2008 is as follows (amounts expressed in thous<strong>and</strong>s).Outst<strong>and</strong>ing short-term debt as <strong>of</strong> June 30, 2007 ........................... $300,000Issuance .......................................................................................... 30,000Retirements..................................................................................... (300,000)Outst<strong>and</strong>ing short-term debt as <strong>of</strong> June 30, 2008 ....................... $ 30,000This amount <strong>of</strong> short-term debt is included in the restricted revenue bonds payable on the <strong>State</strong>ment <strong>of</strong> Net Assets.Subsequent to June 30, 2008, the Administration issued a total <strong>of</strong> $161,380,000 <strong>and</strong> redeemed a total <strong>of</strong> $22,460,000, <strong>of</strong> revenue bonds.Interest Rate Swaps:Objective <strong>of</strong> the interest rate swap. As a means to lower its borrowing costs, when compared against fixed-rate bonds at the time <strong>of</strong> issuance,the Administration entered into interest rate swaps in connection with variable rate revenue bonds totaling $262,415,000. The intention <strong>of</strong>the swaps was to effectively change the Administration’s variable interest rate on the bonds to fixed rates.Terms. The bonds <strong>and</strong> the related swap agreements mature from September 1, 2025 through September 1, 2043, <strong>and</strong> the swaps’notional amount <strong>of</strong> $262,415,000 matches the amount <strong>of</strong> the variable rate bonds. Under the swap agreements, the Administration pays thecounterparty a fixed payment <strong>of</strong> from 3.9% to 5.7% <strong>and</strong> receives a variable payment computed as either 64% <strong>of</strong> the London Interbank OfferedRate (LIBOR) plus .3% or 100% <strong>of</strong> LIBOR. Conversely, the bonds’ variable rate is based on the Securities Industry <strong>and</strong> Financial MarketsAssociation Rate.Fair value. Because interest rates have generally decreased since execution <strong>of</strong> the swaps, the swaps have a fair value <strong>of</strong> ($11,155,000) as <strong>of</strong>June 30, 2008. The swaps’ fair value may be countered by a decrease in total interest payments required under the variable rate bonds, creatinga lower synthetic interest rate. Because the coupons on the Administration’s variable rate bonds adjust to changing interest rates, the bonds donot have a corresponding fair value decrease. The fair value <strong>of</strong> the swaps is based on market value <strong>and</strong> is affirmed by an independent advisorwho used valuation methods <strong>and</strong> assumptions in accordance with GASB Technical Bulletin No. 2003-1.Credit risk. The fair value <strong>of</strong> the swaps represents the Administration’s credit exposure to each counterparty as <strong>of</strong> June 30, 2008. Thefair value <strong>of</strong> three swaps with one counterparty is ($3,415,000), the fair value <strong>of</strong> two swaps with a second counterparty is ($2,825,000), <strong>and</strong>the fair value <strong>of</strong> two swaps with a third counterparty is ($4,915,000). Therefore, the Administration is not exposed to credit risk as <strong>of</strong> June30, 2008, because the swaps have a negative fair value. However, should the valuation <strong>of</strong> the swap change <strong>and</strong> the fair value turn positive,the Administration would be exposed to credit risk in the amount <strong>of</strong> the swap’s fair value. The first counterparty is rated AAA by St<strong>and</strong>ard& Poor’s <strong>and</strong> Aaa by Moody’s, the second counterparty is rated AA by St<strong>and</strong>ard & Poor’s <strong>and</strong> Fitch <strong>and</strong> Aa by Moody’s, <strong>and</strong> the thirdcounterparty is rated Aaa by Moody’s <strong>and</strong> AAA by St<strong>and</strong>ard & Poor’s <strong>and</strong> Fitch. To mitigate the potential for credit risk, if the counterparties’credit quality falls below A, the fair value <strong>of</strong> the swaps will be fully collateralized by the counterparties.Basis risk. The swaps would expose the Administration to basis risk should the relationship between LIBOR <strong>and</strong> the Securities Industry<strong>and</strong> Financial Markets Association Rate converge. If a change occurs that results in the rates moving to convergence, the expected cost savingsmay not be realized.Termination risk. The Administration or the counterparty may terminate the swap if the other party fails to perform under the terms<strong>of</strong> the contract. The counterparty can terminate the contract if the ratings on the related bonds fall below the credit rating thresholds. If aswap is terminated, the underlying variable rate bonds may be exposed to rising interest rates. If at the time <strong>of</strong> such termination a swap has anegative fair value, the Administration would be liable to the counterparty for a payment equal to the swap’s fair value along with any accruedinterest.Swap payments <strong>and</strong> associated debt. Using rates as <strong>of</strong> June 30, 2008, debt service requirements <strong>of</strong> the variable rate debt <strong>and</strong> net swappayments, assuming current interest rates remain the same for their term, are as follows (amounts expressed in thous<strong>and</strong>s). As rates vary,variable rate bond interest payments <strong>and</strong> net swap payments will vary.70 www.maryl<strong>and</strong>taxes.comA-70
Hedged VariableYears Ending Rate <strong>Bonds</strong> Interest RateJune 30, Principal Interest Swaps, Net Total<strong>2009</strong>................................................................................ $ 1,445 $ 6,198 $ 6,836 $ 14,4792010................................................................................ 5,697 6,909 12,6062011................................................................................ 5,697 6,613 12,3102012................................................................................ 5,710 6,255 11,9652013................................................................................ 5,684 5,947 11,6312014-2018 ...................................................................... 28,486 25,477 53,9632019-2023 ...................................................................... 28,486 18,997 47,4832024-2028 ...................................................................... 2,825 28,477 15,485 46,7872029-2033 ...................................................................... 139,570 23,021 12,523 175,1142034-2038 ...................................................................... 60,735 9,097 6,710 76,5422039-2043 ...................................................................... 27,965 4,644 1,134 33,7432044-2048 ...................................................................... 29,875 390 30,265Total……….. .......................................................... $262,415 $151,587 $112,886 $526,888On August 14, 2008, the Administration entered into an interest rate swap with a notional amount <strong>of</strong> $50,000,000. This agreement, asynthetic fixed rate contract, will hedge $50,000,000 <strong>of</strong> 2008 Series D variable rate bonds issued on September 4, 2008.<strong>Maryl<strong>and</strong></strong> Water Quality Financing Administration (Administration) - Revenue <strong>Bonds</strong>:The Administration, an agency <strong>of</strong> the Department <strong>of</strong> Environment, has issued revenue bonds for providing loans <strong>and</strong> grants. Interestrates range from 3.3% to 6.6%, payable semiannually, with annual installments from $2,625,000 to $12,920,000 to March 1, 2025. Theprincipal amount outst<strong>and</strong>ing as <strong>of</strong> June 30, 2008, is $161,272,000. These bonds are payable solely from the revenue, money or property <strong>of</strong>the Administration. During fiscal year 2008, the Administration issued $47,940,000 is Revolving Loan Fund Revenue <strong>Bonds</strong> Series 2008Awith an interest rate <strong>of</strong> 4.1% due serially through March 2025 <strong>and</strong> $50,000,000 in Bay Restoration Revenue <strong>Bonds</strong> Series 2008 with aninterest rate <strong>of</strong> 4.1% due serially through March 2023.<strong>Maryl<strong>and</strong></strong> Transportation Authority <strong>Bonds</strong>:<strong>Bonds</strong> outst<strong>and</strong>ing as <strong>of</strong> June 30, 2008, are as follows (amounts expressed in thous<strong>and</strong>s).Series 1992 Capital appreciation refunding <strong>and</strong> financing revenue bonds for the Authority’s Transportation Facilities Projectsmaturing in annual installments <strong>of</strong> original principal ranging from $720 to $5,781 from July 1, 2008, to July 1, 2015,with approximate yield to maturity <strong>of</strong> 6.3% to 6.4% <strong>and</strong> an accreted amount ...................................................................... $ 74,496BWI Consolidated Car Rental Facility Revenue bonds, Series 2002a, maturing in annual installments ranging from $1,935to $8,505 from July 1, 2008, to July 1, 2032, with interest rates ranging from 2.8% to 6.7%, payable semiannually ............ 109,825BWI Parking Garage Revenue <strong>Bonds</strong>, Series 2002b, maturing in annual installments ranging from $8,590 to $17,470from March 1, <strong>2009</strong>, to March 1, 2027, with interest rates ranging from 4.0% to 5.3% payable semiannually ..................... 238,180BWI Facilities Projects <strong>Bonds</strong>, Series 2003, maturing in annual installments ranging from $9,100 to $11,200from March 1, <strong>2009</strong>, to March 1, 2014, with a current variable rate <strong>of</strong> 1.7%. Payable semiannually .................................... 60,900WMATA Metrorail Parking Projects <strong>Bonds</strong>, Series 2004, maturing in annual installments ranging from $1,105 to $2,780 fromMarch 1, <strong>2009</strong>, to March 1, 2029, with interest rates ranging from 3.0% to 5.0%, payable semiannually............................. 37,890Series 2004 Revenue bonds, for construction <strong>and</strong> improvement <strong>of</strong> Authority’s Transportation Facilities projects, maturing inannual installments <strong>of</strong> $1,045 to $15,235 from July 1, 2008, to July 1, 2032, with interest rates ranging from 4.5% to 5.3%payable semiannually, <strong>and</strong> term bonds maturing July 1, 2034, with an interest rate <strong>of</strong> 5.0% ................................................ 159,000Calvert Street Parking Project Revenue bonds, Series 2005, maturing in annual installments ranging from $600 to $1,415from July 1, 2008 to July 1, 2032, with interest rates ranging from 3.3% to 4.4% payable semiannually .............................. 23,175Grant <strong>and</strong> Revenue Anticipation <strong>Bonds</strong>, Series 2007 (GARVEE bonds), maturing in annual installments ranging from $21,290to $34,390 from March 1, <strong>2009</strong> to March 1, 2019, at an interest rate <strong>of</strong> 4.0%, payable semiannually to financethe Intercounty Connector Highway Project ......................................................................................................................... 300,655Series 2007 Revenue bonds, for construction <strong>and</strong> improvement <strong>of</strong> Authority’s Transportation Facilities projects,maturing in annual installments <strong>of</strong> $1,025 to $12,685 from July 1, 2012, to July 1, 2031, with interest ratesranging from 4.0% to 5.0% payable semiannually, <strong>and</strong> term bonds maturing July 1, 2037 <strong>and</strong> 2041 with aninterest rate <strong>of</strong> 4.6% ............................................................................................................................................................. 300,000Series 2008 Revenue bonds, for construction <strong>and</strong> improvement <strong>of</strong> Authority’s Transportation Facilities projects,maturing in annual installments <strong>of</strong> $8,885 to $31,070 from July 1, 2012 to July 1, 2038, with interest rates rangingfrom 4.8% to 5.1% payable semiannually, <strong>and</strong> term bonds maturing July 1, 2041 with an interest rate <strong>of</strong> 5.0% ................. 573,304Unamortized premium .................................................................................................................................................................. 31,424Total………………………………………………………………………………………………………………………$1,908,849Revenue bonds are payable solely from the revenues <strong>of</strong> the transportation facilities projects. Capital assets constructed from BWIfacilities, WMATA Metrorail <strong>and</strong> the Calvert Street Parking Project are not capital assets <strong>of</strong> the Authority. Capital appreciation bonds payableas <strong>of</strong> June 30, 2008, include an accreted amount <strong>of</strong> $46,655,000.A-71www.maryl<strong>and</strong>taxes.com 71
Refunded debt <strong>of</strong> $59,140,000 was considered defeased as <strong>of</strong> June 30, 2008. Accordingly, the trust account assets <strong>and</strong> the liability for thedefeased bonds are not included in the financial statements.The Authority is authorized to issue Grant <strong>and</strong> Revenue Anticipation <strong>Bonds</strong> (GARVEE <strong>Bonds</strong>) to a maximum amount <strong>of</strong> $750,000,000to be used by the <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Transportation to build the Intercounty Connector (ICC) highway project to be built inMontgomery <strong>and</strong> Prince George’s Counties, <strong>Maryl<strong>and</strong></strong>. Debt service on these bonds is payable from a portion <strong>of</strong> <strong>Maryl<strong>and</strong></strong>’s future Federalhighway aid <strong>and</strong> other pledged moneys. As <strong>of</strong> June 30, 2008, GARVEE bonds in the amount <strong>of</strong> $325,000,000 have been issued. These bondsare not general obligations <strong>of</strong> the Authority or legal obligations <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Transportation or the <strong>State</strong>.<strong>Obligation</strong>s Under Capital Leases -<strong>Obligation</strong>s <strong>of</strong> business-type activities under capital leases as <strong>of</strong> June 30, 2008, are as follows (amounts expressed in thous<strong>and</strong>s).Years Ending June 30,<strong>State</strong> Lottery Agency<strong>2009</strong> ....................................................................................... $5062010 ....................................................................................... 672011 ....................................................................................... 672012 ....................................................................................... 33Total minimum lease payments ............................................ 673Less: Imputed interest ..................................................... 25Present value <strong>of</strong> net minimum lease payments ................ $648The Lottery has entered into lease agreements for certain on-line gaming system equipment <strong>and</strong> a computer system. As <strong>of</strong> June 30, 2008,assets acquired under leases <strong>and</strong> the related accumulated amortization totaled $2,294,000 <strong>and</strong> $1,194,000, respectively, <strong>and</strong> are included incapital assets in the <strong>State</strong>ment <strong>of</strong> Net Assets, Business-type Activities.C. Notes <strong>and</strong> Revenue <strong>Bonds</strong> Payable - Component Units:Higher Education -Certain <strong>State</strong> higher education institutions have issued revenue bonds for the acquisition <strong>and</strong> renovation construction <strong>of</strong> student housing<strong>and</strong> other facilities. Student fees <strong>and</strong> other user revenues collateralize the revenue bonds. Interest rates range from 2.0% to 6.1% on therevenue bonds.Debt service requirements to maturity, excluding debt <strong>of</strong> the foundations in the amount <strong>of</strong> $4,924,000, are as follows (amounts expressedin thous<strong>and</strong>s).Notes Payable <strong>and</strong>Other Long-Term DebtRevenue <strong>Bonds</strong>Years Ending June 30, Principal Interest Principal Interest<strong>2009</strong>........................................................ $ 2,658 $ 3,795 $ 71,604 $ 45,4742010........................................................ 2,815 3,664 70,333 43,4652011........................................................ 2,967 3,525 68,020 40,4182012........................................................ 3,108 3,378 70,390 36,1282013........................................................ 3,262 3,204 60,460 33,2382014-2018 .............................................. 6,774 14,483 292,845 123,7492019-2023 .............................................. 50,385 7,424 238,695 54,4762024-2028 .............................................. 90,250 13,9372029-2033 .............................................. 15,860 2,1952034-2038 .............................................. 1,155 139Total ................................................... 71,969 39,473 979,612 393,219Accumulated accreted interest <strong>and</strong> otherdeferred costs .................................... 29,486Total ............................................. $71,969 $39,473 $1,009,098 $393,219The bonds issued are the debt <strong>and</strong> obligation <strong>of</strong> the issuing higher education institutions <strong>and</strong> are not a debt <strong>and</strong> obligation <strong>of</strong>, or pledge <strong>of</strong>,the faith <strong>and</strong> credit <strong>of</strong> the <strong>State</strong>.As <strong>of</strong> June 30, 2008, higher education institutions have defeased debt outst<strong>and</strong>ing <strong>of</strong> $246,313,000 resulting from the refunding <strong>of</strong>previously issued debt. Accordingly, the trust account assets <strong>and</strong> the liability for the defeased bonds are not included in these financial statements.As <strong>of</strong> June 30, 2008, cash <strong>and</strong> cash equivalents <strong>and</strong> investments were held by the trustees for the higher education institutions in the amount<strong>of</strong> $120,642,000 for the University System <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (System), $2,067,000 for St. Mary’s College <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, <strong>and</strong> $5,772,000 for Morgan<strong>State</strong> University, respectively.On June 26, 2008, the System issued $90,000,000 <strong>of</strong> 2008 Series A Revenue <strong>Bonds</strong> to finance new educational <strong>and</strong> auxiliary facilities <strong>and</strong> forrenovations. The bonds bear interest at 4%-5%. The bonds mature from <strong>2009</strong> until 2028. The bonds were issued with a $2,323,000 premium.72 www.maryl<strong>and</strong>taxes.comA-72
<strong>Obligation</strong>s under capital leases <strong>of</strong> $10,825,000 exist as <strong>of</strong> June 30, 2008, bearing interest at annual rates ranging from 2.8% to 6.8%.<strong>Maryl<strong>and</strong></strong> Stadium Authority (Authority) - Revenue <strong>Bonds</strong>:Debt service requirements to maturity for <strong>Maryl<strong>and</strong></strong> Stadium Authority revenue bonds <strong>and</strong> notes payable are as follows (amountsexpressed in thous<strong>and</strong>s).Years EndingJune 30, Principal Interest<strong>2009</strong> ........................................................................ $ 15,557 $ 16,3782010 ........................................................................ 16,580 15,4732011 ........................................................................ 17,650 14,4912012 ........................................................................ 18,815 13,4962013 ........................................................................ 20,066 12,2492014-2018 ............................................................... 96,987 42,5282019-2023 ............................................................... 65,425 14,6912024-2026 ............................................................... 20,490 2,422Total .................................................................... 271,570 131,728Unamortized discount net <strong>of</strong>unamortized premium ................................. (13)Total ....................................................... $271,557 $131,728The Authority has issued various lease revenue bonds <strong>and</strong> notes to finance the construction <strong>of</strong> the baseball <strong>and</strong> football stadiums,convention center expansions in Baltimore City <strong>and</strong> the Town <strong>of</strong> Ocean City <strong>and</strong> certain other facilities. The outst<strong>and</strong>ing debt is to be repaidthrough capital lease payments from the <strong>State</strong>, as the <strong>State</strong> has entered into capital lease arrangements for the use <strong>of</strong> the facilities financed withthe debt proceeds.As <strong>of</strong> June 30, 2008, the Authority had outst<strong>and</strong>ing revenue bonds for the construction, renovation <strong>and</strong> expansion <strong>of</strong> certain facilities asfollows (amounts expressed in thous<strong>and</strong>s).Outst<strong>and</strong>ing Interest MaturityFacility Amount Rates DateBaseball Stadium ...................................................................... $113,648 Variable December 15, 2019Football Stadium ...................................................................... 71,139 Variable March 1, 2026Baltimore City Convention Center .......................................... 28,385 Variable December 15, 2014Ocean City Convention Center ................................................ 9,644 4.8% to 5.4% December 15, 2015Hippodrome Performing Arts Center ....................................... 17,064 5.0% to 6.3% June 15, 2022Montgomery County Conference Center ................................. 19,817 2.0% to 5.0% June 15, 2024Camden Station ....................................................................... 8,360 3.0% to 5.2% December 15, 2024Camden Yards Complex ........................................................... 3,500 5.6% January 1, 2018Total ..................................................................................... $271,55712. Insurance:The self-insurance liabilities represent the <strong>State</strong>’s liability for its various self-insurance programs. The <strong>State</strong> is self-insured for generalliability, property <strong>and</strong> casualty, workers’ compensation, environmental <strong>and</strong> anti-trust liabilities <strong>and</strong> certain employee health benefits.Commercial insurance coverage is purchased for specialized exposures such as aviation hull <strong>and</strong> liability, steam boiler coverage <strong>and</strong> certaintransportation risks. There were no significant reductions or changes in the commercial insurance coverage from the prior year, <strong>and</strong> theamount <strong>of</strong> settlements have not exceeded insurance coverage for any <strong>of</strong> the past three fiscal years.All funds, agencies <strong>and</strong> authorities <strong>of</strong> the <strong>State</strong> participate in the self-insurance program (Program). The Program, which is accountedfor in the general fund, allocates the cost <strong>of</strong> providing claims servicing <strong>and</strong> claims payment by charging a “premium” to each fund, agency orpublic authority, based on a percentage <strong>of</strong> each organization’s estimated current-year payroll or based on an average loss experienced by eachorganization. This charge considers recent trends in actual claims experience <strong>of</strong> the <strong>State</strong> as a whole <strong>and</strong> makes provision for catastrophiclosses.The Program’s liabilities are reported when it is probable that a loss has occurred <strong>and</strong> the amount <strong>of</strong> that loss can be reasonably estimated.Liabilities include an amount for claims that have been incurred but not reported. Because actual claims liabilities depend on such complexfactors as inflation, changes in legal doctrines, <strong>and</strong> damage awards, actual claims paid could differ from these estimates. Claims liabilities arereevaluated periodically to take into consideration recently settled claims, the frequency <strong>of</strong> claims <strong>and</strong> other economic <strong>and</strong> social factors. Nonincrementalclaims adjustment expenses have been included as part <strong>of</strong> the liability for claims <strong>and</strong> adjustments for the general liability, property<strong>and</strong> casualty, workers’ compensation, environmental <strong>and</strong> anti-trust liabilities. Liabilities for incurred workers’ compensation losses to be settledA-73www.maryl<strong>and</strong>taxes.com 73
y fixed or reasonably determinable payments over a long period <strong>of</strong> time are reported at their present value using a 4% discount rate. Theworkers’ compensation <strong>and</strong> property <strong>and</strong> casualty costs are based upon separately determined actuarial valuations for the following fiscal yearsending. The employee health benefits liability is calculated based on claims subsequently reported <strong>and</strong> claims trends.Changes in the self-insurance liabilities during fiscal year 2008 were as follows (amounts expressed in thous<strong>and</strong>s).Claims <strong>and</strong>AmountBalance Changes in Claim Balance Due WithinJune 30, 2007 Estimates Payments June 30, 2008 One YearProperty, casualty <strong>and</strong> general liability .......................... $ 16,176 $ 7,783 $ 7,625 $ 16,334 $ 5,138Workers’ compensation ................................................ 252,184 74,566 57,247 269,503 41,773Employee health benefits .............................................. 74,125 818,311 819,478 72,958 72,958Total self-insurance costs ......................................... $342,485 $900,660 $884,350 $358,795 $119,869As <strong>of</strong> June 30, 2008, the Program held $337,216,000 in cash <strong>and</strong> investments designated for payments <strong>of</strong> these claims.Changes in the self-insurance liabilities during fiscal year 2007 were as follows (amounts expressed in thous<strong>and</strong>s).Claims <strong>and</strong>AmountBalance Changes in Claim Balance Due WithinJune 30, 2006 Estimates Payments June 30, 2007 One YearProperty, casualty <strong>and</strong> general liability .......................... $ 16,372 $ 7,646 $ 7,842 $ 16,176 $ 5,650Workers’ compensation ................................................ 242,993 55,465 46,274 252,184 39,089Employee health benefits .............................................. 66,903 768,958 761,736 74,125 74,125Total self-insurance costs ........................................ $326,268 $832,069 $815,852 $342,485 $118,864As <strong>of</strong> June 30, 2007, the Program held $377,985,000, in cash <strong>and</strong> investments designated for payments <strong>of</strong> these claims.13. Fund Equity:The unrestricted deficit for governmental activities on the government-wide statement <strong>of</strong> net assets is $2,273,983,000. This occursbecause the <strong>State</strong> incurs debt for the purposes <strong>of</strong> capital acquisition <strong>and</strong> construction on behalf <strong>of</strong> local governments <strong>and</strong> private organizations.Since the incurrence <strong>of</strong> this debt does not result in capital assets <strong>of</strong> the <strong>State</strong>, the debt is not reflected in the net asset category, invested incapital assets, net <strong>of</strong> related debt, but rather in the unrestricted net assets category. As <strong>of</strong> June 30, 2008, the <strong>State</strong> has reported outst<strong>and</strong>inggeneral obligation bonds <strong>and</strong> capital leases applicable to these non-<strong>State</strong> projects <strong>of</strong> $3,748,514,000. Without <strong>State</strong> financing for these capitalassets, the <strong>State</strong> would have reported unrestricted net assets <strong>of</strong> governmental activities in the amount <strong>of</strong> $1,474,531,000.The statement <strong>of</strong> net assets for the primary government reports $2,509,818,000 <strong>of</strong> restricted net assets, including $18,418,000 restrictedby enabling legislation.A portion <strong>of</strong> the general fund’s fund balance, in the amount <strong>of</strong> $720,298,000 as <strong>of</strong> June 30, 2008, has been reserved for the <strong>State</strong>Reserve Fund. The <strong>State</strong> Reserve Fund is comprised <strong>of</strong> the Dedicated Purpose Account, Economic Development Opportunities ProgramAccount, Catastrophic Event Account <strong>and</strong> the Revenue Stabilization Account with balances as <strong>of</strong> June 30, 2008, <strong>of</strong> $22,000,000, $5,148,000,$8,398,000, <strong>and</strong> $684,752,000, respectively. The Dedicated Purpose Account is designed to retain appropriations for major multi-yearexpenditures <strong>and</strong> to meet contingency requirements. The Economic Development Opportunities Program Account is to be used forextraordinary economic development opportunities <strong>and</strong> only as a supplement to existing programs. The Catastrophic Event Account is to beused to respond without undue delay to a natural disaster or other catastrophic event that cannot be managed without appropriations. TheRevenue Stabilization Account is designed to retain <strong>State</strong> revenues for future needs <strong>and</strong> reduce the need for future tax increases.A portion <strong>of</strong> the other governmental funds’ fund balance is reserved for sinking fund deposits <strong>of</strong> $8,128,000, set aside to redeem the 2002,2005 <strong>and</strong> 2007 Qualified Zone Academy <strong>Bonds</strong> due in 2016, 2020, <strong>and</strong> 2022, respectively. A portion <strong>of</strong> the general fund unreserved fundbalance is designated for fiscal year <strong>2009</strong> appropriations in the amount <strong>of</strong> $537,984,000. Portions <strong>of</strong> the other governmental funds’ unreservedfund balance are designated for payment <strong>of</strong> the debt service on <strong>General</strong> <strong>Obligation</strong> long-term debt in the amount <strong>of</strong> $54,263,000. Theundesignated deficit fund balance reported in non-major capital projects fund <strong>of</strong> $128,045,000 results from the reservation for encumbrances<strong>of</strong> $321,443,000 for future construction projects in the capital projects fund.The unrestricted deficit in net assets in other enterprise funds <strong>of</strong> $5,718,000 for the Economic Development Insurance Programs occurredbecause <strong>of</strong> restrictions for insuring mortgages.74 www.maryl<strong>and</strong>taxes.comA-74
14. Segment Information:The <strong>State</strong>’s Economic Development Loan Program contains two separately identifiable activities that have separately issued revenue bondsoutst<strong>and</strong>ing; housing loans <strong>of</strong> the Community Development Administration <strong>and</strong> water quality loans <strong>and</strong> grants <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Water QualityAdministration.The Community Development Administration (CDA) has issued revenue bonds, the proceeds <strong>of</strong> which were used for various mortgage loanprograms. The assets <strong>of</strong> the loan program <strong>and</strong> revenues <strong>of</strong> each mortgage loan program are pledged as collateral for the revenue bonds. The bondindentures require the CDA to separately account for the identifiable activity’s revenues, expenses, gains <strong>and</strong> losses, assets <strong>and</strong> liabilities.The <strong>Maryl<strong>and</strong></strong> Water Quality Administration has issued revenue bonds to encourage capital investment for wastewater treatment systems<strong>and</strong> bay restoration. These bonds are payable solely from, <strong>and</strong> secured by, the revenue, money or property <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Water QualityAdministration. The bond indentures require separate accounting for the identifiable activity’s revenues, expenses, gains <strong>and</strong> losses, assets <strong>and</strong>liabilities.Summary financial information for the two loan programs is presented below.Condensed <strong>State</strong>ment <strong>of</strong> Net AssetsAs <strong>of</strong> June 30, 2008(Expressed in Thous<strong>and</strong>s)Community Development <strong>Maryl<strong>and</strong></strong> Water QualityAdministrationAdministrationAssets:Current restricted assets .............................................. $ 666,229 $110,481Non-current restricted assets ....................................... 2,823,042 667,966Total assets .............................................................. 3,489,271 778,447Liabilities:Current liabilities ....................................................... 213,848 18,113Non-current liabilities ............................................... 2,872,923 146,527Total liabilities ......................................................... 3,086,771 164,640Net Assets:Restricted ................................................................... 402,500 613,807Total net assets ......................................................... $ 402,500 $613,807Condensed <strong>State</strong>ment <strong>of</strong> Revenues, Expenses, <strong>and</strong> Changes in Net AssetsFor the Year Ended June 30, 2008(Expressed in Thous<strong>and</strong>s)Community Development <strong>Maryl<strong>and</strong></strong> Water QualityAdministrationAdministrationOperating income (expenses):Interest on loan income .............................................. $126,397 $ 6,848Other operating revenues ........................................... 4,731Other operating expenses ........................................... (18,410) (19,295)Operating income (expenses).................................. 112,718 (12,447)Non-operating revenues (expenses)................................... (89,715) 572,246Change in net assets ................................................... 23,003 559,799Beginning net assets................................................ 379,497 54,008Ending net assets .................................................... $402,500 $613,807A-75www.maryl<strong>and</strong>taxes.com 75
Condensed <strong>State</strong>ment <strong>of</strong> Cash FlowsFor the Year Ended June 30, 2008(Expressed in Thous<strong>and</strong>s)Community DevelopmentAdministration<strong>Maryl<strong>and</strong></strong> Water QualityAdministrationNet cash provided (used) by:Operating activities ....................................................... $(359,454) $(51,951)Non-capital financing activities ..................................... (187,619) 83,362Investing activities ......................................................... 300,548 850Beginning cash <strong>and</strong> cash equivalents ......................... 683,367 362Ending cash <strong>and</strong> cash equivalents .............................. $436,842 $ 32,62315. Retirement Benefits:<strong>State</strong> Retirement <strong>and</strong> Pension System <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (System):The <strong>State</strong> is a sole employer in the cost-sharing multiple-employer public employee retirement system established by the <strong>State</strong> to providepension benefits for <strong>State</strong> employees (other than employees covered by the <strong>Maryl<strong>and</strong></strong> Transit Administration Pension Plan described below)<strong>and</strong> employees <strong>of</strong> 114 participating political subdivisions or other entities within the <strong>State</strong>. The non-<strong>State</strong> entities that participate within theSystem receive separate actuarial valuations in order to determine their respective funding levels <strong>and</strong> actuarial liabilities. Retirement benefitsare paid from the System’s pooled assets rather than from assets relating to a particular plan participant. Consequently, the System is accountedfor as a single plan as defined in GASB <strong>State</strong>ment No. 25, “Financial Reporting for Defined Benefit Pension Plans <strong>and</strong> Note Disclosures forDefined Contribution Plans.” The System prepares a separately audited Comprehensive Annual Financial Report, which can be obtained fromthe <strong>State</strong> Retirement <strong>and</strong> Pension System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, 120 E. Baltimore Street, Suite 1600, Baltimore, <strong>Maryl<strong>and</strong></strong> 21202-1600.Plan Description:The System is administered in accordance with the <strong>State</strong> Personnel <strong>and</strong> Pensions Article <strong>of</strong> the Annotated Code <strong>of</strong> <strong>Maryl<strong>and</strong></strong> <strong>and</strong> consists<strong>of</strong> several plans which are managed by the System’s Board <strong>of</strong> Trustees. All <strong>State</strong> employees <strong>and</strong> employees <strong>of</strong> participating entities are coveredby the plans.“Retirement System” — retirement programs for substantially all <strong>State</strong> employees, teachers, <strong>State</strong> police <strong>and</strong> judges who are not members<strong>of</strong> the <strong>State</strong> Pension System.“Pension System” — retirement programs for employees <strong>and</strong> teachers hired after January 1, 1980, <strong>and</strong> prior employees who elected totransfer from the Retirement System.The System provides retirement, death <strong>and</strong> disability benefits in accordance with <strong>State</strong> statutes. Vesting begins after 5 years <strong>of</strong> service.A member terminating employment before attaining retirement age, but after completing 5 years <strong>of</strong> service becomes eligible for a vestedretirement allowance provided the member does not withdraw his or her accumulated contributions. Members <strong>of</strong> the Retirement Systemmay retire with full benefits after attaining the age <strong>of</strong> 60, or completing 30 years <strong>of</strong> service credit, regardless <strong>of</strong> age. Members <strong>of</strong> the PensionSystems may retire with full benefits after attaining the age 62, or after completing 30 years <strong>of</strong> Service Credit, regardless <strong>of</strong> age. <strong>State</strong> policemembers may retire with full benefits after attaining age 50, or completing 22 years <strong>of</strong> service credit, regardless <strong>of</strong> age. Members <strong>of</strong> the LawEnforcement Officers System may retire with full benefits at age 50, or completing 25 years <strong>of</strong> service credit, regardless <strong>of</strong> age.The annual benefit for Retirement System Members is equal to 1/55 (1.8%) <strong>of</strong> the member’s highest three-year average salary multipliedby the number <strong>of</strong> years <strong>of</strong> service credit. A member may retire with reduced benefits after completing 25 years <strong>of</strong> service, regardless <strong>of</strong> age. Amember <strong>of</strong> the Pension System will generally receive, upon retirement, an annual service retirement allowance equal to 1.2% <strong>of</strong> the member’shighest three-consecutive year average salary multiplied by the number <strong>of</strong> years <strong>of</strong> service credit on or before June 30, 1998, plus 1.8% <strong>of</strong> thehighest three-consecutive year average salary multiplied by the number <strong>of</strong> years <strong>of</strong> service credit after June 30, 1998. The annual benefit fora Pension System member who is employed by a participating governmental unit that does not provide enhanced pension benefits is equal to0.8% <strong>of</strong> the member’s highest three-consecutive year average salary multiplied by the number <strong>of</strong> years <strong>of</strong> service credit, with a provision foradditional benefits for compensation earned in excess <strong>of</strong> the Social Security wage base. A member <strong>of</strong> either type <strong>of</strong> pension system may retirewith reduced benefits after attaining age 55 <strong>and</strong> completing 15 years <strong>of</strong> service.The annual retirement allowance for a <strong>State</strong> Police member is equal to 2.55% <strong>of</strong> the member’s highest three-year average salary multipliedby each year <strong>of</strong> service up to a maximum <strong>of</strong> 28 years. The annual retirement allowance for a member <strong>of</strong> the Law Enforcement Officers PensionSystem is 2.0% <strong>of</strong> the member’s highest three-consecutive year average salary multiplied by each year <strong>of</strong> service up to a maximum <strong>of</strong> 30 years.Neither the <strong>State</strong> Police Retirement System nor Law Enforcement Officers Pension System provide for an early retirement.Funding Policy:In accordance with the <strong>State</strong> Personnel <strong>and</strong> Pensions Article <strong>of</strong> the Annotated Code <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, employer contribution rates <strong>and</strong> theactuarial accrued liability are established by annual actuarial valuations using the entry age normal cost method <strong>and</strong> other actuarial assumptionsadopted by the Board <strong>of</strong> Trustees. Effective July 1, 1980, in accordance with the law governing the Systems, all benefits <strong>of</strong> the System arefunded in advance. The entry age normal cost method is the actuarial cost method used to determine the employers’ contribution rates <strong>and</strong>the actuarial accrued liability. Members <strong>of</strong> the Retirement System are required to contribute to the System a fixed percentage <strong>of</strong> their regular76 www.maryl<strong>and</strong>taxes.comA-76
salaries <strong>and</strong> wages, 7.0% or 5.0% depending on the retirement plan selected. Members <strong>of</strong> the Pension System are required to contribute to theSystem 4.0% <strong>of</strong> their regular salaries <strong>and</strong> wages for fiscal year 2008, <strong>and</strong> 5.0% thereafter. Members <strong>of</strong> the Pension System who are employedby a participating government that does not provide enhanced pension benefits are required to contribute to the System 5.0% <strong>of</strong> their regularsalaries <strong>and</strong> wages that exceed the Social Security wage base. <strong>State</strong> Police members are required to contribute 8.0% <strong>of</strong> their regular salaries <strong>and</strong>wages to the System. Members <strong>of</strong> the Law Enforcement Officers Pension System are required to contribute 4% <strong>of</strong> earnable compensation. Allcontributions are deducted from each member’s salary, <strong>and</strong> the resulting payments are remitted to the System on a regular <strong>and</strong> periodic basis.The contribution requirements <strong>of</strong> the System members, as well as the <strong>State</strong> <strong>and</strong> participating governmental employers, are established <strong>and</strong>may be amended by the Board <strong>of</strong> Trustees for the System. Effective July 1, 2002, <strong>State</strong> law provides that the contribution rates may be moreor less than the actuarially determined rates for the Employees’ Retirement <strong>and</strong> Pension Systems <strong>and</strong> the Teachers’ Retirement <strong>and</strong> PensionSystems. Contributions to these Systems are based on the Modified Corridor Funding Method which establishes a budgetary contributionrate. This method effectively maintains the contribution rate in effect for the Teachers’ <strong>and</strong> Employees’ combined systems during the precedingfiscal year (as adjusted for any legislative changes in the benefit structure) as long as such systems remain between 90 percent <strong>and</strong> 110 percentfunded. If either system falls below 90 percent funded (i.e., below the corridor), then the contribution rate in effect for the subsequent fiscalyear will be the rate in effect for the preceding fiscal year plus 20 percent <strong>of</strong> the difference between the current fiscal year full funding rate <strong>and</strong>the prior fiscal year contribution rate. Conversely, if either system exceeds 110 percent funded (i.e., above the corridor), then the contributionrate in effect for the subsequent fiscal year will be the rate in effect for the preceding fiscal year minus 20 percent <strong>of</strong> the difference betweenthe current fiscal year full funding rate <strong>and</strong> the prior fiscal year contribution rate. The methodology for computing the <strong>State</strong>’s employercontribution rates for the Law Enforcement Officers’ Pension System, <strong>State</strong> Police Retirement System <strong>and</strong> the Judges’ Retirement Systemremain unchanged. For each <strong>of</strong> these three systems, the employer contribution rate is equal to the sum <strong>of</strong> the normal contribution <strong>and</strong> theaccrued liability contribution rates.During fiscal year 2008, the <strong>State</strong> paid $950,123,000, <strong>of</strong> the required contribution totaling $1,100,335,000 which was 10.1% <strong>of</strong> coveredpayroll <strong>and</strong> 86.3% <strong>of</strong> the required payment. The difference represents an additional pension cost liability in the government-wide statement <strong>of</strong>net assets. The <strong>State</strong> makes non-employer contributions to the System for local school system teachers. The covered payroll amount includesamounts for employees for whom the <strong>State</strong> pays retirement benefits, but does not pay the payroll. As <strong>of</strong> June 30, 2008, the <strong>State</strong>’s membershipincludes 172,672 active members, 45,296 vested former members, <strong>and</strong> 99,796 retirees <strong>and</strong> beneficiaries.Annual Pension Cost <strong>and</strong> Net Pension <strong>Obligation</strong>:The annual pension cost <strong>and</strong> net pension obligation as <strong>of</strong> June 30, 2008, are as follows (amounts expressed in thous<strong>and</strong>s).Teachers’ Employees’ LawRetirement Retirement <strong>State</strong> Police Judges’ Enforcement<strong>and</strong> Pension <strong>and</strong> Pension Retirement Retirement Officers’ PensionSystem System System System SystemAnnual required contribution .................................... $664,646 $ 347,705 $22,559 $16,661 $34,355Interest on net pension obligation ............................. 16,313 33,756Actuarial adjustment toannual required contribution.............................. (11,618) (24,042)Annual pension cost .................................................. 669,341 357,419 22,559 16,661 34,355Contributions made .................................................. 622,314 263,511 13,282 16,661 34,355Increase in net pension obligation ............................. 47,027 93,908 9,277Net pension obligation,beginning <strong>of</strong> year ................................................ 210,484 435,556Net pension obligation,end <strong>of</strong> year ......................................................... $257,511 $529,464 $9,277 $ – $ –Amortization period (years rolling) ............................ 30 30 30 17.36 14.82Three Year Historical Trend Information for the System is as follows (amounts expressed in thous<strong>and</strong>s).Annual Pension CostAs <strong>of</strong> June 30Plan 2008 2007 2006Teachers’ Retirement <strong>and</strong> Pension System................................................................... $669,341 $571,977 $485,799Employees’ Retirement <strong>and</strong> Pension System ............................................................... 357,419 322,923 274,163<strong>State</strong> Police Retirement System ................................................................................... 22,559 11,560 6,681Judges’ Retirement System .......................................................................................... 16,661 15,937 14,442Law Enforcement Officers’ Pension System ................................................................ 34,355 29,412 28,361A-77www.maryl<strong>and</strong>taxes.com 77
Percentage <strong>of</strong> Annual Pension Cost ContributedAs <strong>of</strong> June 30,Plan 2008 2007 2006Teachers’ Retirement <strong>and</strong> Pension System................................................................... 94% 85% 91%Employees’ Retirement <strong>and</strong> Pension System ............................................................... 76 62 59<strong>State</strong> Police Retirement System ................................................................................... 59 100 100Judges’ Retirement System .......................................................................................... 100 100 100Law Enforcement Officers’ Pension System ................................................................ 100 100 100Net Pension <strong>Obligation</strong>As <strong>of</strong> June 30,Plan 2008 2007 2006Teachers’ Retirement <strong>and</strong> Pension System..................................................................... $257,511 $210,484 $123,931Employees’ Retirement <strong>and</strong> Pension System ................................................................. 529,464 435,556 313,662<strong>State</strong> Police Retirement System ..................................................................................... 9,277Judges’ Retirement System ............................................................................................Law Enforcement Officers Pension System ...................................................................The funded status <strong>of</strong> each plan as <strong>of</strong> June 30, 2008, the most recent valuation date, is as follows (amounts expressed in thous<strong>and</strong>s).(Unfunded AAL)Actuarial Actuarial (Unfunded AAL) /ExcessValue <strong>of</strong> Accrued /Excess <strong>of</strong> as aPlan Liability (AAL) Assets Funded Covered Percentage <strong>of</strong>Assets Entry Age over AAL Ratio Payroll Covered PayrollTeachers’ Retirement <strong>and</strong>Pension System .............................. $23,784,404 $29,868,705 $(6,084,301) 79.63% $6,117,591 (99.46) %Employees’ Retirement <strong>and</strong>Pension System .............................. 10,699,418 14,337,460 (3,638,042) 74.63 3,110,640 (116.95)<strong>State</strong> Police Retirement System ......... 1,343,208 1,601,575 (258,367) 83.87 86,464 (298.81)Judges’ Retirement System ................ 306,716 406,782 (100,066) 75.40 37,943 (263.73)Law Enforcement Officers’Pension System .............................. 389,793 611,367 (221,574) 63.76 85,814 (258.20)The schedule <strong>of</strong> funding progress, presented as RSI following the notes to the financial statements, presents multiyear trend informationabout whether the actuarial value <strong>of</strong> plan assets is increasing or decreasing over time relative to the AAL for benefits. The Schedule <strong>of</strong> FundingProgress also discloses the relationship between the System’s covered payroll (i.e., all elements included in compensation paid to active memberson which contributions are based) <strong>and</strong> the unfunded actuarial accrued liability. This relationship, expressed as a ratio, is a measure <strong>of</strong> thesignificance <strong>of</strong> the unfunded AAL relative to the capacity to pay all contributions required to fund the liability.The significant actuarial assumptions listed below were used in the actuarial valuation as <strong>of</strong> June 30, 2008, the most recent valuation date.Valuation method ..................................................................Cost method <strong>of</strong> valuing assets ................................................Rate <strong>of</strong> return on investments ................................................ 7.75%Projected payroll growth ........................................................ 3.5%Projected inflation rate ........................................................... 3.5%Post retirement benefit increase .............................................. 3.0% (Judges system 3.5%)78 www.maryl<strong>and</strong>taxes.comIndividual Entry Age Normal Cost MethodFive-year straight-line amortization <strong>of</strong> each year’s investment gainor loss with final value not more than 120% nor less than 80% <strong>of</strong>market value.Amortization method ............................................................. Level Percent <strong>of</strong> Payroll (period is closed)Remaining amortization period .............................................. 12 years as <strong>of</strong> June 30, 2008 for prior UAAL (existing on June 30, 2000)New layer as <strong>of</strong> June 30, 2001 .............................................. 18 years as <strong>of</strong> June 30, 2008 for new UAALNew layer as <strong>of</strong> June 30, 2002 .............................................. 19 years as <strong>of</strong> June 30, 2008 for new UAALNew layer as <strong>of</strong> June 30, 2003 .............................................. 20 years as <strong>of</strong> June 30, 2008 for new UAALNew layer as <strong>of</strong> June 30, 2004 .............................................. 21 years as <strong>of</strong> June 30, 2008 for new UAALNew layer as <strong>of</strong> June 30, 2005 .............................................. 22 years as <strong>of</strong> June 30, 2008 for new UAALNew layer as <strong>of</strong> June 30, 2006 .............................................. 23 years as <strong>of</strong> June 30, 2008 for new UAALNew layer as <strong>of</strong> June 30, 2007 .............................................. 24 years as <strong>of</strong> June 30, 2008 for new UAALNew layer as <strong>of</strong> June 30, 2008 .............................................. 25 years as <strong>of</strong> June 30, 2008 for new UAALStatus <strong>of</strong> period (Open or Closed) .......................................... 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<strong>Maryl<strong>and</strong></strong> Transit Administration Pension Plan (Plan):The Plan is a single employer non-contributory plan, which covers all <strong>Maryl<strong>and</strong></strong> Transit Administration (Administration) employeescovered by a collective bargaining agreement <strong>and</strong> all those management employees who were employed by the Baltimore Transit Company.In addition, employees who enter the management group as a result <strong>of</strong> a transfer from a position covered by a collective bargainingagreement maintain their participation. The <strong>Maryl<strong>and</strong></strong> Transit Administration was given authority to establish <strong>and</strong> maintain the Plan underTransportation Article, Section 7-206(b)2(ii), <strong>of</strong> the Annotated Code <strong>of</strong> <strong>Maryl<strong>and</strong></strong>. For the year ended June 30, 2008, the Administration’scovered <strong>and</strong> total payroll was $144,775,000. The Plan is administered <strong>and</strong> funded in compliance with the collective bargaining agreements.The Plan prepares separately audited financial statements, which can be obtained from the <strong>Maryl<strong>and</strong></strong> Transit Administration Pension Plan,William Donald Schaefer Tower, 6 Saint Paul Street, Baltimore, <strong>Maryl<strong>and</strong></strong> 21202.Plan Description:The Plan provides retirement, normal <strong>and</strong> early, death <strong>and</strong> disability benefits. Members may retire with full benefits at age 65 withfive years <strong>of</strong> credited service or age 52 with 30 years <strong>of</strong> credited service. The annual normal retirement benefit is 1.4% - 1.6% (1.3% priorto September 8, 2002) <strong>of</strong> final average compensation multiplied by credited service, with minimum <strong>and</strong> maximum benefit limitations.Participants are fully vested after five years <strong>of</strong> credited service.As <strong>of</strong> June 30, 2008, membership in the Plan includes 2,698 active members, 512 vested former members, <strong>and</strong> 1,278 retirees <strong>and</strong>beneficiaries. There were no investments in, loans to, or leases with parties related to the Plan. There were no Plan investments representing5 percent or more <strong>of</strong> total Plan assets.Funding Policy:The Administration’s required contributions are based on actuarial valuations. The entry age normal cost method is the actuarial costmethod used to determine the employer’s contribution rates <strong>and</strong> the actuarial accrued liability. All administrative costs <strong>of</strong> the Plan are paid bythe Plan.Employer contributions to the Plan totaling $24,245,000 (16.7% <strong>of</strong> covered payroll) for fiscal year 2008 were made in accordance withactuarially determined contribution requirements based on an actuarial valuation performed as <strong>of</strong> June 30, 2007. This amount consisted <strong>of</strong>$3,697,000 normal cost <strong>and</strong> $20,548,000 amortization <strong>of</strong> the actuarial accrued liability (2.5% <strong>and</strong> 14.2%, respectively, <strong>of</strong> covered payroll).The liquidation period for the actuarial accrued liabilities, as provided by law, is 11 years from June 30, 2008.Significant actuarial assumptions used to compute contribution requirements are the same as those used to compute the annual pensioncost <strong>and</strong> net pension obligations. The computation <strong>of</strong> the annual required contribution for fiscal year 2008 was based on the same actuarialassumptions, benefit provisions, actuarial funding method <strong>and</strong> other significant factors used to determine pension contribution requirements inthe previous year.Annual Pension Cost <strong>and</strong> Net Pension <strong>Obligation</strong>:The Administration’s annual pension cost <strong>and</strong> net pension obligation as <strong>of</strong> June 30, 2008, are as follows (amounts expressed in thous<strong>and</strong>s).Annual required contribution (ARC) ............................... $24,732Interest on net pension obligation .................................... 261Adjustment to ARC ......................................................... (358)Annual pension cost ......................................................... 24,635Contributions made ......................................................... 24,245Increase in net pension obligation .................................... 390Net pension obligation beginning <strong>of</strong> year ......................... 3,373Net pension obligation end <strong>of</strong> year ................................... $ 3,763Amortization period .........................................................15.7 yearsThree Year Historical Trend Information for the Plan is as follows (amounts expressed in thous<strong>and</strong>s).Annual Percentage NetPension <strong>of</strong> APC PensionFiscal Year Ending, Cost (APC) Contributed <strong>Obligation</strong>6/30/2008 ....................................................... $24,635 99% $3,7636/30/2007 ....................................................... 24,245 84 3,3736/30/2006 ....................................................... 20,435 100A-79www.maryl<strong>and</strong>taxes.com 79
Funded Status <strong>and</strong> Funding Progress:As <strong>of</strong> June 30, 2008, the most recent actuarial valuation date, the plan was 41.7 % funded. The actuarial accrued liability for benefits was$326,988,000 <strong>and</strong> the actuarial value <strong>of</strong> assets was $136,294,000 resulting in an unfunded actuarial accrued liability (UAAL) <strong>of</strong> $190,694,000.The covered payroll (annual payroll <strong>of</strong> active employees covered by the plan) was $144,775,000 <strong>and</strong> the ratio <strong>of</strong> the UAAL to the coveredpayroll was 131.7%The schedule <strong>of</strong> funding progress, presented as RSI following the notes to the financial statements, presents multiyear trend informationabout whether the actuarial value <strong>of</strong> plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits.The significant actuarial assumptions listed below were used in the actuarial valuation as <strong>of</strong> June 30, 2008, the most recent valuation date.Valuation method ........................................................ Entry Age Normal Cost MethodCost method <strong>of</strong> valuing assets ...................................... SmoothingRate <strong>of</strong> return on investments ...................................... 7.75% Compounded per AnnumProjected inflation rate ................................................. 4.00%Rate <strong>of</strong> salary increase .................................................. 4.00% Compounded per AnnumPostretirement benefit increase ..................................... 3.00%-4.00% <strong>of</strong> original benefit amountAmortization method .................................................. Level dollar annual installmentsRemaining amortization period ................................... 11 years from June 30, 2008 for UAAL (existing on June 30, 2002)New amortization period ............................................. 19 years from June 30, 2008 for new UAALStatus <strong>of</strong> period (Open or Closed) ............................... ClosedDuring fiscal year 2008, there were no changes in actuarial assumptions or benefit provisions from 2007 that significantly affected thevaluation <strong>of</strong> the annual pension cost <strong>and</strong> net pension obligation. No significant changes in these assumptions are planned in the near term.Deferred Compensation Plan (Plan):The <strong>State</strong> <strong>of</strong>fers its employees a deferred compensation plan (Plan) created in accordance with Internal Revenue Code Sections 457,403(b), 401(a) <strong>and</strong> 401(k). The Plan, available to eligible <strong>State</strong> employees, permits participants to defer a portion <strong>of</strong> their salary until futureyears. Participation in the Plan is optional. The deferred compensation is not available to employees until termination, retirement, deathor unforeseeable emergency. <strong>State</strong> law provides that the Governor appoint the nine member Board <strong>of</strong> Trustees <strong>of</strong> the <strong>State</strong>’s SupplementalRetirement Systems. The Board is responsible for the implementation, maintenance <strong>and</strong> administration <strong>of</strong> the Plan.The <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> Match Plan <strong>and</strong> Trust was established by the <strong>State</strong> on July 1, 1999. The plan is designed to be a tax-qualified401(a) defined contribution matching plan under Internal Revenue Code section 401(a). Under plan provisions, the <strong>State</strong> contributes to eachparticipant’s account an amount equal to each participant’s contributions to the <strong>State</strong>’s Supplemental Retirement Plans during the same planyear. By statute, the maximum amount contributed to this plan for each participant is $600 for each <strong>State</strong> fiscal year. An employee’s interestin his/her account is fully vested at all times. The match program continues to be established <strong>and</strong> funded in statute. For the plan year endedDecember 31, 2007, the <strong>State</strong> contributed $20,722,000 <strong>and</strong> participants contributed $164,234,000 to the Plan.16. Other Postemployment Benefits, Health Benefits (OPEB)Plan Description:The <strong>State</strong> Employee <strong>and</strong> Retiree Health <strong>and</strong> Welfare Benefits Program (Plan) is a single-employer defined benefit healthcare planestablished by <strong>State</strong> Personnel <strong>and</strong> Pensions Article, Sections 2-501 - 2-516, <strong>of</strong> the Annotated Code <strong>of</strong> <strong>Maryl<strong>and</strong></strong>. The Plan is self-insuredto provide medical, hospitalization, prescription drug <strong>and</strong> dental insurance benefits to eligible state employees, retirees <strong>and</strong> their dependents.<strong>State</strong> law grants authority to establish <strong>and</strong> amend benefit provisions to the Secretary <strong>of</strong> the Department <strong>of</strong> Budget <strong>and</strong> Management (DBM).In addition, the Secretary shall specify by regulation the types or categories <strong>of</strong> <strong>State</strong> employees who are eligible to enroll, with or without statesubsidies, or who are not eligible to enroll.Effective June 1, 2004, the <strong>State</strong> established the Postretirement Health Benefits Trust Fund (OPEB Trust) as a separate entity to receiveappropriated funds <strong>and</strong> contributions which will be used to assist the Plan in financing the <strong>State</strong>’s postretirement health insurance subsidy. TheOPEB Trust is established in accordance with the <strong>State</strong> Personnel <strong>and</strong> Pensions Article, Section 34-101, <strong>of</strong> the Annotated Code <strong>of</strong> <strong>Maryl<strong>and</strong></strong><strong>and</strong> is administered by the Board <strong>of</strong> Trustees for the <strong>State</strong> Retirement <strong>and</strong> Pension System. Financial statements <strong>of</strong> the Trust may be obtainedfrom the Office <strong>of</strong> the Comptroller, Treasury Building, Annapolis, Md. 21401.Funding Policy:The contribution requirements <strong>of</strong> Plan members <strong>and</strong> the <strong>State</strong> are established by the Secretary. Each year the Secretary recommends tothe Governor the <strong>State</strong>’s share <strong>of</strong> the costs <strong>of</strong> the Plan. Beginning in fiscal year 2008, <strong>State</strong> law requires DBM to transfer any subsidy receivedas a result <strong>of</strong> the federal Medicare Prescription Drug Improvement <strong>and</strong> Modernization Act <strong>of</strong> 2003 or similar subsidy to the OPEB Trustto prefund costs <strong>of</strong> retirees’ health benefits. Also, funds may be separately appropriated in the <strong>State</strong>’s budget for transfer to the OPEB Trust.Applicable administrative expenses are payable from the OPEB Trust, but may not exceed $100,000 annually.<strong>General</strong>ly, a retiree may enroll <strong>and</strong> participate in the health benefit options if the retiree retired directly from state service with at least fiveyears <strong>of</strong> creditable service, ended state service with at least 10 years <strong>of</strong> creditable service <strong>and</strong> within five years before the age at which a vested80 www.maryl<strong>and</strong>taxes.comA-80
etirement allowance normally would begin or ended <strong>State</strong> service with at least 16 years <strong>of</strong> creditable service. As <strong>of</strong> July 1, 2007, the <strong>State</strong>’sPlan membership includes 84,425 active employees, 4,468 vested former employees, <strong>and</strong> 53,635 retirees <strong>and</strong> beneficiaries. Based on currentpractice, the <strong>State</strong> subsidizes approximately 50% to 85% <strong>of</strong> retiree premiums to cover medical, dental, prescription <strong>and</strong> hospitalization costs,depending on the type <strong>of</strong> insurance plan. The Plan assesses a charge to retirees for post-employment health care benefits, which is based onhealth care insurance charges for active employees. For the fiscal year ended June 30, 2008, retiree plan members contributed $62,540,000or approximately 19% <strong>of</strong> total retiree premiums, <strong>and</strong> the <strong>State</strong> contributed $271,435,000. In June 2008, the <strong>State</strong> transferred $100,000,000from the <strong>State</strong> Reserve Fund Dedicated Purpose Account <strong>and</strong> $18,884,000 from the federal Medicare drug subsidy to the OPEB Trust toprefund future OPEB costs.Annual OPEB Cost <strong>and</strong> Net OPEB <strong>Obligation</strong>:The <strong>State</strong>’s annual OPEB cost (expense) is calculated based on the annual required contribution (ARC) <strong>of</strong> the employer, an amountactuarially determined in accordance with the parameters <strong>of</strong> GASB <strong>State</strong>ment No. 45. The ARC represents a level <strong>of</strong> funding that, if paid onan ongoing basis, is projected to cover normal cost each year <strong>and</strong> amortize any unfunded actuarial liabilities over a period not to exceed 30years. The following table shows the components <strong>of</strong> the <strong>State</strong>’s annual OPEB cost, the amount actually contributed to the Plan <strong>and</strong> the <strong>State</strong>’snet OPEB obligation as <strong>of</strong> June 30, 2008, the year <strong>of</strong> the initial actuarial valuation (amounts expressed in thous<strong>and</strong>s).Annual required contribution (ARC) .......................................... $1,086,240Less: Contributions made............................................................ 390,319Increase in net OPEB obligation ................................................. 695,921Net OPEB obligation - beginning <strong>of</strong> year ....................................Net OPEB obligation - end <strong>of</strong> year ............................................. $ 695,921Percentage <strong>of</strong> annual OPEB cost contributed ............................. 35.9%Funded Status:As <strong>of</strong> June 30, 2008, the initial actuarial valuation date, the OPEB Trust was .8% funded. The actuarial accrued liability for benefitswas $14,852,304,000, <strong>and</strong> the actuarial value <strong>of</strong> assets was $118,884,000, resulting in an unfunded actuarial accrued liability (UAAL) <strong>of</strong>$14,733,420,000. The ratio <strong>of</strong> the actuarial value <strong>of</strong> assets to the actuarial accrued liability was .8%. The covered payroll (annual payroll <strong>of</strong>active employees covered under the Plan) was $4,625,145,000, <strong>and</strong> the ratio <strong>of</strong> the UAAL to the covered payroll was 319%.Actuarial Methods <strong>and</strong> Assumptions:Actuarial valuations <strong>of</strong> an ongoing plan involve estimates <strong>of</strong> the value <strong>of</strong> reported amounts <strong>and</strong> assumptions about the probability <strong>of</strong>occurrence <strong>of</strong> events far into the future. Examples include assumptions about future employment, mortality, <strong>and</strong> healthcare cost trends.Actuarially determined amounts are subject to continual revision as actual results are compared with past expectations <strong>and</strong> new estimates aremade about the future. Projections <strong>of</strong> benefits for financial reporting purposes are based on the substantive plan (the plan as understood by theemployer <strong>and</strong> the plan members) <strong>and</strong> include the types <strong>of</strong> benefits provided at the time <strong>of</strong> each valuation <strong>and</strong> the historical pattern <strong>of</strong> sharing<strong>of</strong> benefit costs between the employer <strong>and</strong> plan members to that point. The actuarial methods <strong>and</strong> assumptions used include techniques thatare designed to reduce the effects <strong>of</strong> short-term volatility in actuarial accrued liabilities <strong>and</strong> the actuarial value <strong>of</strong> assets, consistent with thelong-term perspective <strong>of</strong> the calculations.The accompanying schedules <strong>of</strong> funding progress <strong>and</strong> employer contributions following the footnotes present trend information about theactuarial value <strong>of</strong> plan assets relative to the actuarial accrued liability for benefits <strong>and</strong> amounts contributed to the plan.The actuarial method <strong>and</strong> significant assumptions listed below were used in the actuarial valuation as <strong>of</strong> June 30, 2008.Actuarial cost method ................................................... Entry Age Normal (percent <strong>of</strong> pay)Asset valuation method ................................................. Fair market value as <strong>of</strong> fiscal year end (fye) 2008Rate <strong>of</strong> return on investments ....................................... 4.30%Aggregate salary growth ................................................ 3.50%Method to determine blended rate ................................Blended rate <strong>of</strong> the expected long-term investment returns on plan assets<strong>and</strong> on the <strong>State</strong>’s own assets calculated based on the funded level <strong>of</strong> theplan at the valuation date.Healthcare cost trend rate ............................................. Medical: 10% for fye 2008 trending down to 5% by fye 2016Prescription drug: 11% for fye 2008 trending down to 5% by fye 2017Dental: 5% for fye 2008 trending down to 4.5% by fye <strong>2009</strong>Amortization method ...................................................Amortization period .....................................................Status <strong>of</strong> period .............................................................Level percentage <strong>of</strong> projected payroll30 yearsTo be determined (closed or open)A-81www.maryl<strong>and</strong>taxes.com 81
17. Commitments:The <strong>State</strong>’s governmental funds lease <strong>of</strong>fice space under various agreements that are accounted for as operating leases. Many <strong>of</strong> the agreementscontain rent escalation clauses <strong>and</strong> renewal options. These leases contain termination for convenience clauses providing for cancellation after acertain number <strong>of</strong> days notice to lessors. In addition, these leases contain appropriation clauses indicating that continuation <strong>of</strong> the lease is subjectto appropriation by the legislature. Rent expenditures for the year ended June 30, 2008, were approximately $66,319,000.As <strong>of</strong> June 30, 2008, the governmental funds, other than the Department <strong>of</strong> Transportation, had commitments <strong>of</strong> approximately$55,270,000 for service contracts.As <strong>of</strong> June 30, 2008, the Department <strong>of</strong> Transportation <strong>and</strong> <strong>Maryl<strong>and</strong></strong> Transportation Authority had commitments <strong>of</strong> approximately$3,501,160,000 <strong>and</strong> $1,665,000,000 respectively, for construction <strong>of</strong> highway <strong>and</strong> mass transit facilities.Approximately 36% <strong>of</strong> future expenditures related to the Department <strong>of</strong> Transportation commitments are expected to bereimbursed from proceeds <strong>of</strong> approved Federal grants when the actual costs are incurred. The remaining portion will be funded by otherfinancial resources <strong>of</strong> the Department <strong>of</strong> Transportation.The Department <strong>of</strong> Transportation, as lessor, leases space at various marine terminals, airport facilities <strong>and</strong> <strong>of</strong>ficespace pursuant to various noncancelable operating leases with scheduled rent increases. Minimum future rental revenues are as follows(amounts expressed in thous<strong>and</strong>s).Years Ending June 30,Amounts<strong>2009</strong> ....................................................................................... $110,1222010 ....................................................................................... 89,0062011 ....................................................................................... 75,1942012 ....................................................................................... 44,5632013 ....................................................................................... 42,6822014 -2018 ............................................................................. 158,876Total .................................................................................... $520,443The cost <strong>and</strong> accumulated depreciation <strong>of</strong> the assets as <strong>of</strong> June 30, 2008, are $1,455,703,000 <strong>and</strong> $492,551,000, respectively.Total minimum future rental revenues do not include contingent rentals that may be received under certain concession leases on the basis<strong>of</strong> a percentage <strong>of</strong> the concessionaire’s gross revenue in excess <strong>of</strong> stipulated minimums. Rental revenue was approximately $155,643,000 for theyear ended June 30, 2008.As <strong>of</strong> June 30, 2008, the <strong>Maryl<strong>and</strong></strong> <strong>State</strong> Lottery Agency had commitments <strong>of</strong> approximately $116,602,000, for services to be renderedrelating principally to the operation <strong>of</strong> the lottery game.As <strong>of</strong> June 30, 2008, the enterprise fund loan programs had committed to lend a total <strong>of</strong> $245,573,000 in additional loans. The CommunityDevelopment Administration, also an enterprise fund loan program, has $450,230,000 <strong>of</strong> revenue bonds outst<strong>and</strong>ing that are not included in thefinancial statements <strong>of</strong> the Administration because the bonds are not guaranteed by the <strong>State</strong> or any other program <strong>of</strong> the <strong>State</strong> or any politicalsubdivision. The revenue bonds are secured solely by the individual multi-family project properties, related revenues, applicable credit enhancementsor investments equal to the debt outst<strong>and</strong>ing.Pursuant to legislation enacted by the <strong>Maryl<strong>and</strong></strong> <strong>General</strong> Assembly in April, 1996, the <strong>Maryl<strong>and</strong></strong> Stadium Authority is required to pay$2,400,000 per year into the Public School Construction Fund over ten years, subject to availability <strong>of</strong> funds, beginning in fiscal year 2001.Payment for fiscal year 2008 was required <strong>and</strong> paid.As <strong>of</strong> June 30, 2008, the higher education fund had commitments <strong>of</strong> approximately $246,565,000 for the completion <strong>of</strong> projects underconstruction.18. Contingencies:The <strong>State</strong> is party to legal proceedings that normally occur in governmental operations. The legal proceedings are not, in the opinion <strong>of</strong>the Attorney <strong>General</strong>, likely to have a material, adverse impact on the financial position <strong>of</strong> the <strong>State</strong> as a whole.82 www.maryl<strong>and</strong>taxes.comA-82
As <strong>of</strong> June 30, 2008, economic development loan programs were contingently liable to financial institutions for $4,689,000 for therepayment <strong>of</strong> loans for small businesses. Non-major enterprise funds were contingently liable as insurers <strong>of</strong> $166,280,000 <strong>of</strong> $377,100,000mortgage loans made by public <strong>and</strong> private lenders. Non-major component units were contingently liable as insurers <strong>of</strong> $24,686,000 <strong>of</strong>$465,790,000 economic development <strong>and</strong> growth bonds issued by financial institutions.As <strong>of</strong> June 30, 2008, there were approved economic development bonds pending settlement which were insured by non-major componentunits for $5,032,000.The <strong>State</strong> receives significant financial assistance from the U.S. Government. Entitlement to the resources is generally conditioned uponcompliance with terms <strong>and</strong> conditions <strong>of</strong> the grant agreements <strong>and</strong> applicable Federal regulations, including the expenditure <strong>of</strong> the resourcesfor eligible purposes. Substantially all grants are subject to financial <strong>and</strong> compliance audits by the grantors. Any disallowances as a result <strong>of</strong>these audits become a liability <strong>of</strong> the fund which received the grant. As <strong>of</strong> June 30, 2008, the <strong>State</strong> estimates that no material liabilities willresult from such audits.19. Tobacco Settlement:Legislation enacted by the 1999 <strong>General</strong> Assembly established the Cigarette Restitution Fund for all revenues received from any judgmentagainst or settlement with the tobacco industry. Expenditures from the fund are made by an appropriation in the annual <strong>State</strong> budget. Thelaw provides that at least 50% <strong>of</strong> the appropriations shall be made for tobacco or health related purposes <strong>and</strong> the remaining appropriationsmay be for any public purpose. During the 2002 legislative session, legislation was enacted providing that for each <strong>of</strong> fiscal years 2003 through2006, at least 25% <strong>of</strong> the appropriations shall be made for the <strong>Maryl<strong>and</strong></strong> Medical Assistance Program (Medicaid); the 2005 legislative sessionincreased that percentage to 30% for each year for which appropriations are made. During the 2003 legislative session, legislation was enactedrequiring that .15% <strong>of</strong> the fund be appropriated for enforcing the escrow requirements for nonparticipating tobacco product manufacturers.Transfers <strong>of</strong> $179,796,000 were made from the proceeds in the Cigarette Restitution Fund for fiscal year 2008 expenditure <strong>of</strong> appropriations.As part <strong>of</strong> the Master Settlement Agreement between the states <strong>and</strong> the tobacco companies, <strong>Maryl<strong>and</strong></strong>’s share during fiscal year 2008 was$173,554,000, including the award from the arbitration panel for attorney fees. This amount does not include $11,898,000, the tobaccocompanies paid to the disputed account pending the outcome <strong>of</strong> litigation.It is estimated that the payments made to the <strong>State</strong> pursuant to the Master Settlement through fiscal year 2013 will total $2.2 billion <strong>of</strong>which, $149,873,000 will be paid to outside counsel. The actual amount paid each year, however, will reflect adjustments for inflation <strong>and</strong>cigarette shipment volume. In addition, the <strong>State</strong> expects to receive $75,972,000 during that same period pursuant to an award for attorneyfees by the national arbitration panel.20. L<strong>and</strong>fill Closure <strong>and</strong> Postclosure Care Costs:<strong>State</strong> <strong>and</strong> Federal laws require the <strong>Maryl<strong>and</strong></strong> Environmental Service (the Service) to cover the Midshore Regional L<strong>and</strong>fill (Midshore),which the current cell is expected to close in December 2010, <strong>and</strong> to perform certain maintenance <strong>and</strong> monitoring functions at the Midshore<strong>and</strong> Easton L<strong>and</strong>fill (Easton) sites for thirty years after closure. Although closure <strong>and</strong> postclosure care costs at Midshore will be paid nearor after the date the l<strong>and</strong>fill stops accepting waste, the Service reports a portion <strong>of</strong> these closure <strong>and</strong> postclosure care costs as a liability basedupon the estimated useful life <strong>of</strong> the l<strong>and</strong>fill. Midshore’s current cells are approximately 82% filled as <strong>of</strong> June 30, 2008. Total closure <strong>and</strong>postclosure care costs for the l<strong>and</strong>fill is currently estimated to be $11,865,000, as determined through engineering studies <strong>and</strong> $9,705,000 hasbeen recognized as a liability on the June 30, 2008, Combining <strong>State</strong>ment <strong>of</strong> Net Assets, Non-Major Component Units. Actual costs may besubject to change due to inflation, deflation, technology, <strong>and</strong> changes in applicable laws <strong>and</strong> regulations.A receivable from project participants corresponding to the accrued liability has also been recorded.Under Federal regulations, the Service has satisfied its financial assurance requirements based upon the local government financial ratio tests<strong>of</strong> the project participants as <strong>of</strong> June 30, 2007. The Service expects to satisfy these requirements as <strong>of</strong> June 30, 2008, using the same criteria.21. Subsequent Event:Subsequent to June 30, 2008, financial markets as a whole incurred significant declines in values. Investments held by the governmental<strong>and</strong> enterprise funds primarily consist <strong>of</strong> U.S. government agency obligations <strong>and</strong> money market mutual funds. There have been no majorfluctuations in the market value <strong>of</strong> these securities. As <strong>of</strong> November 18, 2008, the investment portfolio <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> <strong>State</strong> RetirementSystem (System), fiduciary funds, has incurred a significant decline in the values reported as <strong>of</strong> June 30, 2008. Because the values <strong>of</strong> theindividual investments fluctuate with market conditions, the amount <strong>of</strong> investment losses that the System will recognize in its future financialstatements, if any, cannot be determined at this time.A-83www.maryl<strong>and</strong>taxes.com 83
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<strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>Comprehensive Annual Financial ReportRequired SupplementaryInformationA-85www.maryl<strong>and</strong>taxes.com 85
STATE OF MARYLANDSchedule <strong>of</strong> Revenues <strong>and</strong> Expenditures <strong>and</strong> Changes in Fund Balances - Budget <strong>and</strong> Actual -Budgetary <strong>General</strong>, Special, <strong>and</strong> Federal Funds For the Year Ended June 30, 2008(Expressed in Thous<strong>and</strong>s)<strong>General</strong> Fund Special Fund Federal FundBudget Amounts Variance Budget Amounts Variance Budget Amounts VarianceOriginal Final Actual Positive Original Final Actual Positive Original Final Actual PositiveBudget Budget Amounts (Negative) Budget Budget Amounts (Negative) Budget Budget Amounts (Negative)86 www.maryl<strong>and</strong>taxes.comRevenues:Income taxes .................. $7,638,821 $7,545,165 $7,491,807 $(53,358) $193,838 $171,428 $184,997 $13,569Sales <strong>and</strong> use taxes ......... 3,622,702 3,691,717 3,675,263 (16,454) 29,900 28,796 73,670 44,874Other taxes .................... 954,478 1,083,077 1,100,788 17,711 2,403,814 2,382,488 2,254,336 (128,152)Licenses <strong>and</strong> fees ............ 222,233 205,284 205,314 30 843,684 833,401 782,245 (51,156)Charges for services ........ 301,866 308,532 299,709 (8,823) 968,770 1,308,778 1,034,913 (273,865)Interest <strong>and</strong> otherinvestment income .... 95,000 122,585 234,289 111,704 60,354 68,358 58,689 (9,669) $1,175 $1,175Other ............................. 602,180 601,428 837,322 235,894 1,140,324 952,590 1,042,841 90,251Federal revenue .............. 3,082 3,704 8,294 4,590 $6,704,725 $6,829,997 6,329,206 (500,791)Total revenues ........... 13,437,280 13,557,788 13,844,492 286,704 5,643,766 5,749,543 5,439,985 (309,558) 6,704,725 6,829,997 6,330,381 (499,616)Expenditures <strong>and</strong>encumbrances bymajor function:Payments <strong>of</strong> revenue to civildivisions <strong>of</strong> the <strong>State</strong> ... 150,512 149,512 149,218 294Public debt .................... 29,349 29,349 29,349 663,346 663,345 663,190 155Legislative ...................... 85,389 86,203 69,003 17,200 100 300 228 72Judicial review <strong>and</strong> legal ... 462,614 468,709 446,788 21,921 79,924 87,292 77,079 10,213 6,789 7,393 5,996 1,397Executive <strong>and</strong> administrativecontrol ...................... 214,164 212,724 197,257 15,467 261,922 278,464 196,330 82,134 116,792 123,157 110,104 13,053Financial <strong>and</strong> revenueadministration .......... 186,523 186,750 179,257 7,493 81,164 87,052 81,220 5,832Budget <strong>and</strong> management ... 94,164 34,645 29,236 5,409 46,550 33,367 16,248 17,119Retirement <strong>and</strong> pension ... 36,200 36,400 25,886 10,514<strong>General</strong> services ............. 63,933 60,435 57,239 3,196 1,780 1,794 1,200 594 905 918 918Transportation <strong>and</strong>highways ................... 3,030,979 3,036,714 2,877,191 159,523 869,500 804,845 746,447 58,398Natural resources <strong>and</strong>recreation .................. 79,101 78,968 76,390 2,578 362,321 367,045 294,633 72,412 40,030 44,011 26,414 17,597Agriculture..................... 33,256 35,521 33,846 1,675 185,242 186,222 105,297 80,925 9,257 11,974 5,315 6,659A-86
Health, hospitals <strong>and</strong>mental hygiene ................ 3,711,992 3,672,908 3,614,705 58,203 478,255 510,745 462,643 48,102 3,257,848 3,276,972 3,188,751 88,221Human resources .................. 582,562 583,085 570,535 12,550 84,536 102,326 96,123 6,203 1,073,289 1,174,313 1,084,572 89,741Labor, licensing <strong>and</strong>regulation ........................ 15,965 15,929 15,438 491 44,414 47,466 38,110 9,356 109,281 113,915 111,676 2,239Public safety <strong>and</strong>correctional services ......... 1,031,461 1,041,229 1,035,619 5,610 157,111 173,930 157,322 16,608 10,278 15,163 14,083 1,080Public education ................... 7,094,671 7,085,541 7,028,549 56,992 53,763 58,581 47,054 11,527 1,122,123 1,147,548 900,529 247,019Housing <strong>and</strong> communitydevelopment .................... 40,935 40,847 16,735 24,112 89,667 90,022 49,839 40,183 225,964 234,220 207,194 27,026Business <strong>and</strong> economicdevelopment .................... 126,867 123,570 98,463 25,107 100,404 105,975 40,075 65,900 645 4,645 1,231 3,414Environment ........................ 55,962 55,656 45,108 10,548 338,439 338,886 97,570 241,316 89,102 94,978 71,487 23,491Juvenile services .................... 231,853 267,188 266,696 492 4,214 4,486 2,999 1,487 14,737 14,737 9,433 5,304<strong>State</strong> police ........................... 243,179 249,705 243,462 6,243 69,771 71,698 64,804 6,894 6,620 9,637 2,987 6,650<strong>State</strong> reserve fund ................. 262,795 262,795 262,795Reversions ............................ (30,000) (30,000) (30,000)Total expenditures <strong>and</strong>encumbrances .................. 14,767,247 14,711,269 14,465,688 245,581 6,170,102 6,282,110 5,395,041 887,069 6,953,160 7,078,426 6,487,137 591,289Excess <strong>of</strong> revenuesover (under)expenditures ................. (1,329,967) (1,153,481) (621,196) 532,285 (526,336) (532,567) 44,944 577,511 (248,435) (248,429) (156,756) 91,673Other sources (uses) <strong>of</strong>financial resources:Transfers in (out) .................. (72,596) (72,596) 24,906 24,906 156,756 156,756Excess <strong>of</strong> revenuesover (under) expenditures<strong>and</strong> other sources (uses)<strong>of</strong> financial resources... .. (1,329,967) (1,153,481) (693,792) 459,689 (526,336) (532,567) 69,850 602,417 (248,435) (248,429) 248,429Fund balances -beginning <strong>of</strong> the year ............ (2,080,930) (742,180) 2,080,852 2,823,032 (1,490,790) (1,538,059) 1,711,403 3,249,462 (1,216,676) (1,216,676) 1,216,676Fund balances -end <strong>of</strong> the year..................... $(3,410,897) $(1,895,661) $1,387,060 $3,282,721 $(2,017,126) $(2,070,626) $1,781,253 $3,851,879 $(1,465,111) $(1,465,105) $ – $1,465,105A-87See accompanying Notes to Required Supplementary Information.www.maryl<strong>and</strong>taxes.com 87
STATE OF MARYLANDReconciliation <strong>of</strong> the Budgetary <strong>General</strong> <strong>and</strong>Special Fund, Fund Balances to the GAAP <strong>General</strong><strong>and</strong> Special Revenue Fund, Fund BalancesJune 30, 2008(Expressed in Thous<strong>and</strong>s)<strong>General</strong>SpecialAmount in budgetary funds, fund balance (page 87) ........................................................... $1,387,060 $1,781,253Budgetary special funds reclassified to the general fund .................................................. 1,147,043 (1,147,043)Budgetary special funds reclassified to other funds .......................................................... (553,313)Other non-budgetary funds reclassified to governmental funds ....................................... 247,706 96Total <strong>of</strong> budgetary fund balances reclassified into the governmentalfunds’ fund structure ...................................................................................................... 2,781,809 80,993Accounting principle differences:Assets recognized in the governmental funds financial statementsnot recognized for budgetary purposes:Cash ..................................................................................................................... 57,914 1,124Investments ........................................................................................................... 6,696Taxes receivable ..................................................................................................... 146,769 1,234Intergovernmental receivables ............................................................................... 114,879Other accounts receivable ..................................................................................... 18,738 2,768Prepaid items ........................................................................................................ (189,975)Inventories ............................................................................................................ 25,005 74,458Due from other funds ........................................................................................... 14,702 25,211Liabilities recognized in the governmental funds financialstatements not recognized for budgetary purposes:Salaries payable ..................................................................................................... 28,085Accounts payable <strong>and</strong> accrued liabilities ................................................................ (100,754) (26,405)Due to other funds ............................................................................................... (10,509) (9,132)Accounts payable to political subdivisions ............................................................. (26,096)Deferred revenue ................................................................................................... 26,377Accrued self insurance costs .................................................................................. (8,052)Financial statement governmental funds’ fund balances,June 30, 2008 (page 26) ................................................................................................. $2,885,588 $ 150,251See accompanying Notes to Required Supplementary Information.88 www.maryl<strong>and</strong>taxes.comA-88
STATE OF MARYLANDRequired Supplemental Schedule <strong>of</strong> Funding Progress forPension <strong>and</strong> Retirement System(Expressed in Thous<strong>and</strong>s)Actuarial Actuarial Actuarial (Unfunded AAL) (Unfunded AAL)Valuation Value <strong>of</strong> Accrued /Excess <strong>of</strong> /Excess as aDate Plan Liability (AAL) Assets Funded Covered Percentage <strong>of</strong>June 30, Assets Entry Age over AAL Ratio Payroll (1) Covered Payroll (2)TEACHERS RETIREMENT AND PENSION SYSTEM2008 $23,784,404 $29,868,705 $ (6,084,301) 79.63 % $6,117,591 (99.46)%2007 22,814,759 28,122,575 (5,307,816) 81.13 5,709,765 (92.96)2006 21,575,451 25,617,484 (4,042,033) 84.22 5,269,185 (76.71)2005 20,801,529 23,305,198 (2,503,669) 89.26 5,055,392 (49.52)2004 20,155,415 21,724,178 (1,568,763) 92.78 4,615,607 (33.99)2003 19,626,676 21,152,063 (1,525,387) 92.79 4,609,992 (33.09)STATE EMPLOYEES RETIREMENT AND PENSION SYSTEM2008 $10,699,418 $14,337,460 $ (3,638,042) 74.63 % $3,110,640 (116.95)%2007 10,332,264 13,363,507 (3,031,243) 77.32 3,022,476 (100.29)2006 9,825,416 12,184,215 (2,358,799) 80.64 2,828,348 (83.40)2005 9,544,541 11,241,813 (1,697,272) 84.90 2,743,255 (61.87)2004 9,330,876 10,457,119 (1,126,243) 89.23 2,625,312 (42.90)2003 9,143,380 9,986,544 (843,164) 91.56 2,611,085 (32.29)STATE POLICE RETIREMENT SYSTEM2008 $ 1,343,208 $ 1,601,575 $ (258,367) 83.87 % $86,464 (298.81)%2007 1,334,375 1,516,935 (182,560) 87.97 83,191 (219.45)2006 1,301,877 1,325,875 (23,998) 98.19 80,649 (29.76)2005 1,289,345 1,284,950 4,395 100.34 76,463 5.752004 1,287,981 1,200,605 87,376 107.28 76,445 114.302003 1,285,201 1,062,383 222,818 120.97 80,839 275.63JUDGES RETIREMENT SYSTEM2008 $ 306,716 $ 406,782 $ (100,066) 75.40 % $37,943 (263.73)%2007 293,052 371,987 (78,935) 78.78 37,638 (209.72)2006 273,679 352,537 (78,858) 77.63 35,939 (219.42)2005 260,125 328,033 (67,908) 79.30 33,074 (205.32)2004 250,272 312,285 (62,013) 80.14 32,937 (188.28)2003 240,207 279,008 (38,801) 86.09 33,167 (116.99)STATE LAW ENFORCEMENT OFFICERS’ PENSION SYSTEM2008 $ 389,793 $ 611,367 $ (221,574) 63.76 % $85,814 (258.20)%2007 354,364 593,308 (238,944) 59.73 82,079 (291.11)2006 316,709 504,373 (187,664) 62.79 71,678 (261.82)2005 281,659 470,677 (189,018) 59.84 72,374 (261.17)2004 253,582 400,755 (147,173) 63.28 63,828 (230.58)2003 216,913 358,789 (141,876) 60.46 62,214 (228.05)TOTAL OF ALL PLANS2008 $36,523,539 $46,825,889 $(10,302,350) 78.00 % $9,438,452 (109.15)%2007 35,128,814 43,968,312 (8,839,498) 79.90 8,935,149 (98.93)2006 33,293,132 39,984,484 (6,691,352) 83.27 8,285,799 (80.76)2005 32,177,199 36,630,671 (4,453,472) 87.84 7,980,558 (55.80)2004 31,278,126 34,094,942 (2,816,816) 91.74 7,414,129 (37.99)2003 30,512,377 32,838,787 (2,326,410) 92.92 7,397,297 (31.45)(1) Covered payroll includes the payroll cost <strong>of</strong> those participants for which the <strong>State</strong> pays the retirement contribution but doesnot pay the participants’ payroll cost.(2) (Unfunded AAL)/ excess assets over AAL as a percentage <strong>of</strong> covered payroll.A-89www.maryl<strong>and</strong>taxes.com 89
STATE OF MARYLANDRequired Supplemental Schedule <strong>of</strong> Funding Progress for<strong>Maryl<strong>and</strong></strong> Transit Administration Pension Plan(Expressed in Thous<strong>and</strong>s)Actuarial Actuarial Actuarial Unfunded Unfunded AALValuation Value <strong>of</strong> Accrued Actuarial as aDate Plan Liability Accrued Funded Covered Percentage <strong>of</strong>June 30, Assets Entry Age Liability Ratio Payroll Covered Payroll2008 $136,294 $326,988 $(190,694) 41.68% $144,775 (131.72)%2007 124,496 322,597 (198,101) 38.59% 135,098 (146.64)2006 112,230 300,869 (188,639) 37.30% 128,806 (146.45)Required Supplemental Schedule <strong>of</strong> Funding Progress forOther Post-Employment Benefits Plan(Expressed in Thous<strong>and</strong>s)Actuarial Actuarial Actuarial Unfunded Unfunded AALValuation Value <strong>of</strong> Accrued Actuarial as aDate Plan Liability (AAL) Accrued Funded Covered Percentage <strong>of</strong>June 30, Assets Entry Age Liability Ratio Payroll Covered Payroll2008* $118,884 $14,852,304 $14,733,420 0.8% $4,625,145 318.6%Required Supplemental Schedule <strong>of</strong> Employer Contributions<strong>and</strong> Other Contributing Entities forOther Post-Employment Benefits Plan(Expressed in Thous<strong>and</strong>s)Year EndedJune 30,Annual RequiredContributionEmployerContributions (a)Percentage ContributedOther ContributingEntities (b)2008* $1,086,420 34.2% 1.7% 35.9%*Information for prior years not available.(a) Employer contributions include pre-funding <strong>and</strong> pay-as-you-go contributions (net <strong>of</strong> retiree premiums).(b) Other contributing entities consists <strong>of</strong> the federal Medicare drug subsidy contributed to the OPEB Trust.Total90 www.maryl<strong>and</strong>taxes.comA-90
STATE OF MARYLANDNotes to Required Supplementary InformationFor the Year Ended June 30, 20081. Budgeting <strong>and</strong> Budgetary Control:The <strong>Maryl<strong>and</strong></strong> Constitution requires the Governor to submit to the <strong>General</strong> Assembly an annual balanced budget for the following fiscalyear. This budget is prepared <strong>and</strong> adopted for the <strong>General</strong> Fund, which includes all transactions <strong>of</strong> the <strong>State</strong>, unless otherwise directed to beincluded in another fund <strong>and</strong> the Special Fund, which includes the transportation activities <strong>of</strong> the <strong>State</strong>, fishery <strong>and</strong> wildlife funds, sharedtaxes <strong>and</strong> payments <strong>of</strong> debt service on general obligation bonds. In contrast, the GAAP special revenue fund includes only the operations(other than debt service <strong>and</strong> pension activities) <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Transportation. The budgetary Federal fund revenue <strong>and</strong>expenditures are included in the GAAP <strong>General</strong> <strong>and</strong> Special Funds as federal revenues <strong>and</strong> expenditures by function. An annual budget isalso prepared for the Federal Fund, which accounts for substantially all grants from the Federal government, <strong>and</strong> the current unrestricted<strong>and</strong> restricted funds <strong>of</strong> the Universities <strong>and</strong> Colleges. In addition to the annual budget, the <strong>General</strong> Assembly adopts authorizations for theissuance <strong>of</strong> general obligation bonds. The expenditures <strong>of</strong> the resources obtained thereby are accounted for in the capital projects fund.All <strong>State</strong> budgetary expenditures for the general, special <strong>and</strong> federal funds are made pursuant to appropriations in the annual budget, asamended from time to time, by budget amendments. The legal level <strong>of</strong> budgetary control is at the program level for the general, special <strong>and</strong>federal funds. <strong>State</strong> governmental departments <strong>and</strong> independent agencies may, with the Governor’s approval, amend the appropriations byprogram within the budgetary general fund, provided they do not exceed their total general fund appropriations as contained within the annualbudget. Increases in the total general fund appropriations must be approved by the <strong>General</strong> Assembly. For the fiscal year ended June 30,2008, the <strong>General</strong> Assembly approved a net increase in <strong>General</strong> Fund appropriations <strong>of</strong> $77,453,000. Appropriations for programs fundedin whole or in part from the special or federal funds may permit expenditures in excess <strong>of</strong> original special or federal fund appropriations tothe extent that actual revenues exceed original budget estimates <strong>and</strong> such additional expenditures are approved by the Governor. Unexpendedappropriations from the general fund may be carried over to succeeding years to the extent <strong>of</strong> encumbrances, with all other appropriationslapsing as <strong>of</strong> the end <strong>of</strong> the fiscal year. Unexpended appropriations from special <strong>and</strong> federal funds may be carried over to the extent <strong>of</strong> (a)available resources, <strong>and</strong> (b) encumbrances. The <strong>State</strong>’s accounting system is maintained by the Comptroller in compliance with <strong>State</strong> Law<strong>and</strong> in accordance with the <strong>State</strong>’s Budgetary Funds. It controls expenditures at the program level to ensure legal compliance. The “AgencyAppropriation Unencumbered Balance Report,” which is available for public inspection at the Office <strong>of</strong> the Comptroller, provides a morecomprehensive accounting <strong>of</strong> activity on the basis <strong>of</strong> budgeting at the legal level <strong>of</strong> budgetary control.The original <strong>and</strong> amended budget adopted by the <strong>General</strong> Assembly for the general, special <strong>and</strong> federal funds is presented in the Schedule<strong>of</strong> Revenues, Expenditures <strong>and</strong> Encumbrances, <strong>and</strong> Changes in Fund Balances Budget <strong>and</strong> Actual for the year ended June 30, 2008.The <strong>State</strong>’s budgetary fund structure <strong>and</strong> the basis <strong>of</strong> budgeting, which is the modified accrual basis with certain exceptions, differs fromthat utilized to present financial statements in conformity with generally accepted accounting principles. The budgetary system’s principaldepartures from the modified accrual basis are the classification <strong>of</strong> the <strong>State</strong>’s budgetary funds <strong>and</strong> the timing <strong>of</strong> recognition <strong>of</strong> certain revenues<strong>and</strong> expenditures. A summary <strong>of</strong> the effects <strong>of</strong> the fund structure differences <strong>and</strong> exceptions to the modified accrual basis <strong>of</strong> accounting, as <strong>of</strong>June 30, 2008, is provided in the “Reconciliation <strong>of</strong> the Budgetary <strong>General</strong> <strong>and</strong> Special Fund, Fund Balances to the GAAP <strong>General</strong> <strong>and</strong> SpecialRevenue Fund, Fund Balances” immediately following the budgetary schedule.A-91www.maryl<strong>and</strong>taxes.com 91
STATISTICAL SECTIONA-92
STATE OF MARYLANDCombined Summary Of Revenues,Expenditures, Other Sources And Uses<strong>of</strong> Financial Resources <strong>and</strong> Changes in Fund Balances,<strong>General</strong>, Special Revenue, Debt Service <strong>and</strong> Capital Projects Funds(Expressed in Thous<strong>and</strong>s)Year ended June 30,2008 2007 2006 2005 2004Revenues:I ncome taxes………………………………………...............$7,868,899 $7,325,181 $7,108,573 $6,814,378 $ 5,499,953R etail sales <strong>and</strong> use taxes………………………................3,748,933 3,447,896 3,382,851 3,153,676 2,945,060M otor vehicle taxes <strong>and</strong> fees……………………..............1,920,460 1,982,329 1,983,439 2,031,862 1,792,769O ther taxes…………………………………………..............2,444,883 2,243,581 2,332,968 2,105,362 1,852,417O ther licenses <strong>and</strong> fees…………………………................651,079 782,712 808,617 759,953 754,995C harges for services………………………………..............1,108,666 1,050,187 970,345 978,535 1,044,636R evenues pledged as security for bonds……….............77,541 70,563 70,593 70,875 52,255I nterest <strong>and</strong> other investment income……………..........307,403 315,121 219,609 102,532 32,251F ederal………………………………………………..............6,604,348 6,407,172 6,118,583 5,916,233 5,872,371O ther………………………………………………................214,755 240,671 108,689 331,224 162,748Total revenues…………………………………............. 24,946,967 23,865,413 23,104,267 22,264,630 20,009,455Expenditures:Current:G eneral government……………………………...............727,119 715,235 736,694 700,391 627,626H ealth <strong>and</strong> mental hygiene……………………...............7,536,747 7,252,117 6,547,288 6,329,383 6,064,735E ducation (a)………………………………...................…8,638,203 7,683,885 6,758,158 6,235,534 5,919,742H uman resources………………………………................1,761,284 1,643,078 1,622,922 1,569,032 1,560,876P ublic safety <strong>and</strong> judicial………………………...............2,391,708 2,318,213 2,097,175 1,897,974 1,792,078T ransportation…………………………………….............1,262,973 1,219,507 1,121,714 1,273,622 1,143,520L abor, licensing <strong>and</strong> regulation…………………............166,848 164,255 154,607 166,787 174,047N atural resources <strong>and</strong> recreation………………............188,675 177,553 165,439 167,018 166,730H ousing <strong>and</strong> community development…………...........244,581 228,105 215,940 211,577 202,346E nvironment……………………………………..............…95,918 92,460 83,793 76,393 84,443A griculture………………………………………................147,494 101,252 64,044 56,624 60,537B usiness <strong>and</strong> economic development…………............94,503 65,774 56,374 57,287 58,259I ntergovernmental……………………………..............…1,597,734 1,590,590 1,562,539 1,453,408 1,461,133D ebt service…………………………………….............…814,979 773,715 767,691 726,516 671,952C apital outlays………………………………….................1,476,506 1,437,741 1,538,927 1,531,461 1,461,067Total expenditures………………………………........ 27,145,272 25,463,480 23,493,305 22,453,007 21,449,091Excess (deficiency) <strong>of</strong> revenues over expenditures…. (2,198,305) (1,598,067) (389,038) (188,377) (1,439,636)Other sources (uses) <strong>of</strong> financial resources:Capital <strong>and</strong> direct fin ancing leases…………………......... .31,18556,860 121,197 154,434 145,455Proceeds from bond issues………………………….......... 1,071,403 831,193 904,907 937,480 898,818O ther long-term liabilities…………………......................102 2,411 5,320 12,321 142,015Proceeds from refunding bonds………………………...... 855,840 83,591Payments to escrow agents…………………………........ (940,591) (83,537)Operating transfers in…………………………………....... 1,180,435 1,137,421 1,133,853 1,063,529 1,111,330O perating transfers out………………………………........(702,499) (787,865) (676,003) (642,709) (675,796)Net other sources (uses) <strong>of</strong> fin ancial resources1,580,6261,240,020 1,489,274 1,440,304 1,621,876Excess (deficiency) <strong>of</strong> revenues overexpenditures <strong>and</strong> net other sources(uses) <strong>of</strong> fi n ancial resources…………………...........(617,679)(358,047) 1,100,236 1,251,927 182,240Fund balance, July 1……………………………………......... 3,919,262 4,277,309 3,177,073 1,925,146 1,742,906Fund balance, June 30…………………………………......... $3,301,583 $ 3,919,262 $ 4,277,309 $ 3,177,073 $ 1,925,146A-93
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Appendix B<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> Issued <strong>and</strong> Outst<strong>and</strong>ingSUPPLEMENTARY DEBT SCHEDULES<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>The following table shows the principal amounts <strong>of</strong> outst<strong>and</strong>ing general obligation bonds <strong>and</strong> authorized<strong>and</strong> unissued amounts: (1) at the end <strong>of</strong> each fiscal year shown; <strong>and</strong> (2) adjusted to give effect to sale <strong>of</strong> the <strong>Bonds</strong><strong>of</strong>fered hereby.($ in thous<strong>and</strong>s)At Issued <strong>and</strong> AuthorizedJune 30 Outst<strong>and</strong>ing but Unissued2004..................................................................... $4,102,278 $1,946,4542005..................................................................... 4,511,826 1,835,4882006..................................................................... 4,868,471 1,774,4842007..................................................................... 5,142,154 1,911,5872008..................................................................... 5,493,830 2,063,853March 31, <strong>2009</strong>................................................... 5,873,643 1,216,351Current Sale ....................................................... 485,000 (485,000)Pro Forma............................................................ $6,358,643 $731,351(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)B-1
Debt Service Requirements on <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>The following table shows for all general obligation bonds <strong>of</strong> the <strong>State</strong> for all future fiscal years: (1) thedebt service requirements for outst<strong>and</strong>ing bonds as <strong>of</strong> March 31, <strong>2009</strong> <strong>and</strong> (2) the debt service after giving effect tothe issuance <strong>of</strong> the <strong>Bonds</strong>. Not included is debt service on general obligation bonds for which United <strong>State</strong>sgovernment obligations sufficient to provide fully for the timely payment <strong>of</strong> principal, interest, <strong>and</strong> applicableredemption premium are being held in escrow funds.Debt Service Requirements on <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>Actual - <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> Outst<strong>and</strong>ing($ in thous<strong>and</strong>s)Fiscal Year Principal Gross InterestGross DebtServiceInterestSubsidy (1)Net DebtService2010 ...................................... $482,754 $283,291 $766,045 - $766,0452011 ...................................... 514,724 260,083 774,807 - 774,8072012 ...................................... 541,809 233,481 775,290 - 775,2902013 ...................................... 523,653 206,259 729,912 - 729,9122014 ...................................... 487,144 179,838 666,982 - 666,9822015 ...................................... 462,539 155,399 617,938 - 617,9382016 ...................................... 490,737 131,790 622,527 - 622,5272017 ...................................... 453,348 107,504 560,852 - 560,8522018 ...................................... 434,094 84,844 518,938 - 518,9382019 ...................................... 378,923 63,913 442,836 - 442,8362020 ...................................... 353,216 46,752 399,968 - 399,9682021 ...................................... 280,543 31,391 311,934 - 311,9342022 ...................................... 222,543 19,166 241,709 - 241,7092023 ...................................... 163,786 9,591 173,377 - 173,3772024 ...................................... 83,830 2,937 86,767 - 86,767$5,873,643 $1,816,239 $7,689,882 $0 $7,689,882Debt Service Following Issuance <strong>of</strong> <strong>Bonds</strong>($ in thous<strong>and</strong>s)B-2Gross DebtServiceInterestSubsidy (1)Net DebtServiceFiscal Year Principal Gross Interest2010 ........................................ $482,754 $293,012 $775,765 $(391) $775,3742011 ........................................ 514,724 279,856 794,580 (796) 793,7832012 ........................................ 541,809 253,254 795,062 (796) 794,2662013 ........................................ 552,724 225,454 778,178 (796) 777,3822014 ........................................ 517,239 197,977 715,216 (796) 714,4192015 ........................................ 493,619 172,527 666,145 (796) 665,3492016 ........................................ 522,891 147,812 670,703 (796) 669,9072017 ........................................ 486,683 122,311 608,994 (796) 608,1972018 ........................................ 468,698 98,338 567,036 (796) 566,2392019 ........................................ 415,034 75,852 490,885 (796) 490,0892020 ........................................ 391,082 56,881 447,962 (796) 447,1662021 ........................................ 320,244 39,661 359,904 (796) 359,1082022 ........................................ 264,148 25,527 289,675 (796) 288,8792023 ........................................ 207,416 14,029 221,445 (796) 220,6492024 ........................................ 129,580 5,423 135,003 (796) 134,2072025 ........................................ 50,000 739 50,739 (398) 50,347$6,358,641 $2,008,651 $8,367,292 $(11,937) $8,355,354____________*Totals may not add due to rounding.(1) Interest Subsidy is 35% Federal Subsidy for the <strong>2009</strong> Series C <strong>Bonds</strong>, Build America <strong>Bonds</strong>.
<strong>Maryl<strong>and</strong></strong> Stadium AuthorityLease Revenue Debt Outst<strong>and</strong>ing as <strong>of</strong> March 31, <strong>2009</strong>The following table shows the lease revenue debt <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Stadium Authority outst<strong>and</strong>ing as <strong>of</strong>March 31, <strong>2009</strong>, the uses <strong>of</strong> the proceeds there<strong>of</strong>, <strong>and</strong> the sources <strong>of</strong> repayment <strong>of</strong> the debt. Project descriptionsfollow.Principal AmountOutst<strong>and</strong>ing as <strong>of</strong>Source <strong>of</strong> March 31, <strong>2009</strong>Use <strong>of</strong> Proceeds Repayment ($ in thous<strong>and</strong>s)Oriole Park at Camden Yards Lease Payments $107,045Baltimore City Convention Center Expansion Lease Payments 24,740Ocean City Convention Center Lease Payments 8,655Ravens Stadium Lease Payments 68,800Hippodrome Theater Lease Payments 17,000Montgomery County Conference Center Lease Payments 19,815Camden Station Renovation Lease Payments 8,360$254,415B-3
Project DescriptionsOriole Park at Camden Yards. Currently the <strong>Maryl<strong>and</strong></strong> Stadium Authority (“Authority”) operates OriolePark at Camden Yards, which opened in 1992. In connection with the construction <strong>of</strong> that facility, the Authorityissued $155.0 million in notes <strong>and</strong> bonds. In October, 1993, the Authority entered into an agreement to implement asynthetic fixed rate refinancing <strong>of</strong> the sports facility bonds using a combination <strong>of</strong> variable rate refundingobligations <strong>and</strong> forward interest rate exchange agreements. As provided under the agreements, savings <strong>of</strong> $15.5million was paid to the Authority on April 1, 1996. In accordance with this agreement <strong>and</strong> in consideration for theprior payment <strong>of</strong> the savings, the Authority issued its $17.9 million Sports Facilities Lease Revenue Refunding<strong>Bonds</strong> in December 1998, to refund its outst<strong>and</strong>ing Sports Facility Lease Revenue <strong>Bonds</strong> Series 1989C, <strong>and</strong> issuedits $121.0 million Sports Facilities Lease Revenue Refunding <strong>Bonds</strong> in December 1999, to refund its SportsFacilities Lease Revenue <strong>Bonds</strong> Series 1989D.The Authority’s notes <strong>and</strong> bonds are lease-backed revenue obligations, the payment <strong>of</strong> which is secured by,among other things, an assignment <strong>of</strong> revenues received under a lease <strong>of</strong> Oriole Park at Camden Yards from theAuthority to the <strong>State</strong>. The rental payments due from the <strong>State</strong> under that lease are subject to annual appropriationby the <strong>General</strong> Assembly. Revenues to fund the lease payments are generated from a variety <strong>of</strong> sources, including ineach year revenues from sports lotteries, the net operating revenues <strong>of</strong> the Authority, <strong>and</strong> $1.0 million from the City<strong>of</strong> Baltimore.In November 2001, the Authority issued $10.3 million in bond anticipation notes, which were refunded inJuly 2002 with $10.3 million in taxable lease-backed revenue bonds. The 2001 bond anticipation notes were used t<strong>of</strong>und a $10.0 million deposit to the “Supplemental Improvements Fund” under the Baltimore Orioles Lease inaccordance with the order <strong>of</strong> the panel <strong>of</strong> Arbitrators in American Arbitration Association Case No.16Y1150005500.Annual debt service on the Authority’s total bond obligations for Oriole Park at Camden Yards is $15.8million <strong>and</strong> the amount outst<strong>and</strong>ing as <strong>of</strong> March 31, <strong>2009</strong> totaled $107.0 million.In early 2007, the Baltimore Orioles filed for arbitration over the selection <strong>and</strong> installation <strong>of</strong> a new videoboard at Oriole Park at Camden Yards. In September 2007 the Authority <strong>and</strong> the Baltimore Orioles reached asettlement, agreeing to purchase <strong>and</strong> install $9.0 million <strong>of</strong> new audio <strong>and</strong> video equipment funded by $5.5 millionfrom the “Supplement Improvements Fund” <strong>and</strong> $3.5 million from the Authority. The Authority’s share wasfinanced under the <strong>State</strong>’s Master Equipment Lease-Purchase Program <strong>and</strong> amortized over 10 years.Baltimore City Convention Center Expansion. The Authority also constructed an expansion <strong>of</strong> theBaltimore City Convention Center. The Convention Center expansion cost $167.0 million <strong>and</strong> was financed througha combination <strong>of</strong> funding from Baltimore City revenue bonds ($50.0 million), Authority revenue bonds ($55.0million), <strong>State</strong> general obligation bonds ($58.0 million) <strong>and</strong> other <strong>State</strong> appropriations. As required, the City sold itsrevenue bonds before the Authority’s sale <strong>of</strong> lease-backed revenue bonds on August 25, 1994. The <strong>State</strong> sold $58.0million in general obligation bonds designated for the Convention Center in sales from October, 1993 to October,1996. The agreement between the City <strong>and</strong> the Authority provides that: (1) the City <strong>and</strong> the Authority each makeequal annual contributions to a capital improvements reserve fund; (2) after completion <strong>of</strong> construction throughfiscal year 2008, the Authority <strong>and</strong> the City contribute toward operating deficits in the proportion Authority (2/3),City (1/3); <strong>and</strong> (3) the City be solely responsible for operating deficits <strong>and</strong> capital improvements prior to completion<strong>of</strong> the expansion <strong>and</strong> after fiscal year 2008. Authority debt service in fiscal year 2008 was $5.0 million. The 2008contribution to operating deficits <strong>and</strong> the project’s capital improvements fund was approximately $4.1 million. Theproject has generated direct <strong>and</strong> indirect benefit to the <strong>State</strong> that <strong>of</strong>fset its costs (debt service, operating deficitcontributions, deposits to the capital improvements fund, <strong>and</strong> that portion <strong>of</strong> the Authority’s budget that is allocableto the Convention Center project) since 1999.In June 1998, the Authority entered into an agreement to implement a synthetic fixed rate refinancing <strong>of</strong> itsrevenue bonds for the Baltimore City Convention Center using a combination <strong>of</strong> variable rate refunding obligations<strong>and</strong> forward interest rate exchange agreements. As provided under the agreements, savings <strong>of</strong> $0.6 million was paidto the Authority on June 10, 1998. The Authority issued refunding bonds in the amount <strong>of</strong> $31.6 million <strong>of</strong> which$31.2 million was used to call the outst<strong>and</strong>ing principal balance on the 1994 Series, on December 15, 2006. Thebalance <strong>of</strong> the proceeds, $400,000 was used towards closing costs. The 1994 Series was called on December 15,2006 in accordance with the swap agreement.B-4
The amount outst<strong>and</strong>ing <strong>of</strong> <strong>Maryl<strong>and</strong></strong> Stadium Authority <strong>Bonds</strong> related to the Baltimore City ConventionCenter project totaled $24.7 million as <strong>of</strong> March 31, <strong>2009</strong>.Ocean City Convention Center. The Authority also constructed an expansion <strong>of</strong> the Convention Center inOcean City. The expansion cost $33.2 million <strong>and</strong> was financed through a matching grant from the <strong>State</strong> to OceanCity <strong>and</strong> a combination <strong>of</strong> funding from Ocean City <strong>and</strong> the Authority. In October 1995, the Authority issued $17.3million in revenue bonds to provide <strong>State</strong> funding; as required, Ocean City sold $15.0 million <strong>of</strong> its special tax <strong>and</strong>general obligation bonds before the sale by the Authority. Authority debt service in connection with the revenuebonds for the Convention Center in Ocean City is $1.5 million annually <strong>and</strong> the debt outst<strong>and</strong>ing totaled $8.7million as <strong>of</strong> March 31, <strong>2009</strong>. The Authority will also continue to pay one-half <strong>of</strong> any annual operating deficits <strong>of</strong>the facility through December 15, 2015, after which time Ocean City will be solely responsible for operatingdeficits. The 2008 contribution to operating deficits <strong>and</strong> the project’s capital improvements fund is approximately$1.7 million. The project has generated direct <strong>and</strong> indirect benefits to the <strong>State</strong> that <strong>of</strong>fset its costs (debt service,operating deficit contributions, deposits to the capital improvements fund, <strong>and</strong> that portion <strong>of</strong> the Authority’s budgetthat is allocable to the Convention Center project) since 2007.Ravens Stadium. The Authority currently operates Ravens Stadium, which opened in 1998. In connectionwith the construction <strong>of</strong> that facility, the Authority sold $87.6 million in lease-backed revenue bonds on May 1,1996 for Ravens Stadium. The proceeds from the Authority’s bonds, along with cash available from <strong>State</strong> lotteryproceeds, investment earnings, contributions from the Ravens <strong>and</strong> other sources were used to pay project design <strong>and</strong>construction expenses <strong>of</strong> approximately $229.0 million. The bonds are solely secured by an assignment <strong>of</strong> revenuesreceived under a lease <strong>of</strong> the project from the Authority to the <strong>State</strong>. In June 1998, the Authority entered into anagreement to implement a synthetic fixed rate refinancing <strong>of</strong> the football lease-backed revenue bonds using acombination <strong>of</strong> variable rate refunding obligations <strong>and</strong> forward interest rate exchange agreements. As providedunder the agreements, savings <strong>of</strong> $2.6 million were paid to the Authority on June 10, 1998. The Authority issued<strong>Maryl<strong>and</strong></strong> Stadium Authority Sports Facilities Lease Revenue Refunding <strong>Bonds</strong> Football Stadium Issue Series 2007in the amount <strong>of</strong> $73.5 million <strong>of</strong> which $73.1 million was used to call the outst<strong>and</strong>ing principal balance on the 1996Series on March 1, 2007. The balance <strong>of</strong> the proceeds, $375,000, was used for closing costs. The 1996 Series wascalled on March 1, 2007 in accordance with the swap agreement.On December 15, 1997 the Authority issued $4.6 million in Sports Facilities Lease Revenue <strong>Bonds</strong>, Series1997 whose proceeds were used toward the construction <strong>of</strong> Ravens Stadium. The Series 1997 bonds fully maturedon December 15, 2007. The Authority’s combined debt service on the remaining outst<strong>and</strong>ing revenue bonds is $7.3million annually. The bonds outst<strong>and</strong>ing as <strong>of</strong> March 31, <strong>2009</strong> totaled $68.8 million.Hippodrome Theater. In July 2002, the Authority issued $20.3 million in taxable lease-backed revenuebonds in connection with the renovation <strong>and</strong> construction <strong>of</strong> the Hippodrome Theater as part <strong>of</strong> Baltimore City’sWest Side Development. The cost <strong>of</strong> renovating the theater was $63.0 million <strong>and</strong> was financed by various public<strong>and</strong> private sources. The Authority will not have any operating risk for the project which was completed inFebruary, 2004. The average annual debt service for these bonds is $1.8 million. The bonds outst<strong>and</strong>ing as <strong>of</strong> March31, <strong>2009</strong> totaled $17.0 million.Montgomery County Conference Center. In January 2003, the Authority issued $23.2 million in leasebackedrevenue bonds in connection with the construction <strong>of</strong> a conference center in Montgomery County. Theconference center is adjacent <strong>and</strong> physically connected to a Marriott Hotel, which has been privately financed. Thecenter cost $33.5 million <strong>and</strong> was financed through a combination <strong>of</strong> funding from Montgomery County <strong>and</strong> theAuthority. The Authority does not have any operating risk. The average annual debt service for these bonds is$1.75 million. The bonds outst<strong>and</strong>ing as <strong>of</strong> March 31, <strong>2009</strong> totaled $19.8 million.Camden Station Renovation. In February 2004, the Authority issued $8.7 million in taxable lease-backedrevenue bonds in connection with the renovation <strong>of</strong> the historic Camden Station located at the Camden YardsComplex in Baltimore, <strong>Maryl<strong>and</strong></strong>. The cost <strong>of</strong> the renovation was $8.0 million. The Authority has executed leaseagreements for the entire building, with the Babe Ruth Museum leasing approximately 22,600 square feet sinceMay, 2000 <strong>and</strong> Geppi’s Entertainment Museum leasing the balance <strong>of</strong> the building since early fall 2006. To date,lease payments have not been sufficient to cover debt service on the bonds <strong>and</strong> the shortfall has been subsidized bythe Authority. The average annual debt service for these bonds is $0.8 million. <strong>Bonds</strong> outst<strong>and</strong>ing as <strong>of</strong> March 31,<strong>2009</strong> totaled $8.4 million.B-5
<strong>State</strong> Tax Supported Lease <strong>and</strong> Conditional Purchase FinancingsLease <strong>and</strong> Conditional Purchase Financings Outst<strong>and</strong>ing as <strong>of</strong> March 31, <strong>2009</strong>The following table shows, by <strong>State</strong> agency, <strong>State</strong> tax-supported capital lease <strong>and</strong> conditional purchasefinancings, the facilities financed, <strong>and</strong> the principal amount outst<strong>and</strong>ing at March 31, <strong>2009</strong>.Principal AmountOutst<strong>and</strong>ing as <strong>of</strong>March 31, <strong>2009</strong><strong>State</strong> Agency Facilities Financed ($ in thous<strong>and</strong>s)Department <strong>of</strong> Transportation Headquarters <strong>of</strong>fice building $28,920MAA shuttle buses – BWI10,300Department <strong>of</strong> <strong>General</strong> ServicesMulti-service <strong>of</strong>fice buildingsSt. Mary’s County 2,910Calvert County 1,210Towson District Court 730Hyattsville District Court 995Hilton Street Facility 1,980Prince George’s County JusticeCenter21,265<strong>Maryl<strong>and</strong></strong> Environmental Service Water <strong>and</strong> wastewater facility at 1,870Eastern Correctional InstitutionVarious <strong>State</strong> Agencies Energy performance projects 75,834Various <strong>State</strong> Agencies Communications, data processing, 80,567<strong>and</strong> other equipment<strong>Maryl<strong>and</strong></strong> Transportation Authority <strong>State</strong> <strong>of</strong>fice parking facility 22,575$249,156B-6
Revenue <strong>and</strong> Enterprise FinancingsRevenue <strong>and</strong> Enterprise Financings Outst<strong>and</strong>ing as <strong>of</strong> March 31, <strong>2009</strong> (a)The following table shows, by issuing agency, certain revenue <strong>and</strong> enterprise non-tax-supported debtoutst<strong>and</strong>ing as <strong>of</strong> March 31, <strong>2009</strong>, the facilities financed, <strong>and</strong> the sources <strong>of</strong> repayment <strong>of</strong> the debt.Principal AmountOutst<strong>and</strong>ing as <strong>of</strong>March 31, <strong>2009</strong>Agency Facilities Financed Source <strong>of</strong> Repayment ($ in thous<strong>and</strong>s)Higher EducationUniversity System <strong>of</strong> <strong>Maryl<strong>and</strong></strong> Student housing, Tuition <strong>and</strong> auxiliary $854,865parking facilities,enterprise facilities revenues<strong>and</strong> equipmentCommunication, data processing, Operating revenues 73,534other equipment, <strong>and</strong> lightingfixturesMorgan <strong>State</strong> University Student housing Student fees 23,713Stadium/Fine Art Student fees 5,245Student Center Student fees 29,780Boiler<strong>Maryl<strong>and</strong></strong> HigherEducation Commission (b) 3,490Office spaceIndirect cost recovery from grants<strong>and</strong> contracts1,944St. Mary's College <strong>of</strong> <strong>Maryl<strong>and</strong></strong>Student housing/campus center <strong>and</strong>athletic facilityAcademic fees <strong>and</strong> auxiliaryfacilities fees44,190Community Development Mortgage <strong>and</strong> construction loans Mortgage repayments <strong>and</strong> sales 3,339,060Administration <strong>of</strong> the Loans to local governments for Loan repayments 129,260Department <strong>of</strong> Housing <strong>and</strong>infrastructure projectsCommunity Development<strong>Maryl<strong>and</strong></strong> Environmental Service L<strong>and</strong>fill projects Tipping fees 5,770Equipment Operating revenues 13,123<strong>Maryl<strong>and</strong></strong> Transportation Authority Bridges, tunnels, <strong>and</strong> highways Tolls 1,092,210Parking garage at BWI Parking revenues 229,590Car rental facility Customer facility charges 107,890Improvements at BWI Airport Passenger facility charges 51,800WMATA Metrorail parking facility Lease rental payments 36,785<strong>Maryl<strong>and</strong></strong> Water Quality Financing Loans to local governments for Loan repayments 93,810Administrationwater pollution control facilities<strong>Maryl<strong>and</strong></strong> Department <strong>of</strong>Transportation<strong>Maryl<strong>and</strong></strong> Aviation Administration BWI renovations, de-icing ramp Lease revenues 22,535BWI Piers A/BAirline rentals <strong>and</strong> concession212,590revenues<strong>Maryl<strong>and</strong></strong> Transit Administration MARC rail station parking garage Parking revenues 13,910<strong>Maryl<strong>and</strong></strong> Port Administration Masonville Automobile Terminal Lease revenues 14,424Warehouse FacilitySouth Locust Point TerminalLease revenues 25,395$6,424,913(a) The table does not include debt <strong>of</strong> certain authorities that, under criteria prescribed by the Governmental Accounting St<strong>and</strong>ards Board, are notconsidered <strong>State</strong> entities for financial reporting purposes nor debt for which United <strong>State</strong>s government obligations sufficient to provide fully for thetimely payment <strong>of</strong> principal, interest, <strong>and</strong> applicable redemption premium are being held in escrow funds.(b) The <strong>Maryl<strong>and</strong></strong> Higher Education Commission has included sufficient funds in its annual grants to Morgan <strong>State</strong> University to pay the debtservice on these Academic Facilities <strong>Bonds</strong>.B-7
Descriptions <strong>of</strong> Revenue <strong>and</strong> Enterprise FinancingsHigher Education Institutions. Legislation limits the aggregate principal amount <strong>of</strong> revenue bondsoutst<strong>and</strong>ing <strong>and</strong> the present value <strong>of</strong> capital lease payments, less the amount <strong>of</strong> any reserves established therefore,for academic or auxiliary facilities; effective July 1, <strong>2009</strong> the limits are $1,050.0 million for the University System<strong>of</strong> <strong>Maryl<strong>and</strong></strong>, $88.0 million for Morgan <strong>State</strong> University, $60.0 million for St. Mary’s College <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, <strong>and</strong>$65.0 million for Baltimore City Community College. As <strong>of</strong> March 31, <strong>2009</strong>, outst<strong>and</strong>ing debt <strong>and</strong> lease purchasefinancings <strong>of</strong> the University System <strong>of</strong> <strong>Maryl<strong>and</strong></strong>, Morgan <strong>State</strong> University, <strong>and</strong> St. Mary’s College <strong>of</strong> <strong>Maryl<strong>and</strong></strong> was$928.4 million, $64.2 million, <strong>and</strong> $44.2 million, respectively. Lease <strong>and</strong> Conditional Purchase Financings havebeen used for facilities at various colleges <strong>and</strong> universities.Community Development Administration. The Community Development Administration (“CDA”), a unitwithin the Department <strong>of</strong> Housing <strong>and</strong> Community Development, is responsible for housing finance <strong>and</strong> assistanceprograms. CDA issues bonds <strong>and</strong> notes to provide funding for various home ownership <strong>and</strong> rental housing loanprograms. The debt service on CDA’s revenue bonds <strong>and</strong> notes generally is paid from mortgage repayments. As <strong>of</strong>March 31, <strong>2009</strong>, $3,339.1 million <strong>of</strong> these bonds <strong>and</strong> notes were outst<strong>and</strong>ing. CDA also issues bonds to provideloans to local governments for various infrastructure projects. The bonds are secured by the general obligationpledges <strong>of</strong> the participating local governments. As <strong>of</strong> March 31, <strong>2009</strong>, $129.3 million <strong>of</strong> these bonds wereoutst<strong>and</strong>ing.<strong>Maryl<strong>and</strong></strong> Environmental Service. The <strong>Maryl<strong>and</strong></strong> Environmental Service (“MES”) was established in 1993to provide water supply, wastewater treatment, <strong>and</strong> waste management services to state agencies, local governments,<strong>and</strong> private entities. MES is authorized to issue revenue bonds secured by the revenue derived from its variousfacilities <strong>and</strong> projects. Outst<strong>and</strong>ing debt <strong>of</strong> MES amounted to $18.9 million as <strong>of</strong> March 31, <strong>2009</strong>.<strong>Maryl<strong>and</strong></strong> Transportation Authority. The <strong>Maryl<strong>and</strong></strong> Transportation Authority (“MdTA”) <strong>of</strong> which theSecretary <strong>of</strong> Transportation is Chairman, is responsible for the administration <strong>of</strong> the various toll revenue facilities,which consist <strong>of</strong> bridges over the Susquehanna, Patapsco, <strong>and</strong> Potomac Rivers <strong>and</strong> the Chesapeake Bay; two tunnelsunder the Baltimore Harbor; <strong>and</strong> the John F. Kennedy Memorial Highway. The tolls <strong>and</strong> other revenues receivedfrom these facilities are pledged as security for revenue bonds <strong>of</strong> the MdTA issued under <strong>and</strong> secured by a secondamended <strong>and</strong> restated trust agreement dated as <strong>of</strong> September 1, 2007, between the MdTA <strong>and</strong> a corporate trustee. InSeptember 2007, the MdTA issued $300.0 million <strong>of</strong> its revenue bonds under this agreement, <strong>and</strong> on March 26,2008 the MdTA issued $573.3 million <strong>of</strong> additional revenue bonds under a supplemental trust agreement.In March 2002, the MdTA issued revenue bonds in the amount <strong>of</strong> $264.1 million for the construction <strong>of</strong>projects at BWI. Parking revenues are pledged for the repayment <strong>of</strong> the bonds. In June 2002, the MdTA issuedrevenue bonds in the amount <strong>of</strong> $117.3 million for construction <strong>of</strong> a consolidated rental car facility at BWI.Customer Facility Charge revenues on rental cars are pledged for the repayment <strong>of</strong> the bonds. In December 2003,the MdTA issued revenue bonds in the amount <strong>of</strong> $69.7 million for the construction <strong>of</strong> additional projects at BWI.Passenger Facility Charge revenues are pledged for the payment <strong>of</strong> the bonds. In June 2004, the MdTA issued leaserevenue bonds in the amount <strong>of</strong> $40.0 million to finance the costs <strong>of</strong> parking facilities projects at certain Metrorailstations operated by the Washington Metropolitan Area Transit Authority (“WMATA”). Lease revenue payable byWMATA <strong>and</strong> other amounts from Prince George’s County, <strong>Maryl<strong>and</strong></strong> are pledged for the repayment <strong>of</strong> the bonds.As <strong>of</strong> March 31, <strong>2009</strong>, $1,518.3 million <strong>of</strong> the MdTA’s revenue <strong>and</strong> enterprise financings were outst<strong>and</strong>ingunder various trust agreements.<strong>Maryl<strong>and</strong></strong> Water Quality Financing Administration. The Water Quality Financing Administration in theDepartment <strong>of</strong> the Environment administers the Water Quality Revolving Loan Fund (the “Fund”). The Fund maybe used to provide loans, subsidies, <strong>and</strong> other forms <strong>of</strong> financial assistance to local government units <strong>and</strong> privateentities for wastewater <strong>and</strong> drinking water projects as provided by the federal Water Pollution Control Act <strong>and</strong> thefederal Safe Drinking Water Act.B-8
The Administration is authorized to issue bonds secured by revenues <strong>of</strong> the Funds, including loanrepayments, fees, federal capitalization grants, <strong>and</strong> matching <strong>State</strong> grants. As <strong>of</strong> March 31, <strong>2009</strong>, $93.8 million <strong>of</strong>the Administration’s revenue bonds were outst<strong>and</strong>ing.Units <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> TransportationRevenues from the following projects financed for units <strong>of</strong> the <strong>Maryl<strong>and</strong></strong> Department <strong>of</strong> Transportation(“Department”) are pledged to the payment <strong>of</strong> principal <strong>and</strong> interest on the respective bonds <strong>and</strong> certificates <strong>and</strong>,therefore, these financings are also not considered to be tax-supported.<strong>Maryl<strong>and</strong></strong> Aviation Administration (“MAA”). MAA <strong>and</strong> the Department entered into a conditional purchaseagreement to provide financing for capital improvements at BWI <strong>and</strong> sold $42.8 million Project Certificates <strong>of</strong>Participation for various MAA projects in May 1999. As <strong>of</strong> March 31, <strong>2009</strong>, $22.5 million <strong>of</strong> the certificates wereoutst<strong>and</strong>ing.In April 2003, MEDCO issued lease revenue bonds in the amount <strong>of</strong> $223.7 million to finance theexpansion <strong>and</strong> renovation <strong>of</strong> Piers A <strong>and</strong> B <strong>and</strong> the Terminal building at BWI. The Department records thisfinancing as a capital lease, which is subject to annual appropriation by the <strong>General</strong> Assembly. Airline rentals <strong>and</strong>concession revenues are pledged to the payment <strong>of</strong> principal <strong>and</strong> interest on the bonds <strong>and</strong>, therefore, this financingis not considered tax-supported. As <strong>of</strong> March 31, <strong>2009</strong>, $212.6 million <strong>of</strong> the MEDCO lease revenue bonds wereoutst<strong>and</strong>ing.<strong>Maryl<strong>and</strong></strong> Transit Administration (“MTA”). MTA <strong>and</strong> the Department entered into a conditional purchaseagreement in fiscal year 2001 to provide financing to exp<strong>and</strong> parking in the vicinity <strong>of</strong> BWI at the <strong>Maryl<strong>and</strong></strong> RailCommuter BWI rail station, <strong>and</strong> sold $33.0 million Project Certificates <strong>of</strong> Participation in October, 2000. As <strong>of</strong>March 31, <strong>2009</strong>, $13.9 million <strong>of</strong> the certificates were outst<strong>and</strong>ing.<strong>Maryl<strong>and</strong></strong> Port Administration (“MPA”). The Department entered into a capital lease in the amount <strong>of</strong>$18.4 million by virtue <strong>of</strong> an agreement with the MdTA for financing the MPA Masonville Automobile Terminal.As <strong>of</strong> March 31, <strong>2009</strong>, $14.4 million was outst<strong>and</strong>ing.In addition, MPA <strong>and</strong> the Department entered into a conditional purchase agreement in fiscal year 2006 toprovide financing to construct a warehouse at the South Locust Point Terminal, <strong>and</strong> the Department sold $26.5million Project Certificates <strong>of</strong> Participation in June, 2006. As <strong>of</strong> March 31, <strong>2009</strong>, $25.4 million <strong>of</strong> the certificateswere outst<strong>and</strong>ing.(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)B-9
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Appendix CSupplementary Revenue SchedulesSTATE OF MARYLANDComparison <strong>of</strong> Combined <strong>General</strong>, Special, Federal, <strong>and</strong> Higher Education FundsRevenue Estimates <strong>and</strong> CollectionsThe following table shows, on a net budgetary basis, a comparison between the original revenue estimate (made 19 months before the end <strong>of</strong> the fiscal year), therevised revenue estimate (made seven months before the end <strong>of</strong> the fiscal year <strong>and</strong> reviewed four months before the end <strong>of</strong> the fiscal year), <strong>and</strong> the actual revenuecollections for the combined <strong>General</strong>, Special, Federal, <strong>and</strong> Higher Education Funds for the four fiscal years ended June 30, 2008.($ in millions) ($ in millions) ($ in millions) ($ in millions)Fiscal Year 2005 Fiscal Year 2006 Fiscal Year 2007 Fiscal Year 2008Original Revised Actual Original Revised Actual Original Revised Actual Original Revised ActualEstimate Estimate Collections Estimate Estimate Collections Estimate Estimate Collections Estimate Estimate CollectionsIncome Taxes......................... $5,774.2 $6,008.9 $6,334.6 $6,332.1Sales <strong>and</strong> Use Taxes.............. 2,968.5 3,132.6 3,153.7 3,253.6Motor Vehicle User Taxes,Fees..................................... 1,876.9 2,065.9 2,059.7 2,112.1Property, Franchise, ExciseTaxes .................................. 1,405.3Sundry Fees, Licenses,Charges .............................. 5,328.0$7,002.5 $7,020.2 $7,444.9 $7,348.5 $7,461.2 $7,839.0 $7,773.0 $7,675.53,376.1 3,381.7 3,528.9 3,485.7 3,447.8 3,652.8 3,874.0 3,748.92,087.9 2,085.4 2,169.1 2,086.5 2,068.9 2,144.2 2,100.5 2,004.51,471.1 1,711.4 1,682.9 1,734.5 1,850.8 1,920.0 1,951.7 1,790.8 1,895.9 1,931.4 1,942.06,049.8 4,901.6 5,575.2 5,741.4 5,556.8 6,040.8 6,496.2 6,278.6 6,562.3 6,688.6 6,694.6Federal ................................... 5,793.8 5,978.6 5,955.9 6,276.4 6,483.8 6,286.4 6,569.6 6,653.4 6,441.9 6,709.1 6,607.9 6,561.3Total …………………..….. $23,146.7 $24,706.7 $24,116.8 $25,232.4 $26,426.1 $26,181.3 $27,673.3 $28,022.0 $27,489.3 $28,803.5 $28,975.4 $28,626.8_________Notes: The estimates <strong>and</strong> actuals exclude transfers <strong>and</strong> other actions appearing on page C-3 as extraordinary transfers. Federal revenues are generally recognized to the extent related expenditures chargeable tothe federal grant have been recognized.*Totals may not add due to rounding.C-1
STATE OF MARYLANDComparison <strong>of</strong> <strong>General</strong> Fund Revenue Estimates <strong>and</strong> CollectionsThe following table shows, on a budgetary basis, a comparison between the original revenue estimate (made 19 months before the end <strong>of</strong> the fiscal year), therevised revenue estimate (made seven months before the end <strong>of</strong> the fiscal year <strong>and</strong> revised four months before the end <strong>of</strong> the fiscal year), <strong>and</strong> the actual revenue collectionsfor the four years ended June 30, 2008.($ in millions) ($ in millions) ($ in millions) ($ in millions)Fiscal Year 2005 Fiscal Year 2006 Fiscal Year 2007 Fiscal Year 2008Original Revised Actual Original Revised Actual Original Revised Actual OriginalRevised ActualEstimate Estimate Collections Estimate Estimate Collections Estimate Estimate Collections Estimate Estimate CollectionsIncome Taxes ................................. $5,661.4 $5,866.5 $6,172.9 $6,184.8 $6,811.5 $6,823.4 $7,231.9 $7,167.4 $7,269.0 $7,652.5 $7,545.2 $7,491.8Sales <strong>and</strong> Use Taxes ...................... 2,943.7 3,109.3 3,129.4 3,229.7 3,350.6 3,355.2 3,502.1 3,457.2 3,420.1 3,623.0 3,691.7 3,675.3Motor Vehicle User Taxes,Fees ........................................ 13.1 13.3 13.2 13.6 13.3 13.2 13.7 13.3 13.2 13.6 13.4 13.2Property, Franchise, ExciseTaxes...................................... 868.2 930.5 953.3 925.7 1,018.3 1,001.3 987.0 1,014.1 1,021.1 1,016.6 1,142.0 1,158.4Sundry Fees, Licenses, Charges ... 834.7 974.2 1,048.3 874.5 1,047.4 1,096.9 1,030.0 1,120.3 1,138.4 1,068.1 1,085.8 1,126.3Federal ............................................ 70.0 78.4 77.7 78.1 78.0 79.9 78.5 77.3 78.4 79.1 79.6 80.7Total …………………………… $10,391.1 $10,972.1 $11,394.7 $11,306.3 $12,319.1 $12,369.9 $12,843.2 $12,849.6 $12,940.2 $13,452.8 $13,557.8 $13,545.6_________Notes: The estimates <strong>and</strong> actuals exclude transfers <strong>and</strong> other actions appearing on page C-3 as extraordinary transfers. Federal revenues are generally recognized to the extent related expenditureschargeable to the federal grant have been recognized.*Totals may not add due to rounding.C-2
STATE OF MARYLANDSummary <strong>of</strong> Revenues by SourceThe following table shows, on a net budgetary basis, the trend <strong>of</strong> the operating revenues <strong>of</strong> the principalsources <strong>of</strong> funds <strong>of</strong> the <strong>State</strong> for the four fiscal years ended June 30, 2008, <strong>and</strong> the most recent estimate for the yearending June 30, <strong>2009</strong>. See the summary <strong>of</strong> revenues in “STATE FINANCES - <strong>State</strong> Revenues” for certaininformation useful to the evaluation <strong>of</strong> the following data.Income Taxes($ in millions)Fiscal YearEstimated2005 2006 2007 2008 <strong>2009</strong> (a)Individuals (b)...................................................... $5,660.6 $6,200.2 $6,679.2 $6,940.1 $6,781.5Corporations ........................................................ 674.0 820.0 782.0 735.3 790.8Total ................................................................. 6,334.6 7,020.2 7,461.2 7,675.5 7,572.3Sales <strong>and</strong> Use Taxes (c)..................................... 3,153.7 3,381.7 3,447.8 3,748.9 3,836.9Motor Vehicle User Taxes, FeesMotor Vehicle Fuel Taxes .................................. 752.9 757.9 755.7 755.2 740.6Motor Vehicle Licenses, Fees ............................ 589.1 608.3 609.4 599.6 623.2Motor Vehicle Titling Tax.................................. 717.7 719.2 703.8 649.7 550.0Total ................................................................. 2,059.7 2,085.4 2,068.9 2,004.5 1,913.8Property, Franchise, Excise TaxesReal Property Tax................................................ 516.5 575.1 552.7 625.7 701.0Property Transfer Tax ......................................... 237.3 270.0 212.5 153.5 121.5Business Franchise Taxes ................................... 197.9 196.2 206.6 208.0 209.2<strong>State</strong> Tobacco Tax (d)......................................... 276.0 280.3 278.2 376.1 413.8Tax on Insurance Companies ............................. 268.9 274.9 283.3 301.8 298.3Tax on Distilled Spirits, Wine, Beer .................. 27.3 28.0 28.7 29.0 29.0Tax on Horse Racing........................................... 4.3 4.4 4.4 4.3 4.3Death Taxes ......................................................... 183.1 221.9 224.3 243.5 226.6Total ................................................................. 1,711.4 1,850.8 1,790.8 1,942.0 2,003.7Sundry Fees, Licenses, Service ChargesUniversity <strong>and</strong> College Receipts ........................ 2,607.1 2,771.6 2,870.1 3,091.6 3,357.6Mass Transit, Port, Aviation Income ................. 328.3 340.6 369.2 395.0 397.0Miscellaneous Taxes, <strong>and</strong> Other Receipts ......... 1,278.9 1,627.0 2,200.2 2,369.5 2,648.3Interest on Invested Funds.................................. 69.3 170.7 189.5 170.2 103.0District Courts Fines <strong>and</strong> Fees............................ 87.4 91.3 97.0 91.3 88.3<strong>State</strong> Lottery Receipts ......................................... 530.6 555.6 552.6 577.1 535.1Total ................................................................. 4,901.6 5,556.8 6,278.6 6,694.6 7,129.3Federal Receipts ................................................ 5,955.9 6,286.4 6,441.9 6,561.3 7,790.8Extraordinary Transfers& Revenues (e) ............................................... 201.1 26.8 - - 7.9Gr<strong>and</strong> Total........................................................ $24,317.9 $26,208.1 $27,489.3 $28,626.8 $30,254.7_________(a) The estimated revenues include the general fund estimate by the Board <strong>of</strong> Revenue Estimates on March 11, <strong>2009</strong>, <strong>and</strong> the federal <strong>and</strong>special funds authorized in the <strong>State</strong> budget as set forth in the fiscal year 2010 budget books.(b) The <strong>State</strong> has recorded revenues from individual income taxes on a modified accrual basis.(c) Legislation enacted by the <strong>General</strong> Assembly during the 2007 Special Session increased the sales tax rate from 5% to 6% effectiveJanuary 3, 2008.(d) Legislation enacted by the <strong>General</strong> Assembly during the 2007 Special Session increased the cigarette tax rate from $1.00 per pack to$2.00 per pack effective January 1, 2008.(e) In fiscal year 2005, extraordinary revenues were from the one-time Delaware holding company settlement. In fiscal year 2006, $26.8million in corporate income tax revenues was received from MCI in a settlement. In fiscal year <strong>2009</strong>, $7.9 million had been overaccrued for county income taxes..*Totals may not add due to rounding.C-3
STATE OF MARYLANDComparison <strong>of</strong> <strong>General</strong> Fund Revenues Collectedas <strong>of</strong> March 31, <strong>2009</strong>The following table compares actual cash collections for the period from July 1 to March 31 during fiscalyear <strong>2009</strong> with collections during that same period in the previous four fiscal years. The table does not reflectaccruals.($ in millions)Fiscal Year2005 2006 2007 2008 <strong>2009</strong>Individual Income Tax (a) (c) ....... $3,588.9 $3,925.4 $4,095.9 $4,309.1 $4,244.7Corporate Income Tax (b) (c) ....... 470.0 451.0 391.8 325.9 371.3Sales <strong>and</strong> Use Tax (c) .................... 2,038.2 2,183.8 2,231.6 2,357.4 2,436.7<strong>State</strong> Lottery................................... 287.9 309.2 292.7 334.4 299.2Business Franchise Taxes.............. 93.2 98.8 93.9 101.1 96.7Tobacco Tax (c) ............................. 188.2 190.4 192.8 217.4 280.2Insurance Taxes <strong>and</strong> Fees.............. 152.7 163.6 171.8 179.7 161.6Alcoholic Beverage Taxes ............ 17.8 18.2 18.8 19.0 18.9Death Taxes.................................... 133.1 171.7 173.5 188.4 167.7Clerks <strong>of</strong> Court............................... 42.0 46.6 41.1 36.4 26.6Motor Fuel Taxes........................... 7.7 7.7 7.8 7.8 6.5Hospital Patient Recoveries .......... 72.0 74.4 70.1 71.1 83.0Interest on Investments.................. 32.2 91.0 78.0 76.1 52.7District Court Fees......................... 64.3 68.1 72.9 70.0 67.5Miscellaneous ................................ 145.8 133.7 163.6 186.2 122.3Total................................................ $7,334.0 $7,933.7 $8,096.4 $8,480.2 $8,435.6_________(a) The <strong>State</strong> has recorded revenues from individual income taxes on a modified accrual basis.(b) For fiscal year 2005, includes $151.0 million from the Delaware holding company settlement <strong>and</strong> for fiscal year 2006 includes $20.4million from a settlement with MCI.(c) These taxes were increased on January 1 or January 3, 2008 by the <strong>General</strong> Assembly through actions taken at the 2007 special session. See“STATE FINANCES – <strong>State</strong> Revenues” for details.*Totals may not add due to rounding.C-4
STATE OF MARYLAND<strong>General</strong> Fund RevenuesNeeded to Meet Estimates During the Last Six Months <strong>of</strong> Fiscal Year <strong>2009</strong>The following table compares: (1) the revenues needed during the period from January 1 to June 30, <strong>2009</strong>(including appropriate accruals), in order to meet the most recent <strong>of</strong>ficial estimate <strong>of</strong> revenues for the <strong>2009</strong> fiscalyear with (2) actual collections for that same period during the previous four fiscal years (including appropriateaccruals).($ in millions)Fiscal Year2005 2006 2007 2008 <strong>2009</strong>Individual Income Tax (a) (c) ....... $2,071.7 $2,274.7 $2,583.2 $2,631.0 $2,536.8Corporate Income Tax (b) (c) ....... 42.2 172.2 198.0 225.7 211.0Sales <strong>and</strong> Use Tax (c) .................... 1,091.2 1,171.3 1,188.5 1,317.8 1,174.2<strong>State</strong> Lottery................................... 167.9 171.3 180.5 162.7 156.6Business Franchise Taxes.............. 104.7 97.4 112.7 106.9 112.5Tobacco Tax (c) ............................. 87.8 89.9 85.4 158.7 133.6Insurance Taxes <strong>and</strong> Fees.............. 116.2 111.3 111.5 122.1 136.8Alcoholic Beverage Taxes ............ 9.5 9.7 9.9 10.0 10.1Death Taxes.................................... 50.0 50.2 50.9 55.2 58.9Clerks <strong>of</strong> Court............................... 13.5 12.2 11.2 6.1 5.8Motor Fuel Taxes........................... 5.5 5.5 5.4 5.4 0.0Hospital Patient Recoveries .......... 13.2 11.3 14.8 15.4 -5.7Interest on Investments.................. 32.2 71.4 100.9 90.4 50.3District Court Fees......................... 23.1 23.2 24.1 21.3 20.8Miscellaneous ................................ 231.9 164.4 166.9 136.7 191.0Total................................................ $4,060.7 $4,436.2 $4,843.8 $5,061.4 $4,792.7_________(a) The <strong>State</strong> has recorded revenues from individual income taxes on a modified accrual basis.(b) Fiscal year 2005, includes $151.0 million from the Delaware holding company settlement <strong>and</strong> fiscal year 2006 includes $20.4 million froma settlement with MCI.(c) These taxes were increased on January 1 or January 3, 2008 by the <strong>General</strong> Assembly through actions taken at the 2007 special session. See“STATE FINANCES – <strong>State</strong> Revenues” for details.*Totals may not add due to rounding.C-5
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Appendix DFORMS OF OPINIONS OF THE ATTORNEY GENERALOF MARYLAND AND BOND COUNSELForm <strong>of</strong> Opinion <strong>of</strong> the Attorney <strong>General</strong>(Date <strong>of</strong> Delivery)Board <strong>of</strong> Public Works<strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>Annapolis, <strong>Maryl<strong>and</strong></strong>Dear Members <strong>of</strong> The Board:This opinion is rendered with respect to the $485,000,000 aggregate principal amount <strong>of</strong> the <strong>State</strong> <strong>of</strong><strong>Maryl<strong>and</strong></strong> <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>, <strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>, Second Series, consisting <strong>of</strong>$235,000,000 <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>, Second Series A (the “Second Series A <strong>Bonds</strong>”), $200,000,000 <strong>General</strong><strong>Obligation</strong> <strong>Bonds</strong>, Second Series B the “Second Series B <strong>Bonds</strong>”, <strong>and</strong> $50,000,000 <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>,Second Series C (Build America <strong>Bonds</strong>) (the “Second Series C <strong>Bonds</strong>,” <strong>and</strong> together with the Second Series A<strong>Bonds</strong> <strong>and</strong> the Second Series B <strong>Bonds</strong>, the “<strong>Bonds</strong>”), consolidating various <strong>State</strong> loans or installments there<strong>of</strong>authorized by their enabling acts <strong>and</strong> amendments thereto, issued pursuant to Sections 8-117 through 8-124,inclusive, <strong>of</strong> the <strong>State</strong> Finance <strong>and</strong> Procurement Article <strong>of</strong> the Annotated Code <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (2006Replacement Volume, as amended), <strong>and</strong> Section 22 <strong>of</strong> Article 31 <strong>of</strong> the Annotated Code <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>(2003 Replacement Volume, as amended) (collectively, the “Acts”). The <strong>Bonds</strong> are being issued in fully registeredform in denominations <strong>of</strong> $5,000 each or any integral multiple there<strong>of</strong>, dated the date <strong>of</strong> their issuance <strong>and</strong> delivery,<strong>and</strong> bear interest <strong>and</strong> mature as set forth in the <strong>Bonds</strong>, subject to redemption prior to maturity in the manner <strong>and</strong>upon the terms <strong>and</strong> conditions set forth in the <strong>Bonds</strong>.This <strong>of</strong>fice has examined such legal opinions <strong>and</strong> the originals or certified copies <strong>of</strong> such resolutions,documents, records <strong>and</strong> other pro<strong>of</strong>s as we deemed pertinent.As to questions <strong>of</strong> fact material to the opinion, without undertaking to verify the same by independentinvestigation, we have relied upon the certified proceedings <strong>of</strong> the Board <strong>of</strong> Public Works <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong><strong>and</strong> certifications by public <strong>of</strong>ficials.We express no opinion as to the accuracy, adequacy or completeness <strong>of</strong> the Official <strong>State</strong>ment relating tothe <strong>Bonds</strong>.No opinion is expressed as to the federal income tax status <strong>of</strong> the <strong>Bonds</strong>.Based on the foregoing, I am <strong>of</strong> the opinion that:(a) The <strong>Bonds</strong> have been duly authorized for issuance by the Board <strong>of</strong> Public Works <strong>of</strong><strong>Maryl<strong>and</strong></strong> for the valid public purposes stated in the Acts.(b) The <strong>Bonds</strong> have been lawfully issued <strong>and</strong> constitute valid <strong>and</strong> binding general obligations<strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> to the payment <strong>of</strong> which, as to both principal <strong>and</strong> interest, the full faith <strong>and</strong> credit<strong>and</strong> taxing power <strong>of</strong> the <strong>State</strong> are unconditionally pledged.(c) By the terms <strong>of</strong> the Acts, the <strong>Bonds</strong>, their transfer, the interest payable thereon, <strong>and</strong> anyincome derived therefrom, including any pr<strong>of</strong>it realized in the sale or exchange there<strong>of</strong>, will be exemptfrom taxation within the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> by the <strong>State</strong> or by any <strong>of</strong> its political subdivisions, municipalD-1
corporations, or public agencies; no opinion is expressed as to estate or inheritance taxes, or any other taxesnot levied or assessed directly on the <strong>Bonds</strong>, their transfer, or the income therefrom.(d) The Bond Purchase Agreement for the Second Series A <strong>Bonds</strong> dated August 5, <strong>2009</strong> (the“Bond Purchase Agreement”), executed by the Board <strong>of</strong> Public Works <strong>and</strong> Citigroup Global Markets Inc.,as representative for <strong>and</strong> on behalf <strong>of</strong> the underwriters named therein (the “Representative”), has been dulyauthorized, executed <strong>and</strong> delivered by the Board <strong>of</strong> Public Works <strong>and</strong>, assuming the due authorization,execution <strong>and</strong> delivery by the Representative, the Bond Purchase Agreement is a legal, valid <strong>and</strong> bindingagreement <strong>of</strong> the <strong>State</strong>, enforceable against it in accordance with the terms there<strong>of</strong>.(e) The Continuing Disclosure Agreement dated August 18, <strong>2009</strong>, executed by the Board <strong>of</strong>Public Works has been duly authorized, executed <strong>and</strong> delivered by the Board <strong>of</strong> Public Works <strong>and</strong> is alegal, valid <strong>and</strong> binding agreement <strong>of</strong> the <strong>State</strong>, enforceable against it in accordance with the terms there<strong>of</strong>.It is to be understood that the rights <strong>of</strong> the owners <strong>of</strong> the <strong>Bonds</strong> <strong>and</strong> the enforceability <strong>of</strong> the <strong>Bonds</strong>, the BondPurchase Agreement <strong>and</strong> the Continuing Disclosure Agreement may be limited by bankruptcy, insolvency,reorganization, moratorium <strong>and</strong> other similar laws affecting creditors’ rights generally <strong>and</strong> by equitable principles,whether considered at law or in equity.Very truly yours,[to be signed “Douglas F. GanslerAttorney <strong>General</strong>”]D-2
Form <strong>of</strong> Opinion <strong>of</strong> Bond Counsel(Date <strong>of</strong> Delivery)Board <strong>of</strong> Public Works<strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>Annapolis, <strong>Maryl<strong>and</strong></strong>Dear Members <strong>of</strong> the Board:This opinion is rendered with respect to the $485,000,000 aggregate principal amount <strong>of</strong> the <strong>State</strong> <strong>of</strong><strong>Maryl<strong>and</strong></strong> <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>, <strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>, Second Series, consisting <strong>of</strong>$235,000,000 <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>, Second Series A (the “Second Series A <strong>Bonds</strong>”), $200,000,000 <strong>General</strong><strong>Obligation</strong> <strong>Bonds</strong>, Second Series B (the “Second Series B <strong>Bonds</strong>”), <strong>and</strong> $50,000,000 <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>,Second Series C (Build America <strong>Bonds</strong>) (the “Second Series C <strong>Bonds</strong>,” <strong>and</strong> together with the Second Series A<strong>Bonds</strong> <strong>and</strong> the Second Series B <strong>Bonds</strong>, the “<strong>Bonds</strong>”), consolidating various <strong>State</strong> loans or installments there<strong>of</strong>authorized by their enabling acts <strong>and</strong> amendments thereto, issued pursuant to Sections 8-117 through 8-124,inclusive, <strong>of</strong> the <strong>State</strong> Finance <strong>and</strong> Procurement Article <strong>of</strong> the Annotated Code <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (2006Replacement Volume, as amended) <strong>and</strong> Section 22 <strong>of</strong> Article 31 <strong>of</strong> the Annotated Code <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (2003Replacement Volume, as amended) (collectively, the “Acts”). The <strong>Bonds</strong> are being issued in fully registered formin denominations <strong>of</strong> $5,000 each or any integral multiple there<strong>of</strong>, dated the date <strong>of</strong> their issuance <strong>and</strong> delivery, <strong>and</strong>bear interest <strong>and</strong> mature as set forth in the <strong>Bonds</strong>, subject to redemption prior to maturity in the manner <strong>and</strong> upon theterms <strong>and</strong> conditions set forth in the <strong>Bonds</strong>.We have examined such law <strong>and</strong> the originals or certified copies <strong>of</strong> such resolutions, documents, records<strong>and</strong> other pro<strong>of</strong>s as we deemed pertinent.As to questions <strong>of</strong> fact material to the opinion, without undertaking to verify the same by independentinvestigation, we have relied upon the certified proceedings <strong>of</strong> the Board <strong>of</strong> Public Works <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong><strong>and</strong> certifications by public <strong>of</strong>ficials.We express no opinion as to the accuracy, adequacy or completeness <strong>of</strong> the Official <strong>State</strong>ment relating tothe <strong>Bonds</strong>.We do not express any opinion herein regarding any law other than the law <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> <strong>and</strong>the federal law <strong>of</strong> the United <strong>State</strong>s <strong>of</strong> America.Based on the foregoing, we are <strong>of</strong> the opinion that, under existing law:(a) The <strong>Bonds</strong> have been duly authorized for issuance by the Board <strong>of</strong> Public Works <strong>of</strong><strong>Maryl<strong>and</strong></strong> for the valid public purposes stated in the Acts.(b) The <strong>Bonds</strong> have been lawfully issued <strong>and</strong> constitute valid <strong>and</strong> binding general obligations<strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> to the payment <strong>of</strong> which, as to both principal <strong>and</strong> interest, the full faith <strong>and</strong> credit<strong>and</strong> taxing power <strong>of</strong> the <strong>State</strong> are unconditionally pledged.(c) By the terms <strong>of</strong> the Acts, the <strong>Bonds</strong>, their transfer, the interest payable thereon, <strong>and</strong> anyincome derived therefrom, including any pr<strong>of</strong>it realized in the sale or exchange there<strong>of</strong>, will be exemptfrom taxation within the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> by the <strong>State</strong> or by any <strong>of</strong> its political subdivisions, municipalcorporations, or public agencies; no opinion is expressed as to estate or inheritance taxes, or any other taxesnot levied or assessed directly on the <strong>Bonds</strong>, their transfer, or the income therefrom.D-3
(d) Under existing laws, regulations, rulings <strong>and</strong> judicial decisions, interest on the SecondSeries A <strong>Bonds</strong> <strong>and</strong> the Second Series B <strong>Bonds</strong> is excludable from gross income for federal income taxpurposes. Interest on the Second Series A <strong>Bonds</strong> <strong>and</strong> the Second Series B <strong>Bonds</strong> is not a specificpreference item <strong>and</strong> is not included in adjusted current earnings for purposes <strong>of</strong> the alternative minimumtax imposed on individuals <strong>and</strong> corporations.(e)purposes.Interest on the Second Series C <strong>Bonds</strong> is included in gross income for federal income tax(f) The Second Series C <strong>Bonds</strong> will be characterized as indebtedness <strong>of</strong> the <strong>State</strong> rather thanas an interest in the <strong>State</strong> or any assets <strong>of</strong> the <strong>State</strong> for federal income tax purposes.The opinion set forth in the first sentence <strong>of</strong> paragraph (d) regarding the exclusion <strong>of</strong> interest from grossincome <strong>of</strong> the recipient is subject to continuing compliance by the <strong>State</strong> with covenants regarding federal tax lawcontained in the authorizing resolution <strong>and</strong> the Tax Certificate <strong>and</strong> Compliance Agreement <strong>of</strong> the <strong>State</strong> executed inconnection with the issuance <strong>of</strong> the Second Series A <strong>Bonds</strong> <strong>and</strong> the Second Series B <strong>Bonds</strong>. Failure to comply withsuch covenants could cause interest on the Second Series A <strong>Bonds</strong> <strong>and</strong> the Second Series B <strong>Bonds</strong> to be included ingross income retroactive to the date <strong>of</strong> issue <strong>of</strong> the Second Series A <strong>Bonds</strong> <strong>and</strong> the Second Series B <strong>Bonds</strong>.Although we are <strong>of</strong> the opinion that interest on the Second Series A <strong>Bonds</strong> <strong>and</strong> the Second Series B <strong>Bonds</strong> isexcluded from gross income for federal tax purposes, the accrual or receipt <strong>of</strong> interest on the Second Series A <strong>Bonds</strong><strong>and</strong> the Second Series B <strong>Bonds</strong> may otherwise affect the federal income tax liability <strong>of</strong> the recipient. The extent <strong>of</strong>these other tax consequences will depend upon the recipient’s particular tax status or other items <strong>of</strong> income ordeduction. We express no opinion regarding any such consequences.In rendering the opinion in paragraph (d) above, we have relied upon representations <strong>and</strong> covenants <strong>of</strong> the<strong>State</strong> in the authorizing resolution <strong>and</strong> the Tax Certificate <strong>and</strong> Compliance Agreement concerning the investment<strong>and</strong> use <strong>of</strong> Bond proceeds <strong>and</strong> the use <strong>of</strong> the projects financed with the proceeds <strong>of</strong> the Second Series A <strong>Bonds</strong> <strong>and</strong>the Second Series B <strong>Bonds</strong>. In addition, we have assumed that all such representations are true <strong>and</strong> correct <strong>and</strong> thatthe <strong>State</strong> will comply with such covenants. We have expressed no opinion with respect to the exclusion <strong>of</strong> intereston the Second Series A <strong>Bonds</strong> <strong>and</strong> the Second Series B <strong>Bonds</strong> (including original issue discount treated as interest,if any) from gross income under Section 103(a) <strong>of</strong> the Code in the event that any <strong>of</strong> such <strong>State</strong> representations areuntrue or the <strong>State</strong> should fail to comply with such covenants, unless such failure to comply is based on our adviceor opinion. Except as stated above, we express no opinion as to any federal tax consequences <strong>of</strong> the ownership <strong>of</strong>,receipt <strong>of</strong> interest on, or disposition <strong>of</strong> the Second Series A <strong>Bonds</strong> <strong>and</strong> the Second Series B <strong>Bonds</strong>.The opinion we have expressed herein as to the treatment <strong>of</strong> the <strong>Bonds</strong> or the interest borne thereon forfederal income tax purposes is based upon statutes, regulations, rulings <strong>and</strong> court decisions in effect on the datehere<strong>of</strong>. We undertake no obligation to update the contents <strong>of</strong> this opinion on any future date. Each purchaser <strong>of</strong> the<strong>Bonds</strong> should consult his or her tax advisor regarding any changes in the status <strong>of</strong> any pending or proposedlegislation.It is to be understood that the rights <strong>of</strong> the owners <strong>of</strong> the <strong>Bonds</strong> <strong>and</strong> the enforceability <strong>of</strong> the <strong>Bonds</strong> may belimited by bankruptcy, insolvency, reorganization, moratorium <strong>and</strong> other similar laws affecting creditors’ rightsgenerally <strong>and</strong> by equitable principles, whether considered at law or in equity.D-4
To ensure compliance with Treasury Circular 230, taxpayers are hereby notified that: (a) any discussion <strong>of</strong>U.S. federal tax issues in this opinion is not intended or written by us to be relied upon, <strong>and</strong> cannot be relied upon,by taxpayers for the purpose <strong>of</strong> avoiding penalties that may be imposed on taxpayers under the Code; (b) suchdiscussion is written in connection with the promotion or marketing <strong>of</strong> the transactions or matters addressed herein;<strong>and</strong> (c) taxpayers should seek advice based on their particular circumstances from an independent tax advisor.Very truly yours,[to be signed “Kutak Rock LLP”]D-5
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REVISED OFFICIAL NOTICE OF SALEAppendix E$200,000,000*STATE OF MARYLAND<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong><strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>Second Series BNOTICE IS HEREBY GIVEN that electronic bids only for the purchase <strong>of</strong> all, but not less than all, <strong>of</strong> the issue<strong>of</strong> $200,000,000* <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (the “<strong>State</strong>”) to be designated <strong>State</strong> <strong>and</strong> <strong>Local</strong>Facilities Loan <strong>of</strong> <strong>2009</strong>, Second Series B (the “Second Series B <strong>Bonds</strong>”) will be received, as provided herein. Pursuant toresolutions <strong>of</strong> the Board <strong>of</strong> Public Works <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (the “Board”) providing for the issuance <strong>of</strong> the Second Series B<strong>Bonds</strong>, bids will be received by the Board on the date <strong>and</strong> at the time shown below:Description <strong>of</strong> <strong>Bonds</strong>Date <strong>and</strong> Time: Wednesday, August 5, <strong>2009</strong>11:00 a.m., <strong>Local</strong> Annapolis, <strong>Maryl<strong>and</strong></strong> Time<strong>General</strong>. The Second Series B <strong>Bonds</strong> will be dated as <strong>of</strong> the date <strong>of</strong> delivery, expected to be on or about August18, <strong>2009</strong>, <strong>and</strong> will be in fully registered form in the denomination <strong>of</strong> $5,000 each <strong>and</strong> any integral multiple there<strong>of</strong>.Interest on the Second Series B <strong>Bonds</strong> will accrue from the dated date, <strong>and</strong> will be payable February 15, 2010,<strong>and</strong> semiannually thereafter on each August 15 <strong>and</strong> February 15 until maturity or earlier redemption. The Second Series B<strong>Bonds</strong> will mature on August 15 <strong>of</strong> the years <strong>and</strong> in the amounts as follows:Date <strong>of</strong>MaturityPrincipalAmount*Date <strong>of</strong>MaturityPrincipalAmount*2012 $16,290,000 2018 $25,775,0002013 7,845,000 2019 19,730,0002014 11,650,000 2020 21,180,0002015 13,705,000 2021 18,545,0002016 16,100,000 2022 19,880,0002017 15,590,000 2023 13,710,000Term Bond Option. Bidders may designate in their proposal two or more consecutive annual principal maturitiesas a term bond which matures on the maturity date <strong>of</strong> the last annual principal payment <strong>of</strong> the sequence. Any term bond sodesignated shall be subject to m<strong>and</strong>atory sinking fund redemption in each year on the principal payment date <strong>and</strong> in theentire principal amount for each annual principal maturity designated for inclusion in such term bond. There is nolimitation on the number <strong>of</strong> term bonds in the Second Series B <strong>Bonds</strong>.Form <strong>of</strong> <strong>Bonds</strong>. The Second Series B <strong>Bonds</strong> shall be issued only in fully registered form without coupons. Onebond representing each maturity <strong>of</strong> the Second Series B <strong>Bonds</strong> in principal amount equal to the aggregate principalamount <strong>of</strong> such maturity will be issued to <strong>and</strong> registered in the name <strong>of</strong> Cede & Co., as nominee <strong>of</strong> The Depository TrustCompany, New York, New York (“DTC”), as registered owner <strong>of</strong> the Second Series B <strong>Bonds</strong> <strong>and</strong> each such bond shall beimmobilized in the custody <strong>of</strong> DTC. DTC will act as securities depository for the Second Series B <strong>Bonds</strong>. Individualpurchases will be made in book-entry form only, in the principal amount <strong>of</strong> $5,000 or any integral multiple there<strong>of</strong>.Purchasers will not receive physical delivery <strong>of</strong> certificates representing their interest in the bonds purchased. The winningbidder, as a condition to delivery <strong>of</strong> the Second Series B <strong>Bonds</strong>, will be required to deposit the bond certificatesrepresenting each maturity with DTC.So long as the Second Series B <strong>Bonds</strong> are maintained under a book-entry only system, the Bond Registrar <strong>and</strong>Paying Agent for the Second Series B <strong>Bonds</strong> will be the Treasurer or any other Bond Registrar <strong>and</strong> Paying Agentdesignated by the Treasurer. All payments <strong>of</strong> the principal <strong>of</strong> <strong>and</strong> interest on the Second Series B <strong>Bonds</strong> shall be in suchcoin or currency <strong>of</strong> the United <strong>State</strong>s <strong>of</strong> America as at the time <strong>of</strong> payment is legal tender for payment <strong>of</strong> public <strong>and</strong>private debts.___________*Preliminary, subject to adjustment as provided herein.E-1
Optional Redemption. The Second Series B <strong>Bonds</strong> are subject to redemption prior to their respectivematurities as a whole or in part at the option <strong>of</strong> the <strong>State</strong> as set forth in this paragraph on at least 30 days’ notice <strong>and</strong>,if in part, in any order <strong>of</strong> maturity at the option <strong>of</strong> the <strong>State</strong>, at the redemption price <strong>of</strong> par, plus accrued interest, ifany, to the redemption date. The Second Series B <strong>Bonds</strong> that mature on or after August 15, 2020 are subject toredemption on or after August 15, 2019.If less than all <strong>of</strong> the Second Series B <strong>Bonds</strong> <strong>of</strong> any one maturity shall be called for redemption, theparticular Second Series B <strong>Bonds</strong> to be redeemed shall be selected by the Paying Agent in such manner as, in itsdiscretion, it shall determine, except that so long as DTC or its nominee is the sole registered owner <strong>of</strong> the SecondSeries B <strong>Bonds</strong>, the particular Second Series B Bond or portion to be redeemed shall be selected by DTC, in suchmanner as DTC shall determine.Adjustments to Principal Amounts <strong>of</strong> the <strong>Bonds</strong>The preliminary aggregate principal amount <strong>of</strong> the Second Series B <strong>Bonds</strong> <strong>of</strong> $200,000,000* <strong>and</strong> thepreliminary principal amount <strong>of</strong> each annual maturity <strong>of</strong> the Second Series B <strong>Bonds</strong> as set forth in this Notice <strong>of</strong>Sale (the “Preliminary Aggregate Principal Amount” <strong>and</strong> the “Preliminary Principal Amount” <strong>of</strong> each annualmaturity, respectively; collectively, the “Preliminary Amounts”) may be revised before the receipt <strong>of</strong> electronic bidsfor their purchase. The Preliminary Amounts represent a minimum amount <strong>of</strong> Second Series B <strong>Bonds</strong>, whichSHALL NOT BE DECREASED. If any <strong>of</strong> the $235,000,000* <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>, <strong>State</strong><strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>, Second Series A (as further described in the Preliminary Official <strong>State</strong>ment, the“Second Series A <strong>Bonds</strong>”) remain unsold following a retail sale <strong>of</strong> such Second Series A <strong>Bonds</strong> on July 31, August3 <strong>and</strong> August 4, <strong>2009</strong>, the Preliminary Amounts <strong>of</strong> the Second Series B <strong>Bonds</strong> may be increased by up to the amount<strong>of</strong> the unsold Second Series A <strong>Bonds</strong>. ANY REVISIONS TO THE PRELIMINARY AMOUNTS OF THESECOND SERIES B BONDS made prior to the receipt <strong>of</strong> electronic bids (the “Revised Aggregate PrincipalAmount” <strong>and</strong> the “Revised Principal Amount” <strong>of</strong> each annual maturity, respectively; collectively, the “RevisedAmounts”) WILL BE PUBLISHED ON THOMSON MUNICIPAL MONITOR (“TM3”) (www.tm3.com) NOTLATER THAN 3:00 P.M. (LOCAL ANNAPOLIS, MARYLAND TIME) ON THE LAST BUSINESS DAYPRIOR TO THE DATE OF THE SALE. In the event that no such revisions are made, the Preliminary Amountswill constitute the Revised Amounts. Bidders shall submit bids on the Revised Amounts <strong>and</strong> the Revised Amountswill be used to compare bids <strong>and</strong> select a winning bidder.Interest Rates <strong>and</strong> Basis <strong>of</strong> AwardAll bids shall be for cash on delivery <strong>and</strong> shall be based on an <strong>of</strong>fering to pay not less than 99% <strong>of</strong> the parvalue <strong>of</strong> the Second Series B <strong>Bonds</strong>. Each bidder shall indicate in its bid the rate <strong>of</strong> interest to be paid on the SecondSeries B <strong>Bonds</strong> <strong>of</strong> each maturity. Each rate <strong>of</strong> interest shall be a multiple <strong>of</strong> 1/20 or 1/8 <strong>of</strong> one percent, but allSecond Series B <strong>Bonds</strong> <strong>of</strong> any one maturity <strong>of</strong> the Second Series B <strong>Bonds</strong> must bear interest at the same rate. Anyrate named may be repeated. The difference between the maximum <strong>and</strong> minimum interest rates may not be greaterthan 4%. A zero rate may not be named.Upon review <strong>of</strong> the bids, the Second Series B <strong>Bonds</strong> may be awarded by the Board to the responsiblebidder whose bid results in the lowest true interest cost to the <strong>State</strong>. The lowest true interest cost will be determinedby doubling the semiannual interest rate, compounded semiannually, necessary to discount the debt servicepayments from the payment dates to the date <strong>of</strong> the Second Series B <strong>Bonds</strong> <strong>and</strong> to the amount bid for the SecondSeries B <strong>Bonds</strong> not including interest accrued to the date <strong>of</strong> delivery. If two or more responsible bidders have madebids resulting in the same lowest true interest cost to the <strong>State</strong>, the Second Series B <strong>Bonds</strong> shall be awarded by lot toone <strong>of</strong> these bidders.The Board reserves the right, in its discretion, to reject any or all bids <strong>and</strong> to waive any irregularities in any<strong>of</strong> the bids. The judgment <strong>of</strong> the Board shall be final <strong>and</strong> binding upon all bidders with respect to the form <strong>and</strong>adequacy <strong>of</strong> any proposal received <strong>and</strong> as to its conformity to the terms <strong>of</strong> this Official Notice <strong>of</strong> Sale.___________*Preliminary, subject to adjustment as provided herein.E-2
Procedures for Electronic BiddingBidders may only submit bids via PARITYA prospective bidder may only bid electronically for the Second Series B <strong>Bonds</strong> via PARITY pursuant to thisOfficial Notice <strong>of</strong> Sale. By submitting its bid for the Second Series B <strong>Bonds</strong>, a prospective bidder represents <strong>and</strong> warrantsto the <strong>State</strong> that such bidder’s bid for the purchase <strong>of</strong> the Second Series B <strong>Bonds</strong> is submitted for <strong>and</strong> on behalf <strong>of</strong> suchprospective bidder by an <strong>of</strong>ficer or agent who is duly authorized to bind the prospective bidder to a legal, valid <strong>and</strong>enforceable contract for the purchase <strong>of</strong> the Second Series B <strong>Bonds</strong>.Additional information concerning bidding through the system may be directed to the PARITY Help Desk (212)849-5021.Disclaimer. Each prospective electronic bidder shall be solely responsible to register to bid via PARITY asdescribed above. Each qualified prospective electronic bidder shall be solely responsible to make necessary arrangementsto access PARITY for the purpose <strong>of</strong> submitting its bid in a timely manner <strong>and</strong> in compliance with the requirements <strong>of</strong> theOfficial Notice <strong>of</strong> Sale. Neither the <strong>State</strong> nor PARITY shall have any duty or obligation to undertake such registration tobid for any prospective bidder or to provide or assure such access to any qualified prospective bidder, <strong>and</strong> neither the <strong>State</strong>nor PARITY shall be responsible for a bidder’s failure to register to bid or for proper operation <strong>of</strong>, or have any liability forany delays or interruptions <strong>of</strong>, or any damages caused by PARITY. The <strong>State</strong> is using PARITY as a communicationmechanism, <strong>and</strong> not as the <strong>State</strong>’s agent, to conduct the electronic bidding for the Second Series B <strong>Bonds</strong>. The <strong>State</strong> is notbound by any advice <strong>and</strong> determination <strong>of</strong> PARITY to the effect that any particular bid complies with the terms <strong>of</strong> thisOfficial Notice <strong>of</strong> Sale <strong>and</strong> in particular the “Bid Submissions” hereinafter set forth. All costs <strong>and</strong> expenses incurred byprospective bidders in connection with their registration <strong>and</strong> submission <strong>of</strong> bids via PARITY are the sole responsibility <strong>of</strong>the bidders; <strong>and</strong> the <strong>State</strong> is not responsible, directly or indirectly, for any <strong>of</strong> such costs or expenses. If a prospectivebidder encounters any difficulty in registering to bid or submitting, modifying or withdrawing a bid for the Second SeriesB <strong>Bonds</strong>, such bidder should telephone PARITY New Issues Desk at (212) 849-5021 <strong>and</strong> notify the <strong>State</strong>’s Treasurer’sOffice by facsimile at (410) 260-6057.Electronic Bidding Procedures. Electronic bids must be submitted for the purchase <strong>of</strong> the Second Series B <strong>Bonds</strong>(all or none) via PARITY. Bids will be communicated electronically to the <strong>State</strong> at 11:00 a.m. local Annapolis, <strong>Maryl<strong>and</strong></strong>time, on Wednesday, August 5, <strong>2009</strong>. Prior to that time, an eligible prospective bidder may (1) input the proposed terms <strong>of</strong>its bid via PARITY (2) modify the proposed terms <strong>of</strong> its bid, in which event the proposed terms as last modified will(unless the bid is withdrawn as described herein) constitute its bid for the Second Series B <strong>Bonds</strong> or (3) withdraw itsproposed bid. Once the bids are communicated electronically via PARITY to the <strong>State</strong> each bid will constitute anirrevocable <strong>of</strong>fer to purchase the Second Series B <strong>Bonds</strong> on the terms therein provided. For purposes <strong>of</strong> the electronicbidding process, the time as maintained on PARITY shall constitute the <strong>of</strong>ficial time. For information purposes only,bidders are requested to state in their bids the true interest cost to the <strong>State</strong>, as described under “Interest Rates <strong>and</strong> Basis <strong>of</strong>Award” above, represented by the rate or rates <strong>of</strong> interest <strong>and</strong> the bid price specified in their respective bids.Bid SubmissionsEach bid must be in conformity with this Official Notice <strong>of</strong> Sale.All bids must be delivered to the Treasurer VIA PARITY IN ANNAPOLIS, MARYLAND, before 11:00 a.m.,local time, on August 5, <strong>2009</strong>, at which time they will be received by the Treasurer. As described below, the Boardreserves the right to postpone the date for receipt <strong>of</strong> bids.Minority Business Enterprise ParticipationTHE STATE STRONGLY ENCOURAGES EACH BIDDER FOR THE SECOND SERIES B BONDS TOMAKE A GOOD FAITH EFFORT TO INCLUDE MINORITY BUSINESS ENTERPRISES IN THESYNDICATE PURCHASING THE SECOND SERIES B BONDS. THE SUCCESSFUL BIDDER WILL BEREQUESTED TO PROVIDE A LIST OF SYNDICATE MEMBERS WHICH IDENTIFIES THE MINORITYBUSINESS ENTERPRISE MEMBERS AND INDICATES THEIR PERCENTAGE OF PARTICIPATION.Preliminary AwardAs promptly as reasonably practicable after the bids are received <strong>and</strong> reviewed, but not later than 12:00 noon(local Annapolis, <strong>Maryl<strong>and</strong></strong> time) on the Bid date (unless bids have been postponed), the Treasurer will notify theE-3
apparently successful bidder <strong>of</strong> the Preliminary Award <strong>of</strong> the Second Series B <strong>Bonds</strong>. Upon notification <strong>of</strong> the PreliminaryAward, the apparent successful bidder will be required to wire to the <strong>State</strong> a Good Faith Deposit as further describedherein. Timely notification <strong>of</strong> the Final Award is subject to the <strong>State</strong>’s receipt <strong>of</strong> the Good Faith Deposit.Good Faith DepositThe apparently successful bidder shall wire transfer to the <strong>State</strong> $2,000,000 in immediately available funds nolater than 1:00 p.m. (local Annapolis, <strong>Maryl<strong>and</strong></strong> time) on the Bid Date. In the event that the <strong>State</strong> has not received suchfederal funds wire transfer by the time stated, the <strong>State</strong>, in its sole discretion, may revoke its acceptance <strong>of</strong> the bid. Nointerest on the Good Faith Deposit will accrue to the successful bidder. The Good Faith Deposit will be applied to thepurchase price <strong>of</strong> the Second Series B <strong>Bonds</strong>.IF THE SUCCESSFUL BIDDER FAILS TO COMPLY WITH THE TERMS OF ITS BID, THE GOOD FAITHDEPOSIT MAY BE RETAINED BY THE STATE AS AND FOR FULL LIQUIDATED DAMAGES.Final AwardAs promptly as reasonably practicable after receipt <strong>of</strong> the Good Faith Deposit, the Treasurer will notify thesuccessful bidder <strong>of</strong> the Final Award <strong>of</strong> the Second Series B <strong>Bonds</strong>, <strong>and</strong> such bidder, upon such notice, shall advise theTreasurer <strong>of</strong> the initial re<strong>of</strong>fering price to the public, expressed as a percentage <strong>of</strong> par, <strong>of</strong> each maturity <strong>of</strong> the SecondSeries B <strong>Bonds</strong> (the “Re<strong>of</strong>fering Prices”).Simultaneously with or before delivery <strong>of</strong> the Second Series B <strong>Bonds</strong>, the successful bidder shall furnish to the<strong>State</strong> a certificate acceptable to Bond Counsel stating: (1) the Re<strong>of</strong>fering Prices; (2) that the successful bidder has made abona fide public <strong>of</strong>fering <strong>of</strong> the Second Series B <strong>Bonds</strong> at the Re<strong>of</strong>fering Prices; <strong>and</strong> (3) that a substantial amount <strong>of</strong> theSecond Series B <strong>Bonds</strong> was sold to the public (excluding bond houses, brokers, <strong>and</strong> other intermediaries) at suchRe<strong>of</strong>fering Prices. Bond Counsel advises that: (1) such certificate must be made on the best knowledge, information, <strong>and</strong>belief <strong>of</strong> the successful bidder; (2) the sale to the public <strong>of</strong> 10% or more in par amount <strong>of</strong> the Second Series B <strong>Bonds</strong> <strong>of</strong>each maturity at the Re<strong>of</strong>fering Prices would be sufficient to certify as to the sale <strong>of</strong> a substantial amount <strong>of</strong> the SecondSeries B <strong>Bonds</strong>; <strong>and</strong> (3) reliance on other facts as a basis for such certification would require evaluation by Bond Counselto assure compliance with the statutory requirement to avoid the establishment <strong>of</strong> an artificial price for the Second SeriesB <strong>Bonds</strong>.Delivery <strong>of</strong> the Second Series B <strong>Bonds</strong>When delivered, one bond representing each maturity <strong>of</strong> the Second Series B <strong>Bonds</strong> shall be duly executed <strong>and</strong>authenticated <strong>and</strong> registered in the name <strong>of</strong> Cede & Co., as nominee <strong>of</strong> DTC, as registered owner <strong>of</strong> the Second Series B<strong>Bonds</strong>. It is anticipated that CUSIP identification numbers will be printed on the Second Series B <strong>Bonds</strong>. However,neither the failure to print such numbers on any bond nor any error with respect thereto shall constitute a cause for a failureor refusal by the successful bidder to accept delivery <strong>of</strong> <strong>and</strong> pay for the Second Series B <strong>Bonds</strong> in accordance with thisOfficial Notice <strong>of</strong> Sale. Delivery <strong>of</strong> the Second Series B <strong>Bonds</strong>, without expense, will be made by the <strong>State</strong> to DTC onAugust 18, <strong>2009</strong>, or on a later date determined by the Treasurer as soon thereafter as may be practicable, <strong>and</strong>, thereupon,the purchaser or purchasers there<strong>of</strong> will be required to accept delivery <strong>of</strong> the Second Series B <strong>Bonds</strong> purchased <strong>and</strong> pay, infederal funds, the amount <strong>of</strong> the successful bid, less the good faith deposit. The opinions, certificates, <strong>and</strong> other closingdocuments referred to below will be delivered to the successful bidder on the date <strong>of</strong> delivery <strong>of</strong> the Second Series B<strong>Bonds</strong> at the <strong>of</strong>fice <strong>of</strong> the Treasurer in Annapolis, <strong>Maryl<strong>and</strong></strong>, or at such other location as the Treasurer may determine.(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)E-4
Legal Opinion; Certificate Concerning Official <strong>State</strong>ment; No Litigation CertificateIt shall be a condition to the obligation <strong>of</strong> the successful bidder to accept delivery <strong>of</strong> <strong>and</strong> pay for the SecondSeries B <strong>Bonds</strong> that, simultaneously with or before delivery <strong>and</strong> payment for the Second Series B <strong>Bonds</strong>, the bidderwithout cost shall be furnished with (a) the approving opinions <strong>of</strong> the Attorney <strong>General</strong> <strong>and</strong> <strong>of</strong> Kutak Rock LLP, BondCounsel, dated as <strong>of</strong> the date <strong>of</strong> delivery <strong>of</strong> the Second Series B <strong>Bonds</strong>, substantially in the respective forms included asAppendix D to the Preliminary Official <strong>State</strong>ment referred to below; (b) a certificate <strong>of</strong> the Attorney <strong>General</strong> dated as <strong>of</strong>the date <strong>of</strong> delivery <strong>of</strong> the Second Series B <strong>Bonds</strong> to the effect that there is no litigation pending or, to the best <strong>of</strong> hisknowledge, threatened, that in any manner will affect the validity <strong>of</strong> the Acts under which the Second Series B <strong>Bonds</strong> willbe issued or the Second Series B <strong>Bonds</strong>; (c) a signed copy <strong>of</strong> the Official <strong>State</strong>ment relating to the Second Series B <strong>Bonds</strong>dated as <strong>of</strong> the date <strong>of</strong> the sale <strong>of</strong> the Second Series B <strong>Bonds</strong>; (d) a certificate or certificates <strong>of</strong> the members <strong>of</strong> the Boardto the effect that, to the best <strong>of</strong> their knowledge <strong>and</strong> belief (except for the Re<strong>of</strong>fering Information [defined below]provided by the bidder <strong>and</strong> information regarding DTC <strong>and</strong> DTC’s book-entry system provided by DTC, as to which noview will be expressed): (1) the Official <strong>State</strong>ment as <strong>of</strong> the date <strong>of</strong> sale did not contain any untrue statement <strong>of</strong> a materialfact or omit to state a material fact necessary to make the statements therein, in the light <strong>of</strong> the circumstances under whichthey were made, not misleading, <strong>and</strong> (2) between the date <strong>of</strong> sale <strong>and</strong> the date <strong>of</strong> delivery <strong>of</strong> the Second Series B <strong>Bonds</strong>,there has been no material adverse change in the financial condition or financial affairs <strong>of</strong> the <strong>State</strong> except as may havebeen disclosed in or contemplated by the Official <strong>State</strong>ment as <strong>of</strong> the date <strong>of</strong> sale <strong>and</strong> (e) the Continuing DisclosureAgreement substantially in the form included as Appendix F to the Preliminary Official <strong>State</strong>ment referred to below.The opinions <strong>of</strong> the Attorney <strong>General</strong> <strong>and</strong> Bond Counsel will be delivered, upon request, to the purchaser orpurchasers <strong>of</strong> the Second Series B <strong>Bonds</strong>, without charge. A bidder may make the legality <strong>and</strong> validity <strong>of</strong> the SecondSeries B <strong>Bonds</strong> one <strong>of</strong> the terms <strong>of</strong> the bid by making the bid “subject to legality,” or using any equivalent form <strong>of</strong>expression, which shall be deemed to refer to the opinions <strong>of</strong> the Attorney <strong>General</strong> <strong>and</strong> Bond Counsel referred to above,but no bid should purport to leave this question to the decision <strong>of</strong> the bidder or its counsel. All bids conditioned upon theapproval <strong>of</strong> the bidder or its counsel, whether named or unnamed, will be treated as conditional bids <strong>and</strong> will be rejectedunless the condition is waived by the bidder to the satisfaction <strong>of</strong> the Board before the award has been made.Official <strong>State</strong>mentAdditional information concerning the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> <strong>and</strong> the Second Series B <strong>Bonds</strong> is contained in thePreliminary Official <strong>State</strong>ment, dated July 20, <strong>2009</strong> to which prospective bidders are directed. The Preliminary Official<strong>State</strong>ment is provided for informational purposes only <strong>and</strong> is not a part <strong>of</strong> this Official Notice <strong>of</strong> Sale. The PreliminaryOfficial <strong>State</strong>ment is in a form “deemed final” by the <strong>State</strong> as <strong>of</strong> its date for purposes <strong>of</strong> SEC Rule 15c2-12(b)(1), but issubject to revision, amendment, <strong>and</strong> completion in the Official <strong>State</strong>ment. Electronic copies <strong>of</strong> the Preliminary Official<strong>State</strong>ment are available on the Internet at www.treasurer.state.md.us.In order to assist bidders in complying with SEC Rule 15c2-12(b)(5), the Board <strong>of</strong> Public Works will execute<strong>and</strong> deliver a continuing disclosure agreement on or before the date <strong>of</strong> issuance <strong>of</strong> the bonds pursuant to which it willundertake to provide certain information annually <strong>and</strong> notices <strong>of</strong> certain events. A proposed form <strong>of</strong> this agreement is setforth in the Preliminary Official <strong>State</strong>ment <strong>and</strong> will also be set forth in the Official <strong>State</strong>ment.As soon as practicable after the award <strong>of</strong> the Second Series B <strong>Bonds</strong> to the successful bidder on the date <strong>of</strong> sale,the <strong>State</strong> will authorize an Official <strong>State</strong>ment, which presently is expected to be substantially in the form <strong>of</strong> thePreliminary Official <strong>State</strong>ment. The <strong>State</strong> also will authorize <strong>and</strong> issue any supplement to the Official <strong>State</strong>ment that maybe necessary between the date <strong>of</strong> the authorization <strong>of</strong> the Official <strong>State</strong>ment <strong>and</strong> the date <strong>of</strong> delivery <strong>of</strong>, <strong>and</strong> payment for,the Second Series B <strong>Bonds</strong>. If so requested by the successful bidder at or before the close <strong>of</strong> business on the date <strong>of</strong> thesale, the <strong>State</strong> will include in the Official <strong>State</strong>ment such pricing <strong>and</strong> other information with respect to the terms <strong>of</strong> there<strong>of</strong>fering <strong>of</strong> the Second Series B <strong>Bonds</strong> by the successful bidder (“Re<strong>of</strong>fering Information”), if any, as may be specified<strong>and</strong> furnished in writing by the successful bidder. If no Re<strong>of</strong>fering Information should be specified <strong>and</strong> furnished by thesuccessful bidder, the Official <strong>State</strong>ment will include the interest rates on the Second Series B <strong>Bonds</strong> resulting from thebid <strong>of</strong> the successful bidder <strong>and</strong> the other statements with respect to re<strong>of</strong>fering contained in the Preliminary Official<strong>State</strong>ment. The successful bidder shall be responsible to the <strong>State</strong> <strong>and</strong> its <strong>of</strong>ficials in all respects for the Re<strong>of</strong>feringInformation in any re<strong>of</strong>fering <strong>of</strong> the Second Series B <strong>Bonds</strong>, including the presentation or exclusion <strong>of</strong> any Re<strong>of</strong>feringInformation in any documents, including the Official <strong>State</strong>ment. The successful bidder also will be furnished without costwithin seven business days following the date <strong>of</strong> sale up to 200 copies <strong>of</strong> the Official <strong>State</strong>ment (<strong>and</strong> any amendments orsupplements).E-5
Right to Change the Official Notice <strong>of</strong> Sale <strong>and</strong> to Postpone OfferingThe Board also reserves the right to make changes to the Official Notice <strong>of</strong> Sale <strong>and</strong> postpone, from time to time,the date established for the receipt <strong>of</strong> bids. In the event <strong>of</strong> a change or postponement, the change or new date <strong>and</strong> time <strong>of</strong>sale will be announced via TM3. Any new date <strong>and</strong> time <strong>of</strong> sale will be announced at least 24 hours prior to the timeproposals are to be submitted. On any such alternative sale date, bidders may submit bids for the purchase <strong>of</strong> the SecondSeries B <strong>Bonds</strong> in conformity with the provisions <strong>of</strong> this Official Notice <strong>of</strong> Sale, except for any changes to this OfficialNotice <strong>of</strong> Sale, the change <strong>of</strong> the date <strong>of</strong> sale <strong>and</strong> the changes described in the next sentence. If the date fixed for receipt <strong>of</strong>bids is postponed, the expected date <strong>of</strong> delivery <strong>of</strong> the Second Series B <strong>Bonds</strong> also may be postponed, the dates <strong>of</strong> thesemiannual interest payments <strong>and</strong> annual principal payments <strong>and</strong> the optional redemption dates also may be changed. Suchchanges, if any, will be announced via TM3 at the time any alternative sale date is announced.MARTIN O’MALLEYGovernorPETER FRANCHOTComptrollerNANCY K. KOPPTreasurerAnnapolis, <strong>Maryl<strong>and</strong></strong>July 20, <strong>2009</strong>Constituting the Board <strong>of</strong> Public Works <strong>of</strong> the<strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>E-6
REVISED OFFICIAL NOTICE OF SALEAppendix E$50,000,000STATE OF MARYLAND<strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong><strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>Second Series CFederally Taxable Build America <strong>Bonds</strong> (Direct Payment to the <strong>State</strong>)orTax-Exempt <strong>Bonds</strong>NOTICE IS HEREBY GIVEN that electronic bids only for the purchase <strong>of</strong> all, but not less than all, <strong>of</strong> theissue <strong>of</strong> $50,000,000 <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong> <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (the “<strong>State</strong>”) to be designated <strong>State</strong> <strong>and</strong><strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>, Second Series C (the “Second Series C <strong>Bonds</strong>”) will be received, as provided herein.Pursuant to resolutions <strong>of</strong> the Board <strong>of</strong> Public Works <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (the “Board”) providing for the issuance <strong>of</strong> theSecond Series C <strong>Bonds</strong>, bids will be received by the Board on the date <strong>and</strong> at the time shown below:Description <strong>of</strong> <strong>Bonds</strong>Date <strong>and</strong> Time: Wednesday, August 5, <strong>2009</strong>11:20 a.m., <strong>Local</strong> Annapolis, <strong>Maryl<strong>and</strong></strong> TimeType <strong>of</strong> Bond. Bidders are invited to bid on the Second Series C <strong>Bonds</strong> as:Alternative (1) - Federally Taxable Build America <strong>Bonds</strong> (Direct Payment to the <strong>State</strong>), orAlternative (2) – Tax-Exempt <strong>Bonds</strong>, orboth Alternative (1) <strong>and</strong> Alternative (2).The Board will award the entire amount <strong>of</strong> the Second Series C <strong>Bonds</strong> to the bidder whose bid results in the lowestTrue Interest Cost to the <strong>State</strong>, as provided herein.Alternative (1) - Federally Taxable Build America <strong>Bonds</strong>. Interest on taxable bonds is included in grossincome for federal income tax purposes. If the Second Series C <strong>Bonds</strong> are issued as qualified Build America <strong>Bonds</strong>,the <strong>State</strong> will elect to receive from the United <strong>State</strong>s Treasury on each interest payment date a direct payment in theamount <strong>of</strong> 35% <strong>of</strong> the interest payable by the <strong>State</strong>. No registered owner <strong>of</strong> such Second Series C <strong>Bonds</strong> will beentitled to a tax credit or to a payment from the United <strong>State</strong>s Treasury.Alternative (2) - Tax-Exempt <strong>Bonds</strong>. Interest on tax-exempt bonds is excluded from gross income forfederal income tax purposes <strong>and</strong> is not an item <strong>of</strong> tax preference <strong>and</strong> is not included in adjusted current earnings <strong>of</strong>corporations for federal alternative minimum tax purposes. If the Second Series C <strong>Bonds</strong> are issued as Tax-Exempt<strong>Bonds</strong>, they will be treated as traditional tax-exempt bonds <strong>of</strong> the <strong>State</strong>.<strong>General</strong>. Interest on the Second Series C <strong>Bonds</strong> will accrue from the dated date, <strong>and</strong> will be payableFebruary 15, 2010, <strong>and</strong> semiannually thereafter on each August 15 <strong>and</strong> February 15 until maturity or earlierredemption. The Second Series C <strong>Bonds</strong> will be dated as <strong>of</strong> the date <strong>of</strong> delivery, expected to be on or about August18, <strong>2009</strong>, <strong>and</strong> will be in fully registered form in the denomination <strong>of</strong> $5,000 each <strong>and</strong> any integral multiple there<strong>of</strong>.The Second Series C <strong>Bonds</strong> will mature on August 15 <strong>of</strong> the year <strong>and</strong> in the amounts as follows:Date <strong>of</strong>MaturityPrincipalAmountAlternative (1): 2024 $50,000,000 Federally Taxable Build America <strong>Bonds</strong>ORAlternative (2): 2024 $50,000,000 Tax-Exempt <strong>Bonds</strong>E-7
Form <strong>of</strong> <strong>Bonds</strong>. The Second Series C <strong>Bonds</strong> shall be issued only in fully registered form without coupons.One bond representing the entire principal amount <strong>of</strong> the Second Series C <strong>Bonds</strong> will be issued to <strong>and</strong> registered inthe name <strong>of</strong> Cede & Co., as nominee <strong>of</strong> The Depository Trust Company, New York, New York (“DTC”), asregistered owner <strong>of</strong> the Second Series C <strong>Bonds</strong> <strong>and</strong> such bond shall be immobilized in the custody <strong>of</strong> DTC. DTCwill act as securities depository for the Second Series C <strong>Bonds</strong>. Individual purchases will be made in book-entryform only, in the principal amount <strong>of</strong> $5,000 or any integral multiple there<strong>of</strong>. Purchasers will not receive physicaldelivery <strong>of</strong> certificates representing their interest in the bonds purchased. The winning bidder, as a condition todelivery <strong>of</strong> the Second Series C <strong>Bonds</strong>, will be required to deposit a bond certificate with DTC.So long as the Second Series C <strong>Bonds</strong> are maintained under a book-entry only system, the Bond Registrar<strong>and</strong> Paying Agent for the Second Series C <strong>Bonds</strong> will be the Treasurer or any other Bond Registrar <strong>and</strong> PayingAgent designated by the Treasurer. All payments <strong>of</strong> the principal <strong>of</strong> <strong>and</strong> interest on the Second Series C <strong>Bonds</strong> shallbe in such coin or currency <strong>of</strong> the United <strong>State</strong>s <strong>of</strong> America as at the time <strong>of</strong> payment is legal tender for payment <strong>of</strong>public <strong>and</strong> private debts.Optional Redemption. The Second Series C <strong>Bonds</strong> are subject to redemption prior to their maturity as awhole or in part at the option <strong>of</strong> the <strong>State</strong> as set forth in this paragraph on at least 30 days’ notice at the redemptionprice <strong>of</strong> par, plus accrued interest, if any, to the redemption date. The Second Series C <strong>Bonds</strong> are subject toredemption on or after August 15, 2019.If less than all <strong>of</strong> the Second Series C <strong>Bonds</strong> shall be called for redemption, the particular Second Series C<strong>Bonds</strong> to be redeemed shall be selected by the Paying Agent in such manner as, in its discretion, it shall determine,except that so long as DTC or its nominee is the sole registered owner <strong>of</strong> the Second Series C <strong>Bonds</strong>, the particularportion to be redeemed shall be selected by DTC, in such manner as DTC shall determine.Interest Rates <strong>and</strong> Basis <strong>of</strong> AwardAll bids shall be for cash on delivery <strong>and</strong> shall be based on an <strong>of</strong>fering to pay not less than 99% <strong>of</strong> the parvalue <strong>of</strong> the Second Series C <strong>Bonds</strong>. Each bidder shall indicate in its bid the rate <strong>of</strong> interest to be paid on the SecondSeries C <strong>Bonds</strong>. Each rate <strong>of</strong> interest shall be a multiple <strong>of</strong> 1/20 or 1/8 <strong>of</strong> one percent, but all Second Series C <strong>Bonds</strong>must bear interest at the same rate. A zero rate may not be named.Each bid for the Second Series C <strong>Bonds</strong> which are Federally Taxable Build America <strong>Bonds</strong> must specifythe expected re<strong>of</strong>fering price for such Second Series C <strong>Bonds</strong>, <strong>and</strong> such re<strong>of</strong>fering price cannot exceed the paramount <strong>of</strong> the maturity by more than .25% multiplied by the number <strong>of</strong> complete years to the earlier <strong>of</strong> the maturitydate or the first optional redemption date for the maturity <strong>of</strong> such Second Series C <strong>Bonds</strong>Upon review <strong>of</strong> the bids, the Second Series C <strong>Bonds</strong> may be awarded by the Board to the responsiblebidder whose bid results in the lowest true interest cost to the <strong>State</strong>. The lowest true interest cost will be determinedon the basis <strong>of</strong> present value by doubling the semiannual interest rate, compounded semiannually, necessary todiscount the debt service payments from the payment dates to the date <strong>of</strong> the Second Series C <strong>Bonds</strong> <strong>and</strong> to theamount bid for the Second Series C <strong>Bonds</strong> not including interest accrued to the date <strong>of</strong> delivery. For bids submittedas Alternative (1) - Federally Taxable Build America <strong>Bonds</strong>, the true interest cost to the <strong>State</strong> will be determinedafter subtracting 35% <strong>of</strong> each interest payment, reflecting the direct payment the <strong>State</strong> will elect to receive from theUnited <strong>State</strong>s Treasury if the Second Series C <strong>Bonds</strong> are issued as qualified Build America <strong>Bonds</strong>.If two or more responsible bidders have made bids resulting in the same lowest true interest cost to the<strong>State</strong>, the Second Series C <strong>Bonds</strong> shall be awarded by lot to one <strong>of</strong> these bidders.The Board reserves the right, in its discretion, to reject any or all bids <strong>and</strong> to waive any irregularities in any<strong>of</strong> the bids. The judgment <strong>of</strong> the Board shall be final <strong>and</strong> binding upon all bidders with respect to the form <strong>and</strong>adequacy <strong>of</strong> any proposal received <strong>and</strong> as to its conformity to the terms <strong>of</strong> this Official Notice <strong>of</strong> Sale.(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)E-8
Procedures for Electronic BiddingBidders may only submit bids via PARITYA prospective bidder may only bid electronically for the Second Series C <strong>Bonds</strong> via PARITY pursuant tothis Official Notice <strong>of</strong> Sale. By submitting its bid for the Second Series C <strong>Bonds</strong>, a prospective bidder represents <strong>and</strong>warrants to the <strong>State</strong> that such bidder’s bid for the purchase <strong>of</strong> the Second Series C <strong>Bonds</strong> is submitted for <strong>and</strong> onbehalf <strong>of</strong> such prospective bidder by an <strong>of</strong>ficer or agent who is duly authorized to bind the prospective bidder to alegal, valid <strong>and</strong> enforceable contract for the purchase <strong>of</strong> the Second Series C <strong>Bonds</strong>.Additional information concerning bidding through the system may be directed to the PARITY Help Desk(212) 849-5021.Disclaimer. Each prospective electronic bidder shall be solely responsible to register to bid via PARITY asdescribed above. Each qualified prospective electronic bidder shall be solely responsible to make necessaryarrangements to access PARITY for the purpose <strong>of</strong> submitting its bid in a timely manner <strong>and</strong> in compliance with therequirements <strong>of</strong> the Official Notice <strong>of</strong> Sale. Neither the <strong>State</strong> nor PARITY shall have any duty or obligation toundertake such registration to bid for any prospective bidder or to provide or assure such access to any qualifiedprospective bidder, <strong>and</strong> neither the <strong>State</strong> nor PARITY shall be responsible for a bidder’s failure to register to bid orfor proper operation <strong>of</strong>, or have any liability for any delays or interruptions <strong>of</strong>, or any damages caused by PARITY.The <strong>State</strong> is using PARITY as a communication mechanism, <strong>and</strong> not as the <strong>State</strong>’s agent, to conduct the electronicbidding for the Second Series C <strong>Bonds</strong>. The <strong>State</strong> is not bound by any advice <strong>and</strong> determination <strong>of</strong> PARITY to theeffect that any particular bid complies with the terms <strong>of</strong> this Official Notice <strong>of</strong> Sale <strong>and</strong> in particular the “BidSubmissions” hereinafter set forth. All costs <strong>and</strong> expenses incurred by prospective bidders in connection with theirregistration <strong>and</strong> submission <strong>of</strong> bids via PARITY are the sole responsibility <strong>of</strong> the bidders; <strong>and</strong> the <strong>State</strong> is notresponsible, directly or indirectly, for any <strong>of</strong> such costs or expenses. If a prospective bidder encounters any difficultyin registering to bid or submitting, modifying or withdrawing a bid for the Second Series C <strong>Bonds</strong>, such biddershould telephone PARITY New Issues Desk at (212) 849-5021 <strong>and</strong> notify the <strong>State</strong>’s Treasurer’s Office byfacsimile at (410) 260-6057.Electronic Bidding Procedures. Electronic bids must be submitted for the purchase <strong>of</strong> the Second Series C<strong>Bonds</strong> (all or none) via PARITY. Bids will be communicated electronically to the <strong>State</strong> at 11:20 a.m. localAnnapolis, <strong>Maryl<strong>and</strong></strong> time, on Wednesday, August 5, <strong>2009</strong>. Prior to that time, an eligible prospective bidder may (1)input the proposed terms <strong>of</strong> its bid via PARITY (2) modify the proposed terms <strong>of</strong> its bid, in which event theproposed terms as last modified will (unless the bid is withdrawn as described herein) constitute its bid for theSecond Series C <strong>Bonds</strong> or (3) withdraw its proposed bid. Once the bids are communicated electronically viaPARITY to the <strong>State</strong> each bid will constitute an irrevocable <strong>of</strong>fer to purchase the Second Series C <strong>Bonds</strong> on theterms therein provided. For purposes <strong>of</strong> the electronic bidding process, the time as maintained on PARITY shallconstitute the <strong>of</strong>ficial time. For information purposes only, bidders are requested to state in their bids the trueinterest cost to the <strong>State</strong>, as described under “Interest Rates <strong>and</strong> Basis <strong>of</strong> Award” above, represented by the rate orrates <strong>of</strong> interest <strong>and</strong> the bid price specified in their respective bids.Bid SubmissionsEach bid must be in conformity with this Official Notice <strong>of</strong> Sale.All bids must be delivered to the Treasurer VIA PARITY IN ANNAPOLIS, MARYLAND, before 11:20a.m., local time, on August 5, <strong>2009</strong>, at which time they will be received by the Treasurer. As described below, theBoard reserves the right to postpone the date for receipt <strong>of</strong> bids.Minority Business Enterprise ParticipationTHE STATE STRONGLY ENCOURAGES EACH BIDDER FOR THE SECOND SERIES C BONDS TOMAKE A GOOD FAITH EFFORT TO INCLUDE MINORITY BUSINESS ENTERPRISES IN THESYNDICATE PURCHASING THE SECOND SERIES C BONDS. THE SUCCESSFUL BIDDER WILL BEREQUESTED TO PROVIDE A LIST OF SYNDICATE MEMBERS WHICH IDENTIFIES THE MINORITYBUSINESS ENTERPRISE MEMBERS AND INDICATES THEIR PERCENTAGE OF PARTICIPATION.E-9
Preliminary AwardAs promptly as reasonably practicable after the bids are received <strong>and</strong> reviewed, but not later than 12:00noon (local Annapolis, <strong>Maryl<strong>and</strong></strong> time) on the Bid date (unless bids have been postponed), the Treasurer will notifythe apparently successful bidder <strong>of</strong> the Preliminary Award <strong>of</strong> the Second Series C <strong>Bonds</strong>. Upon notification <strong>of</strong> thePreliminary Award, the apparent successful bidder will be required to wire to the <strong>State</strong> a Good Faith Deposit asfurther described herein. Timely notification <strong>of</strong> the Final Award is subject to the <strong>State</strong>’s receipt <strong>of</strong> the Good FaithDeposit.Good Faith DepositThe apparently successful bidder shall wire transfer to the <strong>State</strong> $500,000 in immediately available fundsno later than 1:00 p.m. (local Annapolis, <strong>Maryl<strong>and</strong></strong> time) on the Bid Date. In the event that the <strong>State</strong> has not receivedsuch federal funds wire transfer by the time stated, the <strong>State</strong>, in its sole discretion, may revoke its acceptance <strong>of</strong> thebid. No interest on the Good Faith Deposit will accrue to the successful bidder. The Good Faith Deposit will beapplied to the purchase price <strong>of</strong> the Second Series C <strong>Bonds</strong>.IF THE SUCCESSFUL BIDDER FAILS TO COMPLY WITH THE TERMS OF ITS BID, THE GOODFAITH DEPOSIT MAY BE RETAINED BY THE STATE AS AND FOR FULL LIQUIDATED DAMAGES.Final AwardAs promptly as reasonably practicable after receipt <strong>of</strong> the Good Faith Deposit, the Treasurer will notify thesuccessful bidder <strong>of</strong> the Final Award <strong>of</strong> the Second Series C <strong>Bonds</strong>, <strong>and</strong> such bidder, upon such notice, shall advisethe Treasurer <strong>of</strong> the initial re<strong>of</strong>fering price to the public, expressed as a percentage <strong>of</strong> par, <strong>of</strong> each maturity <strong>of</strong> theSecond Series C <strong>Bonds</strong> (the “Re<strong>of</strong>fering Prices”).Simultaneously with or before delivery <strong>of</strong> the Second Series C <strong>Bonds</strong>, the successful bidder shall furnish tothe <strong>State</strong> a certificate acceptable to Bond Counsel stating: (1) the Re<strong>of</strong>fering Prices; (2) that the successful bidderhas made a bona fide public <strong>of</strong>fering <strong>of</strong> the Second Series C <strong>Bonds</strong> at the Re<strong>of</strong>fering Prices; <strong>and</strong> (3) that asubstantial amount <strong>of</strong> the Second Series C <strong>Bonds</strong> was sold to the public (excluding bond houses, brokers, <strong>and</strong> otherintermediaries) at such Re<strong>of</strong>fering Prices. Bond Counsel advises that: (1) such certificate must be made on the bestknowledge, information, <strong>and</strong> belief <strong>of</strong> the successful bidder; (2) the sale to the public <strong>of</strong> 10% or more in par amount<strong>of</strong> the Second Series C <strong>Bonds</strong> <strong>of</strong> each maturity at the Re<strong>of</strong>fering Prices would be sufficient to certify as to the sale <strong>of</strong>a substantial amount <strong>of</strong> the Second Series C <strong>Bonds</strong>; <strong>and</strong> (3) reliance on other facts as a basis for such certificationwould require evaluation by Bond Counsel to assure compliance with the statutory requirement to avoid theestablishment <strong>of</strong> an artificial price for the Second Series C <strong>Bonds</strong>.Delivery <strong>of</strong> the Second Series C <strong>Bonds</strong>When delivered, one bond representing the Second Series C <strong>Bonds</strong> shall be duly executed <strong>and</strong>authenticated <strong>and</strong> registered in the name <strong>of</strong> Cede & Co., as nominee <strong>of</strong> DTC, as registered owner <strong>of</strong> the SecondSeries C <strong>Bonds</strong>. It is anticipated that a CUSIP identification number will be printed on the Second Series C <strong>Bonds</strong>.However, neither the failure to print such number on the bond nor any error with respect thereto shall constitute acause for a failure or refusal by the successful bidder to accept delivery <strong>of</strong> <strong>and</strong> pay for the Second Series C <strong>Bonds</strong> inaccordance with this Official Notice <strong>of</strong> Sale. Delivery <strong>of</strong> the Second Series C <strong>Bonds</strong>, without expense, will be madeby the <strong>State</strong> to DTC on August 18, <strong>2009</strong>, or on a later date determined by the Treasurer as soon thereafter as may bepracticable, <strong>and</strong>, thereupon, the purchaser or purchasers there<strong>of</strong> will be required to accept delivery <strong>of</strong> the SecondSeries C <strong>Bonds</strong> purchased <strong>and</strong> pay, in federal funds, the amount <strong>of</strong> the successful bid, less the good faith deposit.The opinions, certificates, <strong>and</strong> other closing documents referred to below will be delivered to the successful bidderon the date <strong>of</strong> delivery <strong>of</strong> the Second Series C <strong>Bonds</strong> at the <strong>of</strong>fice <strong>of</strong> the Treasurer in Annapolis, <strong>Maryl<strong>and</strong></strong>, or atsuch other location as the Treasurer may determine.E-10
Legal Opinion; Certificate Concerning Official <strong>State</strong>ment; No Litigation CertificateIt shall be a condition to the obligation <strong>of</strong> the successful bidder to accept delivery <strong>of</strong> <strong>and</strong> pay for the SecondSeries C <strong>Bonds</strong> that, simultaneously with or before delivery <strong>and</strong> payment for the Second Series C <strong>Bonds</strong>, the bidderwithout cost shall be furnished with (a) the approving opinions <strong>of</strong> the Attorney <strong>General</strong> <strong>and</strong> <strong>of</strong> Kutak Rock LLP,Bond Counsel, dated as <strong>of</strong> the date <strong>of</strong> delivery <strong>of</strong> the Second Series C <strong>Bonds</strong>, substantially in the respective formsincluded as Appendix D to the Preliminary Official <strong>State</strong>ment referred to below; (b) a certificate <strong>of</strong> the Attorney<strong>General</strong> dated as <strong>of</strong> the date <strong>of</strong> delivery <strong>of</strong> the Second Series C <strong>Bonds</strong> to the effect that there is no litigation pendingor, to the best <strong>of</strong> his knowledge, threatened, that in any manner will affect the validity <strong>of</strong> the Acts under which theSecond Series C <strong>Bonds</strong> will be issued or the Second Series C <strong>Bonds</strong>; (c) a signed copy <strong>of</strong> the Official <strong>State</strong>mentrelating to the Second Series C <strong>Bonds</strong> dated as <strong>of</strong> the date <strong>of</strong> the sale <strong>of</strong> the Second Series C <strong>Bonds</strong>; (d) a certificateor certificates <strong>of</strong> the members <strong>of</strong> the Board to the effect that, to the best <strong>of</strong> their knowledge <strong>and</strong> belief (except for theRe<strong>of</strong>fering Information [defined below] provided by the bidder <strong>and</strong> information regarding DTC <strong>and</strong> DTC’s bookentrysystem provided by DTC, as to which no view will be expressed): (1) the Official <strong>State</strong>ment as <strong>of</strong> the date <strong>of</strong>sale did not contain any untrue statement <strong>of</strong> a material fact or omit to state a material fact necessary to make thestatements therein, in the light <strong>of</strong> the circumstances under which they were made, not misleading, <strong>and</strong> (2) betweenthe date <strong>of</strong> sale <strong>and</strong> the date <strong>of</strong> delivery <strong>of</strong> the Second Series C <strong>Bonds</strong>, there has been no material adverse change inthe financial condition or financial affairs <strong>of</strong> the <strong>State</strong> except as may have been disclosed in or contemplated by theOfficial <strong>State</strong>ment as <strong>of</strong> the date <strong>of</strong> sale <strong>and</strong> (e) the Continuing Disclosure Agreement substantially in the formincluded as Appendix F to the Preliminary Official <strong>State</strong>ment referred to below.The opinions <strong>of</strong> the Attorney <strong>General</strong> <strong>and</strong> Bond Counsel will be delivered, upon request, to the purchaseror purchasers <strong>of</strong> the Second Series C <strong>Bonds</strong>, without charge. A bidder may make the legality <strong>and</strong> validity <strong>of</strong> theSecond Series C <strong>Bonds</strong> one <strong>of</strong> the terms <strong>of</strong> the bid by making the bid “subject to legality,” or using any equivalentform <strong>of</strong> expression, which shall be deemed to refer to the opinions <strong>of</strong> the Attorney <strong>General</strong> <strong>and</strong> Bond Counselreferred to above, but no bid should purport to leave this question to the decision <strong>of</strong> the bidder or its counsel. Allbids conditioned upon the approval <strong>of</strong> the bidder or its counsel, whether named or unnamed, will be treated asconditional bids <strong>and</strong> will be rejected unless the condition is waived by the bidder to the satisfaction <strong>of</strong> the Boardbefore the award has been made.Official <strong>State</strong>mentAdditional information concerning the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> <strong>and</strong> the Second Series C <strong>Bonds</strong> is contained inthe Preliminary Official <strong>State</strong>ment, dated July 20, <strong>2009</strong> to which prospective bidders are directed. The PreliminaryOfficial <strong>State</strong>ment is provided for informational purposes only <strong>and</strong> is not a part <strong>of</strong> this Official Notice <strong>of</strong> Sale. ThePreliminary Official <strong>State</strong>ment is in a form “deemed final” by the <strong>State</strong> as <strong>of</strong> its date for purposes <strong>of</strong> SEC Rule 15c2-12(b)(1), but is subject to revision, amendment, <strong>and</strong> completion in the Official <strong>State</strong>ment. Electronic copies <strong>of</strong> thePreliminary Official <strong>State</strong>ment are available on the Internet at www.treasurer.state.md.us.In order to assist bidders in complying with SEC Rule 15c2-12(b)(5), the Board <strong>of</strong> Public Works willexecute <strong>and</strong> deliver a continuing disclosure agreement on or before the date <strong>of</strong> issuance <strong>of</strong> the bonds pursuant towhich it will undertake to provide certain information annually <strong>and</strong> notices <strong>of</strong> certain events. A proposed form <strong>of</strong>this agreement is set forth in the Preliminary Official <strong>State</strong>ment <strong>and</strong> will also be set forth in the Official <strong>State</strong>ment.As soon as practicable after the award <strong>of</strong> the Second Series C <strong>Bonds</strong> to the successful bidder on the date <strong>of</strong>sale, the <strong>State</strong> will authorize an Official <strong>State</strong>ment, which presently is expected to be substantially in the form <strong>of</strong> thePreliminary Official <strong>State</strong>ment. The <strong>State</strong> also will authorize <strong>and</strong> issue any supplement to the Official <strong>State</strong>ment thatmay be necessary between the date <strong>of</strong> the authorization <strong>of</strong> the Official <strong>State</strong>ment <strong>and</strong> the date <strong>of</strong> delivery <strong>of</strong>, <strong>and</strong>payment for, the Second Series C <strong>Bonds</strong>. If so requested by the successful bidder at or before the close <strong>of</strong> businesson the date <strong>of</strong> the sale, the <strong>State</strong> will include in the Official <strong>State</strong>ment such pricing <strong>and</strong> other information withrespect to the terms <strong>of</strong> the re<strong>of</strong>fering <strong>of</strong> the Second Series C <strong>Bonds</strong> by the successful bidder (“Re<strong>of</strong>feringInformation”), if any, as may be specified <strong>and</strong> furnished in writing by the successful bidder. If no Re<strong>of</strong>feringInformation should be specified <strong>and</strong> furnished by the successful bidder, the Official <strong>State</strong>ment will include theinterest rates on the Second Series C <strong>Bonds</strong> resulting from the bid <strong>of</strong> the successful bidder <strong>and</strong> the other statementswith respect to re<strong>of</strong>fering contained in the Preliminary Official <strong>State</strong>ment. The successful bidder shall be responsibleto the <strong>State</strong> <strong>and</strong> its <strong>of</strong>ficials in all respects for the Re<strong>of</strong>fering Information in any re<strong>of</strong>fering <strong>of</strong> the Second Series C<strong>Bonds</strong>, including the presentation or exclusion <strong>of</strong> any Re<strong>of</strong>fering Information in any documents, including theE-11
Official <strong>State</strong>ment. The successful bidder also will be furnished without cost within seven business days followingthe date <strong>of</strong> sale up to 100 copies <strong>of</strong> the Official <strong>State</strong>ment (<strong>and</strong> any amendments or supplements).Right to Change the Official Notice <strong>of</strong> Sale <strong>and</strong> to Postpone OfferingThe Board also reserves the right to make changes to the Official Notice <strong>of</strong> Sale <strong>and</strong> postpone, from time totime, the date established for the receipt <strong>of</strong> bids. In the event <strong>of</strong> a change or postponement, the change or new date<strong>and</strong> time <strong>of</strong> sale will be announced via TM3. Any new date <strong>and</strong> time <strong>of</strong> sale will be announced at least 24 hoursprior to the time proposals are to be submitted. On any such alternative sale date, bidders may submit bids for thepurchase <strong>of</strong> the Second Series C <strong>Bonds</strong> in conformity with the provisions <strong>of</strong> this Official Notice <strong>of</strong> Sale, except forany changes to this Official Notice <strong>of</strong> Sale, the change <strong>of</strong> the date <strong>of</strong> sale <strong>and</strong> the changes described in the nextsentence. If the date fixed for receipt <strong>of</strong> bids is postponed, the expected date <strong>of</strong> delivery <strong>of</strong> the Second Series C<strong>Bonds</strong> also may be postponed, the dates <strong>of</strong> the semiannual interest payments <strong>and</strong> annual principal payments <strong>and</strong> theoptional redemption dates also may be changed. Such changes, if any, will be announced via TM3 at the time anyalternative sale date is announced.MARTIN O’MALLEYGovernorPETER FRANCHOTComptrollerNANCY K. KOPPTreasurerAnnapolis, <strong>Maryl<strong>and</strong></strong>July 20, <strong>2009</strong>Constituting the Board <strong>of</strong> Public Works <strong>of</strong> the<strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>E-12
Appendix FFORM OF CONTINUING DISCLOSURE AGREEMENTThis CONTINUING DISCLOSURE AGREEMENT (this “Disclosure Agreement”) dated as <strong>of</strong> August18, <strong>2009</strong>, is executed <strong>and</strong> delivered by the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> (the “<strong>State</strong>”) in connection with the issuance <strong>of</strong> its$485,000,000 <strong>General</strong> <strong>Obligation</strong> <strong>Bonds</strong>, <strong>State</strong> <strong>and</strong> <strong>Local</strong> Facilities Loan <strong>of</strong> <strong>2009</strong>, Second Series (the “<strong>Bonds</strong>”). The<strong>Bonds</strong> are being issued pursuant to resolutions passed by the Board <strong>of</strong> Public Works (the “Board”) on June 17, <strong>2009</strong>,as amended <strong>and</strong> supplemented by resolutions adopted on August 5, <strong>2009</strong>. The <strong>State</strong>, intending to be legally boundhereby <strong>and</strong> for good <strong>and</strong> valuable consideration, the receipt <strong>and</strong> sufficiency <strong>of</strong> which is hereby acknowledged, doeshereby covenant <strong>and</strong> agree as follows:Section 1.Purpose <strong>of</strong> the Disclosure Agreement.This Disclosure Agreement is being executed <strong>and</strong> delivered by the <strong>State</strong> for the benefit <strong>of</strong> the owners <strong>and</strong>beneficial owners <strong>of</strong> the <strong>Bonds</strong> <strong>and</strong> in order to assist the Participating Underwriters in complying with Securities <strong>and</strong>Exchange Commission Rule 15c2-12(b)(5). The <strong>State</strong>’s obligations hereunder shall be limited to those required bywritten undertaking pursuant to the Rule.Section 2.Definitions.In addition to the definitions set forth above, which apply to any capitalized term used in this DisclosureAgreement unless otherwise defined in this Section, the following capitalized terms shall have the followingmeanings:“Continuing Disclosure Service” shall mean the continuing disclosure service established by theMunicipal Securities Rulemaking Board known as the Electronic Municipal Market Access (“EMMA”) system.“Listed Events” shall mean any <strong>of</strong> the events listed in Section 4(a) <strong>of</strong> this Disclosure Agreement.“Participating Underwriter” shall mean any <strong>of</strong> the original underwriters <strong>of</strong> the <strong>Bonds</strong> required to complywith the Rule in connection with <strong>of</strong>fering <strong>of</strong> the <strong>Bonds</strong>.“Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities <strong>and</strong> Exchange Commission under theSecurities Exchange Act <strong>of</strong> 1934, as the same may be amended from time to time, any successor provisions <strong>of</strong>similar import promulgated by the Securities <strong>and</strong> Exchange Commission in the future, <strong>and</strong> any applicable no-action<strong>and</strong> other authoritative interpretations <strong>of</strong> Rule 15c2-12 released by the Securities <strong>and</strong> Exchange Commission.Section 3.Provision <strong>of</strong> Annual Financial Information, Operating Data <strong>and</strong> Audited Information.(a) The <strong>State</strong> shall provide to the Continuing Disclosure Service, annual financial information <strong>and</strong>operating data as set forth in Schedule A to this Disclosure Agreement, such information <strong>and</strong> data to be updated as<strong>of</strong> the end <strong>of</strong> the preceding fiscal year <strong>and</strong> made available within 275 days after the end <strong>of</strong> the fiscal year,commencing with the fiscal year ending June 30, <strong>2009</strong>.(b) The <strong>State</strong> shall provide to the Continuing Disclosure Service, annual audited financial statements for the<strong>State</strong>, such information to be made available within 275 days after the end <strong>of</strong> the <strong>State</strong>’s fiscal year, commencingwith the fiscal year ending June 30, <strong>2009</strong>, unless the audited financial statements are not available on or before suchdate, in which event said financial statements will be provided promptly when <strong>and</strong> if available. In the event thataudited financial statements are not available within 275 days after the end <strong>of</strong> the <strong>State</strong>’s fiscal year (commencingwith the fiscal year ending June 30, <strong>2009</strong>), the <strong>State</strong> will provide unaudited financial statements within said timeperiod.(c) Except as otherwise set forth in this paragraph (c), the presentation <strong>of</strong> the financial information referredto in paragraph (a) <strong>and</strong> in paragraph (b) shall be made in accordance with the same accounting principles as utilizedF-1
in connection with the presentation <strong>of</strong> applicable comparable financial information included in the final <strong>of</strong>ficialstatement for the <strong>Bonds</strong>.(1) The <strong>State</strong> may make changes to the presentation <strong>of</strong> the financial information required inparagraph (a) <strong>and</strong> paragraph (b) necessitated by changes in <strong>General</strong>ly Accepted AccountingPrinciples;(2) The <strong>State</strong> may otherwise modify the presentation <strong>of</strong> the financial information required herein,provided that this Disclosure Agreement is amended in accordance with Section 6 here<strong>of</strong>.(d) If the <strong>State</strong> is unable to provide the annual financial information <strong>and</strong> operating data within theapplicable time periods specified in (a) <strong>and</strong> (b) above, the <strong>State</strong> shall send in a timely manner a notice <strong>of</strong> such failureto the Continuing Disclosure Service.Section 4.Reporting <strong>of</strong> Significant Events.(a) This Section 4 shall govern the giving <strong>of</strong> notices <strong>of</strong> the occurrence <strong>of</strong> any <strong>of</strong> the following events withrespect to the <strong>Bonds</strong>:(i)(ii)(iii)(iv)(v)(vi)(vii)(viii)(ix)(x)(xi)principal <strong>and</strong> interest payment delinquencies;non-payment related defaults;unscheduled draws on debt service reserves reflecting financial difficulties;unscheduled draws on credit enhancements reflecting financial difficulties;substitution <strong>of</strong> credit or liquidity providers, or their failure to perform;adverse tax opinions or events affecting the tax-exempt status <strong>of</strong> the <strong>Bonds</strong>;modifications to rights <strong>of</strong> bond holders;bond calls;defeasances;release, substitution, or sale <strong>of</strong> property securing repayment <strong>of</strong> the <strong>Bonds</strong>; <strong>and</strong>rating changes.(b) Whenever the <strong>State</strong> obtains knowledge <strong>of</strong> the occurrence <strong>of</strong> a Listed Event, the <strong>State</strong> shall as soon aspossible determine if such event would constitute material information for owners <strong>of</strong> <strong>Bonds</strong>. If the Listed Eventconstitutes material information for owners <strong>of</strong> <strong>Bonds</strong>, the <strong>State</strong> shall promptly file a notice <strong>of</strong> such occurrence withthe Continuing Disclosure Service.Section 5.Termination <strong>of</strong> Reporting <strong>Obligation</strong>.The <strong>State</strong>’s obligations under this Disclosure Agreement shall terminate upon the payment in full <strong>of</strong> all <strong>of</strong>the <strong>Bonds</strong> either at their maturity or by early redemption. In addition, the <strong>State</strong> may terminate its obligations underthis Disclosure Agreement if <strong>and</strong> when the <strong>State</strong> no longer remains an obligated person with respect to the <strong>Bonds</strong>within the meaning <strong>of</strong> Securities <strong>and</strong> Exchange Commission Rule 15c2-12.Section 6.Amendment.The <strong>State</strong> may provide further or additional assurances that will become part <strong>of</strong> the <strong>State</strong>’s obligationsunder this Disclosure Agreement. In addition, this Disclosure Agreement may be amended by the <strong>State</strong> in itsdiscretion provided that: (i) the amendment may only be made in connection with a change in circumstances thatF-2
arises from a change in legal requirements, change in law, or change in the identity, nature, or status <strong>of</strong> the <strong>State</strong> asthe obligated person with respect to the <strong>Bonds</strong>, or type <strong>of</strong> business conducted; (ii) the Disclosure Agreement, asamended, would have complied with the requirements <strong>of</strong> the Rule at the time <strong>of</strong> the issuance <strong>of</strong> the <strong>Bonds</strong>, aftertaking into account any amendments or interpretations <strong>of</strong> the Rule, as well as any change in circumstances; <strong>and</strong> (iii)the amendment does not materially impair the interests <strong>of</strong> holders <strong>of</strong> the <strong>Bonds</strong>, as determined by counsel selectedby the <strong>State</strong> that is expert in federal securities law matters. The reasons for the <strong>State</strong> agreeing to provide any furtheror additional assurances or for any amendment <strong>and</strong> the impact <strong>of</strong> the change in the type <strong>of</strong> operating data orfinancial information being provided will be explained in information provided with the annual financialinformation containing the additional or amended operating data or financial information.Section 7.Additional Information.Nothing in this Disclosure Agreement shall be deemed to prevent the <strong>State</strong> from disseminating any otherinformation, using the means <strong>of</strong> dissemination set forth in this Disclosure Agreement or any other means <strong>of</strong>communication, or including any other information in any disclosure made pursuant to Section 4(a) or (b) here<strong>of</strong> ornotice <strong>of</strong> occurrence <strong>of</strong> a Listed Event in addition to that which is required by this Disclosure Agreement. If the<strong>State</strong> chooses to include any information in any disclosure made pursuant to Section 4(a) or (b) here<strong>of</strong> or notice <strong>of</strong>occurrence <strong>of</strong> a Listed Event in addition to that which is specifically required by this Disclosure Agreement, the<strong>State</strong> shall have no obligation under this Disclosure Agreement to update such information or include it in any futuredisclosure made pursuant to Section 4(a) or (b) here<strong>of</strong> or notice <strong>of</strong> occurrence <strong>of</strong> a Listed Event.Section 8.Law <strong>of</strong> <strong>Maryl<strong>and</strong></strong>.This Disclosure Agreement, <strong>and</strong> any claim made with respect to the performance by the <strong>State</strong> <strong>of</strong> itsobligations hereunder, shall be governed by, subject to, <strong>and</strong> construed according to the laws <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>or the federal law.Section 9.Limitation <strong>of</strong> Forum.Any suit or other proceeding seeking redress with regard to any claimed failure by the <strong>State</strong> to perform itsobligations under this Disclosure Agreement must be filed in the Circuit Court for Anne Arundel County, <strong>Maryl<strong>and</strong></strong>.Section 10.Limitation on Remedies.The <strong>State</strong> shall be given written notice at the address set forth below <strong>of</strong> any claimed failure by the <strong>State</strong> toperform its obligations under the Disclosure Agreement, <strong>and</strong> the <strong>State</strong> shall be given 45 days to remedy any suchclaimed failure. Any suit or other proceeding seeking further redress with regard to any such claimed failure by the<strong>State</strong> shall be limited to specific performance as the adequate <strong>and</strong> exclusive remedy available in connection withsuch action. Written notice to the <strong>State</strong> shall be given to the <strong>State</strong> Treasurer, Louis L. Goldstein Treasury Building,80 Calvert Street, Annapolis, <strong>Maryl<strong>and</strong></strong> 21401, or at such alternate address as shall be specified by the <strong>State</strong> withdisclosures made pursuant to Section 4(a) or 4(b) here<strong>of</strong> or a notice <strong>of</strong> occurrence <strong>of</strong> a Listed Event.Section 11.Relationship to <strong>Bonds</strong>.The Disclosure Agreement constitutes an undertaking by the <strong>State</strong> that is independent <strong>of</strong> the <strong>State</strong>’sobligations with respect to the <strong>Bonds</strong>; any breach or default by the <strong>State</strong> under this Disclosure Agreement shall notconstitute or give rise to a breach or default under the <strong>Bonds</strong>.(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)F-3
Section 12.Beneficiaries.This Disclosure Agreement shall inure solely to the benefit <strong>of</strong> the owners <strong>and</strong> beneficial owners from timeto time <strong>of</strong> the <strong>Bonds</strong>, <strong>and</strong> shall create no rights in any other person or entity.IN WITNESS WHEREOF this Continuing Disclosure Agreement is being executed by the Board <strong>of</strong>Public Works on behalf <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong> as <strong>of</strong> this day <strong>of</strong> August, <strong>2009</strong>.STATE OF MARYLANDBy:__________________________________Martin O’Malley, GovernorBy:__________________________________Peter Franchot, ComptrollerBy:__________________________________Nancy K. Kopp, Treasureras Members <strong>of</strong> the Board <strong>of</strong> PublicWorks <strong>of</strong> the <strong>State</strong> <strong>of</strong> <strong>Maryl<strong>and</strong></strong>F-4
Schedule A(1) Summary <strong>of</strong> Outst<strong>and</strong>ing Tax Supported Debt.(2) Summary <strong>of</strong> <strong>State</strong> Revenues <strong>and</strong> Expenditures.(3) Summary <strong>of</strong> <strong>General</strong> Fund Balances.(4) Summary <strong>of</strong> <strong>State</strong> Reserve Fund.(5) Budget for Current Fiscal Year.(6) Description <strong>of</strong> material litigation based on the accountant’s report contained in the Comprehensive AnnualFinancial Report.F-5