Baltimore County revenues for the current fiscal year are expected to be nearly $40 million lower than budgeted, according to a review by the county auditor. The shortfall is expected to force the county to dip into its surplus funds for the second year in a row.

The lower-than-expected revenues were announced Monday as the county's Spending Affordability Committee approved a 2.25 percent increase for the fiscal year 2012 budget that will be introduced by County Executive Kevin Kamenetz in April.

The $40 million deficit is not as bad as the $60 million shortfall county Auditor Lauren Smelkinson told the committee to expect just last month. Lower-than-expected state income tax distributions to the county in November accounted for about $35 million of Smelkinson’s original projection, according to a report from the state comptroller's office.

But several unexpected events — including the receipt ofpremiums for the county's November bond issuance, a later-than-expected reimbursement for last year's snow removal and a better-than-expected January income tax distribution — contributed to the auditor’s updated projection yesterday.

That update, however, is close to what the auditor initially projected last spring as the council approved the current budget for the fiscal year, which  ends June 30.

County budget officials would not confirm the shortfall. At the Jan. 11 meeting of the Spending Affordability Committee, county Budget and Finance Director Keith Dorsey said the county does not provide mid-year projections on revenues and expenditures.

But some county department heads have said they were asked last fall to begin trimming their budgets.

In November, State's Attorney Scott Shellenberger said his office was asked to trim expenses by about 3 percent and that a hiring freeze was effectively in place.

Don Mohler, a county spokesman, would not confirm the amounts of any requested departmental budget cuts but said any such moves were in line with the county's history of fiscal responsibility.

Mohler said the county had not enacted a hiring freeze.

"All we're doing is saying that we're going to review each position every time there is a vacancy to ensure that it is being used efficiently," said Mohler, adding that the practice is nothing new.

Budget reductions and hiring freezes will probably not be enough to close the gap.

The county will likely have to dip into surplus reserves to offset the shortfall – the second consecutive year such a move has been necessary.

Last year, revenues fell short by $132 million, primarily due to a decline in expected state income tax revenue and mid-year reductions in state aid.

To balance that, the county transferred more than $117 million from other funds, including the capital projects fund and Economic Development Revolving Financing Fund, and made several other budget moves. Such one-time transfers funded ongoing expenses — a practice the committee cautioned last year should not continue.

This year, the committee said the practice is occasionally necessary and sensible during difficult economic times.

Surplus reserves by the end of this year are expected to total about $169.5 million, including  $85 million in the county's so-called rainy day fund, according to county budget projections.

The current budget has already allocated about $9 million in surplus funds to cover ongoing expenses in the general fund. Nearly $50 million in surplus spending would be used to cover ongoing budget expenses in the current fiscal year, according to the auditor.

Also at the Monday meeting, the Spending Affordability Committee approved a 2.25 percent cap on the increase to the county's general fund budget for fiscal year 2012.

The Spending Affordability Committee, created in 1991, is charged with setting a limit on the growth of the county's general fund budget. The cap is not so much a target to be hit as a limit not to be exceeded.

Historically, county executives have not exceeded the committee's recommendation. In 2006, some on the council claimed then-County Executive Jim Smith exceeded the limitation when he failed to apply some costs to the cap. The council may only cut the budget and is charged with keeping it in line with the committee’s recommendations. By law, the council can exceed the recommendation if it provides a reason.

This year's recommendation, which is based on a five-year average of personal income growth, would allow the budget to increase by nearly $36 million to about $1.63 billion.

But a policy change approved at the same meeting will allow Kamenetz's first budget to grow by more than the cap if the state passes expenses such as the teacher's pension costs to local jurisdictions.

The change, which is good for one year only, would allow Kamenetz to absorb the additional expense without having it count against the cap.

Councilman John Olszewski Sr., a Dundalk Democrat, said he asked for the change because of the timeline in which the committee had to prepare a budget report, which is due Feb 15, "and not knowing what issues are coming down the pipeline."

Councilman Tom Quirk, a Catonsville Democrat, said the change made sense.

"We don't know if any amount is going to be passed down or how much," Quirk said. "It's really hard to make a (budget) decision not knowing what we're really dealing with, if anything."

Mohler said he didn't know if Kamenetz had personally asked for the amendment but said the county executive was trying to change the sometimes-adversarial nature of relationships between the administration and council budget staffs.

"He has been very clear that he wanted to make sure there were open lines of communication between the administration and council budget staff," Mohler said.

The General Assembly is likely to consider passing off costs of the state-funded teacher pension program to local jurisdictions. Baltimore County might have to shoulder nearly $90 million in additional costs if its full share is passed down. The costs are equal to about an 18 cent increase on the county's property tax rate.

Gov. Martin O'Malley in his budget released two weeks ago has proposed asking the state's 23 counties and Baltimore City to pay for the operations of the state assessments offices in their respective jurisdictions. Baltimore County's share would be nearly $5 million.

None of the potential changes will likely be finalized in time for Kamenetz's first budget, which will be delivered to the council in April.