projecting operating losses for the year. Between last year's reimbursement rate rollback of 1%, a nursing shortage,
and increasing pharmaceutical costs, hospitals have had to adapt and seek ways to become profitable. MedStar
Health has taken over Georgetown University Medical Centers clinical operations and has cut its own physicians
group and reduced its staff. MedStar, which operates four hospitals in Baltimore and two in Washington, is the
fifteenth largest community-owned, not-for-profit health care system in the country. Harford hospitals have
combined medical staffs in anticipation of opening the new Upper Chesapeake Medical facility, while St. Josephs
announced that it would trim its pediatric unit.

The agricultural sector of Maryland's economy has experienced more than its share of problems over the past
few years. From record low commodity prices to pfisteria to drought, the news of the late 1990s has not been
good. The tide seems to have turned in 2000, however. Early-season rains got the growing season off to a good
start, and there has been no serious presence of pfisteria for two years. Despite improving conditions, some
problems persist.

Production of corn, soybean and tobacco may hit record levels in 2000 after a dismal 1999 in most areas of the
State, although other grains are not doing as well. Unfortunately, prices for most agricultural products remain at
low levels and, when adjusted for inflation, are at all-time low levels for a number of products. Tobacco is one of
the few products not selling at relatively low prices, but tobacco clearly does not have a future in Maryland. The
State is offering a buyout plan to tobacco farmers, funded with 5% of the money from the tobacco industry
settlement. In many cases, farmers could make more from the buyout than from producing tobacco. The
program will require an appropriation each year; even if it is not funded, tobacco will continue to decline. Current
production in the State is about 25% of that from the early 1980s. While income from the agricultural sector will
certainly be higher in 2000 than in 1999, the benefit to the State will not be large as this sector accounts for less
than 1% of gross state product. Gains in 2001 and 2002 are less likely, due to the excellent growing conditions for
many crops in 2000.

MAJOR INITIATIVES

New laws enacted by the 2000 General Assembly and signed by Governor Parris N. Glendening focused on
education at all levels. Significant investments were made in higher education, public school construction and
primary and secondary education. Other increases in funding have gone to fighting crime, creating jobs and
preservation of the environment. Tobacco settlement funds are being targeted to health, education and agriculture.

During the upcoming General Assembly Session, the Glendening Administration plans to introduce legislation
and budget initiatives to strengthen Maryland's Smart Growth laws, increase the mass transit system and usage, and
address environmental concerns. There will be funds requested for continued growth for higher education, K - 12
education, public safety programs and programs that provide services to special needs populations. The Governor
also plans to increase funding for school construction and capital projects at higher education institutions.

FINANCIAL INFORMATION

The State has issued guidelines to its agencies for establishing effective internal control. Internal control is
the overall plan of organization and all the coordinate methods used to safeguard assets, ensure the reliability of
the accounting data, promote efficient operations and ensure compliance with established governmental policies,
laws, regulations and contracts. Internal control is designed to provide reasonable, but not absolute, assurance
that these objectives are met.

As a recipient of federal assistance, the State is responsible for ensuring compliance with kws and regulations
related to such assistance. This compliance is accomplished through the internal control guidelines. Additionally,
the State is required to undergo an annual single audit in conformity with the provisions of the Federal Single
Audit Act, Amendments of 1996 and U.S. Office of Management and Budget Circular A-133 "Audits of States,
Local Governments, and Non-Profit Organizations." Detail information related to the single audits is included
in separate reports.

The Maryland Constitution requires the Governor to submit to the General Assembly a balanced budget for
the following year. The General Assembly cannot increase the budget except in certain organizational units. The
budget currently uses a legally mandated budgetary fund structure. Each state agency is provided appropriations
at a program level, which is the level at which expenditures cannot legally exceed the appropriations. The State
also utilizes an encumbrance system to serve as a tool for managing available appropriations.

22 COMPTROLLER OF MARYLAND