State Fiscal Leaders: It’s Time to Tap Cash Reserves

Maryland’s Spending Affordability Committee (SAC) this week approved a number of recommendations to help guide state budget decisions in the months ahead, including dipping into the state’s reserves to address a projected cash shortfall and structural deficit in the upcoming fiscal year.

As previously reported on Conduit Street, the Board of Revenue Estimates last week bumped up revenue projections for fiscal years 2021 and 2022. The increases in revenue projections are due to higher-than-expected sales tax revenue and higher capital gains from an unexpectedly strong stock market.

According to analysis from the Department of Legislative Services (DLS), while the state is on track to finish the current fiscal year with a $778 million cash surplus, the latest forecast shows a cash shortfall of $632 million at the end of fiscal year 2022. The state faces a structural deficit of $649 million in the current fiscal year, which balloons to $817 million at the end of the 2022 fiscal year.

Source: Department of Legislative Services

It’s Raining

To mitigate budget pressures in the upcoming fiscal year, the committee voted to lower the recommended level of reserves in the Rainy Day Fund by approximately $200 million, and to maintain a Rainy Fund Balance of five percent.

State law authorizes the governor to transfer funds from the Rainy Day Fund to the General Fund “as necessary to support the operation of State government on a temporary basis,” so long as the General Assembly approves the transfer, and it does not cause the account balance to drop below five percent of the estimated general fund revenues for that fiscal year.

According to the SAC analysis:

The committee projects a Rainy Day Fund balance at the beginning of fiscal 2022 of $886.2 million, which is $52.4 million less than 5% of estimated general fund revenues. The Governor will be required to include $525.8 million for the Rainy Day Fund in the fiscal 2022 allowance, based on the unappropriated general fund surplus above $10.0 million from the fiscal 2020 closeout, bringing the available fund balance to approximately 7.2% of estimated general fund revenues.

With a cash shortfall projected for fiscal 2022, the committee recognizes that the State may need to spend a portion of the Rainy Day Fund balance to resolve the budget deficit but also notes that with significant cash shortfalls forecasted in subsequent years that the State must also take actions to better align revenues and spending and preserve some cash reserves for the future.

Kirwan Blueprint Fully Funded Through 2026

The Blueprint for Maryland’s Future Fund — which is dedicated to implementing the recommendations from the Kirwan Commission on Innovation and Excellence in Education — has a dedicated funding source from a portion of online sales tax revenue, and will have enough money to fund the Kirwan Blueprint bill through at least 2026, according to the DLS analysis.

Governor Larry Hogan, citing the wave of economic uncertainty brought by the COVID-19 pandemic, vetoed the Kirwan Blueprint bill earlier this year, as well as a handful of bills that would have raised revenue to pay for its ambitious policy goals.

In fact, the DLS analysis notes that the General Assembly could ease the structural deficit by overriding the aforementioned vetoes, which include bills to apply the state’s sales tax to digital downloads, raise the tax on tobacco products, impose a new tax on digital advertising for large media companies.

Source: Department of Legislative Services

The committee also voted to increase the state’s general obligation bond debt to just over $1.1 billion, and that any future stimulus funds be dedicated to one time expenditures in order to avoid adding to the structural deficit. Finally, the committee recommended that Governor Hogan consults with the General Assembly before allocating future stimulus funds.

Stay tuned to Conduit Street for more information.

Useful Links

Spending Affordability Committee Documents

Previous Conduit Street Coverage: State Bumps Up Revenue Projections, Marylanders Still Suffering

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