Top Issues of 2021 Session: Balancing the Budget

With the 2021 Legislative Session rapidly approaching, MACo is profiling some major issues that stand to gather attention in the General Assembly’s work. Here, we preview Maryland’s budget outlook.

The COVID-19 pandemic has compromised budgets by driving up costs and depleting tax revenues, which creates a degree of uncertainty when considering Maryland’s current and future budget outlook.

The Constitution of Maryland requires a balanced budget: total estimated revenues must equal or exceed total appropriations. The budget also must reflect any estimated revenue surplus or deficit at the end of the preceding year.

While Maryland 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.

More than 1.1 million Marylanders have filed for unemployment since the onset of the pandemic, with the hospitality sector — which typically employs hundreds of thousands of Marylanders — hit particularly hard. In fact, the pandemic’s economic impact is largely income bifurcated, with lower-income jobs are bearing the brunt of this recession.

The topic is profiled by the Department of Legislative Services in its annual compilation of Issue Papers:

Retail sales, especially at restaurants and bars, were most directly impacted by the pandemic. Between State-imposed closures on certain establishments and the general reluctance of consumers to spend time in enclosed spaces, sales dropped.

In addition, consumer spending was directed toward essential goods such as groceries, the bulk of which are not subject to the sales tax. Spending also increasingly shifted to online establishments, and, while some of the revenue from those sales goes to the General Fund, a significant portion is distributed to the Blueprint Fund for education.

Early in the pandemic, the Board of Revenue Estimates — the three-member panel responsible for estimating state revenues to assist with managing the State’s budget — issued unofficial guidance that projected up to a $1.1 billion shortfall in fiscal 2020, a $2.1 billion gap for fiscal 2021, and a $2.6 billion hole for fiscal 2022, all of which proved to be too conservative. The upper bound of the range provided in fiscal 2020 was $924.8 million below the 2020 Closeout Report.

The Board of Revenue Estimates this month bumped up revenue projections for fiscal years 2021 and 2022 due to higher-than-expected sales tax revenue and higher capital gains from an unexpectedly strong stock market. Further, federal stimulus funds — including direct payments to eligible Marylanders, the Paycheck Protection Program, and a boost in federal unemployment benefits — worked as they were intended by temporarily halting a catastrophic economic crash.

The president yesterday signed a nearly $900 billion relief package that includes an 11-week extension of federal unemployment benefits, $600 direct payments to Americans based on income, and additional funding for businesses through the Paycheck Protection Program. While the bill fails to provide needed direct funding for state and local governments, it does include funding for vaccine distribution, schools, broadband, transportation, and rental assistance.

Still, Maryland’s Spending Affordability Committee this month recommended tapping the State’s Rainy Day Fund 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.

The plan to proceed will call for austerity and sacrifice, but the State must resist the lure of simply sending these fiscal problems down to local governments. County governments are not only the front lines for public health and safety during these challenging times, they also face their own revenue shortfalls from the drop in central funding sources.

Counties insist that any combination of budget realignment and revenue enhancement required to balance the State’s fiscal plan should be reached without undermining this balanced fiscal partnership and urge State policymakers to maintain the State’s strong commitment to school construction while also ensuring adequate, fair, and reasonable funding that upholds positive education outcomes for all of Maryland’s students.

More background on the impact of COVID-19 on state and local budgets may be found in previous Conduit Street coverage, and in the DLS Issue Papers:

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

State Bumps Up Revenue Projections, Marylanders Still Suffering

State Revenues Exceed Expectations, But Economic Uncertainty Looms

Fiscal Leaders: State Revenue Shortfall Could Hit $4 Billion by FY 2022

Board Bumps Up Revenue Projections $130 Million for FY 20

DLS Issue Papers: Operating Budget

Helpful 2021 Session Links: