Top Issues of 2022 Session: Budget and Fiscal Outlook

With the 2022 legislative session rapidly approaching, MACo is profiling some significant issues that stand to gather attention in the General Assembly’s work. Here, we preview Maryland’s budget and fiscal 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.

The Maryland Constitution prohibits the General Assembly from increasing any budget item or adding any new items to the governor’s proposed budget for any government agencies except the Judicial branch and the operations of the General Assembly itself. The one exception is that it may add to the budget if it enacts a new revenue source to fund additional items — a rare occurrence.

Furthermore, the General Assembly may not move funds from one agency to another. Thus, in practice, the General Assembly may only recommend cuts to state agency budgets recommended by the governor. Once a budget passes the General Assembly, it becomes law and cannot be amended or vetoed by the governor.

By custom, the House and Senate move the budget bill in alternate years – the House moves the budget in odd-numbered years, and the Senate moves the budget in even-numbered years.

State Revenues Exceed Expectations (Big Time)

As previously reported on Conduit Street, the Board of Revenue Estimates this month voted to once again increase the revenue projections for fiscal 2022 to $21.6 billion, representing a $495 million increase from the September estimates. Additionally, the Board adjusted the official revenue forecast for fiscal 2023 upwards by $543 million to $22.8 billion.

This latest revision follows the Board’s actions in September, writing up fiscal 2022 revenues by $995 million and predicting an additional $1.37 billion in revenues for fiscal 2023. That came days after Maryland closed the books on fiscal 2021 with a $2.5 billion general fund balance.

All told, state budget writers and policymakers have roughly $6 billion in unanticipated revenue as they construct the fiscal 2023 state budget.

What’s Driving All This?

The massive fund balance — the result of much larger-than-expected revenue growth, primarily driven by an influx of federal stimulus funding, as well as a significant uptick in personal and business income and consumer spending — is the largest in state history.

The Department of Legislative Services profiles this issue in its annual compilation of Issue Papers:

Fiscal 2021 general fund revenues were above the estimate by $1.7 billion, or 8.9%. Ongoing general fund revenues were over the estimate by $1.69 billion, or 9.0%. General fund revenues totaled $20.8 billion in fiscal 2021, which is an increase of 11.8% over fiscal 2020, while ongoing revenues grew 9.9% in fiscal 2021.

The top three revenue sources all exceeded the estimate by significant amounts: $903 million for the personal income tax; $397 million for the sales tax; and $323 million for the corporate income tax. Combined, they account for 95% of the overattainment.

How Does the Governor Want to Spend the Record Budget Surplus?

In October, Governor Larry Hogan released a five-point framework for spending $2.5 billion in budget surplus funds.

The governor’s plan includes bolstering the State’s rainy-day fund, tax relief for retirees and working families, enhancing Supplemental Nutrition Assistance Program (SNAP) benefits for low-income beneficiaries, and a potential boost in compensation/benefits for state employees.

What Does Maryland’s Spending Affordability Committee Have to Say?

This month, Maryland’s Spending Affordability Committee approved several recommendations to help guide state budget decisions in the months ahead, including bringing the State’s Rainy Day Fund up to 9 percent of revenue, repaying unfunded liabilities, and prioritizing one-time construction costs.

After assuming a 5% balance in the Rainy Day Fund, estimated cash balances will total $4.3 billion at the close of fiscal 2022. This surplus provides the State with the unique opportunity to invest resources toward unmet needs and priorities.

Recognizing that the fund balance is one-time in nature, the committee recommends against making ongoing investments with the cash surplus. Instead, ongoing needs can be accommodated within the significant structural surplus forecast for fiscal 2023 and beyond.

Recommendations include addressing long-standing deferred maintenance and facility renewal needs in Department of General Services (DGS) operated facilities and at State parks and allocating $200 million to the public four-year institutions of higher education and regional higher education centers for deferred maintenance and facility renewal.

In addition, the committee recommends investing in pay-as-you-go (PAYGO) capital to fund previous commitments and making one-time purposes such as improving cybersecurity and accelerating the replacement of outdated information technology systems.

Read more about Maryland’s budget and revenue outlook in the DLS Issue Papers.