Top Issues of 2023 Session: Budget and Fiscal Outlook

With the 2023 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.

Previously, the Maryland Constitution prohibited 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.

But, starting with the fiscal 2024 budget, state lawmakers will have more say in the operating budget. In 2020, voters approved a Constitutional Amendment to allow state lawmakers to move items around in the budget. In turn, the governor will have line-item veto power for the operating budget. Under current law, the governor may only line-item veto parts or all of the capital budget.

Starting with the fiscal 2024 budget:

  • The General Assembly may increase, reduce, or add to the budget. The General Assembly may also restrict funding for different purposes.
  • The legislature must pass a budget equal to or less than the budget proposed by the governor. Any restricted or fenced-off funding is left to the governor’s discretion to release.
  • Under the new constitutional amendment, the governor may issue line-item vetoes on items that the General Assembly added to the budget.
  • The General Assembly must still enact a balanced budget.

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 Continue to Exceed Expectations, But Economic Uncertainties Loom

Economic growth has been weaker than expected when calendar 2022 began. High inflation has resulted in aggressive interest rate increases by the Federal Reserve, and the odds of a recession have increased. Despite the weakening economic outlook, general fund revenue growth remains strong. Revenues were above expectations in fiscal 2022 by $1.6 billion, and the estimate for 2023 was revised upward by $1.2 billion.

As previously reported on Conduit Street, the Board of Revenue Estimates this month voted to increase state revenue projections for fiscal 2023 to $23.74 billion, a relatively modest uptick of $55.8 million, representing less than one-quarter of one percent of annual revenues. Additionally, the Board lowered revenue projections for fiscal 2024 to $25.1 billion, a decrease of $166.8 million from the forecast approved in September.

Source: Maryland Department of Legislative Services

 

The modest increase for the current fiscal year indicates that revenue collections are generally performing as expected since September’s report, which took a more conservative approach. The more substantial reduction for fiscal 2024 reflects a decrease in capital gains income and unchanged projections in withholding, sales and use, and corporate income taxes, three of the State’s most significant revenue sources.

Current baseline projections estimate the General Fund to have a cash surplus of $2.2 billion at the close of fiscal 2024. The structural surplus is projected to be $1.4 billion.

Source: Maryland Department of Legislative Services

 

Although the fiscal 2024 baseline projects a $1.4 billion structural surplus, the current forecast reflects a diminishing structural balance over the five-year period as ongoing spending outpaces ongoing revenues and does not account for weakening economic conditions that could lead to a recession.

What’s Driving All This?

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

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

Fiscal 2022 general fund revenues were above the estimate by $1.6 billion, or 7.0%. General fund revenues totaled $24.0 billion in fiscal 2022, which is an increase of 15.4% over fiscal 2021, while ongoing revenues grew 17.5% in fiscal 2022.

 

The top three revenues sources all exceeded the estimate by significant amounts: $1.0 billion for the personal income tax; $268.0 million for the sales tax; and $93.8 million for the corporate income tax

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 ten percent of revenue, repaying unfunded liabilities, and prioritizing one-time construction costs.

To ensure sustainability throughout the long-term forecast period, the committee recommends ongoing revenues exceed ongoing spending by at least $100 million in the fiscal 2024 budget. The committee also recommends that the surplus be used for one-time investments in our transportation infrastructure and to ensure the sustainability of commitments to the Blueprint for Maryland’s Future before committing to new ongoing funding requirements.

After assuming a 10 percent balance in the Rainy Day Fund, estimated cash balances total $3.1 billion at the close of fiscal 2023. Although this surplus continues to provide an opportunity for investment in unmet needs and priorities, it is essentially the result of increased nonwithholding income tax revenues, a historically unreliable revenue source.

When combined with the potential for an economic downturn, the committee acknowledges the need for the State to bolster available resources for the future and be wary of committing a significant portion of the surplus toward ongoing commitments. As such, the committee recommends the following:

  • A minimum ending general fund balance for fiscal 2024 of $350 million to cover normal operating deficiencies and protect the State against revenues falling short of estimates.
  • Maintaining a Rainy Day Fund balance of 10 percent of general fund revenues to further ensure the availability of resources during periods of economic stress and to meet new needs in such periods.
  • Committing cash toward pay-as-you-go (PAYGO) capital needs to supplement general obligation bonds, offset the impact of construction inflation, and provide funds for legislative bond initiatives.
  • To the extent practical, reducing other underfunded liabilities, including eliminating the deficit in the health insurance account for employees and retirees.
  • Allocating one-time revenues to support critical State investments, including State workforce, education, and transportation needs.

Federal Funds

The Infrastructure Investments and Jobs Act (IIJA) is an unprecedented investment in the nation’s infrastructure, including all modes of transportation, water, power, broadband, cybersecurity, energy, environmental remediation, resilience, and more.

As previously reported on Conduit Street, MACo, on behalf of Maryland’s 24 county governments, sent a letter to Governor-Elect Wes Moore calling for a new and meaningful commitment to local transportation infrastructure, building on recent gains.

 

With Maryland set to receive billions over the next several years, close coordination with state and local partners is fundamental for unlocking the benefits from these historical investments, delivering on essential projects underpinning our economic success, and enhancing the quality of life across Maryland.

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

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