After Years of Surpluses, State Budget Deficits Loom Large

A report from the Maryland Department of Legislative Services warns of looming structural deficits over the next four years, a stark change from last January, when DLS projected billions in structural surpluses between fiscal 2023 and fiscal 2028.

Fiscal 2024 is projected to end with a fund balance of $367 million, and ongoing revenues exceed ongoing spending by $150 million. A $418 million structural deficit is anticipated for fiscal 2025. Structural challenges prevail for the remainder of the forecast period culminating in a $1.8 billion deficit in fiscal 2028.

The cash and structural budget outlook deteriorates substantially in fiscal 2028 due to the costs of ongoing K-12 education enhancements outpacing the availability of special funds in the Blueprint Fund. The Blueprint Fund is expected to close fiscal 2024 with a fund balance approaching $2.9 billion.

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 2027, according to the DLS analysis.

This fund balance, coupled with annual Blueprint revenues of about $1.4 billion, is sufficient to maintain current Blueprint support for K-12 education and fund most of the increases in K-12 costs for fiscal 2025 through 2027. By the end of fiscal 2027, the Blueprint Fund surplus is exhausted, resulting in substantial K-12 costs shifting to the general fund in fiscal 2028.

Between fiscal 2024 and 2028, ongoing revenues, projected to grow at an average annual rate of 3.3 percent, are outpaced by the increase in ongoing spending, which grows at an average annual rate of 5.1 percent.

Cash shortfalls projected for fiscal 2026 and 2027 can be addressed by shifting planned PAYGO capital to bonds, making modest reductions to planned operating spending, or drawing the Rainy Day Fund below 5 percent of general fund revenues. The fiscal 2028 cash shortfall far exceeds the cash remaining in the Rainy Day Fund necessitating significant spending reductions and/or increased revenues.

Legislation passed during the 2023 session decreases revenues by $884 million and increases spending by $500 million for the five years ending with fiscal 2028.

According to the Department of Legislative Services:

Legislation affecting revenues with a projected five-year impact of $50 million or more includes:

  • Senate Bill 516/House Bill 556 (Chapters 254 and 255) establish the regulatory framework for adult use cannabis and establish a sales and use tax applicable to adult-use cannabis. Under the Acts, general fund revenues increase by $17.9 million in fiscal 2024 (Supplemental Budget No. 2 recognized $15 million of this amount), $31 million in fiscal 2025, $51 million in fiscal 2026, $68 million in fiscal 2027, and $79 million in fiscal 2028.
  • House Bill 2 (Chapter 513) authorizes a subtraction modification against the Maryland income tax for specified union dues paid by an individual during the taxable year. Under the Act, general fund revenues decrease between $10 million and $12 million each year.
  • Senate Bill 553/House Bill 554 (Chapters 613 and 614) enhance the existing military retirement income tax subtraction modification by increasing the maximum amount of military retirement income received by an individual that may be exempted from Maryland income tax. Under the Acts, general fund revenues decrease between $11 million and $13 million each year.
  • Senate Bill 552/House Bill 547 (Chapters 3 and 4) extend the temporary expansions to the Maryland earned income credit that were enacted in 2021 and also eliminate an existing limit on the value of the State refundable earned income credit for individuals without qualifying children. In addition, the Acts permanently extend and alter eligibility for the State child tax credit originally enacted in 2021. Under the Acts, general fund revenues decrease by $172 million in fiscal 2024, $176 million in fiscal 2025, $179 million in fiscal 2026, $183 million in fiscal 2027, and $187 million in fiscal 2028.

Legislation affecting spending with a projected five-year impact of $50 million or more is limited to:

  • Senate Bill 828/House Bill 988 (Chapters 258 and 259) modify the Family and Medical Leave Insurance Program by altering key administrative deadlines, technical definitions, and components of the program’s administration. The start dates for required contributions Chapter 1. Operating Budget 21 and benefit payments are delayed by one year to October 1, 2024, and January 1, 2026, respectively. Under the Acts, general fund spending increases by $22 million in fiscal 2025 and between $36 million and $39 million per year in fiscal 2026 to 2028.

Rising costs, sluggish growth, unfunded mandates, and greater demand for services all signal turbulent times ahead for county government budgets. Economic instability, shifting demographics, and funding the ambitious, multi-billion-dollar overhaul of Maryland‘s education system exacerbate the ballooning pressure.

At the MACo Summer Conference session, “Buckle Up: Turbulent Times for County Budgets,” an expert panel will share best practices for planning, budgeting, and managing expectations and discuss strategies for how counties can best prepare for future fiscal uncertainties.

The 2023 MACo Summer Conference is August 16-19, 2023, at the Roland Powell Convention Center in Ocean City, Maryland.

Learn more about MACo’s Summer Conference: