State Revenue Forecast Largely Unchanged: Inflation, Looming Shutdown Elevate Risk

This week, the Board of Revenue Estimates adopted a revised estimate for fiscal 2024 – a  minor write-down of $14.1 million – and the first official estimate for fiscal 2025.

The Board forecasts total general fund revenues of $24.566 billion in fiscal 2024, an increase of 3.8 percent over the prior year, and $25.081 billion in fiscal 2025, an increase of 2.1 percent over fiscal 2024. On an ongoing basis, taking out one-time distributions and other impacts, ongoing general fund revenues are projected to increase by 0.9 percent in fiscal 2024 and 2.2 percent in fiscal 2025.

The three-member panel, which includes Comptroller Brooke Lierman, State Treasurer Dereck Davis, and Secretary of Budget and Management Helene Grady, is responsible for estimating state revenues to assist with managing the State’s budget. The forecasts for the current fiscal year and the one that begins in July 2024 will provide budget writers and policymakers with the latest revenue projections and economic trends.

“Maryland has weathered several financial storms in the past few years. With savvy investments, prudent financial planning, and a clearer picture of the challenges we face, Maryland is well-positioned to navigate the new post-pandemic economy,” Comptroller Lierman said. “Maryland’s economy remains stable, and I am cautiously optimistic that we will continue to see modest economic growth and avoid a recession.”

Government Shutdown, Inflation Elevate Risk

As previously reported on Conduit Street, the US government is barreling toward yet another government shutdown as Congress struggles to reach a consensus on a series of appropriations bills that fund government operations before the start of the new fiscal year on October 1.

The potential federal government shutdown – a new risk – could substantially impact Maryland. The impact will depend on the shutdown’s severity and length of time and any spending cuts as part of an agreement to end it.

According to the Maryland Comptroller, in Tax Year 2021, 1 in 9 individual income tax filers were either federal workers or retirees, and 352,000 Maryland households directly benefitted from either wages or retirement income from the federal government. These individuals accounted for a total income of $31 billion or 10.5 percent of all income earned in Maryland.

According to the Congressional Budget Office (CBO), the 2018-2019 shutdown reduced Gross Domestic Product (GDP) by $11 billion, including $3 billion that will never be recovered. In addition, a 2019 US Senate report found that the three government shutdowns in 2013, 2018, and 2019 cost taxpayers nearly $4 billion.

Maryland has a disproportionate number of federal employees and contractors because of its proximity to Washington, DC. Maryland is home to more than 160,000 federal jobs, tens of thousands more federal contractors, and many Maryland businesses tied directly to providing services to those workers.

Under a shutdown scenario, most federal employees are told not to report for work as all but essential services are suspended. Federal workers are not paid while the government is shut down, even if they are working. And even though they will eventually get paid, many workers cannot afford to go without a paycheck.

As previously reported on Conduit Street, approximately 172,000 Marylanders affected by the 2018-2019 partial government shutdown missed out on an estimated $778 million in wages, resulting in $57.5 million less in state and local income tax withholding and $2.1 million less in sales tax collections. While furloughed federal workers received back pay once the shutdown ended, it’s unlikely that federal contractors could recoup lost wages.

In response, the Maryland General Assembly passed the Federal Shutdown Paycheck Protection Act, which provides no-interest loans to essential government employees who must report to work without pay.

Elevated inflation rates also contribute to elevated risk levels. The Federal Reserve has not reached its desired rate of inflation, which may mean additional interest rate increases to slow the economy further.

As previously reported on Conduit Street, the Federal Reserve left the primary US interest rate unchanged last week, waiting to see if its historic series of rate hikes gets inflation under control. The Fed had raised interest rates at a torrid pace in the last 18 months, as it increased its benchmark rate at 11 consecutive meetings from March last year until its meeting in July.

“Post-COVID-19 trends are not yet fully understood, including changes to the labor force as well as state-to-state migration patterns,” said Robert Rehrmann, Director of the Bureau of Revenue Estimates and the Board’s Executive Secretary. “The Comptroller’s Office has been examining these trends to better understand the impacts on Maryland’s economy.”

After Years of Surpluses, State Budget Deficits Loom Large

As previously reported on Conduit Street, Comptroller Lierman announced that the State of Maryland closed its books on fiscal 2023 with an unassigned general fund balance of $555 million.

According to the Closeout Report, Maryland closes fiscal 2023 with a general fund balance of $2.584 billion. Of this amount, the General Assembly allocated $2.392 billion for fiscal 2024 operations. Previous estimates made in March by the Board of Revenue Estimates were within 2/10th of a percent of the Closeout Report.

But 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 DLS.

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.

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. 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 continued 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 remaining cash in the Rainy Day Fund, necessitating significant spending reductions or increased revenues.

Next month, the Comptroller’s Office will release a report on the state of Maryland’s economy to aid policymakers, leaders, and government partners in understanding the structural changes in Maryland’s economy, revenue base, and opportunities and challenges. The report will also help ensure stakeholders have access to data for more informed decision-making.

Useful Links

Board of Revenue Estimates Meeting Video

Bureau of Revenue Estimates Presentation

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