With the 2024 legislative session rapidly approaching, lawmakers will face considerable budget challenges that could drive spending cuts, tax increases, or other remedies to resolve significant structural deficits projected through fiscal 2029.
At this week’s Spending Affordability Committee meeting, the Maryland Department of Legislative Services said fiscal 2024 is projected to end with a fund balance of $528 million, with ongoing revenues exceeding ongoing spending by $125 million.
A $413 million structural deficit is anticipated for fiscal 2025. Structural challenges prevail for the remainder of the forecast period, culminating in a $2.1 billion deficit in fiscal 2029.
Over the next five years, DLS projects revenues will grow by 3.5 percent annually. But revenues are outpaced by expected spending growth of 5 percent annually over the same period.
The cash and structural budget outlook deteriorates substantially through 2029 primarily due to the costs of ongoing K-12 education enhancements outpacing the availability of special funds in the Blueprint for Maryland’s Future Fund, which is dedicated to implementing the Kirwan Commission on Innovation and Excellence in Education’s recommendations.
According to DLS, the Fund 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 will be exhausted, resulting in substantial K-12 costs shifting to the general fund beginning in fiscal 2028.
“So, the bottom line is by fiscal ’29, we only have revenues to cover about 93 percent of the projected spending, so it’s a significant structural challenge,” said David Romans, fiscal and policy analysis coordinator at the Maryland Department of Legislative Services. “This is one of the larger challenges we’ve seen in some time.”
Budget Balancing Approaches
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.
According to DLS, 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. Beginning in fiscal 2028, the cash shortfall far exceeds the cash remaining in the Rainy Day Fund, necessitating significant spending reductions and/or increased revenues.
Reduce Ongoing Spending to More Closely Align with Ongoing Revenues
- Helps to resolve underlying problems.
- Given the magnitude of out-year challenges, reducing ongoing spending in fiscal 2025 is essential to avoid a fiscal cliff in fiscal 2028.
Enhance Ongoing Revenues to Support Spending Commitments
- It helps to resolve the underlying problem.
- Revenues alone are unlikely to resolve long-term budget problems. For illustrative purposes, closing the fiscal 2029 budget gap entirely with revenues is equivalent to increasing sales tax revenues by 30 percent or individual income tax revenues by 12 percent.
Improve Cash Outlook
Shift PAYGO to Bonds
- Immediate budget relief.
- Capital Debt Affordability Committee debt increase accommodates and is well within affordability ratios.
- A higher debt limit will increase long-term debt service costs.
Draw on Rainy Day Fund Balance for Temporary Budget Relief
- A temporary solution that does not address the structural challenge that mounts over time.
- Drawing balance down when the economy is growing steadily leaves the State vulnerable to the impact of a recession.
- Prior analyses have indicated that a mild recession will result in general fund revenues falling about 10 percent below pre-recession estimates over two years.
- A recession coupled with the projected fiscal cliff in fiscal 2028 would result in ongoing revenues covering only about 88 percent of projected spending.
The Spending Affordability Committee studies and reviews the status and projections of State revenues and expenditures and the status and projections of the Maryland economy. The Committee’s purpose is to limit the growth rate of State spending to a level that does not exceed the Maryland economy’s growth rate.
Annually, the Committee recommends to the Governor and Legislative Policy Committee the fiscal goals of the State government budget for the next General Assembly session. Committee recommendations cover State spending levels, new debt authorization, State personnel, and the use of surplus funds.
MACo 2024 Legislative Initiative: Modernize Local Revenue Structures
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.
Maryland’s local governments, including the charter counties with the broadest authority, are hamstrung by outdated state-defined tax systems that fail to reflect the modern economy. By expanding revenue authority, this initiative aims to provide counties with the necessary tools to meet the evolving needs of their communities, stimulate economic growth, and enhance the quality of life for residents.
By modernizing local revenue structures, this initiative promotes local decision-making and empowers counties to be more self-sufficient in addressing unique challenges and opportunities.
Stay tuned to Conduit Street for more information.