With the 2024 Legislative Session rapidly approaching, MACo is profiling some significant issues that stand to gather attention in the General Assembly. 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.

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.

In 2020, voters approved a Constitutional Amendment to allow state lawmakers to move items around in the budget. In turn, the governor has line-item veto power for the operating budget.

Under current law:

• 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 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 Lawmakers Weigh Spending Cuts, Revenue Enhancements to Address Looming Budget Deficits

The general fund closed fiscal 2023 with a $2.6 billion fund balance. The Department of Legislative Services (DLS) anticipates a $322 million structural deficit for fiscal 2025, with structural challenges prevailing 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 Department of Legislative Services profiles this issue in its annual compilation of Issue Papers:

The general fund closed fiscal 2023 with a $2.6 billion fund balance. Fiscal 2024 ongoing revenues exceed ongoing spending by $129 million. From fiscal 2025 to 2027, there is a modest structural deficit. In fiscal 2025, ongoing spending exceeds ongoing revenues by $322 million. The structural deficit increases sharply at the end of the forecast period, as it jumps from $436 million in fiscal 2027 to $1.78 billion in fiscal 2028. This deficit is attributable to exhausting the Blueprint for Maryland’s Future Fund (Blueprint) balance in fiscal 2027. General funds for the Blueprint increase in fiscal 2028 from $201 million to $1.848 billion.

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.

Budget Balancing Approaches

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.

Structural Solutions

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.

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.

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