This week, the Department of Legislative Services (DLS) presented its annual fiscal briefing to the General Assembly budget committees. This briefing provides a comprehensive overview of the Governor’s proposed fiscal 2025 operating and capital budgets, aid to local governments, and Maryland’s economic and revenue outlook.
As previously reported on Conduit Street, Governor Wes Moore unveiled a $63.1 billion budget proposal that the Administration says follows a fiscally responsible framework to respond to the state’s budget challenges while making record investments in priorities that will make Maryland safer, more affordable, more competitive, and the state that serves.
The Quick Look at the Fiscal 2025 Budget shows that the governor’s proposed budget leaves a general fund balance of $103 million at the end of fiscal 2025. The Revenue Stabilization Account (Rainy Day Fund) ends fiscal 2025 with a balance of $2.3 billion (9.4 percent of general fund revenues). Combined cash balances at the close of fiscal 2025 of $2.4 billion represent about 9.8 percent of general fund revenues.
Ongoing spending in the fiscal 2025 allowance exceeds ongoing revenues by $495 million, $13 million better than the Spending Affordability Committee’s (SAC) goal of limiting the structural deficit to $508 million.
The fiscal 2024 budget approved by the General Assembly last session allocated a significant share of the State’s general fund budget surplus to one-time capital pay-as-you-go (PAYGO) investments ($1.3 billion) and to the Blueprint for Maryland’s Future Fund ($900 million) to cover future K-12 education costs. Only $74 million of general fund capital PAYGO is funded in fiscal 2025, and no additional funds are allocated to the Blueprint Fund, contributing to an overall $1.6 billion decline in general fund spending.
Federal spending declines in fiscal 2025 as enhanced Medicaid matching funds are available to mitigate the impact of the pandemic sunset. Growth in special fund spending reflects a $315 million increase in Blueprint Fund spending and more than $400 million of additional higher education spending from own-source revenues (tuition and fees, federal grants and contracts, etc.).
The Administration’s budget plan includes revenue and spending adjustments with a combined general fund impact of $994 million contingent on legislation.
Structural Outlook
The Administration’s budget plan anticipates that the structural deficit will grow from $502 million in fiscal 2025 to $3.4 billion by fiscal 2029, meaning ongoing spending is expected to far exceed projected revenues. While the Department of Legislative Services (DLS) anticipates somewhat lower spending in the out-years on Medicaid and K-12 education, the DLS structural gap estimate still reaches almost $3 billion in fiscal 2029.
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.
How Did the Governor Eliminate the Projected Cash Deficit for Fiscal 2025?
In December 2023, DLS estimated that the State would close fiscal 2025 with a cash shortfall of $1.1 billion, assuming the Rainy Day Fund balance remained at 10 percent of general fund revenues. The governor’s budget plan erases the deficit by reducing spending, proposing revenue enhancements, transferring funds from various balances and accounts to the general fund, and leaving less in the Rainy Day Fund.
Budget Includes Enhancements
The budget plan includes at least $389 million of funding for enhancements not anticipated in the DLS forecast, including general fund support for the Washington Metropolitan Area Transit Authority (WMATA) ($150 million), higher salary increases for State workers ($125 million), and grants to higher education institutions for security ($25 million).
What Does It Mean for Counties?
The fiscal 2025 budget provides $10.9 billion in aid to local governments, $507.7 million over fiscal 2024. The primary increases include $461.4 million for K-12 education aid, $74.7 million for transportation, and $7.4 million for local health.
Community Colleges
State funding of Maryland’s community colleges is based on the Senator John R. Cade funding formula, established as law in 1996. The Cade funding aims to provide community colleges with predictable operations support and help maintain affordable tuition rates.
The Cade formula intends that community college costs be divided equally between the state, local government, and student tuition/fees. The original intent of the Cade funding formula was for the State to provide 29 percent of community college funding by 2012. However, the State has adjusted the formula several times and has only recently met its funding obligation.
The current expense formula bases funding on a percentage of the appropriation per FTE student at four-year public higher education institutions. The FY 2025 allowance includes a Budget Reconciliation and Financing Act provision to reduce this percentage and alter other formula components.
Preliminary analysis indicates this BRFA provision reduces fiscal 2025 funding for community colleges by $23 million. In addition, rebasing the funding formula will result in significant cuts in perpetuity.
K-12 Education
The governor’s budget proposal includes $9.1 billion for Maryland’s public schools — fully funding Blueprint for Maryland’s Future programs. The $9.1 billion reflects an increase of $449.7 million or 5.2 percent compared to fiscal 2024.
Transportation
While the governor announced plans for a one-year infusion of cash to ease the initial effects of billions in proposed cuts to local transportation funding over the next six years, the Budget Reconciliation and Financing Act proposes to nix long-overdue progress on restoring funding for local roads.
The State faces a long-term funding imbalance in transportation, with forecasted revenues insufficient to cover costs attached to current projects and distributions. In December, the Maryland Department of Transportation shared a proposed set of service and funding cutbacks, including a reduction in support for local governments, as a plan to manage this imbalance.
Local governments – specifically, counties – maintain the lion’s share of the state’s roads and bridges. Unlike most other states, in Maryland, local governments own and maintain 83 percent of the roads.
Current Law — Highway User Revenues
The motor vehicle fuel tax, registration fees, a share of the motor vehicle titling tax, and a share of the corporate income tax are designated as Highway User Revenues (HUR). The State allocates a portion of these revenues to the counties and municipalities to help fund the construction and maintenance of local roads.
HB 1187 / SB 726 of 2022 increased local jurisdictions’ highway user revenues by an estimated $51.9 million in fiscal 2024, $190.3 million in fiscal 2025, $241.5 million in fiscal 2026, and $245.6 million in fiscal 2027.
However, the Budget Reconciliation and Financing Act proposes to slash funding for local roads by eliminating planned increases in fiscal 2026 and fiscal 2027.
Police, Fire, and Public Safety
The proposed budget includes $50.9 million in enhancement funding above the mandated formula, including $18.9 million for Baltimore City.
The State provides grants to local governments to help provide for police protection services, which are distributed through a formula based on population and population density. Grants are shared between counties and municipalities based on expenditures, and municipalities receive an additional grant based on the number of police officers. The governor’s fiscal 2025 budget provides $50.9 million in enhancement funding above the mandated formula, including $18.9 million for Baltimore City.
Local Health Departments
The governor’s proposed budget includes $123.2 million for local health departments, a $7.4 million increase from fiscal 2023.
Disparity Grants
The fiscal 2025 proposed budget includes $188.5 million for the Disparity Grant program, a formula-driven decrease of $31.6 million from fiscal 2024.
Section 16-501 of the Local Government Article authorizes disparity grants to address the differences in Baltimore City’s capacities and certain counties’ capacities to raise revenue from the local income tax. In general, the grants are the lesser of an amount to raise the jurisdiction’s per capita income tax revenues to 75 percent of the state average or the fiscal year 2010 cap. The formula was modified during the 2013 legislative session to add a minimum grant amount based on the local tax effort of eligible counties and raises from 2.4 percent to 2.6 percent the local income tax rate required to be eligible to receive a grant.
Capital Budget
The fiscal 2025 capital budget for school construction totals $905.9 million and meets legislative intent to provide at least $450 million for public school construction programs. The budget also includes $425.4 million in revenue bonds for renovating and constructing public schools, which will be repaid using casino revenues.
Increased Funding for Housing Programs
Funding for housing and community development increases by $210.9 million, or 53.2 percent, from fiscal 2024 to the fiscal 2025 proposed budget after accounting for deficiencies. This increase includes an increase of $77.7 million in federal funds from the Infrastructure Investment and Jobs Act for broadband, but State funds also increase significantly due to enhanced funding for Rental Housing Programs ($28 million increase in State funds), the Strategic Demolition Fund ($35 million increase), and the Baltimore Regional Neighborhoods Initiative ($15 million increase).
Federal Infrastructure Funding
The budget provides $146 million of federal funds authorized through the Infrastructure Investment and Jobs Act (IIJA) budgeted in the Water Quality and Drinking Water revolving loan programs administered by the Maryland Department of the Environment. This is in addition to the $231 million received through fiscal 2024 and is part of a multi-year federal authorization that would provide $1.1 billion of support for water quality and watershed implementation plan infrastructure. The budget includes $172.8 million for broadband infrastructure, completing the $267.7 million provided by the IIJA.
Maryland Economy
What’s Next?
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. So, for example, the budget bill will start in the Senate this year.
Stay tuned to Conduit Street for more information.
Useful Links
Conduit Street Podcast: We Break Down the New Budget
Previous Conduit Street Coverage: Governor’s 2025 Budget – What It Means for Counties
Proposed Budget Documents (fiscal 2025):
Proposed Operating Budget Detail by Agency
Previous Conduit Street Coverage: State Offering Plan to Stave Off FY25 Transportation Cuts
Stay tuned to Conduit Street for more information.
