This article is part of MACo’s weekly Policy Deep Dive series, in which expert policy analysts explore and explain the day’s top county policy issues. Read all of MACo’s Policy Deep Dives.

Maryland’s fiscal 2024 closeout highlights a revenue picture that may look stronger than it is, primarily due to the timing of several extraordinary revenue events.

The State closed the year with a general fund balance of $1.06 billion, but ongoing general fund revenues — more reflective of the State’s fiscal health — increased by only 1.0 percent over fiscal 2023.

With $581 million allocated to fiscal 2025 operations, the unassigned fund balance rests at $479 million — offering a buffer, though underscored by mixed revenue performance, a slowing economic environment, and a deteriorating fiscal picture.

The Real Story Behind Fiscal 2024 Revenue Growth: A Closer Look

At first glance, the State’s fiscal 2024 revenue numbers seem solid, with general fund (GF) revenues totaling $24.8 billion — an increase of 5.0 percent over the previous year and $217 million above estimates.

However, a closer look at the data reveals that much of this growth stems from extraordinary, one-time revenue boosts that paint a more favorable picture than the underlying fiscal reality.

In fiscal 2023, the State made a significant $800 million transfer from the general fund to the Blueprint for Maryland’s Future Fund, artificially lowering last year’s total GF revenue. This one-time transfer set the stage for this year’s revenue growth to appear more robust than it was, as that money did not impact fiscal 2024 totals.

Moreover, the $150 million transfer from the Local Income Tax Reserve Fund (LITRF) to the general fund in fiscal 2024 further padded the numbers. An audit revealed the LITRF was overfunded by $316 million, allowing the State to shift a substantial portion of those funds into its general fund.

So, while the headline figures suggest robust growth, they mask the reality that the State’s ongoing revenue streams, such as personal income tax, sales tax, and other significant sources, experienced much slower growth.

Revenue Variances: Key Tax Sources Face Pressures

Personal income tax (PIT) revenues, the most significant contributor to the State’s general fund, increased 1.1 percent compared to fiscal 2023, falling short of expectations by $79.7 million because of variances in withholding revenue and higher-than-expected refunds. The slowdown in wage growth and employment trends certainly played a role here, reflecting the broader economic headwinds that Maryland and other states are navigating.

Another critical revenue source, sales and use tax, also underperformed, coming in 1.8 percent lower than the previous fiscal year. The ongoing economic slowdown and a shift to service-oriented spending contributed to this decline, along with increased allocations to the Blueprint for Maryland’s Future Fund, which diverted a larger share of revenues.

Corporate Income and Interest Revenues: Outliers in a Mixed Picture

Most revenue streams experienced weaker growth, but corporate income tax (CIT) revenue surged 7.4 percent, surpassing estimates by $130.5 million. Stronger-than-anticipated profits drove this unexpected growth, yet the volatility of corporate profitability and broader economic trends warrant careful consideration of this outperformance.

Interest income also provided a notable boost, driven by elevated cash balances and higher interest rates due to federal monetary policies. The $380 million generated from interest income surpassed the $302 million estimate, marking a rare upside in a year otherwise marked by revenue constraints.

Fiscal Challenges Ahead: Slower Growth and Shifting Revenue Streams

Maryland’s fiscal landscape continues to reflect the complex dynamics of a post-pandemic economy.

Ongoing general fund revenue growth dropped to 1.0 percent in fiscal 2024, down from 1.7 percent the previous year and significantly below the pandemic-fueled growth of prior years. This deceleration highlights the challenges ahead as the State manages tighter fiscal conditions, slower job growth, and inflation that remains slightly above target.

Legislation redirecting portions of sales tax and corporate income tax revenues to specific funds, such as education and transportation, further constrains the general fund. As a result, while the State maintained a positive balance, the sustainability of some revenue streams could come under pressure, particularly as inflation and interest rate uncertainties continue to impact economic activity.

A Cautious Approach Moving into Fiscal 2025

The fiscal year 2024 closeout underscores the importance of a cautious approach as Maryland heads into fiscal 2025. While a modest surplus remains, the ongoing economic slowdown and the volatility in nonwage income sources pose risks.

The Department of Legislative Services (DLS) anticipates that the State’s structural deficit will grow from $483 million in fiscal 2025 to $3.7 billion by fiscal 2029, meaning ongoing spending will far exceed projected revenues.

As previously reported on Conduit Street, the cash and structural budget outlook deteriorates substantially through 2029 primarily because the costs of ongoing K-12 education enhancements outpace the availability of special funds in the Blueprint for Maryland’s Future Fund.

With actions taken in the fiscal 2025 budget and Budget Reconciliation and Financing Act (BRFA), Blueprint resources provide adequate funding for Blueprint programs through fiscal 2027. However, 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.

Federal Rate Cut Brings Opportunities and Risks for State and Local Budgets

The Federal Reserve’s recent decision to cut interest rates by 0.5 percentage points aims to boost the economy, but it also signals a significant shift for state and local budgets.

Lower rates reduce borrowing costs, especially for infrastructure projects, which may encourage states and local governments to finance more long-term investments. Additionally, states may refinance older, high-interest bonds, creating fiscal flexibility.

Lower mortgage rates could also benefit the housing market, potentially increasing homebuilding and reducing the need for state-funded housing assistance. The cut could boost economic activity, leading to higher tax revenues from increased consumer spending and bullish stock market performance, boosting capital gains and pension funds.

However, lower rates will decrease interest income from state reserves, which grew due to previously high rates. States relying on these reserves to balance budgets face potential challenges. Despite this, the fiscal advantages of reduced borrowing costs and increased revenues should outweigh these concerns, offering governments opportunities to adapt and manage their finances effectively.

Stay tuned to Conduit Street for more information.