With the 2025 legislative session looming, Maryland lawmakers are bracing for significant budget challenges that could demand deep spending cuts, new tax measures, or transformative reforms to close mounting structural deficits projected through fiscal 2030.
Maryland lawmakers left this week’s Spending Affordability briefing with sobering news: the State’s fiscal crisis is accelerating, with a structural deficit projected to hit nearly $6 billion by fiscal 2030. The daunting fiscal outlook sets the stage for difficult decisions on spending cuts, revenue measures, or sweeping reforms.
Why This Matters for Counties
Counties depend on State funding to support vital services like schools, transportation, and public safety. As Maryland’s budget gap grows, counties may face the brunt of financial shortfalls through reduced State aid and unfunded mandates.
Economic Weakness
Maryland’s economic indicators are showing signs of concern. As of September 2024, the state’s unemployment rate remained at 2.9 percent, consistent with the previous month. However, initial unemployment insurance claims have experienced fluctuations, with a notable increase in early October.
The private sector employment outlook is also troubling. Year-over-year payroll growth turned negative early in 2024, and slight job gains since then have been insufficient. The housing market continues to suffer, with median home prices declining steadily and home sales contracting.
Budget Challenges
Maryland’s fiscal health is deteriorating fast, with structural issues that will only get worse without significant interventions. By fiscal 2026, the State’s ongoing revenues will cover just 91.7 percent of spending, plummeting to 84 percent by 2030.
This looming budget gap is even more severe than what Maryland experienced during the Great Recession. Additionally, cash reserves are expected to turn negative, with a projected $2.7 billion shortfall by 2026, even if lawmakers tap into the Rainy Day Fund.
“A recession is not driving this budget problem,” said David Romans, a Department of Legislative Services budget analyst. “It’s being driven by a somewhat stagnant economy and by our spending ambitions.”
Revenue Shortfalls
The meeting revealed a dire revenue forecast across multiple revenue streams:
- Personal Income Tax: Collections fell short by $80 million, a 0.6 percent underperformance, with only modest growth projected for 2025.
- Sales and Use Tax: Receipts missed by $13 million, and future estimates are revised, projecting a mere 1.4 percent increase, well below inflation.
- Corporate Income Tax: While exceeding expectations by $131 million, this isn’t enough to counteract broader fiscal challenges.
Spending Pressures
General fund expenses are escalating across the board, driven by several high-cost obligations:
- Education: The Blueprint for Maryland’s Future will drive education aid costs up by $8.7 billion between 2025 and 2030. These investments aim to transform the education system, but current revenue levels cannot sustain them without a significant boost.
- Entitlements and Health Services: Medicaid and other entitlement programs continue to grow, with inflation and higher enrollment rates driving costs. These programs will take up an increasingly larger share of the budget.
- Public Employee Costs: State personnel expenses are also climbing sharply. Rising wages, pension contributions, and healthcare costs for State workers are adding significant pressure to Maryland’s financial outlook.
Debt and Long-term Liabilities
Maryland’s debt burden raises serious concerns. Debt service payments will consume a growing share of State revenues, reducing funds available for essential programs.
The Capital Debt Affordability Committee highlighted the $2.4 billion in unrecognized actuarial losses within the State Retirement and Pension System. As these losses materialize, pension contributions must increase, further straining State finances.
Short-term Solutions and Long-term Risks
DLS outlined several short-term measures to close the budget gap, but these fixes come with significant long-term risks:
- Tapping the Rainy Day Fund: Using the $2.5 billion in the Rainy Day Fund could provide immediate relief, covering gaps for fiscal 2025 and part of 2026. However, depleting these reserves would expose Maryland if a recession hits, eliminating a critical cushion for economic downturns.
- Suspending the Revenue Volatility Requirement: Lawmakers could suspend the mandate to set aside funds for revenue volatility, freeing hundreds of millions of dollars for immediate use. But this move would leave Maryland unprotected against unpredictable revenue swings in the future.
- Shifting Cash to the Deficit: Another option is to transfer $250 million in cash from capital projects to cover operational shortfalls. Yet, this only delays the problem and could create long-term infrastructure deficits.
- Borrowing for Capital Projects: Maryland could borrow money for already-approved capital projects, redirecting cash to cover operational costs. However, this would increase the State’s debt burden and limit future borrowing capacity.
Federal Dependency and Risks
The federal government’s presence is deeply embedded in Maryland’s economy, making the state highly vulnerable to federal fiscal instability and policy changes. Approximately 160,000 civilian federal jobs are located in Maryland, contributing $25 billion in wages—around 11 percent of the state’s total wages.
While Virginia and the District of Columbia each host around 190,000 federal jobs, many Marylanders commute to those jurisdictions, underscoring the region’s interconnected workforce.
An analysis of tax year 2021 data from the Comptroller’s Office revealed that about 256,000 Marylanders received a federal W-2, making up 8 percent of all taxpayers. Counties like St. Mary’s, Charles, and Calvert are particularly dependent on federal employment, with a significant portion of their local economies tied to federal operations and contracts.
Federal contract spending remains a crucial driver of Maryland’s private-sector economy. In federal fiscal 2023, obligations for work performed in the state totaled $42 billion, accounting for approximately 10 percent of Maryland’s private-sector gross state product.
The stakes are high for Maryland’s fiscal health. The fiscal 2025 budget includes about $19 billion in federal funds, with Medicaid ($9.8 billion) and the Supplemental Nutrition Assistance Program (SNAP) ($2.1 billion) as the most significant sources.
A significant concern is the impact of potential federal funding cuts or policy shifts. The election has put several projects at risk, including Maryland’s selection as the future home of the Federal Bureau of Investigation, and funding for critical infrastructure repairs, such as the Key Bridge, is becoming increasingly uncertain.
This reliance on federal dollars means any significant changes in federal employment or contract spending could ripple through Maryland’s economy, affecting jobs, wages, and crucial programs counties depend on to support residents.
Overall Outlook
Moody’s downgraded Maryland’s debt outlook to negative in June 2024. Concerns over structural deficits and dwindling reserves prompted the shift.
Maryland’s liabilities rank less favorably than other AAA-rated states, heightening risks to fiscal sustainability. These financial pressures could reduce the State’s flexibility and lead to greater competition for limited resources, directly impacting counties.
The overall outlook is grim. Maryland’s fiscal crisis, fueled by economic stagnation and soaring expenses, demands bold, long-term reforms. Counties must prepare for a challenging road ahead, advocating to protect critical funding while managing increased demands and shrinking resources.
MACo 2025 Legislative Initiative: More Flexibility with Local Revenue Structures
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 to capture a more modern economy and newly-opened markets, Maryland should 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.
This statewide county priority promotes local decision-making with revenue structures and restricted state funding and empowers counties to be more self-sufficient in addressing their varied challenges and opportunities.
Stay tuned to Conduit Street for more information.
Useful Links
Department of Legislative Services: Spending Affordability Briefing
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