2025 Issue Preview: Maryland’s Budget Crossroads

As the 2025 Legislative Session approaches, MACo is profiling some issues expected to draw significant attention in the General Assembly. Counties are preparing for potential fiscal impacts as the State grapples with budget challenges and rising costs.

Maryland faces a $2.9 billion deficit in fiscal 2026, and structural shortfalls are projected to reach $6.3 billion by fiscal 2030. Lawmakers must confront difficult decisions to align revenues with rising costs tied to the Blueprint for Maryland’s Future, workforce needs, healthcare, and infrastructure.

What’s Driving the Fiscal Crisis?

Maryland’s fiscal health is deteriorating rapidly, and structural issues will only worsen without significant interventions. By fiscal 2030, the State’s ongoing revenues will cover just 83 percent of spending.

According to the Department of Legislative Services’ annual compilation of Issue Papers, for comparative purposes, during the Great Recession, estimated ongoing revenue in the final year of the fiscal 2008 and 2009 forecasts covered 89% and 87% of ongoing spending, respectively.

General fund expenses are escalating, driven by several high-cost obligations:

Education: Blueprint for Maryland’s Future

The Blueprint for Maryland’s Future—designed to transform education—will drive education aid costs up by $8.7 billion between 2025 and 2030. These investments aim to improve student outcomes, but:

Current revenue levels cannot sustain these costs without significant new funding.
The Blueprint Fund will expire by fiscal 2027, and a growing share of education costs will shift to the General Fund.

Entitlements and Health Services

Medicaid and other entitlement programs continue to grow at an accelerated pace:

Higher Enrollment Rates: Expanded access and population changes drive increases in program participation.
Inflationary Pressures: Rising costs of healthcare services further compound spending growth.
Entitlement programs will consume an increasingly larger budget share, leaving fewer resources for discretionary spending.

Public Employee Costs

State workforce expenses are rising sharply due to:

Wage Growth: Competitive salaries to attract and retain workers in a tight labor market.
Pension Contributions: Growing obligations to fund retirement benefits.
Healthcare Costs: Rising insurance expenses for State employees further strain the budget.

DDA Deficit Emerges as a New and Alarming Pressure

A previously unaccounted-for $350 million deficit in the Developmental Disabilities Administration (DDA) budget has surfaced, adding a new and significant strain on Maryland’s fiscal outlook. Analysts now warn the shortfall reflects an ongoing cost requiring sustained funding.

Revenue Projections: Small Gains Amid Growing Gaps

The Board of Revenue Estimates’ December 2024 projections show slight revenue increases for the current fiscal year and fiscal 2026.

The updated forecasts add $194.5 million to fiscal 2025 revenue estimates and $38.7 million to fiscal 2026, driven primarily by stronger-than-expected personal income tax collections. Despite these adjustments, the structural deficit persists, with significant budgetary hurdles looming.

Source: Maryland Board of Revenue Estimates

Economic resilience, particularly wage growth, underpins revenue increases. For fiscal 2025, personal income tax revenues saw a six percent boost, primarily due to wage growth and strong withholding tax collections.

However, sales tax and lottery revenues have underperformed, and the broader economy remains sluggish compared to pre-pandemic trends.

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Maryland’s reliance on federal employment and contracts compounds the risks, as potential shifts in federal workforce policies could disrupt revenue streams. Federal salaries and contracts account for a substantial portion of the state’s private-sector economy.

Federal Policy Uncertainty

As previously reported on Conduit Street, Maryland’s close ties to federal government operations leave its budget vulnerable to shifts in national policy. This interconnectedness introduces heightened uncertainty into revenue forecasts, making fiscal planning more complex.

Significant risks include expiring federal personal income tax provisions and potential disputes over the federal debt ceiling. These looming federal challenges could further destabilize Maryland’s fiscal outlook in the years ahead.

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.

Spending Affordability Committee Recommendations

The Maryland Spending Affordability Committee (SAC) provides advisory recommendations to the General Assembly on sustainable budget limits, including spending growth, reserve levels, and debt affordability, to support fiscal stability and economic resilience.

As previously reported on Conduit Street, the SAC issued recommendations to address the worsening budget outlook:

Eliminate the $2.9 billion fiscal 2026 deficit, preserve critical fund reserves, and align spending with revenues to close a projected $6.3 billion shortfall by fiscal 2030.

The SAC also called for targeted infrastructure investments, prioritizing critical workforce vacancies, and securing long-term funding for transportation and education programs.

The County Perspective: Local Budgets at Risk

Counties are already grappling with the financial pressures of meeting Blueprint for Maryland’s Future mandates and other growing demands, leaving little capacity to absorb additional strain from State budget gaps.

Reductions in State aid, new unfunded mandates, or cost shifts could force difficult local decisions affecting critical services like education, public safety, and infrastructure.

MACo 2025 Legislative Initiative: More Flexibility with Local Revenue Structures

Maryland’s local governments, including the charter counties with the broadest authority, are hampered 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 through equitable revenue structures and restricted state funding, empowering counties to be more self-sufficient in addressing their varied challenges and opportunities.