Maryland’s budget picture has darkened. The Department of Legislative Services (DLS) informed lawmakers this week that the State now faces a $1.4 billion shortfall in fiscal 2027, nearly five times larger than the projection made in the spring.
The updated forecast from DLS, presented to the Spending Affordability Committee, indicates that slower revenue growth, higher baseline costs, and statutory transfers to the Rainy Day Fund have significantly altered Maryland’s fiscal trajectory.
From Surplus to Shortfall
DLS estimates that the fiscal 2027 general fund outlook has worsened by $1.6 billion since the close of the 2025 session. Roughly half stems from lower revenues and the rest from higher spending.
The federal One Big Beautiful Bill Act (OBBBA) cut into State income tax receipts by about $371 million, mainly through the expanded federal SALT deduction and corporate tax cut provisions that reduce Maryland’s taxable base. Another $321 million was lost when midyear fiscal 2026 deficiencies depleted the carryover balance lawmakers had relied on.
On the spending side, Medicaid and behavioral health programs added $217 million, while education obligations increased by $175 million due to fund swaps and retirement costs.
Additionally, employee health and retirement contributions each rose by $100 million. Together, these changes account for nearly all of the deterioration in the near-term outlook.
DLS also noted that the $450 million deposit of the fiscal 2025 surplus into the Rainy Day Fund, required by statute, further reduces available cash for budgetary planning, only partially offset by $304 million drawn from excess reserves.
Federal Drag and Slower Growth
Maryland’s close fiscal ties to federal employment compound the challenge. The State has lost more than 15,000 federal jobs this year — the most of any state — resulting in lower personal income tax collections and local withholding.
Federal trade and tax changes continue to trim Maryland’s revenue base. At the same time, inflation and slower wage growth weigh on consumer spending, limiting growth in sales and income tax. The prolonged federal shutdown, now in its seventh week, will likely deepen those effects when revenue estimates are next revised.
Education and Blueprint Costs
Education remains a central driver of the State’s rising expenditures. DLS projects that Blueprint for Maryland’s Future spending will exceed $3.7 billion by fiscal 2031, while its dedicated fund will run out by fiscal 2028. That shift means the general fund will bear growing costs in the out-years.
Counties face the same fiscal pressure. In fiscal 2026 alone, counties are projected to provide at least $1.4 billion more in local funding for public schools than the Blueprint’s mandated local share, according to DLS analysis.
The State’s funding model has not kept pace with rising costs, leaving counties to fill staggering gaps in critical areas like:
- Special education – Underfunded by $1 billion annually,
- Student transportation – Underfunded by $500 million annually.
These gaps are not the result of county decisions but rather a formula that does not reflect actual school system costs. The economic landscape has undergone significant changes since the Blueprint’s enactment. COVID-19 has disrupted long-term projections, inflation has driven up costs, and uncertainty persists regarding federal funding.
Capital Outlook
DLS identified an $84 million gap in the capital program, even with a proposed $1.75 billion general obligation bond authorization. The shortfall affects multiple State commitments, including school construction, community colleges, and facility modernization.
Counties depend on predictable State capital support to manage enrollment growth, maintain safe buildings, and keep long-planned projects on schedule. Rising construction costs and delayed approvals create new local pressures, while State affordability limits restrict future bond authorizations.
School construction faces the most acute strain. Material and labor costs continue to climb, and inflation has pushed bids well above early estimates. Built to Learn provided temporary relief, but those dollars have nearly run out while project queues continue to grow.
Counties now face rising expectations for modern learning environments without adequate funding, underscoring MACo’s 2026 initiative to restore balance in the State–local partnership and secure predictable, shared funding for modern school facilities.
Transportation Outlook
Transportation funding now faces pressure from every direction. Recent revenue adjustments, including higher vehicle registration fees and changes to capital gains, are expected to generate approximately $4.8 billion through fiscal 2031.
Almost all of that funding will support maintenance of the existing network and pay down debt service, leaving very little room for expansion or strategic upgrades.
The constrained outlook limits Maryland’s ability to advance major capital priorities, modernize aging facilities, or respond to the transportation demands of a growing population. It also locks counties into an increasingly narrow space, where core local needs compete with the preservation of the statewide system.
The picture for counties becomes even sharper when examining Highway User Revenues. HUR remains well below historical levels, and the current trajectory in the Transportation Trust Fund leaves almost nothing available to restore local funding.
Local governments rely on HUR to maintain thousands of miles of local roads and bridges, which carry the majority of daily trips and support local economies. Chronic underfunding increases long-term costs, slows needed safety improvements, and puts more pressure on local general funds.
As previously reported on Conduit Street, while the Maryland Department of Transportation’s Draft Consolidated Transportation Program (CTP) for fiscal years 2026–2031 adds nearly $300 million compared to last year’s program, the headline for counties is far more sobering: Highway User Revenues are on track to plunge off a cliff, wiping out nearly $110 million in local road funding practically overnight.
Using a modest 2.5% inflation assumption, the cumulative shortfall for counties and Baltimore City will reach about $520 million by fiscal 2031 — a permanent loss unless the General Assembly acts.
Budget Outlook: Steepening Structural Gaps
Maryland now faces about $695 million in general fund deficiencies driven by prior-year costs, provider reimbursements at the Department of Health, and higher-than-expected spending in major entitlement and public safety programs. These deficiencies erase the fiscal 2026 balance lawmakers expected to carry forward.
Cash shortfalls begin in fiscal 2027 and deepen through fiscal 2031. The gap widens from roughly $259 million in fiscal 2026 to more than $3.1 billion by fiscal 2028.
Structural deficits follow a similar trajectory, with projections reaching nearly $4 billion by fiscal 2031. Even with the Rainy Day Fund at approximately 8% of revenues, ongoing revenues are expected to cover only about 89% of continuing spending by fiscal 2030.
General fund spending growth outpaces revenues throughout the outlook period. Costs rise by $2.8 billion in fiscal 2028 alone, driven by Blueprint spending, fund swaps to the general fund, Medicaid and behavioral health obligations, and personnel costs. Revenue growth does not keep pace, which leaves a persistent structural imbalance.
For counties, the widening gap signals continued risk. Tight State finances increase the likelihood of cost shifts, reduced local aid, and slower progress on shared priorities in education, transportation, public safety, and public health.
County Implications
Counties face direct exposure as the State’s fiscal position weakens. Slower income tax growth, declining withholding from federal job losses, and softer consumer activity all affect county revenues in the same way they affect the State.
As the gap widens, counties face a higher likelihood of cost shifts, reduced local aid, and delays in State support for shared priorities in education, transportation, public health, and public safety.
Education pressures continue to intensify. Counties already fund well above the mandated local share for public schools, and rising Blueprint costs increase the risk that the State will lean more heavily on local partners to cover program growth.
Transportation funding creates a similar strain. Highway User Revenues remain far below historical levels, and the current outlook for the Transportation Trust Fund leaves little capacity to restore local road funding or support long-planned projects.
The Rainy Day Fund holds about $2.3 billion, which sits roughly $800 million above the statutory minimum. That cushion offers short-term flexibility, but it does not resolve the long-term mismatch between ongoing revenues and ongoing spending.
Structural pressures continue to grow faster than the revenue base, forcing difficult decisions for both State and local governments as they work to maintain essential services and support community needs.
What’s Next
The Board of Revenue Estimates will update its forecast in December, prior to the governor submitting the fiscal 2027 budget proposal in January. Lawmakers will then determine how to align long-term obligations, including Blueprint implementation and transportation funding, with sustainable revenues.
MACo will continue to monitor these developments and advocate for a balanced, reliable fiscal partnership that protects county revenues, preserves necessary funding for education and infrastructure, and prevents unfunded mandates.
Useful Links
Spending Affordability Briefing
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