This week, the Department of Legislative Services (DLS) presented its annual fiscal briefing to the General Assembly’s budget committees. The briefing outlined the governor’s proposed fiscal 2027 operating and capital budgets, State aid to local governments, and Maryland’s broader economic and revenue outlook.
As previously reported on Conduit Street, Governor Wes Moore’s $70.8 billion fiscal 2027 budget closes a projected $1.5 billion shortfall through fund transfers, capped formulas, and cost shifts rather than long-term structural fixes. While the governor’s budget increases funding that flows through county governments, it leaves unresolved pressures on county operations and continues to rely on counties to absorb costs tied to State policy decisions.
The DLS briefing reinforced a familiar theme for counties: headline growth in “local aid” reflects school funding routed through counties, while discretionary aid remains flat, transportation funding lacks a long-term path, and new or continued cost shifts compound pressures already embedded in county budgets.
Quick Look at the Fiscal 2027 Budget
Governor Moore’s proposed $70.8 billion fiscal 2027 budget maintains spending growth while relying heavily on one-time actions and fund swaps.
Toplines include:
- Total All Funds: $70.8 billion
- General Fund: $27.7 billion
- Special Funds: Growth driven largely by education and transportation accounts
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Federal Funds: Flat to declining, reflecting broader federal uncertainty
While total spending increases, the General Fund declines slightly from prior expectations. The budget balance depends on fund transfers, bond swaps, and capped formulas rather than recurring revenue growth.
DLS emphasized that these tools address short-term balance but do not resolve the State’s longer-term structural imbalance.
Structural Outlook
DLS continues to project significant out-year deficits. Education spending under the Blueprint for Maryland’s Future remains the dominant cost driver, growing faster than available revenues even as other areas flatten or decline.
While DLS anticipates slower Medicaid growth in future years, K–12 education costs continue to outpace projections made when the Blueprint passed. Inflation, workforce costs, and service demands have reshaped the fiscal landscape since 2020, yet funding formulas have not adjusted to reflect those changes.
Budget Includes Enhancements
The governor’s budget includes at least $269 million in discretionary enhancements that were not anticipated in the Department of Legislative Services forecast. Almost half of this funding targets economic growth and business attraction, with the remainder spread across public safety, infrastructure, higher education, and targeted State priorities.
Potential Legislative Issues
- Discretionary enhancements exceed forecasts.
The budget includes at least $269 million in discretionary enhancements not anticipated in the DLS forecast. Nearly half of this funding targets economic growth initiatives, with the remainder spread across employee compensation, public safety, education-related costs, and targeted capital and program investments.
- Long-term budget sustainability remains uncertain.
The budget balances in the near term but relies on one-time actions, fund swaps, and optimistic assumptions that leave limited margin for error in future years.
- Federal policy changes create material risk.
Ongoing federal policy uncertainty poses significant risks to Maryland’s economy and budget. Additional reductions in federal employment or aid to states would directly affect revenues and spending pressures. The General Assembly may need to consider higher cash reserves to manage that risk.
- Additional federal tax decoupling options remain on the table.
While the governor proposes decoupling from select federal tax provisions under the OBBBA, DLS identified further opportunities that lawmakers may consider:
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- Decoupling from full expensing of research and experimental expenditures could generate roughly $100 million over fiscal 2026 and fiscal 2027.
- Decoupling from expanded business interest expense deductions could generate roughly $28 million over the same period.
- Behavioral health funding may fall short of demand.
The budget assumes roughly $170 million less for adult behavioral health services than projected in the December 2025 DLS forecast, even as enrollment and demand under Medicaid have increased sharply over the last two years.
- Unverified federal transportation revenue poses backfill risk.
At the close of fiscal 2025, the Office of Legislative Audits identified $1.4 billion in federal revenue that the Maryland Department of Transportation had assumed without supporting documentation. A portion of this revenue may ultimately require State funds to backfill.
- State employee health insurance costs continue to climb.
Health insurance costs for State employees are projected to increase by roughly 9% in fiscal 2027, adding pressure to the operating budget.
- Child Victims Act liability remains unresolved.
Approximately 12,000 claims are pending under the Child Victims Act as of June 1, 2025. The State’s liability is capped at $890,000 per occurrence for those claims, but no dedicated funding source exists, leaving significant exposure in the out-years.
What “Local Aid” Means in Practice
Before digging into the numbers, it is important to clarify what the State means when it highlights increases in “local aid.”
In practice, local aid primarily means school funding.
Roughly 85% of all State aid flowing to counties supports K–12 education. Counties serve as the funding conduit, but local governments do not control how school systems spend those dollars. Counties also fund significant education costs outside State formulas, including school construction, operating gaps, and transportation.
That distinction matters when evaluating budget growth. Of the $380.8 million increase in total local aid for fiscal 2027, about 97% reflects increased State funding for primary and secondary education.
State Aid to Local Governments
The fiscal 2027 budget provides $11.97 billion in State aid to local governments, an increase of $380.8 million (3.3%) over fiscal 2026. That figure includes $110 million in contingent reductions.
Direct State aid, excluding retirement contributions, totals $10.87 billion, up $341.9 million.
The primary increases include:
- $370.8 million for K–12 education
- $13 million for community colleges
- $2 million for libraries
- $2 million for public safety
Education Funding Continues to Drive Growth
K–12 education funding increases by $359 million (3.7%) in fiscal 2027. That growth reflects both formula-driven aid and significant discretionary actions tied to the Blueprint for Maryland’s Future.
The increase includes $228 million in discretionary funding from the Blueprint Fund to hold school systems covered by the Community Eligibility Provision harmless from declines in Free and Reduced-price Meal (FARMS) counts. The Administration plans to introduce legislation to extend this hold-harmless policy indefinitely.
At the same time, underlying enrollment trends dampen formula growth. Full-time equivalent enrollment declines by 1%, while English Language Learner counts fall by 4% and FARMS counts decline by 2%. Even with those headwinds, every school system except Garrett County receives an increase in direct State aid in fiscal 2027.
State aid for K–12 education totals $10.21 billion, up $370.8 million (3.8%) from fiscal 2026.
Funding includes:
- Foundation Program formula aid
- Compensatory Education technical adjustments
- Continued student transportation funding
- Flat funding for nonpublic special education placements following last year’s policy changes
While State school aid continues to grow, counties still fund substantial education costs that State formulas do not fully cover.
Even with increased State support, counties continue to absorb roughly $1 billion each year in underfunded special education costs and roughly $500 million annually in underfunded student transportation costs.
Those obligations do not disappear in tight budget years. Counties pay them anyway.
Transportation: Stable on Paper, Constrained in Practice
Transportation aid to local governments remains essentially flat. The fiscal 2027 budget provides $470.8 million in transportation aid, an increase of just $327,000 (0.1%) from fiscal 2026.
Local governments maintain more than 80% of Maryland’s road miles and rely almost entirely on HUR for resurfacing, bridge repairs, and safety improvements.
Highway User Revenues (HUR) remain at current levels. However, the local share of transportation revenues drops from roughly 20% to 15.6% in fiscal 2028. That change triggers a nearly $110 million reduction for counties and Baltimore City in a single year.
Using a modest 2.5% inflation assumption, the cumulative shortfall reaches roughly $520 million by fiscal 2031 unless the General Assembly acts.
Other transportation programs remain flat:
- Locally Operated Transit Systems
- Elderly and Disabled Transportation
- Lottery-funded Bus Rapid Transit allocations
Public Safety Aid Shows Limited Growth
State aid for police, fire, and public safety totals $215.2 million, an increase of $1.6 million (0.8%).
Funding includes formula aid for police protection, fire and rescue grants, and targeted public safety programs. These programs support important functions but do not materially reduce counties’ reliance on local revenues to fund core public safety services.
Disparity Grants and Local Health Funding Hold Flat
Disparity Grant funding remains flat at $176.6 million. The BRFA proposes to level-fund the program through fiscal 2029, locking in three years of zero growth for counties with the weakest tax bases. This provision would cut the Disparity Grant program by $27 million in fiscal 2027.
Local health department funding totals $115.2 million. While funding remains stable, outdated formulas continue to strain local health departments amid rising costs and expanding responsibilities.
Community Colleges: Modest Growth With New Caps
State aid for community colleges totals $518.1 million, an increase of $13.0 million (2.6%).
The BRFA proposes to cap enrollment-driven growth under the Senator John R. Cade formula at 3% annually through fiscal 2029. Under the uncapped formula, funding would grow by $32 million in fiscal 2027 alone. The cap reduces that increase by $21 million.
The State continues to pay pension and retirement costs for eligible community college employees. However, the BRFA shifts half of future retirement cost growth to counties in perpetuity.
BRFA: Cost Shifts and New Local Obligations
The Budget Reconciliation and Financing Act implements the governor’s budget by changing State law, capping formulas, redirecting funds, and shifting costs.
For counties, the BRFA compounds pressures already absorbed in fiscal 2026.
Significant provisions include:
- Shifting 50% of the increased retirement costs for K–12 education, community colleges, and libraries to local governments beginning in fiscal 2027
- Capping community college formula growth during a period of workforce demand
- Expanding allowable uses of the 9-1-1 Trust Fund to cover State agency operations, diverting funds from county emergency communications systems
- Creating an assisted outpatient treatment structure that ultimately shifts 100% of program costs to counties by fiscal 2031
- Level-funding Disparity Grants through fiscal 2029
Taken together, counties face roughly $200 million in new or continued obligations across the last two budget cycles to help balance the State’s books.
The Bottom Line for Counties
The governor’s fiscal 2027 budget increases funding that flows through county governments, but it does not ease the pressures counties face.
Education aid continues to grow on paper, transportation funding remains temporarily stable, and overall “local aid” rises. At the same time, the spending plan relies on capped formulas, flat-funded programs, and significant cost shifts that push more responsibility onto counties without providing new tools or flexibility.
Those shifts occur even as counties face the same economic uncertainty, inflationary pressures, and service demands as the State. Counties fund schools, build and maintain roads, support public safety, and deliver core services every day. Yet, the State budget increasingly treats local governments as a backstop for unresolved State fiscal choices.
As the General Assembly begins its review, MACo will continue pressing lawmakers to reject cost shifts, protect local revenue capacity, and restore balance to the State–local fiscal partnership. Counties cannot serve as the State’s fiscal backstop without consequences for residents and local services.
Stay tuned to Conduit Street for continued analysis as the budget process unfolds and for advocacy updates as the governor’s budget moves through the Maryland General Assembly.