Is Maryland the next 'rich state gone broke'?
Chronic budget deficits and slowing economic growth triggered Connecticut's budget crisis in 2017. Maryland could be next.
For years, I’ve been watching the state of Maryland quietly descend into a budget crisis. Revenue is slowing, expenses keep climbing and the legislature’s habit of putting off difficult decisions has led to a nearly $3 billion budget deficit for the fiscal year that starts on July 1.
It’s not just the annual operating budget. The state transportation fund, which helps pay for new projects and ongoing maintenance for roads, bridges and transit, is cutting $1.3 billion in over the next six years. And the state’s multi-billion-dollar education reform plan is only funded through 2027.
While the Old Line State is far from alone in feeling the budget squeeze this year, lawmakers in Annapolis will likely be facing more difficult tradeoffs than their counterparts elsewhere. After historic revenue growth, state tax revenue collections are normalizing. For many places that will mean delaying spending or outright cuts while also looking for small areas to increase revenue (most likely with less politically painful fees). Rainy day funds and budget reserves, which swelled thanks to budget surpluses in recent years, have already started to decline and will probably continue to shrink over the next year.
But in Maryland, the budget deficit isn’t just a revenue surge comedown. For far too long, the AAA-rated state has gotten by on its good looks (home to high income earners) and reputation (proximity to the nation’s capital, sound financial management policies). In reality, the state has been underperforming for years in nearly all the ways that count.
It’s no “Illinois.” At least not yet. But it bears a striking resemblance to Connecticut and the problems that state faced during its budget crisis nearly a decade ago: chronic overspending, anemic growth and growing debt. Connecticut’s chronic budget woes were well known among policy wonks in the 2010s but credit rating downgrades and a budget impasse in 2017 inspired several national stories marveling at how America’s richest state couldn’t get its act together.
What on Earth Is Wrong With Connecticut? - The Atlantic
How Did America's Richest State Become Such a Fiscal Mess? - Governing
Nation’s Wealthiest State May be Tapped Out on Taxing the Rich - WSJ
Here’s why Maryland might be the next poster child for a “rich state gone bust.”
Chronic overspending
Maryland, like Connecticut in the 2010s, habitually spends more than it receives in funding and revenue but tends to paper over the structural deficit with one-time solutions. According to data from Pew’s Fiscal 50, Maryland reported annual deficits in nine out of the 15 years between fiscal years 2008 and 2022 while Connecticut reported 11. (The median state experienced three deficits during the same time frame.)
Moody’s Investors Service also notes that Maryland has also “historically had weaker available fund balances than other Aaa-rated states and this relationship likely will continue as the state struggles to keep up with expenditure needs while limiting tax increases.”
What has saved Maryland so far: Maryland gets lots of high marks from the policy community and from ratings agencies for its fiscal management policies. It’s one of only a handful of states that conducts a long-term budget analysis which can identify structural deficits or potential revenue weakness years ahead of time.
But there’s knowing about a problem…and then there’s doing something about it. In 2017, Governing’s Alan Greenblatt wrote that Connecticut lawmakers “have acted as if they were on a shopping spree at Christmas, confident that the money to pay off the credit cards would somehow be found in the new year.”
The same could be said for Maryland. Legislators in Annapolis have been warned for years about the state’s structural deficit. Then in 2021, they passed a highly anticipated education reform plan—but didn’t identify a new revenue source to pay for it. The Blueprint for Maryland’s Future is a massive (and needed) investment that will cost an estimated $4 billion by 2029. But earlier this year when it became clear that the plan was driving a good portion of the state’s budget deficit, most lawmakers in Annapolis still were unfazed.
“Several years from now we’re going to have to have a much more direct conversation about the long-term costs,” state Senate President Bill Ferguson (D), told Capital News Service reporters. “But we’re not there yet.”
Anemic economic growth
Maryland’s GDP has generally lagged behind the nation since 2011. Connecticut’s economy, which was contracting in the early 2010s, has done better than Maryland’s for three out of the last five years.
Not surprisingly, the federal government’s era of austerity and budget cuts during the 2010s put a strain on Maryland’s own growth. Virginia also struggled for similar reasons but since 2018, it has tracked closely with the national GDP. The fact that Maryland has never been able to regain its footing, combined with its failure to capitalize on the Covid-era federal funding boom, are red flags.
Increasing debt
Maryland’s pension system has underperformed on its investment returns compared to the national average. Over 10 years, it has posted a 7% average annual return compared to the 8% national average. That’s the same as Connecticut’s performance and worse than struggling systems such as Illinois (7.6%) and New Jersey (7.4%).
But even more troubling is Maryland’s lack of momentum. The funding ratio for its state employees plan has slipped in recent years to 70% (lower than the national average). The reversal also comes at a time when most pension systems improved—including New Jersey, Connecticut and Illinois—thanks to good investment returns and extra deposits into the systems.
Pros and cons: Maryland has had much better funding discipline than states with large unfunded pension liabilities. But the state’s chronic underperformance plus higher-risk investment portfolio are warning signs that all might not be well and could further pressure the budget.
What’s next?
Maryland’s spending pressures have left lawmakers with few options and it’s very possible the legislature will miss its 2025 budget deadline. Gov. Wes Moore inherited this mess when he took office in 2023, but the pandemic recovery followed by the Bay Bridge disaster has derailed any real work on the budget’s long-term prognosis.
It means 2025 could feel like Great Recession budgeting all over again.
“We know Maryland is staring down the biggest budget crisis of the last twenty years,” Gov. Wes Moore (D) recently warned. “Billions of dollars from the federal government was not a structural surplus. It was a sugar high.”
The writer of this article fails to mention the obvious. As not the biggest Larry Hogan fan, he left office with a 5 billion dollar surplus. He warned the incoming democrat administration not to blow through it. But Wes Moore and his cronies, much like drunken sailors, blew through that money like it was no big deal. Try mentioning that in your story....
It's very expensive to maintain the black hole that is Baltimore.