MD faces $600 million FY 2014 "structural" deficit, more if feds push US off "fiscal cliff"

As the Governor develops the budget for fiscal year 2014, Maryland is closer to a balanced budget picture at this point in the process than in any of in the last five years. Threats to the economy from the federal budget impasse could make things much worse, though.

The Department of Legislative Services (DLS) briefed the Spending Affordability Committee on Wednesday, forecasting Maryland's economy and issues facing the state in fiscal year (FY) 2014 (DLS's briefing handout).

MBTPI graph from Dep't of Legislative Services data

The highlights include:

Maryland's Economic Outlook

• Labor Market - 12 month payroll employment growth accelerated from June 2011 through February or March of this year. Data from the Current Employment Survey suggests employment grew much slower in the months following, but the trend was still positive. Look for our blog later today about the latest employment figures released this morning (hint: they're good news).
• Housing Market - Existing home sales have been up for the last five months, compared to 12 months prior. Prices for existing homes have been rising since February. Part of the explanation for improvement in the housing market may be that the inventory of homes on the market is down 25 percent compared to 2011.
• Consumer Market - So far this year new vehicle sales are up 10.8 percent while used car sales are essentially flat, compared to 2011. Vehicle prices are also up. Personal income growth has flattened over the first two quarters of 2012, to just under 4 percent.
• Economic Forecast - The Board of Revenue Estimates forecasts that from the current FY 2013 to FY 2015 rising employment (between 0.9 and 1.8 percent growth), personal income (between 3.3 and 6.1 percent growth), and wage and salary income (between 3.4 and 4.2 percent) will reflect the improving state economy.

The improving economy means that DLS projects state revenue growth in FY 2014 of 2.7 percent, to $15.3 billion.

DLS also presented a baseline current services budget (in other words, what the budget would look like if current programs were continued, including expected changes in caseloads, etc.).

One important change this year is that DLS has decided to report information about expenditures from the general funds and some of the state's special funds together. This is an important change, because legislators have increasingly relied on the creation of special funds to help meet revenue shortfalls, masking increases in general funds expenditures. As the inset table shows, including special funds increases the FY 2013 budget by $1.7 billion and the baseline FY 2014 budget by $1.3 billion. This also impacts how we interpret the budget's growth rate. General funds are projected to grow 8.2 percent in FY 2014. However, including the special funds with the general funds drops the annual growth rate of expenditures significantly, to just 4.8 percent.

All of this means that Maryland is likely to face a structural deficit in the FY 2014 budget of more than $600 million. While smaller than in previous years, this is still significant and will require careful work by the executive and legislative branches.

Finally, none of these numbers may mean much if the United States Congress fails to solve their own fiscal problems, specifically sequestration (mandatory across-the-board cuts to discretionary federal spending) and the expiration of various tax cuts and other revenue measures. If Congress fails to act, Maryland could lose $117.6 million in direct federal aid during federal fiscal 2013. Furthermore, Maryland stands to lose up to 60,000 jobs in calendar year 2014 and a further $635 million in lost revenue due to smaller state income and sales tax collections.