What happened to Maryland's budget deficit?

For the first time in six years, Maryland enters a legislative session without an immediate budget crisis. The latest projections show that Maryland's revenues will be sufficient to cover "baseline" expenditures, through the next fiscal year: that is until June 30, 2014.

Over the past several years at this point in the budget cycle, Maryland faced projected shortfalls in the one to two billion dollar range. The shortfalls were resolved each year through a combination of budget cuts, transfers from special funds to the general funds, and revenue increases (including taxes, fees, and expanded gambling).

So why is this year different?

Part of the difference is the continuing economic recovery. The recovery is weak and sporadic. Maryland has not yet recovered all of the jobs its lost in the recession. Nevertheless, the recovery has been sufficient to halt the annual decline of state revenues and also to generate some modest growth.

Another part of what makes this year different is good luck. For example, the dynamics of the national credit market have helped the state receive "premium" payments from investors when it sells bonds, and this reduces the growth in payments for annual debt service.

Let's give credit where credit is due: the improved outlook for Maryland's general fund is also due to good planning and management on the part of state officials. In 2010 the legislature set a goal of resolving the state's structural deficit over three years (the "structural deficit" is the ongoing gap between revenues received and expenditures incurred, excluding one-time and temporary effects).

The Governor signed on to the legislature's plan. The state made some difficult decisions to hold back expenditure growth and raise revenues, including raising taxes on upper-income households, alcohol, and cigarettes. And it worked.

In a week, the Governor will submit his proposed budget for the legislature's consideration. We expect it to have some significant cuts and some modest initiatives, but nothing too dramatic.

A word of warning though: there are three threats that could mess up Maryland's finances before the legislative session concludes in April.

• Congress' next actions to reduce the federal deficit.
• Maryland's response to the need to fund its transportation program.
• The remaining "structural deficit."

We'll discuss each of these threats in upcoming blogs.