Budget advisers are warning that Baltimore could face a $100 million shortfall or worse next year — a financial position one official this week called among the most “precarious” he’s seen over his time with the city.

The projection comes as escalated state dues for schools have put a squeeze on Baltimore’s budget sooner than city leaders anticipated, forcing the city to dip into $30 million of one-time funding just to pass a balanced budget in June. At the time, Mayor Brandon Scott’s Department of Finance warned that the city could have to make cutbacks as soon as the next fiscal year to accommodate further increases in state-mandated education funding.

And Tuesday the department argued against a new tax credit to incentivize development of more affordable housing units, arguing that the city would struggle to shoulder revenues losses and warning the City Council of a looming “structural deficit” of $100 million or more.

But whether the projection from finance officials means the city will be forced to curtail services or make other cutbacks once the fiscal year closes in June remains to be seen. Here’s what we know.

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What’s a ‘structural deficit’?

A structural deficit is when government expenses exceed revenues during typical economic conditions.

The $100 million shortfall Cenname highlighted is a forecast of where the city will stand when it comes time to pass a budget for the 2025 fiscal year, which begins July 1, 2024, based on projected revenues and expenditures.

That means that if revenues for the rest of the fiscal year come in differently than projected, the hole could end up smaller — or larger — than the $100 million figure.

In short, the “structural deficit” warned about by the finance department is more presumptive than real — at least for now.

Finance officials did not respond to emailed questions seeking more information about their projections or how expected tax revenues for the coming fiscal year compare to other recent years.

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At a news conference Wednesday, Scott said he wants to level with people that there may be “tough choices” ahead. But the first-term Democrat added he’s seen plenty of projected deficits in his years in government and remains confident the city will be able to cover the projected shortfall. By law, city leaders are required to pass a budget each year that balances revenues with expenditures.

“I’m always concerned when we have budget deficits like that,” Scott said. “But I’ve been around for ones a lot larger than $100 million. So I know what we can do.”

What’s squeezing the city budget?

City officials have pointed primarily to the sweeping, 2021 state law known as the Blueprint for Maryland’s Future, which rewrote the funding formulas that determine how much local governments contribute to schools. While Baltimore leaders knew from the start that this legislation would lead to increased costs, the formula stuck the city earlier this year with a surprise, $79 million bill, elevating its education dues to a level finance officials hadn’t anticipated until 2029.

That’s left the city in a tight spot.

At a hearing Tuesday night on a pair of much-anticipated bills aimed at fostering more affordable housing in Baltimore, Deputy Director of Finance Bob Cenname pointed to those obligations in an appeal to City Council to pump the brakes on the affordable housing legislation. Thanks to those increased education dues, Cenname said Baltimore is in “a much more precarious financial position” than he’s seen since beginning work with the city in 2006.

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And in a May 2023 letter opposing the affordable housing legislation, Cenname said the city’s financial position has changed “dramatically” since Councilwoman Odette Ramos first introduced the proposals in 2022. Already, the education costs are “crowding out” other basic city costs, Cenname said, including services, employee pay, and infrastructure investments, among others.

City revenues grew more modestly last year than the finance department anticipated, which they attributed to inflation, but the city nonetheless finished the year with a small surplus of just over $90 million.

Is a deficit avoidable?

Scott declined to get into specifics Wednesday about how the city might address any shortfall, but it remains to be seen whether the gap ends up as big as the finance department has warned.

Baltimore’s budget is $4.4 billion, so $100 million would be 2.3% of total spending, a significant, but not insurmountable, hole.

In order to pass a balanced budget for the current fiscal year, finance officials turned to the city’s supplemental city balance fund, a move they said the city hadn’t made since the Great Recession. That bucket is typically reserved for settling city lawsuits, and officials said at the time that the withdrawal left just $11 million in the fund, without the annual contribution of the few million the city usually adds.

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The forecasted shortfall comes as the city is sitting on a windfall in federal pandemic aid.

Scott’s administration has signaled in recent months that the city could reallocate portions of its $641 million American Rescue Plan Act spending plan as soon as early next year. But Scott declined to say Wednesday whether he’s considering using more of that money to patch budget holes, rather than for the broad slate of new projects he has previously announced.

“Everything’s going to be on the table,” he said. “But anything that we do under my administration is gonna be done in a very fiscally responsible way, so that it’s not pushing things down the road.”