If current economic trends and spending levels continue, Baltimore could face a cumulative budget shortfall of $1.8 billion over the next decade.
That was the sobering message city finance officials gave to City Council members at a budget hearing Thursday.
“That’s a scary picture,” Council President Nick Mosby said, looking at a chart depicting how the projected deficit could balloon between now and 2034. The compounding budget problems would mean starting each fiscal year over the next decade with an average shortfall of $175 million, the chart noted. That amounts to about 4% of the $4.4 billion budget Baltimore passed this fiscal year.
Department of Finance officials have warned in recent weeks that rising costs and increased dues for school funding are putting a crunch on city coffers, and Budget Director Laura Larsen pinned the projected structural deficit the city faces heading into the next fiscal year, starting in July, at $107 million.
While lean times of recent history — as in the wake of the 2008 financial crisis and the economic shock at the start of the COVID-19 pandemic — largely have been driven by revenue shortfalls, Baltimore’s problem this time has to do with climbing costs. In the coming fiscal year, the finance department expects growth in city spending to outpace revenues, with incoming funds growing by a projected 2.7% and expenditures growing by 7.7%.
In other words, the city’s expenses are growing nearly three times as fast as its revenues.
While Thursday’s estimates remain forecasts, dependent on a host of economic factors and future city spending decisions, the projected shortfall is substantial. A decade ago former Mayor Stephanie Rawlings-Blake rolled out an ambitious plan to cut costs and raise new revenues in response to a smaller projected 10-year shortfall of $750 million.
Larsen said Thursday that the measures instituted during that prior 10-year window ultimately saved the city $190 million per year, noting the city has found ways to make ends meet during similarly adverse conditions before.
Though some revenue sources such as interest earnings have dipped in the last year, the budget challenges come despite overall projected growth in income tax, property tax and highway user revenues, the Department of Finance reported Thursday.
The problem is on the other side of the ledger. A surprise hike in state dues for schools has put a squeeze on Baltimore’s budget, forcing the city to dip into millions in one-time funding just to pass a balanced budget in June. The city’s payout in salaries and wages is expected to go up 7% this year, partly the result of contract renegotiations with the large police and fire unions. And finance officials noted that inflationary costs are adding strain to the budget.
The forecasted shortfall comes even as the city is sitting on a windfall in federal pandemic aid, with a broad slate of programs on its books currently financed with one-time funding. Mayor Brandon 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.
The finance department has warned about an impending shortfall in recent weeks, opposing legislation to establish a tax credit to develop more affordable housing units in the city. That legislation ultimately passed City Council and drew Scott’s endorsement.
This week, the first-term Democrat unveiled a sweeping, $8 billion plan to tackle vacant housing. That proposal would draw on at least $300 million in city funds over the next 15 years and establish a new tax increment financing district meant to incentivize redevelopment of blighted parts of town.