Maryland’s longstanding top credit rating is now at risk, and the state’s big spending government officials should take notice.
 

Moody’s upgraded State of Maryland general obligation bonds from Aa to Aaa all the way back in 1941 and has maintained this top rating on the state’s credit ever since. During the 21^st century, Moody’s has also been assigning outlooks to many key borrowers. Outlooks show the most likely future direction of the entity’s rating over the medium term. According to Moody’s, approximately one-third of issuers have been downgraded within 18 months of the assignment of a negative rating outlook.
 

Moody’s maintained a Stable outlook on Maryland (meaning that it did not expect to change the state’s Aaa rating) for over twenty years with only one exception. In 2011, Moody’s changed the US federal government’s outlook to negative during a battle over the debt ceiling, and took similar action on state and local governments that it deemed highly dependent on events in Washington, DC. Moody’s restored a Stable outlook to many of these governments, including Maryland, in 2013. So, until now, Maryland’s Aaa rating was only threatened due to federal dysfunction, rather than its own policies.
 

That changed on May 28, when Moody’s changed Maryland’s outlook to negative, giving the following rationale:
 

The outlook revision was driven by expected structural imbalances and planned depletion of General Fund surplus and budgetary reserves by about 60% from fiscal 2023 through fiscal 2025, which threatens to undermine performance relative to peers. …  Escalating expenditures in education and healthcare, combined with elevated retirement benefit liabilities, will test Maryland's management strengths and likely necessitate measures (spending cuts or new taxes) as yet unidentified. …  Looking ahead, Maryland's demographic and real GDP growth may continue to be more closely linked to high-cost Northeast regional peers than to fast-growing southern states, which could hamper efforts to restore structural balance.

According to recent bond offering documents, Maryland expects its general fund reserve to decline from $5.5 billion on June 30, 2022 to just $110 million on June 30, 2025. However, the state does have an additional fiscal cushion: the State Reserve Fund. This fund grew sharply during the pandemic and in its immediate aftermath. Although the reserve fund is also expected to shrink, it is projected to still contain $2.3 billion on June 30, 2025.
 

The state is draining reserves because its expenditures are exceeding revenues each fiscal year. In the 2025 fiscal year, the state is expecting to collect $24.9 billion while appropriating $26.0 billion.
 

Beyond FY 2025, Maryland’s General Assembly Department of Legislative Services expects the gap between revenue and spending to grow. As the department analysts stated last month:
 

Between fiscal 2025 and 2029, ongoing spending is projected to grow at an average annual rate of 5.7%, outpacing ongoing revenues, which are estimated to grow at an average annual rate of 3.0%. The structural gap grows substantially beginning in fiscal 2028 as the Blueprint for Maryland’s Future costs exceed the available Blueprint revenues and $1.9 billion of general funds are required to close the gap.

So, the governor and legislature will have to take specific steps to restore structural budget balance and end the threat of a downgrade.
 

Unfortunately, the administration has already taken a decisive step in the opposite direction. In late June, Governor Moore announced the state’s intention to proceed with the Baltimore Red Line, which had been cancelled by the previous administration. Further, Moore has chosen to build the Red Line as an expensive light rail system rather than using more economical bus rapid transit.
 

Moore’s announcement did not include a cost estimate, but various Red Line options have been previously priced at between $3.2 billion and $7.2 billion. Further, no nonfederal revenue source was announced. A previous suggestion of an additional one percent state sales tax has not polled well.


The Maryland Department of Transportation special revenue fund accounts for resources used for operation of the State's transportation activities, not including debt service and pension activities. The fund balance of the Department's special revenue fund was $623 million as of June 30, 2023, an increase of $2 million compared to an increase of $353 million in the prior fiscal year. Revenues increased by $251 million (4.8%), expenditures increased by $49 million (0.9%), and other sources of financial resources decreased by $554 million (116.4%).
 

Announcing spending plans without cost estimates and without matching revenue is not an action of a top-rated government entity. To remain Aaa, Maryland officials should rein in new spending initiatives and pursue structural balance.