Maryland’s budget secretary told legislators Wednesday that the state will need to cover more than $1 billion in spending that federal pandemic aid was initially going to provide.
Budget Secretary David Brinkley warned the joint budget committees of the House and Senate that changes in what the federal government will cover with pandemic aid will require adjustments to a spending agreement with the legislature.
“We will be introducing some adjustments in the budget that you should see in January,” said Brinkley. “We’re going to get to where our agreement was. We’re going to honor the spirit of the law. We’re going to have to make some changes to satisfy the federal requirements that we have so that we can get to that end.”
Brinkley’s comments come as the state and local governments are struggling to stay ahead of ever-evolving guidance from the U.S. Treasury on how billions of dollars in aid can be spent.
Many of the rules on spending for counties has been issued in a series of “frequently asked questions” rather than the traditional guidebooks from the Treasury Department.
Kevin Kinnally, legislative director for the Maryland Association of Counties, praised the U.S. Treasury. He said how the agency has issued guidance is “highly unusual for a program like this.”
“But again, I have to make it clear, they almost have to do it that way because there was just no time to get this up and running with all the input already embedded in the process,” he said.
Maryland received nearly $12 billion in federal aid through the American Rescue Plan Act. Two-thirds of the aid is set aside for state and local fiscal relief as well as for aid to public schools.
“It’s an awful lot of money coming to us in a $20 billion (general fund) budget that we normally have,” said Brinkley. “Basically, over half of our general fund budget is coming to us this year. We have a couple years to go through this.”
Gov. Larry Hogan and the legislature late in the 2021 session reached an agreement on spending the $3.7 billion in state relief.
The state ended up getting nearly $180 million less than expected. Brinkley said much of that will be partially offset by an expected tax credit penalty that will not be imposed.
The Treasury is clarifying how the aid can be spent. Some complications arose over federal rules that would allow the state to move forward with some tax credits passed earlier this year.
Those agreements included expanded earned income tax credits as well as some sales tax credits for businesses as well as covering a shortfall in the Education Trust Fund.
Transportation will be another concern. Brinkley said the state will need to backfill gaps in toll revenue used to pay some state transportation bonds.
“When you look at all the loss, we had of people not driving and certainly not crossing the Bay Bridge or using some of the toll facilities, the debts on those did not stop. We kept making the payments to the bondholders, but the revenues were certainly interrupted. We still have maintenance to deal with. We’re looking to see how this can be incorporated
Brinkley said the federal government may allow the gap to be covered under “revenue loss” provisions. He said those rules “are the big wild card.”
The state currently estimates an operating budget loss of $1.6 billion. This does not include toll revenue.
Another wildcard is how a federal infrastructure bill, if passed, would affect pandemic aid meant for transportation projects.
“We know it will have some impact, presuming they can get it passed, and we’ll have to make some adjustments along these lines, too,” said Brinkley.
The state is also preparing for a possible clawback of some aid related to Medicaid. Brinkley said the state is building in a cushion just in case.
“We don’t know that it’s going to happen, and we don’t know the magnitude of what it would be, but we think this is being defensive in trying to prepare ourselves for that,” he said.
The state’s 24 largest political subdivisions — the 23 counties and the City of Baltimore — are also navigating changes in federal guidance.
“It’s sort of a moving target as Treasury continues to revise its guidance,” said Kinnally. “This funding is for essential immediate health and economic concerns but also for helping to foster an equitable recovery through long-term sustainable programs and projects. It’s about building resiliency for uncertain times ahead.”
Aid to the state’s counties totals about $1.7 billion. The funds are paid out in two equal portions. All the money must be spent by the end of 2024.
Kinnally said a federal infrastructure bill is “long overdue” but could complicate spending pandemic aid for similar projects.
“You don’t want to put ARPA funds for things that you may be getting soon in an infrastructure bill,” he said. “Trying to put all these puzzle pieces together and make sure that we’re doing it the most efficient way possible is something that has been challenging.
“Certainly it is not something that is ideal but we’re getting through it and I think we’re making progress,” he said.