FY 26 Proposed Operating Budget Book

income tax, opted to use long-term growth averages as a better path forward. Data going back to 1980 was examined, and after adjusting for some outliers, a long-term rolling growth average of 3.5% was established. This was applied to the remaining FY 2024 distributions and from that base to the FY 2025 estimate. The County’s actual experience, however, was significantly better. The last four quarterly distributions, which are based on withholding and estimated payments grew by an average of 5.8%, but the big leap was on reconciling distributions from tax year 2023 that were received in the first half of FY 2025. They grew by an astonishing 161.0% or nearly $22 million. The challenge for the Committee was figuring out what part of the FY 2025 baseline was on-going versus what was likely one-time revenues followed by what impact if any a recession and/or reductions in federal workforce and spending would have on FY 2026 growth. To that end the committee employed two separate models that produced very similar results. The first model maintained the 3.5% long-term growth rate but only applied it to the quarterly distributions, while placing the reconciling distributions at their seven-year average. The second model employed a regression analysis on the historical data and developed bands at the 95% confidence level. The Committee opted to use the lower confidence band on account of the likelihood of a recession in Maryland. Based on those two models, the Committee projects income tax revenue in FY 2025 to increase 9.8% from FY 2024 actuals and then grow by 0.4% in FY 2026. On a budget basis, income tax in FY 2026 is expected to grow by 7.8% or $24.7 million over the FY 2025 budget. As property values are continuing to rise in the County, the Committee believes property tax revenues, based on the current tax rate, should increase 6.0% from FY 2025 budget to FY 2026. This year Group 1, which is primarily the northern portion of the County, was reassessed and grew at 19.8%, which will be phased in over the next three years. This represents the third double-digit reassessment in as many years, Group 3 grew by 22.0% last year and Group 2 was up 16.0% the year before and is an indication of the vibrant housing market in all parts of the County. The phased-in nature of property tax assessments should provide the county with predictable growth for the next several years. One area of particular concern for the Committee is the structural deficit of the County. In FY 2024 the County used $74.1 million of fund balance to balance its budget, and while that number decreased to $58.5 million in FY 2025 it was still too high considering that most of those funds were to finance on-going expenditures. It is the Committee’s understanding that the credit rating agencies have expressed concern, rightfully , about this practice as it is not sustainable. If the County expects to maintain its AAA bond rating, it is imperative that the County Executive and the County Council correct this imbalance in a prudent and practical manner. Finally, while the County’s debt affordability ratios are healthy and in-line with other AAA rated counties, the Capital Budget in recent years has significantly increased the appropriation of bonds. While the Committee understands the capital needs of the County and the rising cost of construction projects, there was concern expressed regarding the trajectory of future debt. Purpose The Spending Affordability Advisory Committee ("Committee") was created by Executive Order 92-2 and further amended by ExecutiveOrder 00-04. The Executive Order charged the Committee as follows: On or before February 15th of each year, the Committee shall submit a report to the County Executive with recommendations offiscal goals for the County budget for the next fiscal year. The report shall contain fiscal goal recommendations for the next fiscal year in the following areas: Recommended level of County spending for the operating fund Recommended level of new debt authorization Recommended level of unassigned fund balance or retained earnings

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