FY 26 Proposed Operating Budget Book

Fund Balance The Committee reviewed the County's practice of maintaining a fiscal stabilization fund, commonly known as a rainy-day fund, of approximately five percent of the annual General Operating Fund Budget. This assigned reserve holds funds that could be used by the County to fund revenue shortfalls or other emergencies.This fund balance is considered critical in maintaining an acceptable level of financial strength. Fiscally strong municipalities/counties are expected to maintain reserves in excess of thefive percent reserve in order to maintain strong investment grade public debt ratings. These additional reserves can be in the form of restricted, assigned, and/or unassigned. It is important for the County to communicate with the rating agencies periodically to understand their current thoughts on the level of reserves. The Committee is aware that the County Executive wants to return to the practice of maintaining a minimum of $20.0 million in unassigned fund balance in addition to the 5% reserve. Unfortunately, this has not been possible in the past few years due to the County having to work itself out of a structural deficit. With the uncertainty of the Maryland economy, the Committee encourages the County to maintain both levels of reserves for several reasons: First, the five percent fiscal stabilization fund and additional reserves help to ensure healthy County operations and services during recessionary conditions or due to unexpected shortfalls in revenue. Recent years have proven to be difficult times in which to manage CountyGovernment. The wisdom of conservatively managing expenditures and planning for the possibility of economic downturns, or other uncontrollable and unexpected economic forces in recent years, has allowed for steady and consistent operation. Second, the fund balance contributes to Harford County's enviable bond ratings, which are especially important in lowering the County’s borrowing costs. In rating the County's creditworthiness, the rating agencies will review the fund balance when assigning their debtratings. They will view a County with strong reserves more favorably. Finally, the Committee was made aware that the rating agencies advised that the County’s total fund balance, based on its current revenues, should be at least $150.0 million. The Committee endorses this recommendation. Recommendations General Fund Budget Based upon our review and analysis of procedures already outlined, the Committee recommends that the FY 2026 General Fund Budget increase the FY 2025 Net Adjusted General Fund Budget, of $721.6 million, by 6.15%. This represents approximately $766.0 million in ongoing revenues for FY 2026. The Committee feels very confident in the property tax component of this growth rate, which is about half of the overall growth rate. The mechanism by which Maryland reassesses properties provides near certainty for counties to budget this important revenue in the upcoming year. Income tax, however, is where all the uncertainty lies and unfortunately there are numerous sources of that uncertainty, including the possibility of a recession in Maryland, the volatility of reconciling distributions, possible changes in both state and federal tax legislation and the mechanical aspects of how the local income tax is collected and disbursed. While there was disagreement among committee members as to how exactly all these factors will impact Harford County, there was unanimous agreement that we should employe a very conservative approach to our income tax forecast. To that end, the Committee felt comfortable that two different models that looked at the data through a conservative and lower risk lens came to a very similar projection of $342.0 million for income tax in FY 2026. While much of the capital budget is debt financed and not likely to affect the General Fund in FY 2026, the Committee is concerned about the long-term impact of rising material prices and higher interest rates will combine to increase debt service costs in future years. The Committee welcomed the opportunity to discuss future development in the County with the department heads of Planning & Zoning, License, Inspection & Permits and Economic Development and encourages the County to continue to adapt to the big changes underway in how people live, work, shop, and play.

68