BALTIMORE — The state is staring down a $3 billion budget deficit, which is likely to overtake the majority of conversations when the Maryland General Assembly convenes on Jan. 8 for the 2025 legislative session.

Lawmakers will hunker down for 90 days of tough conversations to decide where to make cuts, collect revenue or find other solutions.

Gov. Wes Moore, a Democrat, is poised to present his budget proposal on Jan. 15. Here is what you need to know about how Maryland got into its dicey financial situation.

Spending outpacing revenues

Maryland’s budget for fiscal year 2025 is $63 billion — up more than $20 billion from nearly a decade ago. But money coming in hasn’t kept pace, and analysts have been warning for years that either cuts or more revenue will be needed to keep the budget balanced, which is a legal requirement in Maryland.

“They have been highlighting and trying to bring this to policymakers’ attention that they need to act, and they’ve avoided making some tough decisions and that’s caused the problem to get worse,” said Benjamin Orr, chief executive officer of the Maryland Center on Economic Policy.

Billions of taxpayer-backed spending adding up

The budget is packed every year with thousands of programs, both small and large, that keep government services going or create new areas of investment.

Funding for hospitals and schools, parks and roads, sports stadiums and business development.

The largest new initiative in recent years that is putting the most pressure on the state’s budget is the Blueprint for Maryland’s Future, a decade-long education reform plan that aims to expand early childhood education and lift up teachers, among many other priorities.

Democratic lawmakers who’ve said they’re fully committed to making it a success have invested more than $1 billion into it in the last two years to keep it funded through the 2027 fiscal year.

But, as of now, the bills coming due after that can’t be paid. Billions of dollars’ worth of planned investments in future years are unfunded, making it the biggest piece of the puzzle in a deficit projected to reach $6.3 billion in the 2030 fiscal year.

Inflation and the rising costs of government programs

Older programs are costing more, too. Entitlement programs like Medicaid, subsidized child care and developmental disabilities have seen rising costs, putting more pressure on the budget.

The most recent instance of an unexpected blow to the deficit was an extra $350 million the Maryland Department of Health’s Developmental Disabilities Administration is now expected to spend, putting it over projections for the upcoming fiscal year, according to analysts with the state’s Spending Affordability Committee.

State Senate President Bill Ferguson, a Baltimore Democrat, said the increase isn’t because of inappropriate spending, but is instead due to the rising cost of health care, which is also reflected in the state’s Medicaid expenditures.

Maryland spends about $4 billion annually to cover roughly 1.6 million people through Medicaid. Costs for that coverage have gone over budget expectations, in part, because of eligibility requirements changes after the pandemic. Moore made about $150 million in cuts in other areas of the budget in July to cover for the still-moving estimates for Medicaid and other programs.

A hesitancy toward revenue solutions

In the past, policymakers in Annapolis have been loathe to pass changes to broad-based taxes like income or sales taxes. They’ve taken some action on revenue plans, like one that raised $126 million in the last full fiscal year by charging major tech companies for digital advertising services. But others — expanding the sales tax and both personal and corporate income taxes — were left on the cutting room floor.

That may not be the case in 2025, as lawmakers say the latest deficit means every option should be on the table.

A timid economy

For the taxes on the books, slow economic growth in the state has meant smaller amounts of money coming in.

Several signs point to Maryland’s underperformance compared to surrounding states and the nation as a whole.

The state’s gross domestic product grew at a rate of 1.6% between 2016 and early 2023, a small amount compared to a rate of 13.9% for the entire U.S. during the same time period, Comptroller Brooke Lierman reported earlier this year. A 1.2% growth in per capita personal income tax growth over the same time frame also trails neighboring states and the national rate.

The labor force has also taken a hit since the pandemic, said Daraius Irani, an economist who serves as the vice president of strategic partnerships and applied research at Towson University.

Irani said between 100,000 to 130,000 fewer workers are participating in Maryland’s labor market compared to before the pandemic. Add problems like high housing costs and an outdated public transportation system into the mix, and the state has failed to attract new workers.

“Those are workers who would’ve contributed to Maryland’s productivity and economy,” Irani said.

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