Money, Money, Money… This Session’s #1 Topic

(from Maine Townsman, December 2009)
By Geoff Herman, Director, State and Federal Relations, MMA

It is no secret that the struggling economy is continuing to have a negative effect on state revenue, and as far as next session’s legislative preview might be concerned, not much has changed from a year ago.

The predominant focus of the 2010 legislative session will be the magnitude of the state budget cuts, the programs affected and whether the programmatic cuts are structured to be permanent or temporary. An additional inquiry from the municipal perspective will be the degree to which those cuts at the state level will result in property tax increases or sharp reductions in municipal services at the local level.

To help address shortfalls in state revenue last spring, lawmakers took $44 million out of the municipal revenue sharing program, initiated sharp cuts in public school subsidy and cut property tax relief programs across the board. Will the upcoming session usher in more of the same? It seems the property tax is only too available to effectively cushion the impact of state budget shortfalls, either as a direct hit (e.g., revenue sharing raids) or as a two-cushion bank shot (e.g., cuts in school subsidy). The tendency of any state government to increase its reliance on the property tax or other local revenues in response to economic downturns is as predictable as a pendulum swing, which doesn’t make the phenomenon any less unfortunate.

First, it is frustrating to hear politicians brag about ‘balancing the budget without raising “broad-based” taxes’ after they have pushed onto the property tax a big chunk of financial burden that has been historically carried by the “broad-based” taxes.

More important than mere frustration, the overreliance on the property tax in Maine makes the availability of basic governmental services highly contingent on a town or city’s property tax capacity, leading to a nakedly inequitable result. Obtaining greater equity was a central public policy component of the drive to obtain 55% state funding for K-12 education because disparate fiscal capacities become especially apparent, and deeply problematic, when it comes to public education.

The discussion begins, however, by putting a dollar value on the the gap between incoming state revenue and authorized expenditures.

On November 20th, that information was provided when the revenue shortfall was formally identified by the state’s Revenue Forecasting Committee (RFC). After reviewing the trends in actual revenue collections and then weaving into that information the “macro” economic forecast issued in early November by the Consensus Economic Forecasting Committee, the RFC predicted that the state’s General Fund revenue would fall short of current predictions by $209.4 million during this fiscal year (FY 2010) and $174.3 million during the next fiscal year, for a biennial General Fund shortfall of $383.7 million.

To put that forecast into some context, total General Fund revenue for the current biennium is now predicted to be $5.37 billion, which is fully one billion dollars or 20% less than was projected for this biennium several years ago (see Townsman cover) and $100 million less than the General Fund revenues actually collected six years ago during the 2004-2005 biennium.

On the transportation side, the RFC pegged the Highway Fund shortfall at $21 million, which resets the biennial Highway Fund revenue at $600 million. $600 million is just about what was available for the Highway Fund eight years ago, during the 2002-2003 biennium.

It seems the state’s financial capacity has retreated to a previous decade.

Of particular municipal interest, the RFC report predicts that municipal revenue sharing will experience an $11 million, 8.7% reduction during this fiscal year compared to the projection last spring upon which the State Treasurer’s revenue sharing projections were based. Similar, additional reductions in revenue sharing are now predicted for next year as well (FY 2011). As municipal officials well remember, the Legislature decided last spring to add on to the “natural” reductions in revenue sharing that were occurring because of the economy by taking an additional $44 million in revenue sharing funding over the biennium to prop up the state budget. The fact that revenue sharing resources were shrinking naturally and at the same pace as the state’s own revenues were declining didn’t stop the Legislature from cutting into revenue sharing even deeper. It’s a matter of priorities.

On the same day the RFC members were crunching their numbers, Governor Baldacci issued his $63 million “curtailment” package, which is an executive order placing limits on state spending in order to keep the state budget from lurching out-of-balance in mid-year. Since the value of the curtailment order ($63 million) represents just a fraction of the current-year shortfall ($210 million), it is obviously just a precursor for the state budget cuts yet to come.

The details of the curtailment, however, may not provide an entirely clear preview of the cuts-to-come. By its very design as an executive (rather than legislative) authority, the Governor’s curtailment order is not supposed to be especially targeted or assert its own priorities, eliminate programs or amend state statute. Curtailment orders are stop-gap in nature and crude rather than surgical, so the tea leaves of a curtailment order may not be easy to read.

In short, the proportions of the curtailment order may not predict the proportions of the cuts ultimately enacted by the incoming Legislature. That observation could actually provide some weak solace to K-12 education, which in this first round took the biggest curtailment hit by far.

Fully 60% of the Governor’s order for curtailed spending was a $38 million reduction in K-12 public school subsidy for the current school year. The dollar value of the mid-year cuts to each school system are posted on the state’s web site. The cuts to education as a policy area didn’t stop there. The next biggest line-item cut in the curtailment order after General Purpose Aid for Local Schools (GPA) was a $6 million cut to the University of Maine system, followed by a $1.7 million cut to the Community College system. Straight-line proportionality isn’t driving these ordered reductions in spending. The Community College system represents 1.8% of the General Fund budget, but will absorb 2.7% of the curtailment. The University of Maine system receives 6.5% of the General Fund budget, but eats 9.5% of the curtailment. The most disproportionate cut of all is focused on subsidy to local schools. GPA represents 32% of the General Fund budget, but the cut to GPA represents 60% of the curtailment.

General Purpose Aids to Local Schools vs. Total Actual K-12 Spending vs. ELS & GPA vs. Total General Fund Expenditure

For those who may be keeping track, the accompanying graph shows the state contribution to total K-12 spending over the last 20 years as that contribution has been historically measured, and an overlay shows the state share of the Essential Programs and Services (EPS) “total allocation” since the implementation of EPS in 2005. EPS is the school funding model that admittedly doesn’t recognize all reasonably-incurred costs associated with providing a public school education, and generally runs a couple of hundred million dollars less than total actual spending on a statewide basis. As the graph demonstrates, the famous “ramp-up” to 55% enacted in 2005 in response to the “Question 1A” directive from the voters is now “ramped-down” towards its starting point. The state share of public education is quickly dropping down to the historically low levels that existed prior to the voters’ directive that the state provide 55% of that funding out of broad-based taxes…a voter-adopted policy some legislators now want to repeal.

That same graph also shows the 20-year trend of GPA as a percent of the state’s total General Fund budget. The same trend exists by that measure as well. In the early 1990s, GPA represented nearly 35% of the General Fund budget, but 10 years later school funding commanded just a 25% General Fund priority. The 55% directive adopted by the voters as Question 1A in 2004 precipitated an increase in the GPA priority, but not to the pre-existing priority level it held in the late 1980s and early 1990s. The latest round of budget cuts is causing that priority indicator to slip back below the 30% level.

The next step in the process will be the submission of the Governor’s proposed supplemental budget, details of which are scheduled to be released on December 18th. That document will not be constrained by the limitations of the curtailment authority, so it should fully address the size of the budget gap identified by the Revenue Forecasting Committee for both this fiscal year and next, and provide the Governor’s vision of a leaner state government going forward.