On January 20, 2005, the 122 nd Maine Legislature enacted LD 1, “An Act To Increase the State Share of Education Costs, Reduce Property Taxes and Reduce Government Spending at All Levels” (PL 2005, Chapter 2). LD 1 imposed annual growth limits on state, county, K-12 school and municipal spending. It also implemented a new school funding formula using the Essential Programs and Services (EPS) model, and put into law the citizen’s initiative, approved the previous June, that raised state contributions to General Purpose Aid school funding to 55% of the total, with the express aim of reducing property taxes.
The structure of LD 1 combines the citizen’s initiative, sponsored by the Maine Municipal Association, with portions of the “Maine Plan” recommended in 2004 by the Maine State Chamber of Commerce. The spending limitation provisions, with some changes, follow the outlines of the Maine Plan, and treat each of the four major spending components – state, county, school and municipal – separately.
LD 1 contains goals and requirements for Maine’s various units of government that need to be objectively evaluated. For that reason, the Maine State Chamber of Commerce and the Maine Municipal Association (MMA) decided last fall to jointly study and evaluate the impact of LD 1 during its first year of enactment. Specifically, the two organizations were interested in knowing how well the governmental spending limitation systems contained in LD 1 were working.
This report is written with two core goals in mind.
First, to be as objective as possible in the treatment of the available data, including being careful to identify the state appropriations and property tax expenditures that fall within the defined limits of LD 1.
Second, Maine’s tax burden is a measure of total state and local taxes as a percentage of total personal income. It is therefore a goal of this report to open up the analysis beyond the defined limits of LD 1 when the available data suggests that more complete tax burden impacts might be revealed.
SPENDING LIMITATION COMPLIANCE
The purpose of the spending limitation systems of LD 1 are found in the statute’s Tax Burden Reduction goal (36 MRSA, section 7301) that states: “. . . that by 2015 the State’s total state and local tax burden be ranked in the middle 1/3 of all states . . .”
As determined by the U.S. Census Bureau, Maine’s total state and local tax burden in 2002 (the most recent year for which data is available) was 12.63% and the national average was 10.2%. Maine, in 2002, had the second highest state and local tax burden in the nation. Total state and local tax burden is determined by dividing all taxes collected by personal income.
The primary goal of LD 1 was to put Maine on a path towards the middle of the national state and local tax burden rankings. The data collected for this report clearly indicates that during the first year of LD 1, the various levels of government in Maine – state, school, municipal, and county – have begun the journey that will lead to a lower state and local tax burden.
Under LD 1, each level of government – state, school, municipal and county – has its own spending limitation system.
The spending limitation systems for the state, municipalities and counties are broadly similar. For each, a standard growth factor representing a 10-year average (growth) of real TPI (total personal income) is used. For the period considered by this report, that uniform TPI growth factor was 2.58%. For municipalities and counties, a “new property” growth factor is added to the TPI number to establish an overall growth factor. For state government, population growth (also a 10-year average) is the factor that is combined with the TPI number.
The key to tax burden reduction is to keep the percentage growth in taxes below the percentage growth in personal income. Over the past decade, personal income growth has averaged about five percent a year. [NOTE: The real TPI growth factor used in the spending limitation formulas is the growth in total personal income minus inflation, as measured by the Consumer Price Index].
According to the 2002 data from the U.S. Census, Maine’s property tax burden is highest in the nation, at 5.32%. In Maine, property taxes are used to fund services provided by municipalities, counties and schools.
Chapter 3 of this report looks at how municipalities complied with the spending limits of LD 1. The spending limits for municipalities are pegged to the growth in property taxes that fund municipal services. LD 1’s municipal spending limitation applies only to that part of the property tax bill that pays for municipal – not county or school – services. The data on municipalities collected for this report clearly shows progress in achieving LD 1’s tax burden reduction goal.
Of the 211 municipalities that operate on a July-June fiscal year and were thus responsible for complying with the municipal spending limits in 2005, 143 (or 68%) responded to an MMA survey regarding LD 1 compliance. Survey results show the overall increase in property taxes for the municipal side of the local budgets was 2.53% in FY 06. That was just over half of the 4.8% combined growth limitation factor for the same communities and roughly half of the expected increase in personal income for 2005.
Chapter 4 looks at spending limits for county government. LD 1’s county spending limit applied only to the county assessments which are paid from property taxes by each municipality in the county. This report shows that the county assessment increase for the 16 counties, in the aggregate, was 3.18%. The combined growth allowance for all counties was 5.16%. The 3.18% represents about 60% of the expected increase in personal income for 2005. According to the reported data, 15 of the 16 counties stayed within LD 1’s spending limitation system for counties.
There are some footnotes to be added to the county data. At the time this report was being written, Waldo County had not supplied information regarding a growth factor and county assessment for 2006. Correspondence with the county treasurer’s office, just before the report was finalized, supports the conclusion that the Waldo County assessment will stay within the growth limit.
For Sagadahoc and Lincoln counties, an exemption to the growth limit was granted by the State Legislature for jail costs incurred by the Lincoln and Sagadahoc Multicounty Jail Authority (which has budget authority for a new regional jail serving the two counties). The exemption is for two years.
The effect of this exemption is significant in this first year of LD 1. If the exemption were not there, the aggregate increase in county assessments would be 6.26% instead of 3.18%. When the Jail Authority’s budget is included as part of the analysis, the county assessments for both Sagadahoc and Lincoln counties exceed their growth limits and the combined spending limit of all 16 counties (5.16%) is exceeded.
The county assessment in Knox County does not include the user fee that municipalities pay to the Knox County Regional Communications Center. While this type of fee is clearly outside the limitation system in LD 1 because it is not part of the county assessment, the fee does get paid by the same entities – municipalities – that pay the county assessments and in all likelihood is paid for with property taxes.
Chapter 1 of this report covers the spending limitation system on state government and the degree to which the state complied with that spending limitation system.
The spending limitation system for state government is similar to that imposed on municipalities and counties, but very different in some important respects. As stated earlier, the state’s growth factor uses real TPI growth (same as for municipalities and counties) and population growth (municipalities/counties use “new” property growth). The state’s overall growth factor for FY 06 was 3.11%.
The state’s spending limitation system differs from those applied to municipalities and counties in important ways. First, the state limit applies to the largest source of state spending known as the General Fund. They do not limit the Highway Fund, Federal Funds account, or the Other State Funds account. Second, new education appropriations during the four-year ramp-up to get the state paying 55% of the cost of K-12 education are excluded from the limit (this state spending is required by LD 1 and therefore not considered discretionary).
The baseline for the state’s LD 1 limit is the average General Fund appropriation over the two-year FY 1004-05 biennium, which is $2.710 billion. This report adopts that figure for our analysis. The FY 06 General Fund appropriation was $2.716 billion, which is only two/tenths of a percent increase over the FY 05 amount. This small growth in General Fund expenditures is misleading for two reasons.
First, the 0.2% growth figure is misleading because of the way that the Business Equipment Tax Reimbursement (BETR) program is handled. In FY 05, BETR was a General Fund appropriation. For FY 06, the BETR program is continued, but the $73.5 million of BETR funding gets taken out of the state revenue stream before it goes into the General Fund and does not get appropriated. If BETR funding had been a General Fund appropriation in FY 06 (as it was in FY 05), the state would be just $4.4 million under its limit. Using this apples-to-apples analysis, the state’s spending from FY 05 to FY 06 increased 2.95%, just shy of the 3.11% growth allowance.
Second, increased state funding of local education is excluded form the calculation of General Fund appropriations totals under LD 1, as required by that statute. However, looking outside LD 1 by adding back that spending produces a much greater actual state spending growth of approximately 6.7% from the December 1, 2004 baseline to the end of calendar 2005.
The state’s compliance with the spending limits of LD 1 and the effect on the overall tax burden are not as clear-cut as the effects of municipal and county compliance. The reason is that the state’s spending limit does not directly affect the amount of (state) taxes collected. The limits on municipalities and counties do directly impact the amount of property taxes collected.
LD 1 handles revenues over the limit by directing the Legislature to apply these unappropriated tax revenues to a budget stabilization fund, a retirement allowance fund and a capital reserve fund. When those funds reach certain levels, the excess tax revenues collected are then put into a Tax Relief Fund for Maine Residents.
The practical effects of the state’s spending limitation system are to stabilize future General Fund appropriations during economic uncertainty, to lower state government’s unfunded liability for its employee retirement system, to create a savings account for future capital expenses and thereby lessen the need to borrow, and when all of the aforementioned are accomplished, return excess sales and income taxes to Maine taxpayers.
Chapter 2 looks at the impact of LD 1 on schools. An evaluation of the effect of LD 1 on the budget decisions made by Maine’s 286 school administrative units is less straightforward than for state, county and municipal governments.
There is no spending limitation system, per se, on schools. Instead of applying a growth factor to the FY 05 school budget and comparing that to the FY 06 school budget, LD 1 applies a brand new school funding model (Essential Programs & Services, or EPS) as each school unit’s spending benchmark.
The majority of school systems (68%) are spending over the EPS model in their FY 06 budgets. That is really not a surprise. Before EPS went into effect, the Department of Education was putting out data that suggested around 215 (of the 286) school systems were spending more than the EPS model was going to allow.
School spending in FY 06 is partially but not completely described in the spreadsheets provided by the Department of Education and found in an Appendix to this report. For technical reasons, school subsidy “transition” funds don’t show up in some of the spreadsheets and debt service on non-state supported school construction projects is also excluded from a strict analysis of school spending compliance with EPS.
For this report, those “off budget” expenditures were added so we could get a handle on total state and local education spending. This report’s data shows total state & local education spending in FY 05 at $1.779 billion and total spending in FY 06 at $1.887 billion – a 4.9% increase. That increase will be very close to the anticipated growth of personal income in Maine in 2005.
Some of the rate of growth in school spending is tied to the implementation of EPS. Even before LD 1 was enacted, it was accurately predicted that over 25% of the state’s school systems were spending below the recommended EPS level in FY 05.
The real limitation effects of the EPS model will show up as future school budgets are compared to the EPS benchmark. If school budgets remain proportional to EPS or they get closer to the EPS benchmark, then total education spending will be constrained. Particularly because of an anticipated decline in public school student enrollment, the EPS model for school costs will be growing at a much slower pace in future years than total K-12 education expenditures have grown in past years. The Department of Education estimates that the EPS model will grow at a figure that is less than inflation over the next 5 to 10 years.
During its first year of enactment, LD 1 has been a step in the right direction for reducing Maine’s overall tax burden. The key to achieving its goal of tax burden reduction will be a long-term commitment to staying within the spending limits and resisting attempts to allow exemptions or find loopholes to circumvent those limits.
For LD 1, including proposed bill, amendments and finally enacted public law: http://janus.state.me.uslegis/LawMakerWebexternalsiteframe.asp?ID=280014321&LD=1&Type =1&SessionID=6. [address as published in the Maine Townsman]
Use this Link: http://janus.state.me.us/legis/LawMakerWeb/externalsiteframe.asp?ID=280014321&LD=1&Type=1&SessionID=6