A Report Card On Property Tax Reform

(from Maine Townsman, July 2005)
By Geoff Herman, Director of State & Federal Relations, MMA

Just over a year ago, on June 8, 2004, the voters of Maine enacted a law presented to them through the citizens’ initiative process. The new law was designed to accomplish four specific results.

The initiated law was The School Finance and Tax Reform Act of 2003. In the course of the two-year campaign to achieve its enactment, it became known as “Question 1A.”

The four goals of Question 1A were expressed in the “four Rs:” Relief, Reduction, Reform and Restructuring.

Relief. To provide broad-based, significant and sustainable property tax relief by firmly obligating the state to provide 55% of the total state and combined local costs of K-12 public education.
Reduction. To put into place a tax burden management plan designed to reduce Maine’s overall tax burden.
Reform. To direct the Legislature to engage in comprehensive tax reform, modernizing and rebalancing the state’s entire tax code in a revenue-neutral manner to achieve greater revenue stability and equity than is provided by Maine’s current tax system.
Restructuring. To create programs using existing subsidy sources that encourage the development of alternative, more efficient governmental service delivery systems.

Six months after the enactment of Question 1A by the voters of Maine, the newly elected Legislature convened, presumably with the voters’ mandate in mind, although it’s hard to tell. What the Legislature chose to do was immediately repeal Question 1A and enact a law that very closely resembles its own “competing measure” alternative to Question 1A, which as “Question 1B” was rejected by the voters in November 2003.

The two major legislative enactments of this session — the two bills directly related to the implementation of Question 1A — were the first bill that was presented to the Legislature and the last. The seven-month long legislative session was essentially sandwiched between these two slices of legislative bread.

The first bill was LD 1, which was Governor Baldacci’s and ultimately the Legislature’s version of the property tax reform law enacted by the voters. LD 1 was introduced in the first week of the December 2004 and enacted early this year, on January 20th.

The last bill, LD 1691, was the bill that re-shaped and re-financed the two-year state budget first enacted in late March, but as a false start. LD 1691 included the funding necessary to implement LD 1, but was enacted six months later, on June 18th.

The municipal vision, as expressed in Question 1A, was different than the Legislature’s actions, with respect to both procedure and the substance of the property tax reform enactments.

Procedurally, Question 1A envisioned property tax relief, tax burden reduction, comprehensive tax reform and the restructuring incentives all being implemented as a piece, maybe not as a single enactment, but at least in a coherently integrated legislative package. The implementation of property tax relief through Question 1A was designed to nurture and support comprehensive tax reform. True tax reform (guided by Question 1A’s requirement of revenue-neutrality along with its directive to reduce Maine’s overall tax burden) was designed to support a rational system of tax burden reduction. Tax burden reduction, in turn, was designed to include the implementation of restructuring incentives. The “four Rs” of Question 1A were much more than a sound bite or a slogan. They laid out the basic elements of a tax code problem that has been nagging the state for decades, and they provided in their interrelatedness an opportunity to crack the political code that has frustrated any action on comprehensive tax reform for just as long.

Rather than working with these four goals inclusively, the Legislature took a fragmented approach. As a result of that fragmentation, a good deal of the impact offered by Question 1A was squandered.

The Legislature’s first step was to repeal Question 1A exactly 266 days after the voters enacted it into law. Maine’s lawmakers then chose to increase education funding and implement property tax relief over a multi-year period, thus diluting its impact, and otherwise fractured the delivery of the rest of the package. The tax burden reduction system was enacted in January, independently of tax reform. The reform package was developed in April and May on a separate track, only to be politically derailed in June. Finally, in the last days of the session in mid-June, almost one year to the day after the voters created them at referendum, the Legislature dismembered the last remnants of the efficiency funds.

This article provides a report card on the Legislature’s implementation of Question 1A, assigning a grade to each of the four legs of The School Finance and Tax Reform Act of 2003. As described in more detail below, the report card would look like this:

Relief – Incomplete
Reduction – B
Reform – F
Restructuring – F

Relief
The property tax relief in LD 1 earns the Legislature a grade of Incomplete.
“Incomplete” was not the grade that Governor Baldacci and leading Democrats gave to LD 1. From their perspective, LD 1 was historic, ground-breaking property tax reform that would reduce the average Mainer’s property tax bill by 13%, or $238 on average.

On the cover of this edition of the Townsman, there is a map of Maine and all its municipalities that represents the best attempt of MMA’s staff to predict where in the state property tax relief could be provided on the basis of the LD 1 package, where in the state there will likely be little change in property tax effort, and where in the state property taxes are likely to increase as a result of LD 1. One of the primary reasons the Legislature’s grade for property tax relief this session is “Incomplete” is expressed through the map, which shows the broad geographic areas of Maine that were given no opportunity to provide broad-based relief through the enactment of LD 1.

The evaluation of the property tax relief that was made available through the enactment of the LD 1 package is a complicated analysis. A description of the methodology used to calculate these projected impacts is provided in the article beginning on page 5. It should be emphasized at the outset that this projected impact analysis is provided for general illustrative purposes only. Municipal and school budgets are influenced by hundreds of factors as they increase or decrease from one year to the next, but the projected impact analysis provided on the cover of this magazine assumes that all those factors are static, predictable, and not imposing increased costs on a year-to-year basis. This analysis, in short, assumes that the only influences on property taxes this year are provided by LD 1, and that assumption, obviously, is grossly unrealistic.

Multiple facets of the LD 1 package have to be taken into account in order to understand the property tax relief that it will and will not provide. Those elements of the legislation include:

• The implementation of the Essential Programs and Services school funding model and the school systems the model favors;
• The four-year phase-in to 55% state funding;
• The EPS model and its mixed messages to school systems currently spending below the model;
• The new state-mandated cost sharing arrangements within multi-municipal school districts;
• The new $13,000 homestead property tax exemption that is just 50% reimbursed by the state;
• The changes to municipal revenue sharing in LD 1 and the reductions in municipal revenue sharing in the budget bills; and
• The expansion of the “Circuit Breaker property tax and rent rebate program.

A brief description of each of these elements of the LD 1 package is in order to fully explain the “Incomplete” grade.

The ideal “EPS school.” Under the EPS school funding distribution system, there are two primary steps in determining how much subsidy from the state a school system will receive. The first step is to determine the school system’s “total allocation”. The term “allocation” means how many combined state and local dollars should be appropriated to support the school without any consideration (at least at this step) of the state share or the local share. As a general rule, it is to the school’s advantage to have a higher total allocation rather than a lower total allocation because the higher allocation could result in greater levels of state subsidy, particularly for a school system that is not a very low receiver. Conversely, given similarly situated school systems, the one with the lower total allocation will more likely pay for a greater share of the costs of operating that school with local property taxes than state subsidy. In addition to the ultimate value of the “total allocation” for any school system as measured by the EPS model, an equally important consideration is the size of the gap between that “total allocation” and the school’s actual budget. 100% of all school expenditures that are not recognized by the EPS model are paid for with local property taxes, so a school system budget that is in line with the EPS model will be supported by state funds to the maximum amount possible.

The most direct path to a relatively high “total allocation” is achieved by being designated with a higher-than-average “per pupil rate,” which could fall somewhere between $4,500 and $6,000 per student as the model is currently calibrated. The base per-pupil calculation is determined according to statewide average salaries paid to school personnel and applied to every school according to the staffing levels considered appropriate by the EPS model. The base calculations are adjusted to create unique per-pupil amounts for each school system depending on: (1) the experience and educational levels of the school’s teaching staff; (2) the number of financially disadvantaged students; (3) the number of students of limited English proficiency; and (4) a cost-of-living-type “regional adjustment” applied to the total school personnel salaries and benefit amounts that are recognized by the model.

Any school funding model structured so directly on a per-pupil basis will favor school systems where there are a lot of students densely populating each physical school facility. If those more highly populated school systems happen to be located in service center communities with a higher-than-average proportion of non-English speaking students, or with a higher-than-average proportion of low income residents, and that are otherwise located within a relatively robust labor market area that generates a “regional adjustment” factor that is greater than average, and that are also located within a region that exerts competitive upward pressure on teacher experience and education credentials, it is that school system that most closely represents the EPS ideal.

The flip side of that coin is the rural school system covering a large geographic area with low student density in an economically challenged area of the state. Although the number of financially disadvantaged students may help a little bit in propping up the per-pupil rate, the relatively low number of pupils, the higher costs of infrastructure per student, the lower-than-average regional adjustment, and the typically lower than average teacher experience and education levels all contribute to relatively low “total allocations” for those school systems.

This basic structure of the EPS model can be visualized on the LD 1 property tax relief map on the cover of this magazine. The distribution state aid for education was most significant along the I-95 corridor from Kittery to Bangor where Maine’s population and student population is most dense and Maine’s economic vitality is strongest. Although pockets of property tax relief were made available throughout the umbrella that surrounds the I-95 corridor, much of Eastern, Northern and Western Maine were not included in the property tax relief provided in this year of education funding implementation.

The four-year phase-in to 55%. It is common knowledge that the Legislature chose to implement over a four-year period the Question 1A requirement that the state finance 55% of the statewide cost of K-12 education. By some, this is phrased as a “phase-in” or “ramp-up” to 55%. By others it’s called a simple delay.

The specific mechanism the Legislature employed to phase-in this requirement is to reduce by a certain percentage the full EPS model so that the state will only recognize a sub-set of the full model in FY 06, a larger sub-set in FY 07, an even larger sub-set in FY 08, and then the state’s entire model will be recognized by the state in FY 09.

As was the case with the old “GPA allocation” model, the EPS model is made up of four internal components: operating costs, program costs, debt service and adjustments. The “operating cost” category covers such cost centers as salaries and benefits, administration, physical plant, and supplies and equipment. Statewide, operating costs represent nearly 75% of all school costs within the model. Program costs cover transportation expenditures and the costs of three special programs: special education, vocational education, and the recently-mandated gifted and talented programs. Program costs represent nearly 20% of all school costs within the model.

The specific percentage-reduction mechanism employed by the Legislature pertains only to the operating-cost component of the EPS model. In FY 06, the state will recognize only 84% of the operating cost component while it recognizes 100% of the program cost and debt service elements of the model. 90% of the operating cost component of the model will be recognized in FY 07, 95% in FY 08 and 100% of the model in FY 09.

Phasing-in the full implementation of 55% state funding for education over a four-year period obviously reduces the level of property tax relief that would be available if the requisite level of state funding were provided more immediately. Making sure the Legislature honors this newly-drafted version of the 1984 commitment to provide 55% state funding will be the highest municipal advocacy priority over the next four years, and until the 55% level is reached, measured accurately and fairly, the grade for property tax relief will remain “Incomplete.”

In addition, whenever a school funding distribution system is reduced by a “percentage reduction” methodology, the public policy underpinnings of the distribution system become skewed and distorted. In this case, the school systems that are most disadvantaged by the failure of the state to recognize 16% of the operating cost element of the EPS model in FY 06 are those school systems with relatively small program cost centers (such as special education or gifted and talented programs) and therefore proportionately larger operating cost budgets as a percentage of all school spending.

As the model unfolds over the next four years to recognize the full operating cost component of school spending, greater levels of state subsidy should be distributed to schools disadvantaged on the short term by the Legislature’s percentage-reduction system. Until then, the “Incomplete” grade is especially appropriate for those school systems.

The ambiguous EPS message on school spending. As discussed at the beginning of this article, the driving force behind the enactment of LD 1 was the Question 1A citizen initiative adopted by the voters on June 8, 2004. When Question 1A was originally developed back in 2002 as The School Finance and Tax Reform Act of 2003, the fundamental goal was to increase state support for K-12 education statewide to the long-promised level of 55% in order to provide property tax relief. Among the municipal proponents of Question 1A, there was never a goal of increasing the overall amount to be expended on K-12 education beyond normal and justified inflation-based levels.

At the same time, however, quite independently of Question 1A, the State Board of Education, the Department of Education, and the Legislature were in the process of developing and implementing the Essential Programs and Services school funding model. The EPS school funding model is light-years more rational and reflective of actual school costs than its predecessor, the General Purpose Aid to Education allocation system. The EPS model actually takes into account and develops a benchmark factor for all the various elements of providing a public education.

When Question 1A was converted into LD 1 by the Legislature, the GPA allocation model was simultaneously converted to the EPS allocation model. When that happened, a supposedly rational, highly-developed and very specific “adequate” school budget is presented to each school system. This is a new experience for the schools. For the longest time, the “GPA allocation” for each school was essentially an arbitrary number without any justification…a number to be ignored. With the advent of the new EPS “total allocation”, some schools began to get the message for the first time, in published material from the Maine Department of Education, that their actual school budget was significantly below what the EPS model considers to be “adequate”. In short, their actual school budget could be described as inadequate.

When all the school systems that spend below the EPS model are aggregated, they are spending approximately $40 million below the model. Some of those school systems also fit the “ideal” EPS school system as described above, and are therefore the recipients of significant increases in state financial school aid under LD 1.

The Sanford school system is perhaps the clearest example. According to DOE estimates, Sanford’s actual spending before FY 06 was 24% below the EPS model, and Sanford was also the recipient of the largest year-to-year increase in school aid of over $3.2 million over the previous year’s subsidy, after accounting for changes in debt subsidy. Lewiston, Brunswick, Windham and Brewer are just a few examples of other school systems in similar circumstances.

When it came time for these communities to make their final budget decisions, they were dealing with ambiguous messages from lawmakers in Augusta. Do you dedicate the increased school subsidy to property tax relief which was the intention of Question 1A, or do you use some of that increased state subsidy to bring your school budgets closer to the “adequate” level, as defined by the state?

When in the name of property tax relief the Legislature infuses $100 million more into school funding but in the same breath is encouraging a bunch of school systems across the state to increase their overall school spending by $40 million, the Legislature cannot then expect $100 million of property tax relief. MMA never expected the implementation of Question 1A to actually encourage increased school spending, but that became part of the Legislature’s implementation goals, thus rendering the property tax relief goal as “Incomplete.”

The new cost sharing arrangements. Any cost sharing agreement governing the distribution of financial responsibility among the towns in a multi-municipal district can create completely different impacts between towns in the same district and between any one of the participating towns and the district itself. In a five-town school district, for example, the district might benefit as a whole because of increased state subsidy, but one or two of the towns in the district might actually see their taxes go up because of the cost sharing agreement.

Historically, School Administrative Districts (SADs) were set up to allocate the financial responsibilities among their participating municipalities on the basis of municipal valuation, just as county taxes are assessed. Community School Districts (CSDs), on the other hand, were set up to allocate those financial responsibilities on the basis of student population. Maine law has long allowed the districts to modify their cost sharing system by creating a local cost sharing agreement, and many of the districts, particularly the SADs, have developed local agreements which blend the influence of municipal valuation with the influence of student count.

A year ago, in April 2004, the Legislature changed all that for FY 06 when it adopted a law implementing EPS (PL 2003, chap. 712) that overturned all the locally developed cost sharing agreements and replaced them with a state-mandated cost sharing arrangement. In essence, the new arrangement uses both the influence of each participating municipality’s student population and the influence of the municipality’s valuation to determine that municipality’s financial obligations to the school district. The reason the Legislature replaced the local agreements with the state-mandated arrangement is because the overriding goal of the Legislature was to create and enforce the “maximum mill rate expectation” system, where one day in the future, when the EPS system is fully implemented, no municipality in Maine will have to pay more than a certain mill rate effort to support its schools. That uniformity of maximum mill rate effort is very important to the Legislature.

The implementation of the new cost sharing arrangement was very disruptive. Cost sharing arrangements by their very nature are disruptive and controversial, but they have remained essentially unchanged for many years and are therefore relatively predictable. Suddenly, the disruptive and controversial arrangements were being imposed on every school district, and not as a matter of an amended local agreement but from outside the district, overriding local control. In some districts the cost sharing changes were different from, but no more remarkable than, the changes that would have occurred under the local agreement because of changes in student count or valuation, or both. In some districts the new arrangements created big winners and big losers without any discernable public policy rationale. Some very property rich communities with very few (or zero) students were being let of the hook completely, and their property-not-so-rich neighbors didn’t think that made a lot of sense.

At the end of the legislative day, two school districts (SAD 6 and SAD 44) were exempted from the state imposed cost sharing arrangement and others were ushered into “transition plans” which were designed to soften the sharp impacts of the state-imposed arrangement over the duration of the four-year implementation period.

Until the cost sharing arrangements stabilize, the property tax relief available under the LD 1 package remains “Incomplete.”

The unreimbursed homestead property tax exemption. For many municipal managers, selectmen and councilors, the new $13,000 homestead exemption that is only half reimbursed by the state is the most discouraging element of the entire LD 1 package. When the politicians’ claims of “historic” property tax reform are matched up to the actual mechanism of relief – an unreimbursed homestead exemption – a rather profound gap in legislative understanding of property taxation and municipal government becomes apparent.

The unreimbursed homestead exemption has the exact same effect as any other property tax exemption created by the Legislature. In the form of an increased property tax rate, it shifts the burden of paying for local services onto all the remaining property taxpayers who are not eligible for the exemption. In the case of the unreimbursed homestead exemption, because it is a partial exemption, the burden is shifted across the entire tax base, even to some variable degree back against the homesteaders themselves depending on the mix of taxable properties in the community. Other taxpayers who pick up the increased property tax rate without any offsetting exemption are local businesses, landlords and renters, owners of second homes, and farmers and other owners of open land. As a split rate taxation system disguised as a homestead exemption, the unreimbursed homestead certainly challenges the spirit of the provision in Maine’s Constitution that requires all property taxes to be assessed and apportioned equally according to “just value.”

For its gimmicky nature and general ineffectiveness as an instrument of real, community-wide, broad-based relief, and given its effect of forcing increases rather than decreases to the property tax rate in communities throughout Maine, the unreimbursed homestead exemption is disliked by municipal leaders in all but the most urban municipalities in Maine.

Changes and reductions to municipal revenue sharing. The municipal revenue sharing program got booted around by the Legislature this last session in a number of ways.

First, the Legislature voted to delay for another two years a projected incremental increase to the Local Government Fund (from which revenue sharing is distributed) that was enacted in 2000 to become effective in 2003, delayed in 2003 until 2005, and now delayed again until 2007. The original increase enacted in 2000 was one-half of a bill developed by Sen. Ken Gagnon (Waterville) which created the alternative “Revenue Sharing II” distribution system for the benefit of high mill rate municipalities. Unfortunately, the incentive half of that initiative – the “pro quo” of the quid pro quo – has never materialized.

Second, in LD 1 the Legislature changed the way revenue sharing will be distributed in FY 06 to the advantage of high mill rate communities and the disadvantage of municipalities with lower than average mill rates. Although the correlation is not perfect, this change to revenue sharing impacted many municipalities in the same way the municipalities were impacted by the first-year implementation of the EPS school funding model because both subsidy systems are attracted to high mill rate communities and repelled by low mill rate communities on the belief that a low mill rate is the equivalent of wealth and the absence of need.

Third, the entire amount of revenue sharing to be distributed in FY 06 and subsequent years was reduced by the Legislature in three ways. Last year and now this year, the Legislature has chosen to call the financing of both the Circuit Breaker program and the Business Equipment Tax Reimbursement Program something other than a General Fund appropriation. The effect is to remove approximately $115 million of revenue from the General Fund each year, and therefore 5.1% of that sum (nearly $6 million) from the Local Government Fund annually. Also, Question 1A created a Local Government Efficiency Fund and capitalized it with 2% of revenue sharing funds annually for the purpose of providing municipalities with grant resources to implement efficiency projects. The Legislature raided that Fund for the next two years, depriving municipal access to $2.4 million in annual revenue sharing resources for both FY 06 and FY 07. Finally, the Legislature directly raided municipal revenue sharing for FY 07 to the tune of $5 million.

Circuit Breaker expansion. The Legislature did expand the Circuit Breaker property tax and rent rebate program both in terms of the base of eligibility and the potential value of the benefits. The Circuit Breaker program clearly has its place in the menu of property tax relief mechanisms, but because the Circuit Breaker program by its design is targeted to a subset of property taxpayers and does not affect either property tax rates or the amount of any property tax bill, it is not broad-based property tax relief. Because the actual distribution of property tax relief under the Circuit Breaker program cannot be predicted or assigned to individual municipalities, its impacts are not reflected on the map on the cover of this magazine.

On paper, the scope of the Circuit Breaker expansion is significant. Although the Circuit Breaker payments are no longer “appropriated” by the Legislature in a technical sense, the changes to the threshold income eligibility levels (up to $100,000 a year) and maximum benefit levels (from $1,000 to $2,000) are expected to increase the statewide cost of the program from around $25 million annually to $40 million. It is not a rock-solid projection, because the Circuit Breaker program suffers from a surprisingly incomplete participation rate. Under the current program, somewhere between 40% to 50% of all the eligible households actually apply for and receive a benefit. If the participation rate under the new program is substantially higher than historical levels, the cost to the state could easily exceed the $40 million level. If the participation rate under the new program continues to be low, the $40 million projection may exceed actual expenditures.

Broad-based property tax relief was the first goal of Question 1A, to be provided by reducing property tax bills through increased state support for the schools. The Legislature seems to prefer targeted rather than broad-based relief, focusing the benefits on renters and lower-income residents. The targeted approach means providing the rebate benefit long after the tax bill is sent out, after an application has been filed and eligibility verified. In any event, a Circuit Breaker-type program fulfills an important role in any overall property tax relief effort, and the expansion of the Circuit Breaker program may help address an element of the property tax problem that no amount of broad based relief can reach, which is the issue of spiking valuations on the waterfront.

Reduction
The spending limitation systems created through LD 1 earns the Legislature a solid B grade in the category of tax burden reduction. It’s the highest grade the Legislature earned for any element of LD 1, and like any well-earned grade, it didn’t come easily.

The enactment and implementation of the LD 1 spending limitation systems was certainly not a pretty picture. Most of the major problems associated with the spending limitation systems in LD 1 are attributable to its too-hasty enactment, and they include: (1) no careful legislative review of the text of the bill; (2) an overly immediate implementation schedule for the affected municipalities; (3) no accommodation for first time debt service payments that were approved locally before LD 1 was even conceived; (4) no direct accountability for school funding increases; (5) a “net new funding” adjustment system that punishes municipalities for increases in mandated and earmarked state programs such as General Assistance; and (6) the implementation of a school funding spending limitation system that actually encourages increased spending.

Lack of legislative review. The core elements of the “property tax levy limit” (affecting municipalities) and the counties’ “assessment limit” were developed by the Maine State Chamber of Commerce and written into a proposed citizen initiative that the Chamber began circulating in 2004 as a more rational alternative to the radical and deeply flawed “Palesky” and “TABOR” tax cap proposals. Governor Baldacci simply incorporated the Chamber’s spending limitation system into LD 1, but only as it pertained to local government. Apparently the Governor, the Select Committee on Property Tax Reform, and ultimately the full Legislature believed that the Chamber’s initiative had been fully researched and carefully written so that no careful independent review on the legislative level and no substantive consultation with municipal government was necessary prior to enactment.

As a consequence, the Chamber’s spending limitation petition received no thorough review before its enactment. Even today, six months after enactment, there are very few legislators able to explain the actual mechanics of what they voted for. In fact, there are gross drafting errors within the enacted law that make its literal implementation impossible.

Immediate implementation. The implementation of the spending limit system fell with lightning speed on municipalities with a July 1 – June 30th fiscal year. Municipalities with a calendar fiscal year and most county governments were given a one-year reprieve before the spending limitation system becomes effective, but the fiscal year towns and cities had to plunge immediately into the significant complexity of the LD 1 spending limit system, with its complicated “property growth factor” analysis, obscure “net new funding” calculations, and bizarre procedural distinctions between “exceeding” or “increasing” the municipality’s overall levy limit.

No accommodation for previous debt. Spending limitation systems typically accommodate capital borrowing decisions that were made by the municipality before the spending limit system went into effect on the reasonable grounds that when the pre-LD 1 municipal voters approved the borrowing, they were not aware that the additional debt service obligations they were approving might squeeze out financial support for other local programs. LD 1 made no such accommodation.

“Net new funding.” Under LD 1, if a municipality receives increased amounts of General Assistance reimbursement from the state from one year to the next, it can be required to reduce its spending on other local programs to make up for that increase. General Assistance is a state-mandated welfare program. The benefits to qualified recipients are paid out locally, and 50% of the value of those benefits are reimbursed by the state. The local administration of General Assistance is entirely paid for with local resources. If the local costs of the General Assistance program increase from one year to the next, the 50% state reimbursement increases, but to effectively require the increased state reimbursement to be used to cut, for example, the police department budget doesn’t make any sense. The General Assistance program is a state mandate and the use of the resources to fund the program are earmarked. The “net new funding” system makes sense with respect to municipal revenue sharing, but not with respect to General Assistance.

No direct accountability for use of increased school subsidies. For the schools’ spending discipline, the Legislature decided to create a completely different limitation system than either the system created for municipal government or the system presented in the Chamber’s original template for the schools. There are ironies associated with this decision that underscore the ambiguous relationship the Legislature has with K-12 public education.

Theoretically, spending on K-12 education was the centerpiece of LD 1 and by infusing nearly $100 million more in state aid for education, the focus of the spending limitation system would be to ensure that the new state aid for schools would result in a reduced property tax effort wherever it was provided. The Chamber’s spending limitation system included just such a mechanism – a “net new funding” system that would identify increases in General Purpose Aid to Education (GPA) and require GPA increases that outpaced the rate of inflation to be used to reduce property taxes. The Legislature stripped out that “net new funding” provision as it applies to the schools and applied it only to the municipal side of the ledger, where it is far less applicable. The school’s “spending limitation system” in LD 1 was entirely given over to the Essential Programs and Services (EPS) school funding model.

The legislative decision to increase school funding by $100 million and then remove the system of directly accounting for that increased state aid on the local level suggests the Legislature was advancing multiple, but competing, goals with LD 1. One was property tax relief; the other was to implement the EPS school funding model which in many cases encouraged additional school spending.

Messages to the under-EPS school systems. A similar ambiguous message is sent by the way the EPS model was used to both distribute the increased state aid to education and serve as the school’s spending limitation barometer. As discussed above, a group of schools scattered throughout the state have been operating on school budgets that are below – in some cases well below – the 100% EPS allocation that represents what the state calculates to be an appropriate funding effort. If all those below-EPS school systems are aggregated, they under-spend the EPS model by $40 million a year. The not-so-subliminal message from Augusta to any school system that might be spending below the EPS model is to increase school spending. That’s where a share of property tax relief could easily be redirected.

On the plus side. For all of the confusion, awkward wording, illogical and ironic twists and miscues that occurred in the legislative process, and inherently ambiguous messages Maine’s lawmakers send to the schools, the spending limitation systems in LD 1 still represent a strong first step in a tax burden reduction effort.

Although only half the municipalities had to engage in the spending limit exercise this budget cycle, town meetings and town and city councils across the state were provided for the first time a spending benchmark that was at least roughly rational. This roughly rational system is designed and applied separately to the municipal side, the school side and the county side of the local government ledger, so we should now be able to get away from lumping all local government budgets as “municipal” spending, and begin to identify much more accurately where in the overall governmental service delivery system the spending benchmarks are most often exceeded and need more management attention. The municipalities are not afraid of that analysis.

As the spending benchmark system opens up to the rest of the municipalities and state and county government, and as municipal officials and the general public become more familiar with the EPS model and more skilled at using it as a benchmarking tool for their school budgets, the legislative bodies at all levels of government will be provided both the information and the tools they need to control the year-to-year growth in governmental spending rationally, recognizing and accommodating inflationary pressures, and with the necessary safety valves to respond to any emergency.

Reform
The Legislature earns a solid F in the category of comprehensive tax reform very simply because it has not engaged in any tax reform despite a once-in-a-legislative-lifetime opportunity to do so.

When the voters adopted Question 1A at referendum a year ago, they directed the Legislature’s Taxation Committee to develop a revenue-neutral tax reform package designed to finance the state’s increased obligation to support K-12 education. The instruction was perfectly clear and fully integrated with the tax relief, tax reduction and restructuring elements of Question 1A as discussed at the beginning of this article.

Years of study on the imbalance, inequity and instability of Maine’s tax code preceded and supported this directive, as did year upon frustrating year of tax reform legislation that always crumbles to dust at the end of each legislative session for a lack of political will, as happened this year.

The many public policy reasons to modernize Maine’s tax code make a solid case for reform on their own merit, but the political recipe for restructuring the tax code requires a conspicuous dose of tax relief as well. Question 1A proposed to provide reform and deep property tax relief. With the Legislature’s decision to phase-in the education funding required by Question 1A over four years, the opportunity for conspicuous broad-based property tax relief was lost, along with the political motivation for reform.

At the end of the session, a sharply divided Taxation Committee actually reported out a tax reform bill (LD 1595) that certainly meets the requirements of Question 1A. The bill was briefly debated in the House before being recommitted to the Taxation Committee and ultimately “carried over” or deferred until the Legislature chooses to pick up the subject again.

Municipal leaders have been advocating for comprehensive tax reform for decades, and hope springs for them almost eternally. The awkward choreography of this latest reform effort, however, does not bode well for its enactment.

Restructuring
The Legislature also earned a solid F in the category of restructuring.

The failure is particularly noteworthy for two reasons.

For all the political rhetoric coming out of Augusta alleging the redundant and inefficient delivery of governmental services at the local level, one would think the Legislature would prioritize its support for a consensus-based approach designed to develop and implement more efficient service delivery systems.

On top of that, Maine’s voters created the restructuring plans – one for public education and the other for municipal services – with their adoption of Question 1A in 2004. That law established both efficiency funds and fully capitalized them out of existing subsidy systems. All the voters left for the Legislature to do was the dotting of an i or two, and the crossing of a couple of t’s. Specifically, the Legislature was directed to set up the system to manage the two funds. It was clear that the Fund for the Efficient Delivery of Educational Services (School Efficiency Fund) and the Fund for the Efficient Delivery of Local and Regional Services (Local Efficiency Fund) were designed to tap into local ingenuity by allowing schools and municipalities to compete for financial assistance from each of the respective funds to implement creative collaborations with other schools, municipalities or regional service providers. The questions that remained were only who would make the decisions and according to what procedures and standards? This was all the Legislature was asked to develop, the management plan for two efficiency funds that were otherwise created by Maine’s voters.

The Legislature completely bulldozed the School Efficiency Fund. Early in the legislative session, the lawmakers raided the School Efficiency Fund financially in order to provide “transition funds” to targeted school systems that were disadvantaged by the changeover to the EPS-based school financing system. Perhaps as a result of the raid, the Legislature decided not to implement a directive embedded within both Question 1A and LD 1 to develop by March 31, 2005 a bill “to govern the design, implementation, management and oversight of the (School Efficiency) Fund.”

The fate of the Local Efficiency Fund was almost as bleak. In this case, the Legislature did develop and enact a management system for the Local Efficiency Fund, which was to be capitalized – according to voter instructions – by setting aside 2% of municipal revenue sharing funds each year to finance municipal grant proposals. Having successfully set up the Local Efficiency Fund management system (see LD 1637, under the State and Local Government section of the New Laws article in this edition of the Townsman), the Legislature then proceeded to completely raid the Fund for the next two-year period in order to balance the state budget.

There is nothing in any of this that supports issuing a passing grade to the Legislature for its management of the Efficiency Fund directives established by Maine’s voters. The Legislature could hardly have exhibited more hostility to the voter’s instructions in this area.

QUOTABLE QUOTES FROM THE STATE HOUSE
(On LD 1) “Come tax time next year, people can say ‘Oh yeah, they did something.’ It’s more than a cup of coffee.”
– Sen. Beth Edmonds (Freeport), Senate President
– Kennebec Journal (12-04-04)
(On MMA’s recommendations for comprehensive tax reform) “There are 40 new areas of sales tax [in MMA proposal], many of which many Maine homeowners pay. I wonder if voters would have passed 1A [if they knew that]. At least Palesky was clear [about her intentions].”
– Sen. Joe Perry (Bangor)
– Times Record (12-15-04)
(On LD 1) “We’ve had people looking at (tax reform) for 30 years in this building and we did it in 30 days.”
– Rep. John Richardson (Brunswick), Speaker of the House
– Morning Sentinel (1-12-05)
(On LD 1) “This plan is not perfect. But this plan is what is possible today.”
– Rep. John Richardson (Brunswick), Speaker of the House
– Kennebec Journal (1-20-05)
(On the spending limitation systems in LD 1) “Long before our petition expires, we will all be in a position to judge whether LD 1 has framed local and state spending decisions that lower taxes or not. Over the next several months, our signature gathering will continue, and our organization will set up an independent assessment program for evaluating the effectiveness of LD 1. Whether we proceed with a 2006 campaign on the Maine Plan will depend on the path Maine’s state and local tax burden takes over the next several months.”
– Dana Connors, Maine Chamber of Commerce
– Bangor Daily News (1-20-05)
(On LD 1) “This tax relief plan is bold, historic, comprehensive and bipartisan.”
– Gov. John Baldacci
– Kennebec Journal (1-22-05)
(On LD 1) “This is historic for Republicans because it’s the first time government has acknowledged we have a spending problem.”
– Rep. David Bowles, House Minority Leader
– Kennebec Journal (1-22-05)
(On repealing Question 1A as adopted by the voters on June 8, 2004) “No previous Legislature has ever had the audacity to even consider such an action… We must not let expedience, convenience or loyalty to party lead us down that thorny path. The Maine Constitution gives the people the right to nullify our acts – not the other way around.”
– Rep. Barbara Merrill (Appleton)
– Bangor Daily News (1-20-05)
(On LD 1) “It is important that you recognize that this is not tax reform.”
– Rep. Chris Rector (Thomaston)
– Courier Gazette (1-27-05)
(On LD 1) “It’s true that some money will go directly to the citizens, but that was basically the goal of the Legislature to provide money to lower taxes, not necessarily to provide more money for municipalities to spend.”
– Sen. John Martin (Eagle Lake)
– Bangor Daily News (2-15-05)
(On LD 1) “Keep in mind, the Maine Chamber of Commerce supported LD 1 in its final form. They wouldn’t have supported something that would be bad for business.”
– Sen. John Martin (Eagle Lake)
– Bangor Daily News (2-15-05)
(On LD 1) “It’s not perfect, but it’s not pathetic. It’s somewhere in-between.”
– Sen. Dennis Damon (Trenton)
– Lincoln County News (1-27-05)
(On Question 1A) “Maine Municipal Association and the Maine Education Association also deserve a great deal of the blame because they disingenuously put a proposal on the ballot last year which raised an expectation that was not likely to be fulfilled, that funding education at the 55% level would necessarily result in lower property taxes.”
– Rep. Lawrence Jacobsen (Waterboro)
– Journal Tribune (2-15-05)
(On LD 1) “We didn’t hit a home run with LD 1, but maybe a bunt single.”
– Rep. Patrick Flood (Winthrop)
– Community Advertiser (2-26-05)
(On EPS and LD 1) “It’s flooded some of our most favored communities with so much money many don’t know what to do with it.”
– Sen. Peter Mills
– Bangor Daily News (3-9-05)
(On LD 1’s spending limit system) “We don’t want to see 16 boards of (county) commissioners vote to override the cap in its first year.”
– Rep. Chris Barstow (Gorham)
– Lincoln County News (3-31-05)
(On the first state budget enacted in March) “This is a first in the history of Maine, and it was done in violation of the spirit of the Constitution, which expressly prohibits the state from borrowing money for ongoing expenses. A loophole was discovered and the legislature drove a 450 million loan right through it.”
– Rep. Steve Bowen (Rockport)
– Rep. Barbara Merrill (Appleton)
– Camden Herald (4-14-05)
(On citizen initiatives) “The referendum process is the essence of democracy and to ignore that is, at the least, arrogant.”
– Rep. John McKane (Newcastle)
– Boothbay Register (4-21-05)
(On the level of property tax relief in LD 1) “If you listened only to the Republican spin machine, you might never know that Maine people will see more than $350 million in direct property tax relief. Republicans also don’t want you to know Maine people will see a 13 percent cut in their property tax bill in 2006, and see as much as $2,000 back in their pockets through property tax rebates.”
– Patrick Colwell, Maine Democratic Party Chair
– Kennebec Journal (4-25-05)
(On LD 1 and tax reform) “While LD 1 focused on property taxes and lowering the overall burden of taxes in Maine, it did not address many of the broader issues of tax restructuring and tax reform.”
– Sen. Joe Perry (Bangor)
– Rep. Dick Woodbury (Yarmouth)
– Bangor Daily News (4-26-05)
(On tax reform) “Everybody wants us to fix it, but they don’t want their special interest taxed.”
– Sen. Joe Perry (Bangor)
– Time Record (4-26-05)
(On the state budget before the second round of cuts) “We’ve cut state government to the bone.”
– Sen. Mike Brennan (Portland), Senate Majority Leader
– Rep. Glenn Cummings (Portland), House Majority Leader
– Bangor Daily News (5-4-05)
(On the unreimbursed homestead exemption) “The towns are cutting the budget, but they are raising (tax) rates. It’s stupid. The towns are getting hit hard everywhere.”
– Sen. Paul Davis, Senate Minority Leader
– Kennebec Journal (5-4-05)
(On Governor Baldacci’s proposal to repeal the personal property tax) “Perhaps municipalities, like the state, will need to continue their frugal ways… but the goal is to increase total valuation for towns through the development that accompanies new investment and new jobs.”
– Martha Freeman, Director of the State Planning Office
– Sun Journal (5-10-05)
(On LD 1) “Too many towns are already disappointed by the ‘dead count bounce’ of LD 1, the state’s tepid response to the MMA referendum.”
– Sen. Peter Mills
– Morning Sentinal (5-16-05)
(On LD 1) “If the cities and towns are increasing their taxes, they need to look inward to trim their sails. Every school district is getting an increase in aid, some more than others.”
– Rep. John Richardson, Speaker of the House
– Lewiston Daily Sun (5-22-05)
(On the proposal to implement a 5% across-the-board state spending cut) “We want to know whether it’s an honest attempt to find out areas where savings could be achieved or is it an attempt to just scare the public with worst possible scenarios.”
– Rep. David Bowles, House Minority Leader
– Bangor Daily News (5-26-05)
(On the proposal to implement a 5% across-the-board state spending cut) “This sounds similar to the football team. This is what we’ve been suffering from in this state for years: the inability to reduce either the size or the costs of state government. So your commissioners and apparently the administration doesn’t agree that 5 percent is doable.”
– Sen. Richard Nass (Acton)
– Bangor Daily News (6-1-05)
(On the proposal to implement a 5% across-the-board state spending cut) “For us to think that we’re not down to the football team is kidding ourselves. The bottom line is that we are down to the bone here.”
– Rebecca Wyke, Commissioner, Department of Administration and Financial Services
– Bangor Daily News (6-1-05)
(On fully funding the unreimbursed homestead exemption) “When you’re talking $33 million of new money to throw at the municipalities…we’ve already put all this new money into education. The state is looking to cut another $250 million, to add $33 million on top of that I don’t think would be responsible. And quite frankly, I think the state is suffering much worse than the municipalities. I don’t see them going through the same drastic cuts and the measures that we’ve had to.
– Sen. Joe Perry (Bangor)
– Maine Public Radio (6-1-05)
(On the unreimbursed homestead exemption) “Requiring the towns to pay half the cost [of the homestead exemption] has had an unexpected side benefit. It has caused towns to reduce their spending, which many of us would like to see.”
– Rep. Arthur Lerman (Augusta)
– Kennebec Journal (6-04-05)
(On the final state budget) Overall, the anticipated budget revision seems better than the borrowing it replaces, but far from the broad tax relief and tax reform we had expected in the opening days of the legislative session.
– Editorial
– Morning Sentinel (6-17-05)
(On tax reform) “If you think fundamental rebalancing is needed, then this [proposed LD 1595] bill is what tax reform has to look like.”
– Rep. Dick Woodbury, Yarmouth
– Morning Sentinel (6-17-05)
(On the legislative session) “It’s been a twisted and tortured path to this moment.”
– Sen. Kevin Raye (Perry)
– Bangor Daily News (6-18-05)