Implementing Question 1A

(from Maine Townsman, December 2004)
By Geoff Herman, Director of State & Federal Relations, MMA

It has been called many names. By the press and in the halls of the State House, it was called the “MMA initiative”. As a printed bill before the Legislature, it was called “LD 1372”. When a legislatively-enacted competing measure was thrown up against it, it was called “Question 1A” to distinguish the citizen initiative from its “1B” and “1C” competitors. In the June election where it stood alone for an up-or-down vote, it was called Question 1. The name on its birth certificate, which most accurately describes its breadth and depth, is The School Finance and Tax Reform Act of 2003. For the purpose of this article, the new, citizen-initiated law that was passed by Maine voters on June 8, 2004 will be referred to as “Question 1A” or “1A”, it’s most recognizable and often-referred-to name.

Governor Baldacci, the 121 st Legislature, the State Board of Education, the Maine State Chamber of Commerce, a coalition of social service agencies and the media…in short, the entire political establishment did not want the voters to adopt Question 1A. Against that backdrop, the implementation of Question 1A now that is has been adopted into law rests in the hands of the Legislature just elected. This article gives definition to that implementation package from the perspective of the municipal community, where Question 1A originated.

On primary election day 2004, the voters moved Question 1A from a common citizen initiative into the law books by a decisive 55%-45% margin. That vote was the culmination of an intensive, two-year effort by the state’s municipalities and school teachers to bring a clean question to the voters: “Do you want the State to pay 55% of the cost of public education, including all special education, for the purpose of shifting costs from the property tax to State resources?”

Although the initiative was adopted by the voters six months ago, it has not become “operational” as a law quite yet. A clause in Maine’s Constitution creates a dormancy period for any citizen initiative that requires additional state expenditure “until 45 days after the next convening of the Legislature in regular session….” (Article IV, Part Third, Section 19). The next Legislature convened for its first day of regular session on December 1, 2004; therefore, Question 1A will not become “operational” until January 14, 2005.

This 45-day rule is but a minor point. The Act at its centerpiece requires the Legislature to properly fund the state’s public elementary and secondary schools for the next fiscal year (FY 06) that begins on July 1, 2005. Although the funding decision certainly doesn’t have to be made as early as January, the Legislature’s school funding appropriation for FY 06, whenever it is made over the next five months, will be the focus of all attention. It is that single act by the new Legislature that will immediately determine compliance or lack of compliance with the new law enacted by the people in June.

But funding 55% of the total cost of K-12 education is only one element of what the multifaceted Question 1A requires. It is just a piece of the package…25% of the whole. During the lengthy two-year campaign, the proponents of Question 1A repeatedly stressed the four directives that combined together to make up the substance of the whole initiative:

Property Tax Relief, obviously, through increased state support for public education;

Reduction, by consciously managing Maine’s overall tax burden as a matter of law;

Restructuring, the delivery of governmental services by both capitalizing and implementing local government and school-based efficiency funds; and

Comprehensive Tax Reform, made politically possible through a guarantee of revenue neutrality.

A person listening to the debate over the last two years would have little reason to know about the reduction or the restructuring or the reform elements of Question 1A unless he or she had read the text of the initiative itself. From their various perches in the political establishment, the opponents of the initiative summarily dismissed these elements of the Act as some sort of window dressing or eye wash. As far as the media was concerned, all elements of Question 1A beyond the 55% school funding requirement weren’t worth mentioning.

But now Question 1A is law, and although the newly-elected Legislature could repeal it, amend it or otherwise ignore it, one has to assume the new lawmakers will take up its implementation in good faith.

Understanding 1A History

No unenthusiastic student in a grade school social studies class fails to be reminded of the philosopher Santayana’s warning: “Those who do not remember the past are condemned to repeat it.” In Maine’s modern history, the Legislature has been completely and indisputably opposed to engaging in comprehensive tax reform, and the state’s financial contribution to public education over the last 15 years, as a percentage of all spending, has been dropping sharply away from the 55% obligation rather than towards it. So as not to repeat this condemnable history, a brief review of the Legislature’s actions and reaction to Question 1A over the last two years is in order. It can be summed up in one word: resistance.

It all began 20 years ago. In 1984, the Legislature was providing 50% of the total state and local cost of public education. In that year Maine’s lawmakers adopted an education reform bill that included a boatload of new and expensive educational mandates. Presumably in recognition of the local financial impacts of that education reform package, the Legislature enacted into law its intention to increase the state’s financial obligation to 55% of the “total allocation”.

Fast-forward two decades. The Legislature’s contribution to the “total allocation” dropped to a new low in 2003, continuing a steady 10-year decline in relative state support for the public schools. Specifically, the state was providing just 42% of the total allocation, over $200 million short of the 1984 promise. The response of the Legislature in the Spring of 2003 was to change the rules, and it quietly enacted a revised state funding obligation which would commit the state to pay just 50% of the cost of education, as measured by the emerging Essential Programs and Services (EPS) school funding model. The enactment was PL 2003, chapter 504. The revised funding obligation was not only considerably less aggressive than the 1984 promise, but it was to be fulfilled very slowly… “ramped-up” over time. In one simultaneous enactment, the Legislature reduced its statutory commitment to public education by about $85 million a year, and then pushed out that reduced obligation six full years, to 2010.

This ramped and revamped education funding commitment, and the several variations that the Legislature advanced in its reactions to Question 1A, are mapped out in the chart on page 11.

At the same time that it was developing and enacting public law chapter 504, the Legislature was presented with Question 1A as a citizen initiative, endorsed by 100,000 signatures collected in a single day, a state record. At the urging of Governor Baldacci, the Legislature’s response was to place the “1B” competing measure on the ballot against Question 1A. The Legislature’s “1B” proposal retained the six-year “ramp-up” structure of chapter 504, but tweaked the steps in the ramp so that the state share would top-out at 55% of the EPS allocation in the year 2010, rather than 50%. This new ramp was constructed in such a way that no significant increases in state support would be required until FY 2007, leaving property taxpayers out of luck for three full school fiscal years. The unmistakable message from the Legislature contained in the “1B” strategy was: “We agree that 50% state funding was the wrong target, and we agree that at some point we will have to provide 55%, but not now…not yet…give us some time.”

That November, the voters opted for the more aggressive property tax relief of Question 1A by a 38% plurality in a three-way vote. Since a majority vote is needed to move a citizen initiative into the law books, an up-or-down vote on Question 1A was scheduled for June 8, 2004.

During the winter and spring of 2004, a concentrated effort was made to get the Legislature to enact a compromise plan, laid out in specific detail. The proposed compromise, it turns out, was a package the Legislature chose not to enact. What was enacted instead was LD 1924 (now PL 2003, chapter 712). The thrust of LD 1924 was to re-adjust, one more time, the six-year ramp first created in 2003 and adjusted by Question 1B. The steps in this new ramp were re-adjusted without much rhyme or reason, laying out a bumpy ride to 55. For example, LD 1924 called for very little increase in state support for public schools this year (FY 05), a sizable $70 million increase for the next fiscal year (FY 06), then dropping back again for FY 07 with a much smaller $40 million increase. A bumpy ride to 55%.

One June 8th, the voters had an opportunity to chart their own path, without the confusing interference of a competing measure, and the electorate enacted Question 1A into law.

Without missing a stitch, the public debate immediately turned to the Palesky tax cap initiative which would have imported into this state California’s “Proposition 13” — a system that limits the growth in property assessments as long as the property stays in the same ownership, and caps all municipal property tax rates at 10 mills.

For any number of reasons the voters rejected the Palesky proposal by nearly a 2:1 margin on November 2 this year. It was patently unconstitutional, trampled local decision-making authority, deconstructed the municipal ability to provide expected levels of local services without offering any type of reconstruction plan, and its impacts would have been wildly uneven, crushing hundreds of towns and cities while leaving others unscathed. For all of that, the debate over the tax cap proposal left no doubt in anyone’s mind that the voters’ rejection of the Palesky initiative was but a reprieve. If substantial and sustainable property tax relief is not provided by this newly-elected Legislature, the voters will grab the next opportunity for relief offered to them, regardless of the consequences.

And the possibilities of negative consequences abound. The so-called “Taxpayers’ Bill of Rights” proposal (TABOR) is being circulated as a citizen initiative by Mary Adams, the former “freedom fighter” from Garland who launched the drive against the uniform property tax in the 1970s. Like the Palesky tax cap proposal, the TABOR plan is based on a citizen-initiated constitutional amendment adopted in another state — in this case, Colorado — that was facing very different circumstances than is Maine.

TABOR would create spending limits on all levels of government that would be tied to population growth, creating annual school spending growth allowances, for example, that could swing as much as –15% to +15% depending on the region of the state.

In addition, TABOR would severely restrict the ability of local, school and state legislatures to raise tax rates, expand tax bases, or repeal unwarranted tax exemptions by forcing all those changes to be first approved by at least a 2/3 “supermajority” at the legislative level, and then also approved by a majority of the voters at secret ballot referendum.

Because it was a constitutional amendment in Colorado, but would only be statutory law here in Maine, the restrictions on state-level spending in TABOR would not be legally enforceable against the Legislature.

Against all of that background, Governor Baldacci unveiled his plan to implement Question 1A on November 30 th, one day before the newly-elected Legislature formally convened to begin organizing itself for the 2005 legislative session. As described with more detail as a separate article in this edition of the Townsman, the Governor’s plan would adjust for the fourth time in 18 months the “ramp to 55%” first constructed (as a ramp to 50%) in June, 2003. In this case, the Governor’s proposal would shorten the ramp by one year, achieving the 55% goal in FY 09, and increasing state aid to education each year between now and then in roughly equal installments. The Governor’s plan also includes a spending limitation system that would be applied to county, school and municipal governments loosely based on the system in the citizen initiative begin sponsored by the Chamber of Commerce as the “Maine Taxpayer Relief Act”.

MMA PLAN TO IMPLEMENT 1A

On December 9 th, MMA’s Legislative Policy Committee (LPC) met to finalize the Association’s legislative agenda for the 2005-2006 biennium. In addition to a number of bills not directly related to implementing Question 1A, the LPC endorsed the following package of legislation to implement the School Finance and Tax Reform Act of 2003.

Getting to 55%. The implementation of Question 1A endorsed by MMA simply amends the existing law that phases in the state requirement to fund 55% of educational costs and removes all the language that “transitions” that requirement over a five-year period. By their vote on June 8, 2004 the voters adopted that aggressive level of state educational funding, and it seems only appropriate that the full implementation of that popularly-adopted law be the starting point and the centerpiece of any implementing legislation.

A great deal has happened to school funding law since Question 1A was first written and circulated as a citizen-initiated petition back in 2002. Specifically, the entire school funding allocation system has been entirely repealed and replaced with the Essential Programs and Services allocation model, and the subsidy distribution system has been changed to define every municipality’s financial contribution to public education in terms of a maximum mill rate effort to support its school’s EPS-based budget.

MMA’s implementation plan accepts those changes and works with them, but there is a strong feeling within the municipal community that the voters in this state deserve to see what the school funding impacts (and related property tax relief impacts) would be if the new EPS-based system is implemented with full state funding at the 55% level. It seems only right that the state recognize the full EPS model for the purposes of school funding distribution. It is hard to argue that the voters intended their vote for 55% school funding last June to be implemented in the first year with the state paying 52.6% of just 84% of what full school funding is supposed to be, as measured by the state’s own standards.

EPS Review Committee. A school funding allocation system is supposed to first determine how many dollars, state and local, should be appropriated by each school system to provide an adequate public education for all the students. The current allocation system, which the EPS model is scheduled to replace, completely failed in that regard. That cannot be allowed to happen again for any reason.

If the state is going to be held to contribute 55% of the cost of education as measured by the EPS model, that model must be managed in such a way to hold its integrity over time. Toward that end, MMA’s implementing legislation formally establishes an EPS review committee, with Department of Education and State Board of Education representation along with a number of educational practitioners and municipal representatives, charged with providing an annual report card regarding the adequacy and integrity of the EPS model.

Special Education. Question 1A requires the state to provide 100% funding for the federal and state special education mandates placed on our schools. Because Question 1A was written at a time when special education funding was structured as a reimbursement system, Question 1A established the 100% requirement in that context. With the advent of the EPS model, it is possible to provide that 100% level of state support for special education in the current year of expenditure, rather than as a reimbursement provided in subsequent years. Accordingly, MMA’s implementing legislation causes that minor amendment to be made to the law that was adopted on June 8 th, so that the 100% special education allocation can be provided to each school during the current year expenditures.

Efficiency Funds. MMA’s implementation plan would place into law a clearly defined management system for both efficiency funds created by Question 1A. On June 8 th, the voters capitalized the "Fund for the Efficient Delivery of Local and Regional Services" by dedicating 2% of the annual distribution of municipal revenue sharing for the broad purpose of encouraging multi-municipal and regional collaborations. Through that fund a $2 million annual grant program is created which the towns and cities can compete for in order to implement new, more cost-effective service delivery systems. A parallel system was created by Question 1A to capitalize the "Fund for the Efficient Delivery of Educational Services" with 2% of the annual school subsidy, roughly $19 million a year if Question 1A is fully funded.

According to MMA’s implementation, both efficiency funds would be similarly managed by creating for each a project review panel made up largely of former municipal officials (for the local government fund) and education practitioners (for the school efficiency fund). Municipalities with innovative collaboration projects could apply with other municipalities or counties or other regional service providers. The schools could apply singly, in collaboration with each other, or with municipal partners. The project review panel for each fund would be charged with awarding the grants according to a number of criteria, the most prominent of which is the demonstrable savings in the cost of delivering targeted services.

Approaches advanced over the last few years in the broad area of “regionalization" by the Baldacci administration and the Legislature could be characterized as top-down or prescriptive, where the municipal or school entities get financially rewarded for forming bigger districts. The approach or MMA’s implementing legislation would work from the bottom up, tapping into the creativity and innovation of the people who are actually providing the services.

Spending limitations. In two ways Question 1A makes it clear that the package of tax reform the voters adopted must address the issue of Maine’s overall tax burden. First, to the extent the Legislature restructures the state’s overall tax code in order for the state to meet its financial responsibility in the area of public education, Question 1A requires that restructuring to be “revenue neutral”, meaning that for any tax increase in one area, systems must be established to ensure appropriate tax decreases in other areas. Second, Question 1A directs the Legislature to adopt an overall tax burden management plan. A rational spending limitation system that functions at all levels of government in Maine works to implement both of these elements of Question 1A.

The spending limitation system supported by MMA uses as a foundation the system established in an initiative proposed by the Maine State Chamber of Commerce, the Maine Taxpayers Relief Act. There are several sections in the Chamber’s proposed initiative, however, that were ambiguous with regard to the specifics of its implementation, and did not adequately recognize the complexity of the state-local funding system for public education and the differences between a town meeting governance system and a town or city council governance system. MMA's spending limitation legislation attempts to correct for those oversights without substantially changing the goals or effect of the Chamber’s proposal.

Specifically, the MMA plan adopts the Chamber’s formula for allowed growth as the average real growth in the state’s Total Personal Income-plus-the local property growth factor. For municipalities, the year-to-year growth allowance would apply to the property tax commitment that relates to municipal services, clearly segregating the portion of the property tax commitment for the counties and the portion for the schools. The responsibility for the management of each element of the property tax commitment would be given to the appropriate officers; that is, the municipal officers for the municipal portion of the commitment, the school officers for the school’s portion of the commitment, and the county commissioners for the county portion of the commitment.

The general rule under the MMA plan would be that the growth allowance provided under the Chamber’s formula would be applied, including the provision that would reduce the maximum growth allowance in any year where there is “net new funding” from the state. That relatively simple formula fails to take into account, however, the complexity of state and local funding for public schools. Because of the implementation of the new EPS-based school funding distribution system, some schools will be eligible for more funding from the state but they will have to raise more local dollars for the school system in order to leverage the increased state aid. The “net new funding” formula in the Chamber’s plan fails to account for that complexity and generally fails to coordinate well with the implementation of the EPS school funding distribution system. To address that issue, the MMA version of spending limitation would generally exempt a school system which has a total state and local budget that is no greater than that school system’s existing profile with the EPS model.

With these modifications in place, the same governance mechanisms of the Chamber plan would pertain. Generally, in order for a municipality, school system (whether a municipal school system or school district), or county to exceed its defined growth allowance, the legislative body would have to approve the budget by secret ballot referendum.

In order to preserve what should remain as the ultimate prerogative of a local legislature, however, the MMA plan would allow the voters of any municipality to establish a different procedure to adopt a budget that exceeded the statutory limits, but that different procedure would have to be approved by the voters through a referendum process. For example, a community that has a charter which generally controls election procedures could adopt by charter amendment the authority of the town or city council to adopt a budget that exceeded the statutory limits. Similarly, the smaller communities could adopt an ordinance that gives to the town meeting that authority. In both cases, however, the charter provision and the town’s ordinance would have to be approved by the voters at referendum.

Tax Reform. Finally, but in many respects most importantly, the MMA package includes a “white paper” recommendation regarding the skunk at the party that no one wants to admit is there…actual tax reform. Question 1A created an obligation on the Legislature to fund K-12 education at the 55% level, and to meet that obligation as it was enacted by the voters the Legislature will have to both reprioritize current levels of state spending, dedicate the natural growth in new state revenue to the public schools, and find additional resources. The Governor’s implementation proposal only contemplates the first two tasks. There is a powerful legislative resistance against engaging in real tax reform, which involves opening up the state’s entire tax code and amending it according to well-established tax policy principles of equity, balance, progressivity, and stability. It is precisely that political unwillingness to engage in comprehensive tax reform which results in the 55% funding obligation being phased-in over a four year period, diluting the impact of property tax relief.

The MMA white paper reviews eight of the most prominent legislatively-initiated and academic studies published over the last 25 years, which conclude as a matter of consensus that the state’s sales tax base is over-exempted, overly narrow, and should be expanded for the express purpose of lowering Maine’s over-reliance on the property tax. The white paper outlines a proposed sales tax base expansion that would bring Maine’s sales tax code into alignment with the sales tax base in many other states and modernizes the tax base to better fit today’s economy. The proposed base expansion would apply the sales tax to a number of selected amusement and recreation services, personal services and membership services, all of which are commonly subject to the sales tax in other jurisdictions.

With a meaningful spending limitation in place, the political resistance to taking an honest look at Maine’s sales tax code becomes unjustified because the reforms will have zero negative effect on Maine’s tax burden. With that protection, true tax reform becomes possible, especially when a genuine effort at tax reform will provide the level of property tax relief that the voters of Maine are demanding.