Legislature Adjourns: Tax reform debate to be resolved in November
(from Maine Townsman, July 2003)
by Geoffrey Herman, Director of State & Federal Relations, MMA

The First Session of the 121st Maine Legislature adjourned in the early morning hours of Saturday, June 14. At that time there was an intention of reassembling for a one-day special legislative session in late June that would be dedicated to the matter of tax reform. The day-long special session was also potentially available to consider a bond package to be put before the voters in November.  Like tax reform, consensus between the parties over the next bond package did not materialize during the regular legislative session.

As it turns out, neither did the one-day special session in June to hammer-out a legislative strategy to address the call for comprehensive tax reform. At this writing it is unclear when (or if) the Legislature will be called back to a special session in 2003.

Despite the lack of finality that usually accompanies the exodus of lawmakers from Augusta, the June 14 adjournment of the Legislature provides an appropriate time to review what the last six months of lawmaking have achieved. The municipal interests this last legislative session fell into three categories: comprehensive tax reform, state budget fallout and bonding proposals, and the thick stream of legislation that is annually enacted as it might affect the task of municipal government, which is the delivery of public services.

TAX REFORM

The municipal focus this year concentrated almost entirely on the issue of comprehensive tax reform. The tax reform debate was placed front-and-center before the Legislature because of a citizen-initiated tax reform proposal, The School Finance and Tax Reform Act of 2003. This directive to the Legislature to provide property tax relief, increase state financial support for public education and engage in comprehensive tax reform was initially developed by a group of municipal officials, became the recipient of a record 100,000 signatures as a proposed initiative, and is now scheduled to be on the ballot at the statewide election on November 4, 2003.

The School Finance and Tax Reform Act of 2003 is designed to accomplish four goals. If adopted by the voters, the initiative would provide property tax relief by requiring the state to meet its long-unfulfilled obligation to provide 55% of the funding necessary for kindergarten through grade 12 education, rather than the 43% (and falling) state contribution that is currently provided. The proposal would further compel comprehensive tax reform, establish investments to achieve structural efficiencies in the delivery of governmental services, and accomplish the development of a comprehensive plan to address Maine’s overall tax burden.

Although the Legislature had the option of adopting the School Finance and Tax Reform Act of 2003 and begin tackling the integrated challenges of providing property tax relief, comprehensive tax reform and tax burden management, the decision was made to reject the initiative and therefore place it on the ballot on November 4. Having made that decision, the last tax-reform question the Legislature was wrestling with before it adjourned is whether the citizen-initiated measure would be on the ballot all by itself for an up-or-down vote of Maine’s electorate, or whether the Legislature would place a “competing measure” alongside the citizens’ initiative to try to pull the voters in a third direction. The doctrine that governs how the Legislature can create a “competing measure” to a citizen-initiated proposal is explained in a separate article in this edition of the TOWNSMAN.

The legislative efforts to address the challenge of tax reform evolved over the course of the 6-month legislative session.

Tax Reform: Phase I

When the Legislature’s Taxation Committee came out of the starting gates at the new year, there seemed to be a general interest in developing a comprehensive tax reform/tax relief package. Against the bitter January winds that buffeted the State House, the rhetoric inside supporting comprehensive tax reform was warm and plentiful. Procedurally, almost all the regular legislation that was referred to the tax panel was summarily killed in Committee in order to clear the decks for a centerpiece tax reform effort which, at the end of the day, never materialized.

Tax Reform: Phase II

 As the winter’s rock-hard snow pack began to soften in late March, there was a period of great promise as the Committee focused on simultaneously providing property tax relief and fulfilling the state’s longstanding but unfulfilled commitment to provide 55% of K-12 educational funding. The method to fulfill these two goals simultaneously was to implement a system of capping the local property tax effort required to support public education to the extent the community’s school budget falls within the Essential Programs and Services (EPS) funding model. 10-mill cap and 9-mill cap spreadsheets began to blossom inside the State House along with the jonquils and forsythia outside, and the discussion over achieving multiple goals  through tax reform (property tax relief, the creation of a rational benchmarking of school costs, and creating a coherent school-funding distribution system) was energized.

At the same time, other discussions in the State House, both in publicly-held work sessions and behind-the-scenes, focused on the strategy of the “competing measure”. In some of those discussions, the first purpose was not comprehensive tax reform. The priority goal among some lawmakers was to develop an alternative proposal that could be placed on the ballot to defeat the citizen-initiated measure.

Tax Reform: Phase III

 Just before the lilacs blossomed in May, and against the background scent wafting off a hundred freshly mowed lawns in the Capital City, the initial promise of substantial, EPS-centered tax reform began to rapidly deflate and the drive to develop an effective “competing measure” gathered steam. The developing plans – coming first from the chairs of the Taxation Committee and then from Governor Baldacci’s Office – promoted themselves as  “no-new-tax” tax reform proposals that simply took away municipal tax revenue from various sources and promised to redistribute that revenue in certain ways, all in the name of tax reform and educational funding relief.

The central theme of Governor Baldacci’s “fiscal reform” proposal was that the lion’s share of any additional revenue that may be needed to adequately fund K-12 education is currently locked-up in municipal and educational inefficiencies. The message was that if the municipal and educational service delivery systems could be restructured into bigger administrative systems, dramatic efficiency savings would eliminate the property tax problem. Evan Richert, the former Director of the State Planning Office and now with the University of Maine’s Muskie School, and Phillip Trostel of the University of Maine’s Margaret Chase Smith Center, both prepared “studies” of municipal and school governance structures which coincidentally concluded that bigger School Administrative Districts (SADs) and the consolidation of municipalities into 20,000-plus population “Service Districts” would guarantee enormous financial savings. The Governor’s Office began to quantify the financial potential that is allegedly locked-up in local government inefficiency at $125 million a year, $150 million a year, and even $185 million a year. Although the method of converting those local savings into increased state support for education went largely undisclosed, these “efficiency” savings were characterized as nearly enough to make the long-ignored state promise to pay 55% of K-12 education a reality. As it was explained, however, the potential of using the revenue trapped in local government inefficiency for property tax relief could only be actualized if the state could just figure out how to tap through the hard crust of “local control” and “home rule authority”.

A summary of the competing final versions of Governor Baldacci’s “fiscal reform” plan, as reworked by the Taxation Committee, is provided in a separate article in this edition of the TOWNSMAN.

Tax Reform: Phase IV

The last phase of the Legislature’s grapple with tax reform (at least for now) occurred in June. Summer was emerging from a cold, wet spring, the regular business of the legislative session was complete, and even the school baseball and softball seasons were drawing to a close. In the last weeks before the June 14th adjournment the several proposed competing measures were floated in a clutch of trial balloons, but no bipartisan consensus emerged on either the overall scope or the specific essential ingredients of the draft “competing measures”. On the Legislature’s last evening of debate the Governor’s competing measure bill was pulled back to the Taxation Committee and “carried over” to the next legislative session to avoid a pointless discussion. Less than a week after the Legislature’s June 14th adjournment, the Taxation Committee reconvened to see what elements of a tax reform effort could garner bipartisan support, but whatever threads of consensus may have previously existed had become, if anything, even further unraveled after the four days of rest and reflection.

No Conclusion

As this edition of the TOWNSMAN goes to press, there is no neat summary regarding the Legislature’s strategy to address tax reform in 2003 and 2004. It is possible that legislative leaders, the Governor’s Office and the Taxation Committee will come together on a “competing measure” proposal over the course of the summer and early fall, and the Legislature will be reconvened sometime before Labor Day for the purpose of adopting that alternative tax reform approach to be placed on the November 4th ballot to compete against the citizen-initiated School Finance and Tax Reform Act of 2003. It is perhaps just as likely that the Legislature will not reconvene and the citizen-initiated tax reform proposal will go out to the voters for an up-or-down vote in November without a competing option. When the strategy comes into a sharper focus, MMA’s State and Federal Relations staff will endeavor to inform municipal officials of the Legislature’s next steps by means of a special edition of MMA’s Legislative Bulletin.

STATE BUDGETS AND BOND PROPOSALS

Four Budget Bills

Another area of concentrated municipal focus was the four state budget bills that were enacted during the course of the legislative session. Two of those budget bills were designed to balance the state’s budget for FY 03, which just concluded on June 30th. The two other budget bills were designed to map out state government expenditures for the next two fiscal years (FY 04 and 05).

A description of all four of those bills is provided in the “New Laws” article, beginning on page ##, under the "Appropriations and Financial Affairs" heading. The major municipal impacts of the state budgeting decisions made by the Legislature this session will be: (1) the short and longer-term property tax impacts resulting from the Legislature’s decision to nearly flat-fund education; (2) a restructuring of the Homestead property tax exemption that will increase the property tax burden for many homeowners, especially in southern and coastal Maine; and (3) a cluster of less direct impacts related to the scaling back of state services, some of which will likely reappear as increased demand for municipal services.

Education Funding.  As shown by the chart on page ##, legislative appropriations for education have flattened-out significantly in response to the state’s financial difficulties, beginning with a series of “curtailments” and deappropriations that resulted in a mere 1.8% increase in state support for public schools from FY 02 to FY 03, a 2.4% increase from FY 03 to FY 04, and an actual reduction in state support of nearly 1% between FY 04 and FY 05. The last time there was a reduction from one year to the next in state support for education was 1992, beginning a seven-year period of flat state funding for education that triggered the surge in property tax burden that has precipitated annual calls and several petition drives for property tax relief and comprehensive tax reform in recent years.

Based on conservative projections of the total cost of K-12 education over the next two years, it appears that the state’s contribution to public school education (which since 1985 is supposed to be at least 55% of the total) will drop from the current 43% level to 42% in FY 04 and just 40% in FY 05.

Homestead Exemption. One program to which the Legislature turned to reduce state expenditures was the Homestead property tax relief system. Specifically, the Legislature adopted Governor Baldacci’s recommendation to “restructure” the flat $7,000 Homestead property tax exemption into the “graduated” homestead exemption. Starting with the current 2003 tax year, homesteads that have a full value of less than $125,000 will still receive the $7,000 exemption. Homesteads with a full value between $125,000 and $249,999 will receive a $5,000 exemption. Homesteads with a value of $250,000 or more will receive a Homestead exemption of just $2,500. These changes were calculated to reduce the state’s $40 million annual appropriation for Homestead relief by about $5 million (or 12%) a year. The impacts, obviously, will be felt more broadly in southern and coastal Maine, where housing values tend to be higher. In some communities, the vast majority of homesteads will be impacted.

Maine Revenue Services (MRS) has prepared and distributed a paper that describes the changes to the homestead exemption law and a new “Ratio Declaration and Reimbursement Application”, which is an effective worksheet that walks municipal assessors through the task of  identifying all the homesteads that may be affected by this new graduated system. Municipal assessors should make sure they have a copy of the MRS worksheet before they take up the task of administering this new “graduated” reduction in property tax relief benefits formerly provided under the 1998 Homestead Act.

Other state budget impacts. A sampling of decisions made by the Legislature in the various budget bills enacted this session that will impose some additional impacts on municipalities include: eliminating the state Bureau of Liquor Enforcement, eliminating some state game warden services with respect to nuisance wild animals, cutbacks to municipal planning grants formerly provided by the State Planning Office and the Department of Conservation, elimination of library and fire warden stipends, increased hunting, fishing, and snowmobile and ATV registration fees, and new assessments levied  against the municipalities located within the jurisdiction of the Land Use Regulation Commission to cover LURC’s land use regulatory program. More detail is provided in the “New Laws” article under the Appropriations and Financial Affairs category.

Bond Packages

The Legislature’s approach to the total bond recommendation to be submitted to the voters in 2003 could be fairly described as a work-in-progress.

The glass half full. A $60 million “economic stimulus” bond package was put on the fast track, readily endorsed by the Legislature and sent out to the voters on the second Tuesday in June. By a 60-40 split, Maine’s electorate easily approved the recommended borrowing, which was almost entirely dedicated to further capitalizing “research and development” initiatives throughout Maine’s higher education system and private-public biomedical research partnerships. The two elements of the $60 million package not directly related to “R&D” are $8 million for affordable housing and a $6 million boost to the Municipal Investment Trust Fund (MITF). Parallel legislation opened up the ability of Maine’s “service center” municipalities to access direct grants (rather than loans) from the MITF in an concerted effort to convert the theoretical promise of municipal infrastructure assistance into real-life construction projects for this building season.

The glass half empty. The other half of the borrowing recommendation eluded lawmakers during the First Regular Session. Governor Baldacci had three remaining bond recommendations for 2003 on the table:

Transportation.  A $75 million transportation bond proposal that would provide:

• $42 million for highways and bridges ($13 million from the Highway Fund and $29 million from the General Fund);

• $5.6 million for airport improvements;

• $9.36 million for port and ferry improvements;

• $14.2 million for rail improvements;

• $2 million for trail improvements; and

• $1.84 million for transit and park-and-ride improvements

Environment.  A $16.8 million environmental bond proposal that would provide:

• $2.5 million for loans to construct and upgrade water pollution control facilities, matching $12.5 million in federal funds;

• $10 million for grants to construct water pollution control facilities;

• $2.15 million to clean up uncontrolled hazardous substance sites;

• $350,000 to remediate solid waste landfills; and

• $1.8 million for both grants and loans for public drinking water system improvements, matching $6 million in federal funds.

Higher Education, Courts and Culture.  A $13.3 million higher education borrowing proposal that would provide: 

• $4 million to upgrade the laboratory facilities at the University of Maine’s Farmington, Machias and Presque Isle campuses and at the University of Southern Maine.

• $2 million for campus-wide infrastructure and technology investments to transition the Maine Technical College System to the Maine Community College System.

• $2 million for improvements to state parks.

• $1.3 million to install video conferencing facilities in the state’s court system and to rebuild the violation bureau’s information system; and

• $4 million to be distributed to a number of organizations under the Maine Cultural Affairs Council, including the Maine Arts Commission, the Maine Historic Preservation Commission, the Maine State Library, the Maine State Museum, the Maine Historical Society, the Maine State Archives and the Maine Humanities Council.

In addition to the $105 million in borrowing wrapped-up in these three gubernatorial recommendations, dozens of bond proposals were submitted during the course of the legislative session by legislators, seeking hundreds of millions of borrowed dollars for such diverse purposes as riverfront park projects, civic centers, helicopter medical rescue systems, the School Renovation Fund, energy conservation and the Geographic Information Library.

By the end of the legislative session, however, after the several budgets had been negotiated, there was not enough juice left in the negotiating reserves to bring the two parties to agreement with respect to the total amount of borrowing that should be recommended to the voters for 2003. After the $60 million bond package was approved by the voters on June 10, Republicans thought it would be prudent to limit the November package to $83 million in order to keep the aggregate new debt in line with the amount of debt service that was being retired. The Democrats focused on the historically low interest rates and another benchmark on borrowing (ratio of debt service to annual General Fund revenue) to support a larger borrowing package in November – in the range of $109 million. Because bond proposals require a two-thirds vote in both the House and the Senate before they can go to the voters, the different positions of the two parties created an impasse over the final bond package that could not be bridged before adjournment. Like tax reform, the next borrowing package awaits a special session or the next regular session in January.

GENERAL MUNICIPAL LEGISLATION

Approximately 1,700 separate pieces of legislation were taken up by the Legislature during its first regular session. MMA was tracking 513 of those bills because of their direct or indirect impacts on local government. 162 of those municipally-related bills were ultimately enacted into law and 53 were “carried over” to the next legislative session. What follows in the next three articles (New Laws, Task Forces & Working Groups, and Carry Over Bills) is a complete description of all the enacted legislation with municipal impact, organized according to the appropriate legislative committees of jurisdiction. We recommend that the selectmen, councilors and other municipal officials take the time to read through this compendium of newly enacted law to familiarize themselves with the changes and to make sure other municipal officials and employees have an opportunity to become familiar with the new legislation.

As a sampler, the newly created Pine Tree economic development program is described under LD 1614 (under "Appropriations and Financial Affairs").  In the "Education" category, LD 1623 provides a description of the new Essential Programs and Services school funding model that the Legislature has adopted according to a 6-year phase-in. Under "Natural Resources", the reader is introduced to a sweeping improvement to the state’s junkyard licensing law (LD 1367), and the "Taxation" section includes a description of the new affordable-housing Tax Increment Financing opportunity that was created with the enactment of LD 858.

On the less positive side, the reader might want to review the Legislature’s preemption of municipal ATV regulation under LD 1482 in the "Inland Fisheries and Wildlife" category. Or perhaps the new unfunded state mandate in the "Education" section enacted as LD 1577, which requires the implementation by 2005 of each school’s “Gifted and Talented” program…probably the most conspicuous state mandate enacted by the Legislature this session. And if all of this is too much to take, LD 1290 under "State and Local Government" will walk you through the new, more complicated and extensive procedures that are required in order for a municipality to consider deorganization.