Revenue Forecasting Committee
Consensus Economic Forecasting Commission

The Seasonal Challenge of Structural Deficits

(from Maine Townsman, December 2008)
By Jeff Austin, Legislative Advocate, MMA

As applied to the state budget, the so-called structural deficit has two components. The first is a projection of revenues, the second is a projection of appropriations. When the projected appropriations exceed projected revenues, you have a “structural deficit.” For the fifth consecutive time, Maine is facing a biennial structural deficit of several hundred million dollars.

Projected Revenues

Maine created a Revenue Forecasting Committee (RFC) to project its future revenues. The RFC is aided in its work by the Consensus Economic Forecasting Commission (CEFC). The composition and duties of both bodies are contained in statute (Title 5, Chapter 151-B).

The RFC was established in 1992 and the CEFC was established in 1995. The most significant change came in 1997 when the law was amended requiring the Governor to use the RFC’s revenue projection in the Governor’s proposed budget. Before 1997 the projections by the RFC were advisory only.

The RFC is obligated to issue two forecasts per year, one in December and one in March. The primary purpose of the projections is to aid the Legislature in its budget adoption process. The December projection primarily assists the Governor as he crafts his budget proposal. The projection in the following March assists the Legislature as it fully develops and finally adopts the budget bill.

On December 2, the RFC formally released its December forecast for state General Fund revenues. An abridged version of that forecast showing the top five revenue lines and the grand total is reproduced in Chart 1.

The information provided in this revised forecast is remarkable for several reasons.

First, RFC’s forecast formally establishes the immediate budget gap affecting the current fiscal year budget (FY 2009) at $140 million. This shortfall will need to be addressed by the Legislature in the short term.

Second, the updated forecast frames the challenge of balancing the upcoming two-year state budget by establishing the General Fund structural deficit at $840 million.

The December forecast also allows a comparison of two-year structural deficits over time, demonstrating the cyclical, ever-repeating financial crises facing state government – a cycle of crisis that begs for a structural solution.

And finally, also of great municipal interest, the RFC forecast provides information regarding changes to the state Highway Fund and the municipal revenue sharing program that will affect municipal budgets on both the short and long term.

Chart 1–State General Fund Revenue Projection

Chart 1–State General Fund Revenue Projection

Impact in Fiscal Year 2009

This FY 2009 re-projection identifies a reduction of $140 million in General Fund revenue from the March RFC forecast. The FY 09 shortfall will need to be addressed prior to the end of the fiscal year on June 30, 2009. The Governor issued a “curtailment” order in November seeking the reduction of $80 million in spending. The Governor will be presenting the Legislature with a FY 09 supplemental budget bill in mid-December that will likely reiterate his curtailment cuts (in order to allow the Legislature to consider alternatives) and seek to implement an additional $60 million worth of non-curtailment items.

For local government, the major impact of the curtailment order is a $27 million (2.7%) reduction in school subsidy that was scheduled to be distributed to Maine’s public schools during this year.

In addition, as discussed more fully below, the RFC’s new forecast suggests that municipal revenue sharing for the current fiscal year will be approximately 5% below the March projections upon which many municipal budgets were based.

Chart 2–Structural Deficit

Chart 2–Structural Deficit
Source: State of Maine: Bureau of the Budget, Revenue & Expenditure Projection, Sept. 30, 2008 and RFC, December 1, 2008 Revenue Forecast.

FY 2010-2011 - Structural Deficit

Maine law requires the State Budget Officer to present a forecast of revenue and expenditures for the following biennium no later than September 30th each even numbered year.

The assumptions underlying this forecast are also established in statute.

“The forecast must assume the continuation of current laws and include reasonable and predictable estimates of growth in revenues and expenditures based on national and local trends and program operations. General Fund and Highway Fund revenue must be forecasted by [by the Economic Forecasting Commission]. Expenditure forecasts for the General Fund and the Highway Fund must be forecasted on the basis of current law and assumed inflation variables related to program operations.”

The Bureau of the Budget published its “Revenue & Expenditure Projection” for FY 2010-11 in September. Combining the information in that report with the most recent RFC projections reveals the following in Chart 2.

The Alternative Structural Deficit

The calculation in Chart 2 of $841 million is the “traditional” structural deficit analysis and the one most-often cited in the press today.

The November edition of the Office of Fiscal & Program Review’s (OFPR) monthly publication entitled “Fiscal News” contains an alternative “structural gap” projection. This projection does not use the Bureau of the Budget’s $6.8 billion estimate for appropriations in the FY 2010-2011 biennium. Instead, it uses something called the “modified flat-funded Baseline Budget appropriations and allocations.” Using this figure, the structural gap is projected at a lower amount of $540 million.

According to the Office of Fiscal and Program Review: “The 2008-2009 Biennium begins a major change in Maine’s budget process. The traditional “Current Services” incremental approach to building a biennial budget is being replaced with a new “Baseline Budget” approach and bill format recommended by the Commission to Reform the State Budget Process and adopted by the Legislature (see PL 2005, c. 601). This new “Baseline Budgeting” approach uses a modified flat-funded starting point that allows Personal Services appropriations to grow based on currently authorized positions, collective bargaining agreements and projected growth of contribution rates for retirement, health insurance and fringe benefits, but provides All Other funding at current year funding. The base is adjusted for one-time initiatives. Capital Expenditures (for items costing more than $3,000) are considered one-time and are not included in the Baseline Budget. Adjustments to this new Baseline Budget starting point are proposed as new initiatives.”

Chart 3–History of Structural Deficits.

Chart 3–History of Structural Deficits.
Source: OFPR Analysis of LD 499 (FY 2008-2009 Budget Bill), June 2007.

By either measure, the upcoming biennium faces a significant structural deficit. For municipalities, the impact is not yet known. However, senior administration officials have been suggesting that education aid to municipalities will be flat-funded “at best.” Furthermore, to the extent state revenues are lower than anticipated, both municipal revenue sharing and local road assistance are proportionately reduced automatically.

Structural Deficits Over Time

There are structural gaps almost every biennium (see Chart 3). Back in 2006, the FY 2008-2009 (current biennium) structural gap was estimated at $400 million. This gap was predicated on an overprojection of revenues compared to what was actually collected. If the budget analysts knew then what they know now, the gap between the appropriations estimate and actual revenues for the FY 2008-09 biennium would have been closer to $600 million.

According to information provided by the Legislature’s Office of Fiscal and Program Review, the General Fund structural gaps over the last 10 biennia are cyclical but persistent.

While closing the structural gap has been a recurring event, it has sometimes been a matter of reducing the level of growth in spending. Next biennium, revenues are projected to actually decline by over $300 million compared to the current biennium, and not merely decline relative to a previous projection. So, closing the gap this year will be different.

It should be noted that these are preliminary estimates. For example, the $334 million projection in FY 98-99 never materialized because revenues came-in much faster than anticipated. By contrast, the FY 08-09 projection of $398 million is ultimately going to be much lower than the actual deficit given the rapid decline in the economy and the December projection that FY 09 revenues will be $140 million lower than anticipated in March.

Highway Fund Deficit

Chart 4–Highway Fund Projections

Chart 4–Highway Fund Projections

The Highway Fund, which receives the revenue generated by the state’s gas tax, is also projected to decline compared to the March estimate (see Chart 4).

While the change in estimates for the upcoming FY 2010-11 biennium are not that substantial, the Highway Fund in FY 2010 and FY 2011 is projected to receive less revenue than was received in FY 2008. Similar to the General Fund, this is a ‘real’ cut.

There is an alternative “structural gap” analysis for the Highway Fund as well. However, the difference between the “traditional” gap and the new “baseline” gap is quite dramatic. Under the new “baseline” gap analysis, the Highway Fund will face a structural gap of approximately $50 million. According to the “traditional” analysis the gap is estimated at $560 million. However, the “traditional” structural gap analysis changed significantly this biennium because expenditures required to meet certain “goals” were to be added to the appropriations assumption. The cost of these goals account for $160 million of the (traditionally-calculated) $560 million structural gap.

State-Municipal Revenue Sharing

As mentioned above, the RFC’s recent re-projection of state revenue forecasts a 4.5% reduction in municipal revenue sharing compared to the March forecast, which was the projection on which many municipal budgets were based. Just as is occurring on the state level, municipal officials in many communities are directing spending curtailments on the local level in response to the reductions in revenue sharing in combination with the depressed motor vehicle excise tax revenues.

Going forward, the new RFC projection suggests that municipal revenue sharing will be distributing approximately $7 million a year less than previously projected over each year of the biennium.

To put it another way, where the RFC’s projections stand right now, municipal revenue sharing will take a “real” cut of about $6 million during this current year when compared to last year’s distribution.

In 2010, municipal revenue sharing is projected to return to the 2008 levels.


Revenue Forecasting Committee:

Jerome Gerard, Chair,
Acting State Tax Assessor

James Breece,
University of Maine System

Marc Cyr, Principal Analyst,
Office of Fiscal and Program Review

Grant Pennoyer, Director,
Office of Fiscal and Program Review

Catherine Reilly,
State Economist

Ellen Jane Schneiter,
State Budget Officer

Consensus Economic Forecasting Commission:

Charles Colgan, Chair, Professor of Public Policy and Management,
University of Southern Maine

Eleanor Baker, Managing Principal, Baker Newman Noyes, LLC

John Davulis, Chief Economist,
Central Maine Power Co.

Michael Donihue, Associate Professor of Economics, Colby College

Charles Lawton, Senior Economist, Planning Decisions, Inc.

For information related to the Revenue Forecast, visit the OFPR website: http://www.maine.gov/legis/ofpr/revenue_forecasting_committee/index.htm

For information related to the structural gap and the curtailment order visit the Budget Bureau’s website: http://maine.gov/budget/