MMA’s 2009-2010 Legislative Agenda

Legislative Overview: Hunkering Down

(from Maine Townsman, December 2008)
By Geoff Herman, Director, State and Federal Relations, MMA

Across the board, at every level of government in Maine, legislative decision-making in 2009 will be characterized as a belt-tightening, expenditure-limiting, program-cutting activity, with governments hunkering down in reaction to the sharply negative economic conditions, all the while trying to continue providing their core-function services.

The members of the newly-elected 124th Maine State Legislature were sworn into office on December 3rd, just a few days after the state’s General Fund “structural deficit” was recalibrated as an $840 million shortfall between projected revenues and the estimated costs of providing state governmental programs and services over the next two-year period.

The two-year shortfall comes on top of a more immediate $140 million shortfall in the current-year General Fund budget, a revenue-to-expenses gap that needs to be bridged between now and next June.

A more detailed description of the state’s General Fund and Highway Fund deficits is provided in a separate article. The point to be made is that a revenue shortfall of over $400 million for each year of the next biennium is serious business, especially because some of the more routine and easier legislative fixes are used up or exhausted after several years of state budget trimming.

Rumors bounce all over the place, but the specific budget-balancing proposals advanced by the Governor or suggested by legislative leadership will not be known for several weeks.

During the waiting period, municipal officials have expressed four general concerns.

Concern #1. The incoming Legislature, in response to the 64%-36% vote by Maine’s electorate on November 4 to repeal enacted increases to various beverage taxes to help fund the Dirigo health insurance program, will make a big deal about addressing the shortfall “without raising taxes.”

The concern is that the Legislature will then turn around and cut various forms of financial support to local governments, which will either force increases in property taxes, serious reductions in local services, or some degree of both.

In a flashback to the early 1990s, the Baldacci Administration is recommending cuts to the current year school subsidy distribution, followed by flat funding levels for FY 2010 and 2011 at the new negative level. There have been reports that the Department of Administration and Financial Services is recommending eliminating or scaling back Tree Growth reimbursement. Legislative appropriation of municipal revenue sharing has become commonplace in the last few years, originally as partial and more recently as complete raids of the Local Government Efficiency Fund, which is capitalized with municipal revenue sharing dollars.

How far will the new Legislature want to tap into property tax resources to help balance the state budget?

Concern #2. Municipal officials are willing to take their hits in due proportion. For example, to the extent state revenues are down, municipal revenue sharing is automatically down because it is directly linked to state revenue (5.1% of sales and income tax revenue). If the whole pot is smaller, the municipal share is smaller. Just this year, for example, revenue sharing is projected to drop $6 million from what was distributed last year. Similarly, to the extent the state’s Highway Fund is down, local road assistance (called “URIP”) is down because URIP is 10.4% of all Highway Fund revenue dedicated to roads and bridges.

Motor vehicle excise tax revenue is taking an obvious hit affecting all municipalities. On top of that, to the extent real estate transfer tax revenues are reduced because of the soft housing market, the bills sent by the counties that the municipalities must pay – at least for non-jail services -- will likely be increased.

And to some degree, the municipal property tax base may actually constrict, forcing very difficult decisions between increases to property tax rates or service reductions.

These revenue reductions are proportionate and represent the municipalities’ fair share of the economic downturn. Municipal officials completely understand their responsibilities to respond to these revenue shortfalls. It is when the reductions become disproportionate through legislative actions that the intergovernmental financial relationships that have been developed and held relatively stable over long periods of time are unfairly broken.

Concern #3. As a group, the municipalities have been strongly pushing for comprehensive tax reform for 20 years. Municipal leaders believe the piecemeal approach to tax changes to help fund the Dirigo program, and the public’s negative reaction on Nov. 4th, may make comprehensive tax reform much more difficult for the foreseeable future, which is extremely disappointing. If well-crafted comprehensive tax reform had been put into place, such as the package developed by the Taxation Committee in 2007, there would be somewhat greater stability in state revenue today because the state’s tax code would not rely as heavily on personal income, automobile sales and construction activity.

Tax reform, by itself, cannot completely mitigate the governmental impacts caused by a worldwide economic crisis, but it greatly improves equity and maximizes stability. The proper management of the state tax code is one of the Legislature’s primary responsibilities. The Taxation Committee took that job very seriously in 2007. Unfortunately, the full Legislature didn’t follow its Tax Committee’s good advice.

Concern #4. Immediate cuts in intergovernmental subsidy already scheduled to be provided and upon which local budgets have been adopted are obviously very hard to absorb without directly and immediately cutting services. Municipal officials know that none of this is easy on any level of government, but in the interest of reasonably managing service delivery reductions, it is better to make cuts in such a way that there is time to respond to the reduction in revenue 

Accountability, Equity, Efficiency and Investment: MMA’s Legislative Agenda. Against that background, MMA’s Legislative Policy Committee (LPC) met on December 10th and gave final approval to the Association’s legislative agenda for the 2009-2010 biennium. The final decisions of the newly-elected Policy Committee come at the conclusion of a four-month process. A long list of issues to be addressed was developed over the late summer through a brainstorming process. Potential legislative solutions were drafted. By means of a multi-step prioritization process that began at the MMA Convention in October, that list was winnowed down to nine legislative initiatives.

In response to the tough economic times, the LPC wanted to focus on measures that would in large or small ways improve: (1) accountability in how governmental programs are measured; (2) equity, particularly with respect to tax burden; (3) the efficiency of governmental administration; and (4) the capacity for investment. Two bills in the MMA package could be fairly described as simply clean-up or clarifying legislation.

What follows is a description of the nine bills in MMA’s 2009-2010 legislative agenda.

The taproot of governmental equity: Comprehensive Tax Reform. As indicated above, one of the primary municipal concerns going into this legislative session is that the impetus, momentum and political will to accomplish comprehensive tax reform might have been derailed on November 4th when Maine’s voters responded favorably to the “Fed Up With Taxes” campaign to successfully repeal the beverage tax increases that were enacted last spring to fund the Dirigo health insurance program. The beverage tax increases had absolutely nothing to do with comprehensive tax reform, which is expressly designed to be revenue neutral and entirely indifferent to all matters regarding appropriations, but that distinction will be all the more difficult to articulate through the “Fed Up with Taxes” din.

If that’s the case, it is a terrible shame. The proper management of the state’s tax code is a core obligation of the Maine State Legislature, and it takes strong leadership and extraordinary political resolve to successfully advance tax reform past the special interests lobbying for their narrow advantage. Derailing an honest tax reform effort, from a lobbyist’s perspective, is as easy as shooting fish in a barrel. The strategy is to paint all taxes as ‘bad’ and all efforts to reform the tax code as thinly disguised attempts to generate additional revenue. Ergo, all tax reform is “bad”.

And so, the effort by MMA to re-introduce a comprehensive tax reform product and reinvigorate that debate may be snidely characterized as doomed, futile and naively Quixotic. But the facts are still the facts.

• The state’s sales tax code was written in 1953 and has been only riddled with exemptions ever since. The entire retail sales marketplace has been completely transformed over the last 50 years but the sales tax code has remained transfixed.

• Countless studies have identified the volatility of Maine’s tax code. The wide swings in state budget “structural deficits” over recent years, from over $1 billion to zero dollars to nearly a billion again (see Chart 3 on page 14), have been suggesting the need for legislative attention for two decades.

• The state’s income tax code was written in 1969 and now sports one of the highest marginal tax rates on the lowest level of income among all state income taxes.

• By every tax burden measure and by every political measure, states across the nation are advantaged by exporting the tax burden out of state, but that is a strategy Maine does not aggressively employ.

• Combining the “Big Three” taxes in Maine (using 2007 data):

– the income (personal and corporate) generates 35% of the total;

– the property tax generates 42% of the total; and

– the sales (and “service provider) tax generates just 23% of the total.

That is remarkably close to the same unbalanced mix of core governmental revenue in Maine – and the same overreliance on the property tax -- that existed 10 years ago and 10 years before that. If the Legislature had adopted the comprehensive tax reform plan developed by the Taxation Committee in 2007, that mix today would be somewhat more balanced, particularly between the sales and income taxes.

– The Income tax would generate 30.5% of the total

– The Property tax would generate 41% of the total

– The sales tax would generate 28.5% of the total

For all these reasons and many more, a centerpiece of MMA’s legislative agenda for the 2009-2010 biennium – one more time again – is comprehensive tax reform. As a starting point, the Association is supporting the core elements of the well-crafted proposal developed by the Taxation Committee during the first session of the 123rd Legislature.

Accountability: The yardstick that measures educational spending. At the time of this writing, the state is moving very quickly away from the directive it was given by the voters in 2004 to provide 55% of the cost of K-12 public education.

$27 million is being pulled out of the General Purpose Aid to Local Schools (GPA) distribution that was appropriated for the current fiscal year (FY 09). It is being reported that the state subsidy for both the next fiscal year (FY 2010) and the year after that (FY 2011) will be held at that reduced-funding level. Under current economic circumstances, even negative-flat funding is considered a best-case scenario.

But even if the 55% directive is being abandoned or deferred by the Legislature, that should not mean that the mechanisms developed to identify adequate education spending levels and measure the state’s share of K-12 spending should be abandoned as well.

The yardstick of total measure is called the Essential Programs and Services school funding model (EPS).

The dipstick that measures the state share of EPS is called GPA.

In an apparent attempt to achieve, at least on paper, the “55%” directive by the voters, the Legislature in recent years has expanded the core concept of what is meant by “General Purpose Aid to Local Schools”. Some of those expansions were legitimate and some were not so legitimate. The state’s expenditures for the Baxter School for the Deaf and the Limestone School of Science and Mathematics were for the first time in the history of local school subsidy identified as “GPA”. Contracts between the Department of Education and an educational research department at the University of Maine began to be covered through the GPA account. Although these changes were new, they were defensible. The students who go to the Baxter or Limestone schools are public school students who happen to go to specialized schools. The state contract with the University supports the development and annual maintenance of the EPS model, without which the whole system of measuring school expenditures would not work.

The GPA appropriation began to take a different turn in just the last few years. Suddenly, the salary and benefits of state employees who work in the Department of Education and, more recently, the Department of Corrections began to get paid through the GPA account.

In response to those changes, another bill in MMA’s legislative agenda seeks to review and define, as a matter of public policy, the entire universe of expenditures that should fall within the General Purpose Aid to Local Schools appropriation.

After all, if the yardstick is made out of rubber and can be stretched each year to conform to the financial environment, the entire system of measurement becomes untrustworthy.

Equity: Large tax exempt corporations should contribute toward needed services. For a very long time, municipal leaders have been concerned about the equity implications associated with the wholesale 100% property tax exemptions the Legislature has provided over the years to the large “charitable” corporations and “literary and scientific” organizations. These major corporations rely on a range of municipal services but are under no obligation to contribute to that effort. The burden of paying for those services is therefore transferred to the residents and businesses in the municipality that do not enjoy the broad property tax exemption.

At the same time, there is an old, dust-covered and essentially unusable provision in state law regarding tax exempt corporations that allows the application of “service charges” in certain circumstances. A working group was initiated by the last legislature to review the “service charge” statute and make recommendations about modernizing its applicability. The working group, which included both municipal officials and representatives of the tax exempt organizations, convened several times this fall. A set of recommendations to modernize and make functional the “service charge” statute was developed but, as might be expected, not by consensus.

The people on the working group representing the tax exempt institutions do not believe that exempt institutions should be subject to any service charges.

The recommendations of the municipal members of the working group are found in the bill being advanced as part of MMA’s legislative agenda. This bill amends the current law to:

• narrow the list of the types of municipal services that may be considered in the application of service charges to include just fire protection services, police protection services, road services and storm water control services;

• develop a methodology for calculating the appropriate service charge for each service; and

• expand the list of tax exempt institutions that may be subject to service charges to include those corporations or institutions that are 100% exempt from taxation and would have an assessed value (if subject to the property tax) of $1,000,000 or more in the municipality or generate a gross annual income of $1,000,000 or more as a result of the exempt property within the municipality.

The bill also amends the tax exemption statute to limit the tax exemption for leased property used by hospitals to personal property only. For reasons that are certainly not clear from either a public policy or equity perspective, hospitals are the only corporations within the entire universe of exempt entities, including the state or federal governments, that get to extend their property tax exemption to the real estate they choose to lease.

Efficiency: Improving the opportunity for “one-stop shopping” development review. Most new businesses or developments that are contemplating creating new or retrofitted space that will be open to customers, staff or clients are considered “places of public accommodation”. That type of development, for obvious reasons, undergoes zoning and site plan reviews at the local level. Under current law, it also needs to be reviewed at the state level by the Fire Marshal’s Office to ensure conformity with the state’s “life safety” and accessibility codes.

In an effort to both simplify and speed up the review process that developers need to undergo, the fourth bill in MMA’s legislative agenda provides for the delegation of fire code permitting authority from the Fire Marshal’s Office to qualified municipalities who want to provide that service locally. The bill is largely modeled on delegation statutes elsewhere in Maine law that allow the Department of Environmental Protection to delegate Site Location Act permitting authority to municipalities who voluntarily seek that authority.

Investment: Self-capitalize the Municipal Investment Trust Fund. Ever since Maine’s voters created the Fund for the Efficient Delivery of Local and Regional Services in 2004, the Legislature has manipulated, raided and effectively eliminated the program, shifting about $5 million of municipal revenue sharing each biennium to the state’s side of the ledger.

As created by the voters, the Local Government Efficiency Fund would have set aside 2% of municipal revenue each year and made those resources available to municipalities to develop and implement new programs that provide specified services on a multi-municipal or regional level. As the chart on page 10 shows, over the last four years, the Legislature has taken about $15 million in municipal revenue sharing. Two-thirds of that raid on municipal revenue sharing has been done by gutting the Local Government Efficiency Fund.

As a result, this component of the legislative agenda would repeal the Local Government Efficiency Fund but use the same 2% set-aside mechanism to capitalize the Municipal Investment Trust Fund, which was created 15 years ago and has been capitalized with bond revenue, albeit intermittently.

It is widely recognized that a key strategy in response to the economic downturn is to invest in the many long-overdue infrastructure construction projects. There could hardly be a more elegant way to allow that to happen.

Equity: Fixing the penalty system in the school consolidation law. As is the case in the larger community, there is a wide disparity of opinion among municipal officials about the school consolidation law.

As the map on page 17 indicates visually, over 50% of Maine’s public school students go to schools that were not required to consolidate. As a result, a number of municipal officials, particularly in the southern part of the state, are not intimately connected with the consolidation law.

Of the municipal officials who needed to wade hip-deep into the consolidation effort, there are very few – perhaps none – who believe the law was well written.

And while the law has its admirers among some municipal officials who were able to work with it, others believe the well-intended legislation was implemented in an awkward, confusing, and eminently frustrating manner.

And there are a fair number of municipal officials, particularly in rural Maine, who believe the law is so poorly written, it should be repealed.

Against that backdrop of diverse opinion, it would be easy to think that a membership organization like MMA would have a difficult time developing any consensus around the issue of “fixing” or repairing the school consolidation law. A consensus was achieved, however, regarding two key elements of the school consolidation law that municipal officials would like to see corrected.

First, the current penalty structure levies a financial penalty on those school systems that were given no exemption from consolidating and ultimately failed to do so. The dollars that the state “saves” as a result of those penalties are provided to all the other school systems in Maine, whether they were required to consolidate or not.

Under MMA’s school consolidation fix-up bill, the entire penalty system would be converted into an incentive system. Under the converted approach, those school systems that actually consolidated would be provided a three-year financial reward for that effort to help address the implementation costs of consolidation. The dollar value of that incentive would be essentially borne by all other school systems, including those that failed to consolidate as well as those that were exempted from the consolidation process. It is a matter of being positive instead of negative, fairly targeting the reward and fairly paying for it.

Second, MMA’s school consolidation fix-up bill would allow all school systems to reconsider the way they adopt the school budget to allow a simple referendum approval process rather than the multi-step “school budget validation referendum”, which overly complicates the budget adoption procedure in some communities.

Administrative efficiency: Enabling credit card use at the town office. Credit card companies typically charge a “merchant fee” to merchants who accept credit cards from their customers. For years, the credit card companies would not allow those merchants to pass-along this fee to the customer using the credit card. In recent years, the credit card companies have modified their policy if the merchant is a governmental entity which accepts credit cards as payment for governmental charges. Maine law has not caught-up with this change in policy and still prohibits governments from passing-through the fee to the customer.

Municipalities are generally reluctant to absorb the cost of paying those “merchant fees” out of their general fund resources. If the municipality picks up the tab, the benefit of convenience that is being provided to the credit card user is being paid for by a lot of taxpayers who don’t have credit cards and pay their bills to the town directly.

An administrative bill in the MMA legislative agenda establishes that the traditional types of payments made to governmental entities, such as taxes, fees, and fines, are not the type of “sales transactions” that are subject to this prohibition, thereby allowing local and county governments to accept credit card transactions and pass the merchant fee cost onto the constituents who choose to use their credit card rather than the generalized tax base that supports the governmental entity.

As a reasonable condition for being granted this authority, the legislation requires that the convenience fees that may be charged by governmental entities be clearly disclosed to the consumer prior to payment. The bill also prohibits the governmental entity from charging a fee that exceeds the administrative costs directly incurred by the governmental entity or that may be assessed by an authorized third-party payment services provider.

Recent History of Local Government Efficiency Fund (chart)

Recent History of Local Government Efficiency Fund (chart)

Clarifying the standard governing (local) citizen petitions. Another administrative bill in the Association’s agenda could fairly be described as a housekeeping measure seeking to clarify the role municipal officers play when determining whether or not a petitioned issue will be included on a municipal warrant or referendum ballot.

Generally under the laws guiding petitioned warrant articles and referendum questions, municipal officials are required to place a petitioned article or referendum question on the next warrant issued or ballot printed or call for a special town meeting for the petitioned article’s consideration. Implicit in that directive is that the petitioned issue is appropriately before the legislative body…that the town meeting or council is legally authorized to act on the proposed measure. In cases where the legislative body cannot legally act on the proposed issue (e.g., firing the town manager, amending a collective bargaining contract, regulating the speed limits on state roads, etc.), the municipal officers should not forward the petitioned measure to the voters. Petitioners sometimes do not understand this element of election law, and the refusal of the municipal officers to honor the petition causes friction between municipal officers and the citizens petitioning the article or referendum question.

In order to clarify the municipal officers’ authority, alleviate potential tensions between municipal officers and petitioners, and reduce the need for unnecessary litigation, another bill on the MMA legislative agenda would clarify existing law to state that only those articles or referendum questions that “the legislative body is authorized to act on pursuant to federal and state law and municipal charters” may be placed on the municipal warrant or referendum ballot.

Cleaning up some loose ends in last session’s building code law. Last session the Legislature enacted a sweeping, statewide building code bill. The bill has over twenty sections, amended three different titles of law and includes a dizzying array of cross-references, deadlines and directives. MMA is seeking to clean-up some of the loose-ends created by the legislation. The intent of this bill is not to modify or in any way undermine the integrity or intent of the law passed last year. In fact, the purpose of the bill is to have the Legislature either reinforce or clarify the intent and meaning of various elements of the law. The Legislative Policy Committee did not seek to have MMA revisit the larger policy debates from last session regarding the application and enforcement of the code; although it is apparent that others may do so.

MMA’s 2009-2010 Legislative Agenda

(adopted by the Legislative Policy Committee on 12/10/08)

The following nine initiatives make up MMA’s 2009-2010 legislative agenda.

Taxation; comprehensive tax reform. Re-submit the well-crafted comprehensive tax reform legislation designed by the Taxation Committee during the First Session of the 123rd Legislature.

Taxation; property tax exemptions. Establish a system whereby a municipality, through the adoption of an ordinance, can require certain property tax exempt institutions to pay a service fee for vital municipal services such as public safety and snow removal.

Revenue Sharing. Redirect the 2% set-aside within the municipal revenue sharing program so that those resources are dedicated to the Municipal Investment Trust Fund rather than the Local Government Efficiency Fund, which has been repeatedly raided by the Legislature.

Education; the integrity of the GPA/EPS ratio. Protect the integrity of the system measuring the state’s support for education by not allowing the state to artificially achieve a certain level of contribution by including the salaries and benefits of state employees in that measurement.

Education; repair the school consolidation system. Amend the school consolidation law, with particular focus on reconstructing the penalty system, as currently designed, into an incentive system.

Codes. Clean-up the building code legislation enacted last spring to address such issues as the application of the training mandate, the degree to which a municipality can rely on the work of third-party inspectors, the application of the concept of “inconsistent” ordinances, etc.

Codes; delegated life safety code review. Establish a program to allow the State Fire Marshal to delegate the commercial project “plan review” responsibility to qualified municipalities that would like to do the review locally.

Administration; local petition process. Write into statute the legal standard governing the legitimacy of local petitions.

Administration; credit card use at city hall. Allow municipal governments to pass through to the consumer the credit card “merchant fees” that credit card companies charge to municipalities that accept credit cards.