December 6, 2004
Executive session | Gov. John Baldacci on business, the economy and what is sure to be the defining issue of his tenure: Tax reform
By Sean Donahue
The halfway point of any trip offers a natural place to stop and look back at your progress while keeping an eye on how far you have left to go. So with the impending end of 2004 marking the mid-way point of Gov. John Baldacci's term, Mainebiz decided to check in with the governor about the major business and economic issues that have dominated his time since taking office.
We met Baldacci in his State House office the day before Thanksgiving, a busy time made even busier since he was still catching up from the previous week's European trade mission and the T-Mobile Oakland call center announcement. That morning also found the governor unexpectedly tied up on the telephone, dealing with L.L. Bean's decision to scrap plans for its own FirstPark call center due to fears of a workforce shortage.
Still, we managed an hour-long discussion of the economic development priorities Baldacci spelled out in his inaugural speech, such as health care reform, Pine Tree Zones and investing in research and development. But following last month's vote on the tax cap referendum and simmering public demand for some kind of tax relief, it appears now that tax reform ˆ and Baldacci's success or failure in helping deliver it ˆ will be the defining issue of his term. For that reason, we started by asking about tax reform, lingering budget gaps and other challenges he'll be addressing with the new Legislature, which convenes this month. An edited transcript of the conversation follows.
Mainebiz: You've made passing tax reform your top priority with the new Legislature, but coming into the session the state is facing a projected $730 million budget gap over the next two years. On top of that, the state is on the hook for up to $250 million more for school funding required by the June referendum. That's before any tax reform plan. Where do you think the state can find the money to pay for all of this?
Baldacci: I think, first of all, you need to put everything in context. The budget that we were confronted with two years ago [had] a $1.2 billion structural gap, and we balanced the budget without raising state taxes. And we've gone from number one in the country for state and local tax burden to 13th for state tax burden and number two for property [tax]. We've been able to see our incomes rise: We're now up from 35th to 30th in per capita [income] in the country.
Galen Rose [an economist in the State Planning Office] has said that that's more attributable to Maine holding its own and the rest of the country being in a mild recession. But whatever the reasons are, Maine's income growth is being recognized. Portland was just recognized as the 14th leading economic center in the country [by the Santa Monica, Calif.-based Milken Institute]. Maine is the eighth-leading state in terms of exports. We're a full percentage point lower than the national unemployment average, and we've reclaimed all the jobs lost in the recession and then some. Maine is the fourth highest state in the country for net in-migration. I think we have a wonderful opportunity to continue to grow, and with Pine Tree Zones and community colleges and health care efforts, Maine is going to be a leader.
Now, the budget has a $733 million structural gap this time ˆ so we've actually cut the structural gap in half from what it was before. In the $733 million, though, is $193 million for [general purpose aid to education, as required by the June referendum]. It's not in addition to the $733 million, it's already incorporated in the structural gap. But at the same time, the course that I've set is to reduce our tax burden and get us from the top of the pack to more in the middle of the pack. And we've made the steps, but we need to make a lot more.
So when you look at tax reform or tax relief, its focus initially is going to be on property taxes ˆ it has to be. We recognize that we're going to have to own up to more of the share of local education. A portion of the money going into it, though, is going to have to be guaranteed to go directly to people. It can't be for new spending or new programs. And then you're going to have tax caps on the local government, on the county government, and you're going to extend the spending cap on all of state government. I believe with those actions taken, over a 10-year period Maine will find itself more in the middle of the mix. There are a lot of other nuances to this, but those are probably the leading things I see in addressing the issue.
Those tax and spending caps sound like elements of the Maine State Chamber's tax reform planˆ
Oh yeah, the chamber's plan was a comprehensive plan, and we're using a lot of their work. And the endorsement by the service-center communities of their work is part of this plan, no question about it. I appreciate what Dana Connors and the Maine State Chamber have done. This is sort of a group effort.
But that plan is just a framework ˆ there are still those nuances you mentioned that will have to be worked out with Legislature. Where do you think the state can save money, since you've said you won't raise taxes or fees?
We're talking about state taxes. There may be [increased] fees, but it will be incidental. There won't be a balancing of the budget with fees, but I think you have to be careful. They may raise something to $5 from a dollar or whatever it is, but that is something a department does on its own.
But we've merged two departments ˆ the Department of Human Services and the Department of Behavioral and Developmental Services. We've eliminated 17 senior-level positions and saved $5.8 million. I've asked the agencies and departments to continue to look at restructuring and streamlining to make cost savings. There are three departments that are joining forces to do payroll services instead of each one doing it separately.
So I'm looking for efficiencies, I'm looking for Yankee ingenuity, I'm looking to stretch dollars. The money that's coming to general purpose aid to education or anything in our tax reform or relief proposal will be paid for in the biennial budget that I'll present Jan. 7. So Jan. 7 they'll have a balanced budget that does not raise taxes.
The cost of health insurance remains the biggest concern for most small businesses. In your inaugural address you made health care reform your top economic development priority, and now, two years later, Dirigo Health is being marketed to small businesses in Maine. Though it's been a long and sometimes painful process just to get that product to the market, the goal of the Dirigo Health Act was not just to create Dirigo ˆ the goal was to meaningfully lower the cost of health insurance and health care delivery in Maine, which will take longer to achieve. What's your role in continuing to push that process forward?
I think my role starts as a cheerleader, someone who can use the big megaphone to point out what we need to do as individuals. Fifty percent of our health care costs are what we do to ourselves ˆ eating, drinking and smoking. What we do has an impact, but that's a cultural change that doesn't happen overnight. And you have to address environmental issues ˆ we [rank in the top ten states] for cases of asthma. I've been fighting hard to sue with other states to get those coal-fired plants to clean their scrubbers.
I was just looking at the recent Dirigo numbers. So far, we've had a total enrollment of 1,357 [individual] members in Dirigo and 53 small businesses. That's real. Those are real people and real businesses. Now, [Dirigo] doesn't have an answer for everybody, but we wanted a market-based solution. We didn't want to raise taxes, and we wanted to change our health care system and regulations, so I'm very proud of it, but we've got more work to do.
It's like our tax burden: It will take us a little while to see the big benefits, but we're headed in the right direction. My goal as governor is to keep the speed up of those reforms and changes, and keep the pressure on everybody not to go back to where the rest of the country is. Businesses are engaged, they're sitting on our boards and commissions.
Insurance companies are there. Doctors and hospitals are there. As hard as it is, we all sit together and figure out what is the right thing to do for the citizens of Maine. I have to keep the pressure on that process so they don't revert back to their special interests or parochial interests, so that they continue to feel the pressure of the public interest.
The health insurance product has overshadowed Dirigo's efforts to reduce the cost of health care delivery in Maine. But Maine hospitals, in particular, have been very vocal about their concerns with some proposals in this area, particularly an initial effort to cap hospital price increases. Did you anticipate those concerns or were you surprised by how contentious the debate seemed to become?
I guess where I was taken aback a little bit was that I thought that if I had proposed voluntary caps I would be extending a hand, saying "Look, we need to do this in a voluntary, market-oriented way. This can't be government command and control."
I think if you're going to do anything in health care, you have to engage the providers and the consumers, the people who are using and delivering the services on the front line. If they don't buy into it then it's not going to have legs.
Sure, in some quarters there's a little bit of disappointment in how some have reacted, but there are hospitals that I have worked well with. I've asked Sister Mary Norberta at St. Joseph [Hospital in Bangor] to head up an administrators effort for me to help hospitals reduce their costs. I've enjoyed working with Bill Caron [president of MaineHealth] and Vince Conti [CEO of Maine Medical Center] and John Welsh [CEO of Rumford Hospital].
So yeah, as an organization sometimes their representatives say things in a harsh way or a negative way, but all of the hospitals out there have an important role. They're all core parts of their community. I don't want to see any hospital close down ˆ I want to see every hospital that's there stay there. I want to work with them. They're part of the solution, as far as I'm concerned.
Recently the Dirigo commission received a report that found Maine hospitals to be, on average, the most profitable in New England. Is that the kind of data you plan to bring to the table for further discussions about cost reductions?
What we all need is information, and this information will be helpful when we look at our overall cost of health care ˆ as we go down avenues, we'll be better able to understand the impacts that they're going to have. Frankly, what was of particular interest to me in that report was the hospitals that weren't doing well, and why weren't they doing well, and what could we do proactively to help them do better.
I don't know if you've seen the publicity out there, but Maine Medical Center actually planned to reduce their rates as of Aug. 1 by $4.3 million; they had a surplus, and they were working with their insurer to make sure it was actually delivered right to the subscriber. So I think with our voluntary guidelines, and the actions by the hospitals in terms of their operating margins, through all of that acrimony we actually ended up pretty close to the margin we established. I think that's progress.
You've also made boosting investment in education and research and development centerpieces of your economic development strategy. But during the last session, even though Republicans and Democrats both wanted some form of bond package they couldn't agree on an amount. Looking back, could you have done more to solve that impasse, or are you planning to do anything differently with the new Legislature to help create consensus over a bond package?
I think the closer you get to an election the more difficult it is for people to look beyond it. As we worked on that bond package, and it got closer and closer to the election, it made it more difficult because the natural tendency was to revert to our corners and fight it out, and then afterwards get back together again.
In hindsight, I was just hoping against hope that we could look beyond that, and it was hard to do. But now we're going to put it in the beginning year of the session and it needs a two-thirds majority. The tax reform piece needs bipartisan support, the budget needs bipartisan support, so I think we're set up in a way that reunites that kind of cooperation and goodwill. And I don't think that's phony, I think that's there. In all the meetings I've had with Democratic and Republican leadership they have all tried to really reach out and work together to accomplish an awful lot this session.
Everyone walks into a new session with the best intentions, but that goodwill doesn't always last. Haven't you said that no one is going home until they reach a deal on the bond package?
No, that was on the tax reform package. And nobody is going anywhere until we finish property tax relief and property tax reform.
Do you feel the same about the bond package?
You know, when you keep drawing lines in the sand in Maine, sometimes people like to say, "Well I'm going to walk through it just it to show him." So I've made it clear to all the leadership that a tax relief package, a budget bill and a bond package are three of the most critical things we need to get done before we leave. I've appreciated, at least initially, the cooperation people have extended and I want to encourage that.
Creating Pine Tree Zones was another goal you laid out at the start of your administration, but that program, too, seems to still be evolving. There's been talk of including tourism-based businesses or creative economy companies in Pine Tree Zones, which has confused some people who thought the program was designed to protect and win back manufacturing jobs. What would you say to people who are asking just what Pine Tree Zones are for?
When we first established Pine Tree Zones, they were to attract manufacturing and industrial, financial services, environmental technology and those types of companies. That was the initial goal. And also, equally important, was we wanted them strategically located to provide economic anchors in regions of Maine where the economic tide hadn't reached as high. So I've been up in Aroostook County, western Maine and downeast Maine. Right now, there are a total of 1,587 [new] jobs related to Pine Tree and approximately 31 certified companies to date, 34 applications in process and 114 inquiries.
In terms of extending the zones to the creative economy or other industries, I think you have to be flexible. One thing I've learned in life is that, yeah, I'd like to have Dirigo done in four years but it's going to be five years. But you have to keep moving ahead. You learn, you listen and you make changes. That's life.
And if we want to promote the creative economy ˆ jobs in the creative economy like architects, engineers and software designers pay just as well or better than manufacturing or industrial [jobs]. So if I get a company that's in financial services that wants to move into Maine and provide jobs and income like Energy East, which pays $75,000 a year, why wouldn't I want that? I like manufacturing jobs. I want the mix in our state and I think it's critical to maintain the manufacturing base. But I also think that [we can help] people can find opportunities in the financial services. The goal of Pine Tree is to say that we want your company. We want your jobs and benefits, and we're willing to forgive a great deal of the taxation that Maine would have gained otherwise because we know the most important social service program is a good job.
One last important question: When are the Red Sox coming to Maine for the World Series victory parade? Can you use the weight of the office to put in a call to Larry Lucchino and John Henry?
I asked Lance Boucher [a legislative aide in the Baldacci administration] about that yesterdayˆ [calls to his assistant to get Boucher on the phone, and in a few seconds the phone rings in the governor's office] Hey Lance, what's the story on the Red Sox? [pause] Alright, thanks.
The word has gone out, the calls have been made and there are messages with different people at the Red Sox organization. Believe me, they'll be here. And Maine is going to have the best celebration when it comes to the Boston Red Sox. We don't want to rush them, and it's very important that when they come they have as much of the team as possible ˆ and if possible my sister would like them to bring Johnny Damon.
We met Baldacci in his State House office the day before Thanksgiving, a busy time made even busier since he was still catching up from the previous week's European trade mission and the T-Mobile Oakland call center announcement. That morning also found the governor unexpectedly tied up on the telephone, dealing with L.L. Bean's decision to scrap plans for its own FirstPark call center due to fears of a workforce shortage.
Still, we managed an hour-long discussion of the economic development priorities Baldacci spelled out in his inaugural speech, such as health care reform, Pine Tree Zones and investing in research and development. But following last month's vote on the tax cap referendum and simmering public demand for some kind of tax relief, it appears now that tax reform ˆ and Baldacci's success or failure in helping deliver it ˆ will be the defining issue of his term. For that reason, we started by asking about tax reform, lingering budget gaps and other challenges he'll be addressing with the new Legislature, which convenes this month. An edited transcript of the conversation follows.
Mainebiz: You've made passing tax reform your top priority with the new Legislature, but coming into the session the state is facing a projected $730 million budget gap over the next two years. On top of that, the state is on the hook for up to $250 million more for school funding required by the June referendum. That's before any tax reform plan. Where do you think the state can find the money to pay for all of this?
Baldacci: I think, first of all, you need to put everything in context. The budget that we were confronted with two years ago [had] a $1.2 billion structural gap, and we balanced the budget without raising state taxes. And we've gone from number one in the country for state and local tax burden to 13th for state tax burden and number two for property [tax]. We've been able to see our incomes rise: We're now up from 35th to 30th in per capita [income] in the country.
Galen Rose [an economist in the State Planning Office] has said that that's more attributable to Maine holding its own and the rest of the country being in a mild recession. But whatever the reasons are, Maine's income growth is being recognized. Portland was just recognized as the 14th leading economic center in the country [by the Santa Monica, Calif.-based Milken Institute]. Maine is the eighth-leading state in terms of exports. We're a full percentage point lower than the national unemployment average, and we've reclaimed all the jobs lost in the recession and then some. Maine is the fourth highest state in the country for net in-migration. I think we have a wonderful opportunity to continue to grow, and with Pine Tree Zones and community colleges and health care efforts, Maine is going to be a leader.
Now, the budget has a $733 million structural gap this time ˆ so we've actually cut the structural gap in half from what it was before. In the $733 million, though, is $193 million for [general purpose aid to education, as required by the June referendum]. It's not in addition to the $733 million, it's already incorporated in the structural gap. But at the same time, the course that I've set is to reduce our tax burden and get us from the top of the pack to more in the middle of the pack. And we've made the steps, but we need to make a lot more.
So when you look at tax reform or tax relief, its focus initially is going to be on property taxes ˆ it has to be. We recognize that we're going to have to own up to more of the share of local education. A portion of the money going into it, though, is going to have to be guaranteed to go directly to people. It can't be for new spending or new programs. And then you're going to have tax caps on the local government, on the county government, and you're going to extend the spending cap on all of state government. I believe with those actions taken, over a 10-year period Maine will find itself more in the middle of the mix. There are a lot of other nuances to this, but those are probably the leading things I see in addressing the issue.
Those tax and spending caps sound like elements of the Maine State Chamber's tax reform planˆ
Oh yeah, the chamber's plan was a comprehensive plan, and we're using a lot of their work. And the endorsement by the service-center communities of their work is part of this plan, no question about it. I appreciate what Dana Connors and the Maine State Chamber have done. This is sort of a group effort.
But that plan is just a framework ˆ there are still those nuances you mentioned that will have to be worked out with Legislature. Where do you think the state can save money, since you've said you won't raise taxes or fees?
We're talking about state taxes. There may be [increased] fees, but it will be incidental. There won't be a balancing of the budget with fees, but I think you have to be careful. They may raise something to $5 from a dollar or whatever it is, but that is something a department does on its own.
But we've merged two departments ˆ the Department of Human Services and the Department of Behavioral and Developmental Services. We've eliminated 17 senior-level positions and saved $5.8 million. I've asked the agencies and departments to continue to look at restructuring and streamlining to make cost savings. There are three departments that are joining forces to do payroll services instead of each one doing it separately.
So I'm looking for efficiencies, I'm looking for Yankee ingenuity, I'm looking to stretch dollars. The money that's coming to general purpose aid to education or anything in our tax reform or relief proposal will be paid for in the biennial budget that I'll present Jan. 7. So Jan. 7 they'll have a balanced budget that does not raise taxes.
The cost of health insurance remains the biggest concern for most small businesses. In your inaugural address you made health care reform your top economic development priority, and now, two years later, Dirigo Health is being marketed to small businesses in Maine. Though it's been a long and sometimes painful process just to get that product to the market, the goal of the Dirigo Health Act was not just to create Dirigo ˆ the goal was to meaningfully lower the cost of health insurance and health care delivery in Maine, which will take longer to achieve. What's your role in continuing to push that process forward?
I think my role starts as a cheerleader, someone who can use the big megaphone to point out what we need to do as individuals. Fifty percent of our health care costs are what we do to ourselves ˆ eating, drinking and smoking. What we do has an impact, but that's a cultural change that doesn't happen overnight. And you have to address environmental issues ˆ we [rank in the top ten states] for cases of asthma. I've been fighting hard to sue with other states to get those coal-fired plants to clean their scrubbers.
I was just looking at the recent Dirigo numbers. So far, we've had a total enrollment of 1,357 [individual] members in Dirigo and 53 small businesses. That's real. Those are real people and real businesses. Now, [Dirigo] doesn't have an answer for everybody, but we wanted a market-based solution. We didn't want to raise taxes, and we wanted to change our health care system and regulations, so I'm very proud of it, but we've got more work to do.
It's like our tax burden: It will take us a little while to see the big benefits, but we're headed in the right direction. My goal as governor is to keep the speed up of those reforms and changes, and keep the pressure on everybody not to go back to where the rest of the country is. Businesses are engaged, they're sitting on our boards and commissions.
Insurance companies are there. Doctors and hospitals are there. As hard as it is, we all sit together and figure out what is the right thing to do for the citizens of Maine. I have to keep the pressure on that process so they don't revert back to their special interests or parochial interests, so that they continue to feel the pressure of the public interest.
The health insurance product has overshadowed Dirigo's efforts to reduce the cost of health care delivery in Maine. But Maine hospitals, in particular, have been very vocal about their concerns with some proposals in this area, particularly an initial effort to cap hospital price increases. Did you anticipate those concerns or were you surprised by how contentious the debate seemed to become?
I guess where I was taken aback a little bit was that I thought that if I had proposed voluntary caps I would be extending a hand, saying "Look, we need to do this in a voluntary, market-oriented way. This can't be government command and control."
I think if you're going to do anything in health care, you have to engage the providers and the consumers, the people who are using and delivering the services on the front line. If they don't buy into it then it's not going to have legs.
Sure, in some quarters there's a little bit of disappointment in how some have reacted, but there are hospitals that I have worked well with. I've asked Sister Mary Norberta at St. Joseph [Hospital in Bangor] to head up an administrators effort for me to help hospitals reduce their costs. I've enjoyed working with Bill Caron [president of MaineHealth] and Vince Conti [CEO of Maine Medical Center] and John Welsh [CEO of Rumford Hospital].
So yeah, as an organization sometimes their representatives say things in a harsh way or a negative way, but all of the hospitals out there have an important role. They're all core parts of their community. I don't want to see any hospital close down ˆ I want to see every hospital that's there stay there. I want to work with them. They're part of the solution, as far as I'm concerned.
Recently the Dirigo commission received a report that found Maine hospitals to be, on average, the most profitable in New England. Is that the kind of data you plan to bring to the table for further discussions about cost reductions?
What we all need is information, and this information will be helpful when we look at our overall cost of health care ˆ as we go down avenues, we'll be better able to understand the impacts that they're going to have. Frankly, what was of particular interest to me in that report was the hospitals that weren't doing well, and why weren't they doing well, and what could we do proactively to help them do better.
I don't know if you've seen the publicity out there, but Maine Medical Center actually planned to reduce their rates as of Aug. 1 by $4.3 million; they had a surplus, and they were working with their insurer to make sure it was actually delivered right to the subscriber. So I think with our voluntary guidelines, and the actions by the hospitals in terms of their operating margins, through all of that acrimony we actually ended up pretty close to the margin we established. I think that's progress.
You've also made boosting investment in education and research and development centerpieces of your economic development strategy. But during the last session, even though Republicans and Democrats both wanted some form of bond package they couldn't agree on an amount. Looking back, could you have done more to solve that impasse, or are you planning to do anything differently with the new Legislature to help create consensus over a bond package?
I think the closer you get to an election the more difficult it is for people to look beyond it. As we worked on that bond package, and it got closer and closer to the election, it made it more difficult because the natural tendency was to revert to our corners and fight it out, and then afterwards get back together again.
In hindsight, I was just hoping against hope that we could look beyond that, and it was hard to do. But now we're going to put it in the beginning year of the session and it needs a two-thirds majority. The tax reform piece needs bipartisan support, the budget needs bipartisan support, so I think we're set up in a way that reunites that kind of cooperation and goodwill. And I don't think that's phony, I think that's there. In all the meetings I've had with Democratic and Republican leadership they have all tried to really reach out and work together to accomplish an awful lot this session.
Everyone walks into a new session with the best intentions, but that goodwill doesn't always last. Haven't you said that no one is going home until they reach a deal on the bond package?
No, that was on the tax reform package. And nobody is going anywhere until we finish property tax relief and property tax reform.
Do you feel the same about the bond package?
You know, when you keep drawing lines in the sand in Maine, sometimes people like to say, "Well I'm going to walk through it just it to show him." So I've made it clear to all the leadership that a tax relief package, a budget bill and a bond package are three of the most critical things we need to get done before we leave. I've appreciated, at least initially, the cooperation people have extended and I want to encourage that.
Creating Pine Tree Zones was another goal you laid out at the start of your administration, but that program, too, seems to still be evolving. There's been talk of including tourism-based businesses or creative economy companies in Pine Tree Zones, which has confused some people who thought the program was designed to protect and win back manufacturing jobs. What would you say to people who are asking just what Pine Tree Zones are for?
When we first established Pine Tree Zones, they were to attract manufacturing and industrial, financial services, environmental technology and those types of companies. That was the initial goal. And also, equally important, was we wanted them strategically located to provide economic anchors in regions of Maine where the economic tide hadn't reached as high. So I've been up in Aroostook County, western Maine and downeast Maine. Right now, there are a total of 1,587 [new] jobs related to Pine Tree and approximately 31 certified companies to date, 34 applications in process and 114 inquiries.
In terms of extending the zones to the creative economy or other industries, I think you have to be flexible. One thing I've learned in life is that, yeah, I'd like to have Dirigo done in four years but it's going to be five years. But you have to keep moving ahead. You learn, you listen and you make changes. That's life.
And if we want to promote the creative economy ˆ jobs in the creative economy like architects, engineers and software designers pay just as well or better than manufacturing or industrial [jobs]. So if I get a company that's in financial services that wants to move into Maine and provide jobs and income like Energy East, which pays $75,000 a year, why wouldn't I want that? I like manufacturing jobs. I want the mix in our state and I think it's critical to maintain the manufacturing base. But I also think that [we can help] people can find opportunities in the financial services. The goal of Pine Tree is to say that we want your company. We want your jobs and benefits, and we're willing to forgive a great deal of the taxation that Maine would have gained otherwise because we know the most important social service program is a good job.
One last important question: When are the Red Sox coming to Maine for the World Series victory parade? Can you use the weight of the office to put in a call to Larry Lucchino and John Henry?
I asked Lance Boucher [a legislative aide in the Baldacci administration] about that yesterdayˆ [calls to his assistant to get Boucher on the phone, and in a few seconds the phone rings in the governor's office] Hey Lance, what's the story on the Red Sox? [pause] Alright, thanks.
The word has gone out, the calls have been made and there are messages with different people at the Red Sox organization. Believe me, they'll be here. And Maine is going to have the best celebration when it comes to the Boston Red Sox. We don't want to rush them, and it's very important that when they come they have as much of the team as possible ˆ and if possible my sister would like them to bring Johnny Damon.
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