January 14, 2008
Missing money | Should we be worried about Maine's growing budget gap?
When Maine's Revenue Forecasting Committee recently predicted a $95.2 million shortfall in the state budget ˆ $37.8 million this fiscal year and $57.4 million next year ˆ reaction was fairly swift.
Within weeks, Gov. John Baldacci had ordered that more than $37 million be immediately trimmed from 27 state departments. A few legislators commended Baldacci's quick move away from a tax hike, but humanitarian advocates criticized reductions to the Department of Health and Human Services, which, along with K-12 education, received the brunt of cuts.
In the grand scheme of multi-billion-dollar state budgets, a $95 million shortfall in the general fund this year and next is somewhat insignificant, experts say. It is, after all, only about 1.5% of the two-year $6.3 billion budget.
Still, there's concern that children, the mentally ill and the elderly could be hurt if services to help them are reduced or eliminated. Also worrisome is the economic implications of a projected dwindling of state revenues. Maine's budget has not had a significant downward adjustment since December 2001 ˆ just after 9/11 and the dot-com deflation helped precipitate a recession. But at that time the shortfall was a walloping $248.6 million.
Mike Allen, director of econometric research for Maine Revenue Services, says at least half of the current projected shortfall ˆ mainly the tax revenue streams ˆ is tied to a jittery national economy. "I don't think anyone has a good feel for where the economy is heading," he says. "Things could break our way and energy prices could fall and housing issues could resolve, or the odds are just as likely that things could go the other way."
Beyond concerns about a possible national recession, the projected shortfall this year is disconcerting because the state doesn't have much time to find savings or new revenue sources. By law, the budget must be balanced by the fiscal year's end, June 30. "You've only got from now to June to save $38 million," says Marc Cyr, principal analyst for the Office of Fiscal and Program Review and a member of the Revenue Forecasting Committee, which is in charge of issuing budget revisions twice a year. "That's where the pinch comes in."
It's all relative
Christopher St. John, executive director of the Maine Center for Economic Policy, says that Maine's deficit is largely due to the lethargy of the national economy, and not to poor fiscal planning. State budgets are on the whole growing more slowly, according to the 2007 Fiscal Survey of States by the National Governors Association and National Association of State Budget Officers. The two organizations reported that states are dealing with rising health care costs, a softening housing sector and an aging population, all while grappling with federal funding that has leveled off. Some states already have projected shortfalls, and of those 13, Maine has the smallest, according to the Washington, D.C.-based Center on Budget and Policy Priorities.
While the CBPP criticizes some states for their slowdowns, it also says the blow up of the housing bubble has stalled tax revenues from the sale of furniture, appliances and construction materials. Laurie Lachance, president of the Maine Development Foundation and a former state economist for Maine, says a third of Maine's budget comes from automobiles and building supply sales taxes. "And those are the two most volatile sales," she says. "Spiraling energy prices take a toll on those big ticket items, and those are immediately felt in Maine revenues."
The Revenue Forecasting Committee has predicted a $40.6 million decrease in sales and use taxes this fiscal year and next, blaming high oil prices for dragging on the economy and curbing consumer confidence. Corporate income taxes also came in lower by $14.8 million, fuel taxes were revised down, and cigarette and tobacco tax revenue missed their target by $12.5 million.
And Cyr says if oil prices do not reverse, there could be more surprises ahead. "Oil lubricates more than machinery ˆ it lubricates economies," he says.
Legislators could reverse some of Baldacci's cuts as they hash out a supplemental budget this month. Already alternatives to Baldacci's $37.7 million reduction plan have been proposed, one of which is a suggestion to raise taxes or fees rather than target social service programs.
The governor's spending curtailment order includes trimming $13.5 million from DHHS before July 1. Of that amount, $7.4 million in savings would come from not filling vacant posts, according to Commissioner Brenda Harvey. The other cut, $20.1 million, is from K-12 education, and together these items account for almost 90% of the reductions.
Harvey points out that DHHS and K-12 education spending make up more than three-fourths of the general fund. And Lachance notes that big programs inevitably receive the brunt of big cuts. "If you need to look for savings, you have to examine those big expenditure areas," she says. "You can't achieve savings by going extremely deep in other areas."
But St. John criticizes the direct cuts to DHHS. "We do not think that is the right choice," he says, speaking on behalf of several agencies that advocate for the disadvantaged. "We recognize the governor had the responsibility to slow spending down." He adds that he's concerned about cuts that would impact vulnerable residents, and would suggest alternatives.
St. John has suggested instead the state find purchasing efficiencies in health insurance programs for universities, state employees, public school teachers and MaineCare recipients. And because savings in this plan would not be immediate, he recommends dipping into the state's roughly $117.1 million rainy day fund.
But Baldacci's spokesman David Farmer says economic woes could get worse, and using a chunk of the state's reserve funds might imperil Maine later. "We would expect the Legislature will have its own ideas [on balancing the budget]," Farmer says. "But every day they wait, the cuts they propose will have to be largerˆ The calendar is working against them."
Within weeks, Gov. John Baldacci had ordered that more than $37 million be immediately trimmed from 27 state departments. A few legislators commended Baldacci's quick move away from a tax hike, but humanitarian advocates criticized reductions to the Department of Health and Human Services, which, along with K-12 education, received the brunt of cuts.
In the grand scheme of multi-billion-dollar state budgets, a $95 million shortfall in the general fund this year and next is somewhat insignificant, experts say. It is, after all, only about 1.5% of the two-year $6.3 billion budget.
Still, there's concern that children, the mentally ill and the elderly could be hurt if services to help them are reduced or eliminated. Also worrisome is the economic implications of a projected dwindling of state revenues. Maine's budget has not had a significant downward adjustment since December 2001 ˆ just after 9/11 and the dot-com deflation helped precipitate a recession. But at that time the shortfall was a walloping $248.6 million.
Mike Allen, director of econometric research for Maine Revenue Services, says at least half of the current projected shortfall ˆ mainly the tax revenue streams ˆ is tied to a jittery national economy. "I don't think anyone has a good feel for where the economy is heading," he says. "Things could break our way and energy prices could fall and housing issues could resolve, or the odds are just as likely that things could go the other way."
Beyond concerns about a possible national recession, the projected shortfall this year is disconcerting because the state doesn't have much time to find savings or new revenue sources. By law, the budget must be balanced by the fiscal year's end, June 30. "You've only got from now to June to save $38 million," says Marc Cyr, principal analyst for the Office of Fiscal and Program Review and a member of the Revenue Forecasting Committee, which is in charge of issuing budget revisions twice a year. "That's where the pinch comes in."
It's all relative
Christopher St. John, executive director of the Maine Center for Economic Policy, says that Maine's deficit is largely due to the lethargy of the national economy, and not to poor fiscal planning. State budgets are on the whole growing more slowly, according to the 2007 Fiscal Survey of States by the National Governors Association and National Association of State Budget Officers. The two organizations reported that states are dealing with rising health care costs, a softening housing sector and an aging population, all while grappling with federal funding that has leveled off. Some states already have projected shortfalls, and of those 13, Maine has the smallest, according to the Washington, D.C.-based Center on Budget and Policy Priorities.
While the CBPP criticizes some states for their slowdowns, it also says the blow up of the housing bubble has stalled tax revenues from the sale of furniture, appliances and construction materials. Laurie Lachance, president of the Maine Development Foundation and a former state economist for Maine, says a third of Maine's budget comes from automobiles and building supply sales taxes. "And those are the two most volatile sales," she says. "Spiraling energy prices take a toll on those big ticket items, and those are immediately felt in Maine revenues."
The Revenue Forecasting Committee has predicted a $40.6 million decrease in sales and use taxes this fiscal year and next, blaming high oil prices for dragging on the economy and curbing consumer confidence. Corporate income taxes also came in lower by $14.8 million, fuel taxes were revised down, and cigarette and tobacco tax revenue missed their target by $12.5 million.
And Cyr says if oil prices do not reverse, there could be more surprises ahead. "Oil lubricates more than machinery ˆ it lubricates economies," he says.
Legislators could reverse some of Baldacci's cuts as they hash out a supplemental budget this month. Already alternatives to Baldacci's $37.7 million reduction plan have been proposed, one of which is a suggestion to raise taxes or fees rather than target social service programs.
The governor's spending curtailment order includes trimming $13.5 million from DHHS before July 1. Of that amount, $7.4 million in savings would come from not filling vacant posts, according to Commissioner Brenda Harvey. The other cut, $20.1 million, is from K-12 education, and together these items account for almost 90% of the reductions.
Harvey points out that DHHS and K-12 education spending make up more than three-fourths of the general fund. And Lachance notes that big programs inevitably receive the brunt of big cuts. "If you need to look for savings, you have to examine those big expenditure areas," she says. "You can't achieve savings by going extremely deep in other areas."
But St. John criticizes the direct cuts to DHHS. "We do not think that is the right choice," he says, speaking on behalf of several agencies that advocate for the disadvantaged. "We recognize the governor had the responsibility to slow spending down." He adds that he's concerned about cuts that would impact vulnerable residents, and would suggest alternatives.
St. John has suggested instead the state find purchasing efficiencies in health insurance programs for universities, state employees, public school teachers and MaineCare recipients. And because savings in this plan would not be immediate, he recommends dipping into the state's roughly $117.1 million rainy day fund.
But Baldacci's spokesman David Farmer says economic woes could get worse, and using a chunk of the state's reserve funds might imperil Maine later. "We would expect the Legislature will have its own ideas [on balancing the budget]," Farmer says. "But every day they wait, the cuts they propose will have to be largerˆ The calendar is working against them."
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