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The Portland Phoenix
December 13 - 20, 2001

[Features]

Angus King’s bad final year

And the next governor’s first year could be worse. However, fiscal gimmicks and Carol Palesky may come to the rescue.

By Lance Tapley

What a legacy for Angus King.

Our independent but fervently pro-business governor came into office in 1995 pledging to be the economic-development governor and run a tight state fiscal ship. He lucked out with years of a rising national economic tide. Although he presided over the continued deterioration of Maine’s manufacturing industries, the growth of the service sector (telemarketer MBNA, call-center EnvisioNet, etc.) cast a golden glow on him — and filled the state’s tax coffers.

With the legislature’s cooperation, he was even able to reduce state taxes a little (the “snack tax” was abolished and the sales tax dropped from six to five percent), although some other taxes were raised (on cigarettes, some taxes on meals and lodging, etc.).

But King’s luck may have run out for 2002, the final year of his second four-year term. The recession is beginning to bite deeply into Maine’s jobs and profits. The national economy that blessed him is now his curse.

And it is the legislators’ curse as well. For both King and the 120th Maine Legislature, which is preparing to convene in its second regular session on January 2, the recession-whacked state budget is a pressing dilemma.

There will be bad feelings enough toward politicians if the private economy continues to go south. EnvisioNet, for example, which King vigorously promoted, collapsed financially and was taken over in a shrunken state by a California company.

But the state budget problem is the fierce monster now capturing the attention of the State House cave dwellers. The state’s nonpartisan economic forecasters project a $244-million shortfall between tax receipts and government expenditures in the two-year period, the “biennium,” that runs from July 1, 2001, to June 30, 2003 (Fiscal Years 2002 and 2003).

And that’s the good news. The really awful news is that the next governor and legislature, to be elected less than a year from now, may face the fashioning of a budget for the following two years — according to the nonpartisan economic gurus — that will start out with a built-in $700-million-plus shortfall between receipts and expenditures.

This built-in shortfall is what Augusta politicians mean when they talk about a “structural gap.” Because state expenditures are generally rising faster than revenues, unless taxes are raised or services cut there won’t be enough money to pay for state government. This looming gap has been common knowledge in Augusta for some time. The 2001 legislative session just deferred dealing with it, and it has gotten worse since then.

That $700-million-plus abyss yawns beyond the $244 million extra needed this year. In sum, adding together the current and the next biennium’s shortfalls, somebody — somehow — sometime soon — has got to come up with an extra billion dollars for a budget that runs around $5 billion for each two-year period. And it must be done. The state constitution forbids an unbalanced budget.

“We’re in deep trouble now,” says Rep. Joseph Bruno, the Republican House minority floor leader from Raymond. “There’s going to be more acrimony” than in the last session. “We got along pretty well last session. It’s going to be different this time.”

“When it comes to making budget cuts, lots of acrimony is likely,” chimes in Ted Potter, aide to Speaker of the House Michael Saxl, the Portland Democrat.

So a potentially big fight is brewing. Of course, hard decisions could be cooperatively made. Most predictions are that cooperation will be hard to come by.

Oh yes, there is one other huge threat on the government horizon. A group led by the notorious Carol Palesky of Topsham, who has done jail time for petition-signature fraud, has once again submitted signatures to the state for a property-tax-cap referendum. (In 1998, her tax-cap petition was rejected because of insufficient signatures.) It would drastically limit those municipal taxes to one percent of assessed valuation.

If the state certifies that the necessary 42,101 signatures are valid by a February 27 deadline, this citizen initiative proposal will be submitted to the legislature. If the legislature doesn’t enact it — which is extremely likely — it will be sent to the voters at the November election. If passed, it would throw state and municipal finances into a turmoil that would make the current mess look like the governor’s inaugural ball.

Some legislators and the governor’s office are discussing a “competing measure” — allowed under the constitution — to the tax cap to be sent to voters that would be a less-severe restriction on property taxes. And some people dream that this competing measure would be an opportunity for the state to take a bold step to structurally reform state taxes. In other words, here is, potentially, a storm cloud with a silver lining.

Imaginative legislators and state officials, hoping to avoid either cutting programs or raising taxes, are also dreaming of new ways to borrow money — usually called “fiscal gimmicks” in the legislative lexicon — to bridge the fiscal chasms. Reputedly, one way being studied for this purpose is for the state to borrow on the collateral of the millions it receives annually from the tobacco corporations as part of the settlement of the suit brought by the state against them for smoking-related medical costs.

“In the end the legislature will go to some gimmick involving borrowing,” claims Peter Mills of Skowhegan, the Republicans’ senator on the powerful legislative appropriations committee.

What options are available? First, hit the reserves

Another way to avoid cutting services or raising taxes is to dig into reserves. First, there is the Maine Rainy Day Fund, set aside by the legislature to meet unexpected needs and to allow the state to meet its monthly cash-flow requirements without having to do short-term borrowing. This fund now contains $103 million of uncommitted money.

That’s more than enough to plug the $86-million shortfall (of that $244 million) for the first year of the current biennium. However, the Republicans, who pride themselves on being fiscally prudent, are loath to withdraw from this state savings account. “We’ll look at it as the last resort,” says Bruno. Gov. King, who also prides himself on fiscal prudence, nevertheless believes drawing from this fund is a possibility, according to Kay Rand, his chief of staff. And it’s unlikely the Democrats, to protect favorite programs, would object to at least some of this money being spent.

Also in reserve is the money set aside to fund King’s pet proposal to provide laptop computers for middle-school students. There is $30 million in the bank for this, trimmed down from $50 million by the last legislative session. “This has to be on the table,” Bruno says. Beverly Daggett of Augusta, the Senate Democratic leader, responds identically: “Everything’s on the table.”

She suggests that the legislature might fund the purchase of computers with an annual appropriation, which she estimates would amount to $3 to $4 million, instead of from the interest earned on the laptop fund. The governor’s office, which has always expressed reluctance to draw down the fund, nevertheless says that it, too, is on the table. (However, if the legislature is going to seize any of this money it had better act quickly since negotiations for a contract for the computers are proceeding.)

Another fund, the Revenue Reserve, exists largely to cover possible losses in revenue from changes in federal tax law, especially the federal income and estate taxes, to which Maine’s taxes are coupled. There is $21 million now in this fund. Grant Pennoyer, the director of the legislative Office of Fiscal and Program Review, says current forecasts are that about $19 million will be needed for this biennium to cover federally induced hits to the state’s tax collections — including the beginning of the phasing out of federal estate taxes.

But he expects the demand on this kitty to rise significantly. It might be especially difficult to prudently dip into it when tax cuts in President George W. Bush’s national “economic stimulus” tax package, if it is passed, might result in a $20-million further hit to state collections. That’s the forecast coming from Christopher St. John, director of the Maine Center for Economic Policy, a small, nonpartisan, Augusta research organization.

The option exists, St. John suggests, for the state to decouple from Washington’s tax forms — for example, not to go along with the recently enacted federal estate-tax cuts. “This spring, the legislature will have to make a decision on that,” he says. He favors the state going its own way and taxing inherited property at a higher rate.

But if this decoupling occurs, “it is so inconvenient for the state, and it will drive wealthy retirees away from Maine,” claims Republican Sen. Mills. He feels it will not occur. Speaker Saxl is not so certain. “Don’t call it ‘decoupling,’ ” he says. “The legislature has to take affirmative action to tie the state to the federal taxation. Sometimes we go along, sometime we don’t.”

How about cutting services?

Legislative leaders and the governor’s office chant a litany: “Everything’s on the table.” However, practically speaking, that may not be true. The biggest single item in the state budget is known as general purpose aid, which means the share the state pays to cities and towns for school expenses. The number is $1.4 billion for the biennium’s $5.3 billion “general fund” budget. (There are also federally funded and dedicated-revenue expenditures counted in the state budget. They include the fund that finances much of the highway repair costs from gasoline tax receipts. They total another $5.5 billion.)

Last session, the legislature struggled mightily to set this school subsidy amount, and legislators are unlikely to change it in 2002. Even a fiscal conservative such as Rep. Bruno says: “I don’t think anyone’s willing to look at that again.” Kay Rand gives the governor’s view: “He hopes to avoid reductions in school subsidies and will most likely be able to do so.” So, practically, that may be off the table.

What about the next biggest item, the state’s share of Medicaid welfare payments, largely for poor people’s health care, including those in nursing homes? Adding these dollars up for two years, the number is an impressive $760 million. But federal regulations restrict tampering with this sum. “We’d have to request a waiver” from Washington for some changes, says fiscal analyst Pennoyer.

However, Rep. Bruno mentions the possibility of cutting a new program pushed by Speaker Saxl last session — to the tune of $20 million, Bruno says — that will expand Medicaid coverage to a larger group of the working poor.

Understandably, Saxl takes a dim view of Bruno’s eyeing this program, which has not yet taken effect. “Twenty million is not accurate,” he says. “It costs six million a year in state dollars. Anyway, rather than look at every small program separately, we need to look at all things collectively.” Regardless, conservatives may seek some savings in the Medicaid budget.

The next biggest expense line is for higher education, including the University of Maine system, the technical colleges, and Maine Maritime Academy. Those three categories cost $457 million over the current biennium. “It’s on the table,” says Bruno.

But Rand expresses reluctance to cut higher education. “The past three legislatures have spent a lot of time getting funding back to normal” after the recession-induced budget crunch of the early ’90s, and she praises “reinvesting” in the university system. “Now it feels like we are going backwards,” she adds. Sen. Mills believes “people will want to keep these expenses” for higher education. Rand says the governor hasn’t made up his mind what he wants to recommend for higher-education cuts.

However, King already has commanded most state agencies, including the university campuses and the technical colleges, to reduce their current expenditures by two percent — a cut expected, Rand says, to product $40 million in savings by the biennium’s end. And agencies have been asked to have at the ready a plan to cut another four percent. Some of those cuts are “undesirable” while others are simply “unacceptable,” she says. “It a tough challenge. It’s a heavy wet blanket. It’s frustrating to consider cutting agencies that are just getting properly funded again.”

The “agencies” — administrative and financial services, corrections, the courts, the legislature, conservation, inland fisheries and wildlife, state police, agriculture, environmental protection, defense, etc. — account for the rest of the biennial budget: $1.3 billion, slightly less than the school subsidies.

Peter Mills of the appropriations committee thinks some agencies could stand to be cut in a time of economic downturn. “Some people will have to be laid off in the public sector while it’s happening in the private sector, but it won’t make a lot of people terribly happy.”

The Republicans, of course, generally see no big problem in cutting programs. “The governor could do more than two percent in program cuts,” says the new Senate president, Republican Richard Bennett of Norway. “He should be more aggressive.”

Bennett took over the Senate Presidency for the second session in a power-sharing deal that came about because the Senate is split among 17 Republicans, 17 Democrats, and one independent. He thinks these cuts should take priority over dipping into reserves. “We don’t know how long the recession will be,” he comments. “I’ll resist strenuously going into the Rainy Day Fund.”

But even the Democrats — generally more sympathetic to government programs — think some cuts are inevitable. They are not complaining about the two percent King has instituted. However, “We need to see the details in the governor’s plan,” Saxl says, pointing out that he sees government spending as an economic stimulus.

The question of cuts to services is complicated by the fact that the governor, the Democrats, and even the Republicans are going to be looking favorably on some increases in spending. Rand, the governor’s aide, says that “homeland security,” the new national priority since September 11, will need to be beefed up. This could take the form, for example, of more money for state emergency management services and the Bureau of Health.

Rand says the governor is considering asking the legislature to send out to voters a bond issue proposal for spending of this sort that could come under a heading of “capital costs” — such as equipment to test for anthrax and other bioterrorism threats. The spending resulting from this bond issue could also serve as an economic stimulus, she says.

Both Republicans and Democrats are likely to support war expenses, although the governor is lobbying the federal government to pick up as many defense-related costs as possible. Daggett says she doesn’t know “if everything needs to be done this year,” especially when it is not known what the feds will do to pick up costs. Bennett also foresees having the state wait a while to watch the federal government’s moves.

There is also the big question of how to deal with the on-going crisis in health-care costs. Universally, Augusta politicians say they are hearing from both consumers and businesses that the health-care system has to be fixed. “Everybody’s constituents are thinking of this issue,” says Rand. Many small businesses are finding it impossible to insure their employees. The governor hears about this issue “whenever he meets with small business people,” she says.

Last session, the legislature created a commission to study ways to set up a Canadian-style, “single-payor,” universal health-care system for Maine. Its report is due in March, and this work was given a boost by the recent advisory referendum in Portland that approved endorsing a single-payor system despite massive advertising against it by the Anthem Blue Cross insurance company. But the task of creating a state system in a national economy is so daunting that most State House observers feel the commission’s work will have to be extended. Virtually no one believes such a radical change can be voted on this year.

Incremental health-insurance change, however, may be proposed. The governor’s office is dubious about incremental change, but Republicans like Rep. Bruno may reintroduce proposals to loosen the rules to allow insurance companies to offer lower-cost policies to younger and healthy people. The Democrats will likely resist this move. For their part, they, along with some Republicans, may continue to try to expand the Medicaid system, especially to cover more children, such as with greater reimbursements for dental care. Saxl is working on a plan, he says, to help small business with health-care costs.

Still, new programs face a steep uphill climb. The governor’s office says it is in the throes of deciding what to propose. Sen. Daggett says she expects a King administration new-spending proposal in the $10-million realm.

What about raising taxes?

There is “not much libido for tax hikes,” Sen. Bennett asserts. The overall state and local burden on the average Maine taxpayer, according to a well-publicized federal Census Bureau study earlier this year, is the heaviest in the nation — 14 percent of personal income in 1998.

Christopher St. John, the policy researcher, disputes this claim. According to him, after mistakes made by the census bureau are corrected, the real burden places Maine perhaps twelfth in the nation. Inevitably, he says, our tax burden will be high because of our exceptionally low personal income (37th in the country) and high cost of distributing state and local government services over a sparsely populated area.

Still, the perception is high — especially when one talks to Republicans and the governor’s office — that Mainers are overtaxed. Do you foresee the governor proposing a tax increase to help balance the budget, Rand is asked? “No,” she replies simply.

“We can’t afford any tax hike,” Sen. Bennett says with equal finality. Even Democratic leader Daggett says that she “doesn’t see anyone hopping on the let’s-raise-taxes bandwagon.”

And various past proposals to “reform” taxes that might result in more state revenues will have a rough time re-emerging this winter. Sen. Mills has been trying for some time to get the Business Equipment Tax Rebate (BETR) program altered so it doesn’t year after year drain more and more money from the treasury. This King administration economic-development device now costs the state about $50 million a year, and soon the bill may be over $100 million. It rebates, mostly to large corporations, local property taxes on machinery and equipment.

Some corporations not only collect this money, they “double dip” because they also get a refund for the same property taxes when they participate in a municipality’s Tax Increment Financing (TIF) corporate tax break. This situation has continually inflamed reformers.

After losing the fight to a muscular big-business lobby in the last session, Mills admits there is little chance for this tax reform in the coming session. “There is no interest on the part of the legislature in eliminating BETR,” Democrat Daggett says flatly.

Reformers perennially attack other sizable corporate tax breaks such as the Tree Growth Tax Law. It provides for low forestland property taxation in the state’s vast Unorganized Territories where there are no municipalities. And the corporate income tax has declined considerably over 30 years in its contribution to the state’s coffers.

But very few bills opposed by business interests have made it through the legislature in recent years. The business lobby’s arguments and campaign contributions tend to be persuasive to both Republicans and Democrats.

So what is the solution?

Coming up is the short, let’s-get-out-of-here-quickly session of the legislature. Next year is an election year, with all the political posturing that means. It is also Angus King’s last year as governor — he’s already being called a lame duck — and King is not known for bold leadership. And maybe things are not so bad, some legislators are saying. Maybe the recession won’t last long. Maybe the next economic and state-revenue projections will paint a rosier picture than can be discerned now. There is also a legislative lack of bold leadership, some observers feel, in an institution where nobody sticks around long because of term limits. All this points to a set of hobbles on any decisive actions to deal with the budget crisis.

For the short-term, $244-million question, the best bet is that the legislature and governor will answer it with some reserve draw-downs, service cuts, and perhaps a borrowing gimmick or two. It will be “muddling through,” predicts St. John. “There will be a tendency to gloss over the problem,” warns Bennett. The starting point for negotiations will be in January when the governor submits his budget plan.

Peter Mills of the appropriations committee reads the political tea leaves and sees mostly a “gimmicky” session. “You play games. Borrowing is the easy way out,” he says, and refers to a study being conducted by Janet Waldron, King’s finance and administration commissioner, on “securitizing” the state’s cash flow from the tobacco settlement, a flow that theoretically goes on forever.

This money, which amounts to nearly $60 million a year, is not calculated with the state’s general fund. It finances the separate Fund for a Healthy Maine to the tune of close to $50 million a year, providing money for anti-smoking advertising, some Medicaid coverages, child-care services, and other health and social-service efforts. The legislature has directed that the balance of the tobacco money in this biennium go into the general fund.

Securitizing, Waldron explains, is “selling the right to the revenue stream for a certain time period.” It might be, she says, that Wall Street investors would give the state $625 million or so for this right over, say, 25 years. This is a way for the state to get the tobacco money up front, similar to lottery winners who, in order to have a big lump sum immediately, take less than payments over many years would give them.

Other states have securitized either to plug pressing financial gaps or to put the sum into an endowment so as to be completely assured it will be there in the future and have a uniform revenue flow. Wall Street firms are lobbying legislators to go this route. If the tobacco-settlement money were securitized, it likely would severely impact the Fund for a Healthy Maine.

Although Gov. King told the Bangor Daily News that doing this is an option to close the gap — though it would only be a one-time, not a structural, gap closer — his finance commissioner Waldron vehemently denies that the administration is studying using a securitizing scheme to plug the long-term gap or even the smaller $244-million hole in the current budget. “It’s not the governor’s intent,” she says. “We’re doing this to have information to make the best financial and program decisions.”

So how, then, will that big $700-million-plus gap be bridged? Waldron says with cuts in services, and this is what the Republicans would like. But the Democrats are extremely unlikely to participate in enormous slashing of services, especially in an election year. By the same token, nobody in an election year will jump on raising taxes. Thus, any number of State House regulars will opine that there simply won’t be any structural gap bridged this year. That will mean that true, fire-breathing financial terror will stalk the next biennium. This monster will eat the governor and legislators for breakfast every day.

Enter Carol Palesky to the rescue. Her tax-cap initiative petition lies in the Secretary of State’s Office waiting to be certified. It purports to have several hundred more signatures than necessary (not a big margin for error). If it is certified, then it will become “a major issue in the session,” Speaker Saxl observes in an understatement. But he sees the creation of a competing measure as an opportunity in a crisis, a vehicle to reconfigure the state’s tax system. And, in doing so, perhaps to get rid of that billion-dollar gap. So, real tax reform is not really off the table.

Others join him in this sentiment. Mills is already working with the Maine Municipal Association on a competing measure that would, as a major component, limit property taxes — but not in the draconian way Palesky’s referendum would. The legislature’s taxation and education panels have each established committees to study long-term tax reform. They, too, might get involved in the fashioning of a competing measure.

Christopher St. John says one possibility heavily bruited around Augusta as part of a competing measure is to broaden the sales tax base to cover services. Doing this properly might allow for both a property-tax reduction and a filling in of state government’s fiscal gap. Maine’s sales tax base, according to a study by Anthony Neves, the state tax assessor, is one of the narrowest in the nation. St. John agrees that the competing measure possibility is a “crisis-slash-opportunity.”

However, the chairwoman of the legislative appropriations committee, the Senate’s lone independent and balance-of-power-holder Jill Goldthwait of Bar Harbor, has been trying for some time, unsuccessfully, to interest the legislature in broadening the sales tax. She is doubtful that this will occur under any scenario this coming year.

“The long-term view is never our strong point,” she comments.

What a legacy for Angus King to leave.

Lance Tapley can be reached at ltapley@ctel.net.

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