Budget lotto (continued)
	Across-the-board Baldacci Carroll Lee, the former president of Bangor Hydro Electric Company, Maine’s second-largest electric utility, is a Republican who doesn’t like to see government money spent on unnecessary services or in any way wasted. But he’s also a board member of Community Health and Counseling Services in Bangor, a mental-health agency, and he is distressed over the service cuts that will hit mentally ill people if Governor Baldacci’s budget clears the legislature. He is particularly upset at the unbusinesslike way, he says, that the administration arrived at what it says should be slashed. "These are across-the-board cuts," Lee says indignantly. "They ignore the underlying drivers of the costs of a program like the socio-economic factors that affect people with mental problems." Such factors might be, he says, trends in homelessness, incarceration, and drug abuse. These might legitimately and significantly increase a demand for services that would be ignored under a meat-cleaver approach to a budget. Under Baldacci’s plan, the Department of Health and Human Service alone would suffer $140 million in cuts to services for the poor, sick, and mentally ill and mentally disabled people. These proposed reductions have aroused almost daily mass protests before the Appropriations Committee — and have upset many legislators of Baldacci’s own political party. In his testimony earlier this month to the Appropriations Committee, Lee bemoaned that the state hadn’t adopted "zero-based budgeting," as has much of the business world. Such budgeting looks at each component of a business’s costs separately. "The total budget cuts relative to current service trends amount to seven to eight percent in 2006 and 2007," he says. "However, the cuts to the budgets for health and human services (DHHS) [related to service trends] are 11 to 12 percent, or 50 percent greater." He also believes the budget numbers "are targeted to cuts in the delivery of services by community agencies rather than to cuts in administration at the state level." In other words, few state workers will lose their jobs, but many of the front-line, private, community-agency workers who rely on state funds will lose theirs. He is amazed that the recent merger of the Department of Human Services and the Department of Behavioral and Developmental Services to create the mega-DHHS, with its 4000 employees, resulted in few state-worker job losses: "Typically, a private-sector merger brings a 20-percent reduction in personnel. Theirs was less than one percent. This is laughable. The merger — why did they do it then?" State controller Karass agrees that state budgeting now "takes place on an incremental basis" and that "at some point the state needs to go to zero-based budgeting." Such budgeting, he admits, "would be a more strategic use of [tax] revenues." — Lance Tapley

Moody’s is now reviewing the state’s finances in more detail. Although Johnson is not concerned that Maine’s bonds will ever go unpaid, she says, it is possible the state might have to pay higher interest rates on its bonds if its credit rating drops.

The Maine State Retirement System is not hot for the lottery deal, either.

When David Wakelin, chairman of its board of trustees, testified earlier this month before the legislature’s Labor Committee, he said Baldacci was proposing a bad deal for the state treasury by suggesting the state pay back to the retirement system its $250 million plus an eight-percent-or-so (figured at compound interest) return, if the system bought the lottery proceeds. Wakelin said the state might be able to sell the lottery revenue on the private market and only pay a four- or five-percent return to the investor. And the deal Baldacci was proposing also might not be that wonderful for the retirement system, he said, since his organization made 12.6 percent last year on its investments.

Furthermore, Wakelin said, getting only eight percent from the state would not be that helpful to pay down the system’s "unfunded liability," as Baldacci has suggested. Wakelin wanted better than eight percent to make real headway. The unfunded liability is the amount the system is obligated to pay in retirement benefits that isn’t covered by assets — $3 billion at present.

Baldacci’s idea to help the retirement system with its unfunded liability through the lottery deal is an attempt at compensation. In this year’s proposed budget, he intends to reverse a legislative commitment to speed up the state’s payments to reduce the unfunded liability. By not accelerating these payments, Baldacci would retain in the state treasury $142 million over the next two years that had been committed to the system.

Wakelin didn’t even know if a lottery deal with his outfit would be legal since the federal Internal Revenue Service requires "tangible security" for the retirement system’s investments, and the system is not supposed to give preferential treatment in extending a loan to a contributing employer.

Possibly as a result of all the criticism of the deal, the administration is now considering various options besides a sale to the retirement system, according to Edward Karass, state controller. These include, he says, the issuance of a revenue bond. The state constitution forbids an encumbrance on the general tax revenues, but pledging the state’s lottery revenues would not be prohibited, he believes. Or the lottery revenue could be sold to Wall Street investment banks or perhaps private investors, he suggests.

If the state only paid four or five percent, he adds, it might not be necessary to commit as much as $40 million a year of the revenues (under Baldacci’s scheme, anything taken in over the pledged amount the state would keep; at present, the lottery produces about $50 million a year).

The administration’s goal, Karass says, is to raise $250 million "tied to education funding." This sum is roughly the amount the Legislature committed in January to the cities and towns for extra school aid, although this gift was made to allow the municipalities to reduce property taxes. Baldacci is attempting to sell his lottery proposal to legislators and the public under the banner of making an investment in both the state’s educational and tax system. Beefing up education and lowering property taxes, he says, will help economic development.

But even the Maine Sunday Telegram, which usually supports Baldacci, doesn’t buy the investment argument: "The lottery sales are [being sold as] an investment. Trouble is, there’s not a consistent link between these investments and state economic performance, which is tied more closely to the national economic picture," writes John Porter, editorial page editor.

If the lottery deal doesn’t fly, where will Baldacci get $250 million, since he has vowed not to raise taxes?

"It’s premature to say it’s dead," responds Lee Umphrey, the governor’s spokesman, to the discontent about the lottery deal. Still, what’s Plan B — to deal with a $250-million hole in the budget plans — if the lottery scheme fails?

"Plan B is to provide more information to reinforce why this should be the route we should take," he says.

Umphrey adds, a bit plaintively: "It wasn’t his first choice," speaking of Baldacci. "Or even his second choice. But it became the solution because raising taxes is not an option."

A number of State House observers speculate that Baldacci will try to give legislative Democrats a rough political choice between sticking with him on the lottery sale or facing even more severe cuts to services than he is now proposing — and the cuts projected for many services already seem severe to some legislators. Baldacci could pass big cuts with a majority composed of Republicans and a few conservative Democrats.

With this potential scenario, some Democrats are restive under the governor’s leadership. They also have another budgetary problem with Baldacci: "We didn’t have a clue what was in this budget until it was presented in January. It’s so unlike Angus King," Senator Nutting laments.

Representatives from King’s departments, he says, would meet well in advance of the session with the relevant legislative committees to discuss potential cuts. In the case of the Baldacci lottery proposal, too, there was "lack of communication," he says.

Some Democrats indirectly pose a choice to Baldacci: If he abandons his no-new-taxes pledge, he can avoid both the increasingly unpopular service cuts and the sale of the lottery. And he could avoid a sharper break with many legislators of his own party.

Such a rupture might not be a wise political move before a re-election campaign. Baldacci could come out of this legislative session with more than the three broken ribs he suffered the other day when he slipped on the ice outside the Blaine House.

"There’s a perfect storm coming," says Senator Davis.

Lance Tapley can be reached at ltapley@prexar.com