Budget Ups and Downs

Posted July 21, 2010, at 5:30 p.m.

The fact that the state ended the last fiscal year with a little extra revenue than expected is a glimmer of good news. That money, however, doesn’t alleviate the need to further cut state spending both in the immediate and long term.

The governor’s office announced Tuesday that the state ended fiscal year 2010 (which was officially over on June 30) with a $70.4 million surplus. That means state revenues were higher than predicted. However, last year’s revenue (mostly from tax collections) was nearly $56 million lower than the previous year’s.

“We are beginning to see signs that our economy is recovering from the recession,” Gov. John Baldacci said in announcing the revenue numbers. “But things remain fragile and we must be vigilant. The surplus is good news, but it’s not the end of the story.”

A big part of the story is that the state now has a hole of roughly $100 million in the 2011 budget. This is because Congress was expected to continue increased federal funding for the Medicaid Federal Medical Assistance Percentage, or FMAP.

Earlier this spring, both the U.S. House and Senate passed bills extending enhanced FMAP payments for six months. The higher payments were part of the American Recovery and Reinvestment Act, which aimed at pulling the economy out of recession.

After the March House and Senate votes approving a continuation of the higher FMAP payments, Maine and 32 other states included the increased federal funds in their budgets.

More recently, the Senate has rejected an extension of the enhanced FMAP payments. Republican senators object to the fact that the FMAP extension is not paid for with cuts elsewhere in the federal budget, despite the fact that numerous economists say that the federal expenditure will help alleviate the recession.

If the additional FMAP money is not forthcoming, Maine must trim its budget by about $100 million. Gov. Baldacci has begun that process by asking departments to look for places to cut spending as he prepares an order to curtail state spending.

The unexpected revenues could be part of the solution, but it would take an act of the Legislature. Under law, the $70.4 million is allocated to the state’s budget stabilization fund, the loan insurance reserve fund at the Finance Authority of Maine, the state retirement system and retiree health fund, General Fund operating capital, the capital construction and improvement reserve fund and the governor’s contingent account. The Legislature could change the law to use the money for other purposes.

In this sense, the surplus gives lawmakers options, but they are not good options.

The state needs to continue to rebuild its reserves and its retirement system is already short of funds. In addition, even without the FMAP shortfall, state expenditures are expected to exceed revenues by at least $500 million over the next two years.

The only way out of this cycle is to continue work to increase government efficiency and reduce duplication as part of an effort to ensure government spending better matches residents’ ability to pay for it.

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