AUGUSTA, Maine — Even after the somewhat pessimistic forecast of state revenues in April, May revenues were $18.7 million above the new projections and Finance Commissioner Sawin Millett is expecting a “solid” budget surplus come the end of the budget year on June 30.
“This is good news,” Millet said Friday in an interview. “We were concerned about some of the line items, like the sales tax, and whether the high gasoline prices would drive down consumer spending. But sales tax revenue was up $3.4 million for May.”
He said all three major state tax sources — the personal income tax, the corporate income tax and the sales tax — were above the new projections. He said that is an indication that the economy is continuing its slow growth out of the recession. But, he said he is perplexed by the continued growth in the personal income tax while unemployment rates have been steady around 7.6 percent.
“It is somewhat of an enigma,” Millett said. “We don’t see a lot of increase in the number of employed people; we do see some increase in the number of hours worked by those that are employed.”
He said until employment starts to significantly grow, the state will not see substantive growth in revenues. He said he will watch the summer tourism season closely to see if both sales and income taxes show growth.
“This is really good news after the ups and downs we have seen in revenues over the last few years,” said Rep. Peggy Rotundo, D-Lewiston, the lead Democrat on the Appropriations Committee. “I think it does show we are starting to recover.”
Sen. Richard Rosen, R-Bucksport, the co-chairman of the panel agreed. He said the revenues are above the new projections and that is a sign that the economy is growing, although slowly.
“It’s encouraging news because it would seem to indicate that the economy is holding up against the increased fuel prices we experienced during this spring,” he said. “Hopefully this is an indication of the underlying foundation firming up in a positive way.”
Rosen said he is also pleased the corporate tax continues to outpace projections. He said it shows larger businesses are continuing policies to conserve cash and are cautious about making investments.
“Maybe it will be a good sign for some of those companies to start investing and adding jobs,” he said. “It is clear they have the resources.”
Rotundo agreed. She said continued profits of large companies mean that they have the resources to start investing in new equipment and new workers.
“It is a good sign and I hope we see an expansion,” she said.
Millett said so far in June revenues are continuing the pattern of meeting or exceeding estimates, so he is confident the state will end the budget year June 30 with a “significant” surplus.
“We have seen nothing so far in June that would cause any concerns,” he said.
Millett said in addition to the revenue surplus, state agencies will lapse unspent funds and that should add between $5 million and $10 million to the total surplus.
“We are looking at the year end cascade to help us in a couple of ways,” he said. “We want to restore funding to the budget stabilization fund and that has first dibs on up to $25 million of the surplus.”
Millett said replenishing what is often called the Rainy Day fund is an issue for the bond rating firms. He said during meetings with the firms in May the lack of reserves was brought up.
“They did express a concern that our reserves were too low and we agreed,” he said.
That is also an issue for the Appropriations Committee, Rosen said. He said the panel has been concerned all year as the reserves were drawn down as part of the emergency budgets to fund the current budget.
“It’s an important indicator that the state can manage its fiscal house,” he said. “ When we talk about our bond rating, our level of debt and our reserves, those are all positive signs for the bond houses.”
Rotundo said the state has been struggling over the last few years to keep adequate reserves as revenues fell and the costs of programs continued to rise.
“We have been working very hard to build up that Rainy Day fund,” she said. “This will be a help and, I hope, show the bond houses we are on the right track.”
Millett said the actual size of the surplus will not be known until after the books are closed on this budget year in late July or early August.