LePage faces structural budget gap of $756 million without cuts, more revenue

AUGUSTA, Maine — State spending will exceed revenue by $756 million over the course of the next two-year budget cycle, according to a recent analysis by the state’s budget bureau.

The figure reflects what would happen if state spending essentially continues at current levels, the state meets all spending obligations required by law and revenues match projections made in April.

The $756 million estimate of the state’s structural budget gap is a starting point for Gov. Paul LePage and administration officials as they assemble a proposal for a new two-year budget to present to a newly sworn-in state Legislature this winter. The two-year budget would take effect July 1, 2013, and the state constitution requires that it be balanced.

“Between now and January, much will change,” said Sawin Millett, the state’s finance commissioner. “This is not a reflection of what the budget will look like.”

The structural budget gap has become a point of debate in this year’s campaign for Maine’s open U.S. Senate seat. The U.S. Chamber of Commerce in July launched ads accusing former Gov. Angus King of leaving behind a $1 billion shortfall when he left office in 2003.

The number the Chamber was referring to was the structural gap projected by state budget officials. King’s campaign responded with videos explaining the state budget process and data showing the state has projected a structural budget gap nearly every budget cycle since the early 1990s.

The state’s budget bureau is required to issue a structural budget gap analysis every two years in advance of the governor proposing a new, two-year state budget. In 2010, the bureau projected a $1.17 billion structural gap.

The nonpartisan Office of Fiscal and Program Review will prepare a similar analysis.

The projection for a structural gap — contained in a report issued last week by the state’s Bureau of the Budget — is based on a number of assumptions that are unlikely to become reality when lawmakers get to work on the next two-year budget package. The analysis also doesn’t take into account policy proposals to either decrease spending or raise additional revenues that would be part of a budget proposal.

“We have to have a balanced budget, and we will,” Millett said. “It will not include new taxes and it will include more prioritization.”

The budget gap document, for example, assumes the state will meet its requirement to pay 55 percent of public education costs, a measure required by a 2004 ballot initiative that has never been realized. If funding continues at current levels, the document notes that the structural gap falls to about $503 million. The state is currently funding 45 percent of the cost of essential programs and services in schools, according to the Maine Department of Education.

The document also assumes the state will restore the portion of revenue it shares with municipalities to the legally required 5 percent of sales and income tax collections, which is another unlikely scenario, Millett said. And the structural gap assumes a continued increase in spending on Medicaid, which the LePage administration has targeted as an area to scale back.

The assumptions “illustrate the need for further structural changes in the way in which general purpose aid [for schools], MaineCare [Maine’s Medicaid program] for our general population and revenue sharing are calculated and funded in the next biennial budget,” Millett said.

Part of the reason for this year’s smaller gap, Millett said, are changes to the state pension system that lawmakers passed as part of the state’s current two-year budget. Those reforms included freezing benefits for three years and capping future increases at 3 percent a year, down from the previous 4 percent cap.

“Some of the long-term strategies we put in place in the 2011 session are paying dividends,” Millett said. But the fact that structural gaps continue “suggests that we’ve been spending beyond our means in the past and going from budget cycle to budget cycle. We’ve been bumping along the bottom of a revenue shortfall.”

On the revenue side, the structural gap document assumes essentially no change in revenue collections based on projections made by the state’s Revenue Forecasting Committee in April. The committee will revisit those forecasts in November, Millett said.

But the state will forego about $342 million in individual income tax collections during the two years covered by the next budget, Millett said. That’s a result of the current two-year budget, which lowers the top income tax rate to 7.95 percent from 8.5 percent starting Jan. 1, 2013, and creates two tax rates, down from the current four.

“The tax cuts passed in the last Legislature that benefit primarily the rich in Maine are one reason for the size of this structural gap,” said Rep. Peggy Rotundo of Lewiston, the ranking Democrat on the Legislature’s budget-writing Appropriations Committee.

Millett said the savings from spending cuts the LePage administration has implemented will make up for lost revenue from cutting income tax rates. The state can also count on more revenue in the future after it renegotiates its wholesale liquor contract, he said.

“We knew downstream that we were going to see some value in the liquor contract renewal,” Millett said, “and obviously there were other structural savings that, had they not been done, would result in more cost growth.”

The budget proposal lawmakers see from LePage will contain the results of the “zero-base budgeting” process agencies have undertaken to take stock of their core functions and recommend areas for reductions.

Lawmakers are more likely to focus on efforts like those to balance the budget when they take up a new budget proposal in the winter, rather than the size of the structural budget gap, said Rotundo.

“I think it’s important for us to know what the figure is,” she said. “But on a day-to-day basis, our job is to make sure the budget is in balance, and that’s what we do.”