How did Maine towns, cities respond to state funding cuts? With reduced spending, higher taxes, more debt

Posted Jan. 03, 2014, at 9:18 a.m.
Emily Shaw
Emily Shaw

Maine’s recent state budgets have dramatically cut money for town programs over the past several years, resulting in substantially less revenue for municipalities.

While local service needs have not necessarily declined in the years following the 2007-2009 recession, munici­palities have been forced to restructure how they fund those services. Restructuring has taken a variety of forms: Towns and cities have reduced spending on services, raised additional money from residents and other users of town services, and taken on additional municipal debt to continue providing services at the necessary level, according to the 2007-2011 Maine Municipal Association fiscal surveys of municipal revenues and expenditures.

The cuts

State and municipal revenues both increased until 2008. Following that year, municipalities continued to collect more property tax each year, while the state began contributing less.

The national economic recession clearly served as an important inflection point in Maine municipal finance, and we know that part of the reason for reduced state disbursements in 2009 was lower-than-projected state collections of income and sales tax.

However, state government policy shifts — including a reduction of top state income tax levels, reductions in state expenditures on education and a decision to reduce municipal revenue sharing — have led to a perpetuation of the reduced levels of state funding for municipalities.

The largest item for which the state provides funds for local services is education. A dramatic decrease in state spending on education in 2010 has left state education funding substantially below where it was in 2009 — although state funding levels have not decreased again since that initial drop.

As the state has consistently failed to meet statutory guidelines for education spending since before the recession, it is somewhat difficult to charac­terize the adequacy of funding levels. There is general agreement that the state has not met its statutory target, but there is disagreement regarding the question of by how much the state is missing this target.

The second-largest program area through which the state funds local services has been, until recently, munic­ipal revenue sharing. This program represents a smaller share of state-funded municipal revenue than education and has experienced far greater reductions than education funding.

Before 2009, the state’s municipal revenue sharing program was almost always fully funded at 5 percent of the state’s revenue from general income taxes. This began to change in 2009, with municipal revenue sharing initially seeing some reductions.

Eventually, Gov. Paul LePage’s policy effort to eliminate municipal revenue sharing altogether led to the funding being reduced substantially from its 2008 level in 2010-2012, with even more dramatic reductions put into place for the 2014-2015 budget.

Although education and municipal revenue sharing are the largest state municipal revenue programs, they are not the only ones. State programs providing funding to municipalities — including the state homestead exemp­tion, road assistance, general assistance and the tree growth program — were also the subject of budget cuts and contributed to the overall reduction of state funding to municipal governments.

The cumulative impact of the 2008-2011 budget cuts meant that Maine municipalities received about $80 million less than they would have had 2007 levels of funding remained the same, for all programs except education. Cuts to municipal revenue sharing represented more than $50 million of that reduction in cumulative spending since 2007.

Maine municipalities received a cumulative $48.7 million more in K-12 education funding between 2008 and 2011 than they would have under 2007 levels of funding. But the state funding increase was smaller than the increase in education spending by towns and cities during the period.

Municipal response

With less state revenue, municipalities had to decide whether to reduce expenditures, increase revenue from other sources, or do both. In many cases, they appear to have tried to do both.

Municipal tax collection figures in 2010 and 2011 suggest that munic­ipalities were functionally replacing state money with municipal sources: increases in locally generated reve­nues above 2008 levels closely match decreases in state and federal revenues.

Despite a national trend in declining property tax collection following the 2009 recession, Maine’s munic­ipalities collectively increased their residential property tax collection by an average of 5 percent each year. In addition, recent municipal budget trends demonstrate that municipalities now rely more heavily on user fees as a source of revenue than they did in the past.

There were also cuts within municipal government.

Statewide, municipal spending on general administration decreased each year after 2007; the largest estimated decrease in this expenditure category, $15 million, occurred in 2010.

Cumulatively, reduced spending on general municipal administration has resulted in more than $203 million less in municipal expenditures than if municipalities had maintained 2007 levels of spending in this cate­gory.

Looking at reductions in general administration in closer detail, we can see that 2010 was also the year of largest reductions in one major dimension of general administration expenditures: employee bene­fits.

Public works also saw substantially reduced spending relative to 2007 in most years during this period, as did public safety and codes and human services.

Meanwhile, spending on county assessments rose sharply in 2009 and increased in 2010 also. Increased statewide municipal expenditures on debt service increased most in 2010 and 2011.

The increased spending on K-12 education relative to 2007 drives the largest piece of the overall increase in munic­ipal spending, despite the numerous cuts that have taken place during the same period.

It is also valu­able to look not just at total reductions but at the percentages of spending reductions in particular categories. Codes and human services and debt service have experi­enced the greatest degree of change since 2007, and in the case of debt service, since 2008.

The increase in debt service reveals that one of the strategies used by municipalities facing a decline in state support appears to be an increased willingness to take on debt. Municipal borrowing is on the rise in Maine, according to the U.S. Census Bureau. Even though state debt fell in 2010-2011, municipal debt continued to climb 6 percent over the previous year’s amount.

Education spending

Under these trying conditions, it is important to note that education spending is generally continuing to increase. Many towns have raised local revenue rather than cut funding for K-12 education.

Looking more closely, we can also see that there is substantial variation in education spending by town size. Though the belt-tightening of 2010 caused most towns to cut back, at least temporarily, Maine’s largest towns continued to increase spending on educa­tion, so that by 2011 they were on average spending more than 33 percent more than they were in 2007.

This difference in spending on education demon­strates another potential consequence of the reduction in state support for municipal services. Since larger towns appear to be continuing to increase their education expenditures despite cuts, there is a possibility of a larger-than-usual gulf between the educa­tional services provided in smaller and larger towns across the state.

The trends

The variety of shifts in municipal revenues and expenditures reveal that municipalities are seriously affected by reductions in state revenue. The outcome is a mixture of heightened municipal revenue collection, decreased spending on general town services, increased spending on education — and where necessary, increased indebtedness.

Because of the availability of data, this analysis considers primarily budgetary changes that occurred between 2007 or 2008 and 2011. We know that the trends exemplified in the post-recession period have largely continued — and in some situa­tions, like the reduction in municipal revenue sharing and education spending relative to municipal K–12 assessments, have greatly accelerated.

However, it is impossible to discern the magnitude of the most recent changes without additional data. Nonetheless, the impact of the existing trends is highly likely to continue given the state’s continued failure to meet its previous statutory requirements for municipal funding.

In terms of expenditures, municipalities spend substantially less than they had earlier on town adminis­tration, including code enforcement and human services. Spending on county services has increased in recent years, suggesting that municipalities in the aggregate may be seeking to provide services in less expensive ways through service consolidation.

Unfortunately, since these elements of the town budget account for relatively little of the overall spending — especially in comparison to education — dramatic cuts in these areas may substan­tially alter the nature of the services available in towns.

Looking at spending patterns in the aggregate, we can see that municipal spending statewide is fairly inelastic. On average, Maine’s municipalities have so far been unable to reduce their total spending in response to substantial reductions in state funding.

Instead, despite obvious efforts to cut where they can, munici­palities are largely making up for the lack of state spending through increasing the tax and fee burden on their local populations.

Emily Shaw teaches courses in public administration, economics, and state and local government as an assistant professor of political science at Thomas College in Waterville. She is a member of the Maine chapter of the national Scholars Strategy Network, which brings together scholars across the country to address public challenges and their policy implications.

The complete version of this article first appeared in Maine Policy Review, published by the University of Maine’s Margaret Chase Smith Policy Center, and can be found at digitalcommons.library.umaine.edu/mpr.

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