Balancing budgets during a recession: a three-step process
Gov. Baldacci introduces his two year budget proposal at the Capitol in Augusta, Maine.
Article and photos by Ramona du Houx
February 18th, 2009
STEP 1: Curtailment order cuts $80 million skillfully to ensure people’s needs are not hurt. STEP 2: Supplemental budget: urgent action required by Legislature for savings to happen. STEP 3: The $6.1 billion biennial budget – cuts could be mitigated by consolidation efforts.
Savings for Maine's budget with consolidation efforts
The $6.1 billion biennial budget – cuts could be mitigated by consolidation efforts
While many states are increasing taxes to weather the economic storm, Baldacci will not raise broad-based taxes, saying that the people of Maine are already suffering from the recession. The budget proposal for FY 2010-11 extends the majority of the budget changes included in the supplemental budget. That budget must be approved before work starts on the ’010-’011 budget.
“I have taken great care to safeguard core government functions: keeping police on the streets, maintaining the State’s ability to respond to emergencies, protecting vulnerable populations — our children, our elderly and our disabled — and limiting, when possible, the ripple impacts of necessary spending reductions on Maine’s economy,” said Governor John Baldacci.
This biennial budget accounts for a $330 million decline in revenues caused by the national recession and a structural gap of an additional $508 million.
“We are in the midst of a national crisis, the likes of which have not been seen in a generation. Our country is mired in a recession. We are all called upon to do our part to get through this difficult time,” said the governor. “This budget I’m presenting will be difficult for all of us. But to balance our budget and prepare our State for recovery will require shared sacrifice and a commitment to work together for the greater good.”
The proposed budget for fiscal years 2010-11 will be about $200 million less than the 2008-09 two-year budget, this is the first time that a biennial budget is smaller than its predecessor.
Major proposals of the $6.1 billion two-year General Fund budget include:
• Spending reductions across State government.
• State employees with salaries of $50,000 to $89,999 will be required to contribute 5 percent of the cost of their healthcare coverage, and those earning $90,000 or more will have to contribute 10 percent of the cost.
• The elimination of 219 positions, which requires 139 layoffs and a state employee retirement incentive.
• A continuation of the current strict hiring freeze.
• Temporary 10 percent reductions in tax rebate programs, such as Circuit Breaker, the Business Equipment Tax Reimbursement Program, the Maine Tree Growth Program and State-municipal revenue sharing.
• Increased fees in the departments of Marine Resources, Inland Fisheries and Wildlife, and Conservation, to partially offset potential cuts in frontline law enforcement (total fee increases in these areas: $4.1 million); alternatively, the governor said that four different departments that encompass protecting the state’s natural resource could be merged together to form one agency with new legislation he will introduce.
• Changes to the tax code, including equalizing the taxes on smokeless tobacco, a change in business taxes that benefits Maine-based companies and a continuation of the estate tax
• Higher-education funding would be cut by 2.4 percent. At the same time OpportunityME, a program that gives rebates to students attending college, will be funded.
• Reduced funding for the public financing of gubernatorial campaigns.
• Department of Corrections changes: While some prisons are overcrowded, others have empty beds. To solve the problem, the budget proposes: to ship 118 prisoners to out-of-state facilities. “Most of these inmates have few or no family members in Maine and are serving long sentences. They’ve come to Maine to commit a crime,” said Corrections Commissioner Martin Magnusson. It costs the state $103 a day per inmate to keep them here; it would cost $66 to $70 to keep them out-of-state. And The Department of Corrections will see consolidation methods that will reduce prison beds in Warren, Machiasport, and at the Windham Correctional Center.
• A placeholder for an increase in federal support for MaineCare, the State’s Medicaid program. The Baldacci administration conservatively estimates $98.8 million in increased funding for MaineCare to be included in President-elect Obama’s economic stimulus package. The estimate is based on reports from Washington on increased funding for health care.
• The budget invests new money in childhood immunization and preparation for a possible flu pandemic, maintains eligibility in MaineCare, maintains the Red Tide monitoring program.
• Overall, the Judiciary’s budget will increase by almost $6 million per year over FY 2008-09 funding.
• The budget sets aside $1.5 million in incentive funds for municipalities that seek to consolidate service delivery and administrative functions with regional school units.
“I believe that there is great opportunity for savings for municipalities that take a more regional approach to providing administrative services. This funding will help those communities willing to consider change to use alternatives to their current way of doing business,” said the governor.
Consolidation efforts will help-
Even with help from an Obama administration in Washington, DC, there will be approaches that each state must take on their own to work through the recession. The governor said that new proposals will be forthcoming, including an energy package, and consolidation efforts.
Merging the natural resource agencies — as well as a new structure for the Department of Economic and Community Development that emphasizes a regional approach to development and eliminates too many layers of administration — will be introduced. These measures could mitigate some of the cuts proposed.
“Maine will be tested by the current national recession and other unforeseen challenges,” said Baldacci. “But a consistent, disciplined approach to spending and taxation, a smaller, more modern and more efficient government structure, and smart investments in education, research and development, health care, and economic development will usher in a new era of prosperity and strength.”
STEP II The Supplemental Budget
UPDATE– the Supplemental budget was passed quickly in Jan, 2009
Governor Baldacci, his budget team and department heads, worked to maintain the state’s core programs, putting the safety and well-being of Mainers first with the supplemental budget proposal. They also used findings from a McKinsey & Co. report to identify places to improve services and save funds.
To protect citizens, the Rainy Day Stabilization Fund was used. “Now is the time to use the reserves,” said the governor. Using $45 million, 28 percent of the Rainy Day Fund, was proposed. With uncertainty in the economy, the governor did not want to take away any more of the stabilization funds to fill the budget gap, with the probability that they may be needed in the near future.
“Reducing spending by $140 million is not an easy job; if it was we would have done it last year,” said Ryan Low, commissioner of the Department of Financial Services.
“In order to make an additional $45 million in cuts, we would have to do some very substantial reductions across state government. Using the Stabilization Fund will in fact stabilize the situation, so the Legislature can act quickly, and we can move on to the biennial budget and review new polices we will put forward.”
Leaders from both parties offered $1.6 million in cuts from their operations in this proposal, underscoring the seriousness of this measure. The governor instituted a hiring freeze, saving $1.8 million, and has not filled positions in his office.
Urgency is required by the Legislature for passage by a two-thirds vote of this measure, or the projected savings won’t happen.
“It needs to be acted on. The quicker and sooner, the better,” said Baldacci. “Every day that goes without action puts more pressure on State resources and makes it harder to balance our budget. The plan I am presenting is responsible, balanced and tough. I urge the Legislature to do its work quickly. We have more difficult challenges ahead.”
Brenda Harvey, commissioner of the Department of Human Services, agreed. “In order for us to achieve the target savings, we need to implement quickly,” she said. “We were very cognizant that the things we curtailed would not take away from people’s needs, because that would just ad to our wait list. The supplemental budget continues in the same vain; we were very surgical about where we thought the impact would be the least harmful.”
Baldacci’s proposal would continue the nearly $80 million in curtailments he made, draw $45 million from the Stabilization Fund, and use a series of cuts and returned money to come up with the remaining $29 million.
Those cuts include the elimination of 94 positions, including 40 layoffs. Most of the layoffs would occur in the state Corrections Department. Cutbacks have reduced the size of state government by 729 workers in the past five years.
The proposed bill also changes the reimbursement rate for Critical Access Hospitals and for hospital-based physicians.
Other savings initiatives include $6.4 million excess reserves from retiree health, $2 million in reduced capital expenditures, $1 million in reduced debt service, and $500,000 in reduced contracts in the Department of Corrections.
“The U.S. economy is in recession, and most states are facing serious budget challenges, many on a scale far worse than the state of Maine,” said the governor. “People are losing their jobs, they’re watching as their retirement accounts decline in value, there’s fears that things could get worse. We have great hope that with a new partner soon to be in the White House, our country will be able to quickly recover its economic strength. But for now, we must deal with declining revenues and an increased demand for government services.”
“We have a lot of hope the next president will make sure there is an F-map increase (the federal match to the state Medicaid fund for general services.) With just a one percent increase, there would be a huge difference. Governor Baldacci has asked for an increase so that some of the measures that have to be put into the governor’s next biennial budget will be mitigated,” said Harvey.
Any economic stimulus package passed by Congress would take effect too late to have an impact on the supplemental budget.
STEP 1 Curtailment
Revenues for the state have not met expectations, due to the national recession, which has forced Maine to make reductions in the ’08 budget cycle. Some states that have not been fiscally responsible are facing dramatically hard times.
“Rhode Island has $372 million shortfall; Connecticut has a $400 million shortfall. For Maine $150 million is very difficult, but we’re in a better position than neighboring states,” said Ryan Low, commissioner of the state Department of Administrative and Financial Services.
Last November Governor John Baldacci announced to first step in the administration’s plan to meet the constitutional requirements of a balanced budget. Maine cannot print money like the federal government to keep running; the state has to balance its budget by the fiscal year end, June 30. The governor’s curtailment order will cut spending by nearly $80 million to help close a shortfall in the 2007-2008 biennial budget.
The largest cuts are to the Department of Health and Human Services (DHHS), $31 million, and to the Department of Education, $28 million. Many state jobs will be left vacant to save money.
Under the restrictions of a curtailment, no programs can be eliminated, the legislative and judicial branches of state government cannot be part of the formula, new initiatives cannot be introduced, and rain day funds cannot be used.
“Curtailment is a blunt and limited tool,” said the governor. One which Baldacci is using skillfully to ensure the most vulnerable of Maine’s population are not adversely effected.
Nearly $25 million of the $31 million in cuts to the Department of Health and Human Services is not related to services or programs. They represent cuts made through accounting adjustments and payment schedules. “We’re not taking people off services,” said DHHS Commissioner Brenda Harvey.
Just by changing from biweekly to monthly paychecks, some savings will occur.
On the education side, state government has steadily been increasing funds to local schools. During the last four years, over 800 million new dollars have been invested in Maine’s school system. About one billion is spent per year in educational general-purpose aid for schools.
According to Dept. of Education spokesperson David Connerty-Marin, the amount local schools are receiving from the state remains higher than it was before Baldacci became governor. “Right now the state is funding 53 percent of local school costs,” he said, up from 43 percent when Baldacci took office.
The University of Maine System will need to cut $8 million and $3 million from the Community College System. It’s important to remember that the budget being amended originally invested approximately $533 million into the university system, Community Colleges, and Maine Maritime academy.
Virtually all State agencies will see some cuts as part of the curtailment.
State revenue forecasters predict a total of $140 million revenue shortfall in the current budget. The curtailment order represents measures that the governor was able to achieve without the consent of the Legislature and will be included in the supplemental budget.
The curtailment is the first step in a three parts in the budgets that will see Maine hopefully through the recession.
“As we worked on the details of the curtailment, I moved forward carefully to limit the direct impacts on people who need help the most — the vulnerable populations of children, people with disabilities, the elderly, and also watching out for public health, safety, and the economy,” said the governor. “We can get through these difficult times; I have great confidence in the people of Maine and the people who serve them. We will overcome these obstacles.”