APRIL SURPRISE

Timing is, if not everything in life, at least a healthy portion of it, so pity John Fitzsimmons, president of the state’s technical college system, who chose May 1 to announce a $23 million plan to expand his system. While he was talking to reporters from his Augusta office about the need for this additional money, Gov. King was sitting in his Augusta office explaining how the state happened to find itself $180 million short for the 14 months remaining in the biennium. The timing of this announcement, too, was unfortunate, coming as late as it did in the fiscal year when there is little left to cut, requiring Mr. Fitzsimmons and the leaders of other state departments and programs, to switch from thinking about expansions to defending what they already have, or thought they had.

First, the blame. One-third of Maine’s $180 million problem comes from miscalculating how much personal income was going to rise in 2001. The King administration figured 5 percent; it actually was 4.8 percent, a robust ninth best in the country, suggesting a small but important miss by Maine’s revenue forecasters. The other two-thirds of the problem was a drop in state tax revenue from capital gains. The forecasters knew the revenue from that source was going to drop because the stock market was so obviously down and predicted it would fall by 23 percent for the year. (By comparison, the Congressional Budget Office predicted a 19 percent drop nationally.) Not all the accounting is done yet, but it looks like the governor’s estimate was only about half as pessimistic as required.

Could Maine have done a better job with its forecast? Initially, probably not – it was as responsible as the current information allowed. But other states, and at least a couple of the publications that follow state-budget trends, saw a problem deeper than originally predicted months ago. California, for instance, concluded in May 2001 that its capital gains would fall by 40 percent; in January they realized they needed to drop that forecast considerably more. Massachusetts by late last year was predicting a capital-gains drop of up to 40 percent. Governing Magazine noted last July that, “The current wisdom is that the capital gains and stock options incomes has had its last hurrah, that tax year 2000 was a capital year for capital tax realizations. … Ominous signs of weakness are already appearing in several states.” In October 2001, a paper with the self-explanatory title “The Looming Fiscal Threat From Falling Stock Prices” was the talk of several state capitals.

Not everyone was far-sighted and, in fairness to Maine forecasters, the revenue drop was off the usual charts. New York is facing a $1.2 billion drop in tax revenues and the federal government itself, having guessed wrong, is contemplating $50 billion in lost revenues. New York is considering new casinos to make up its losses and the Bush administration is nearly certain to deficit-spend even more deeply than it already intended, two options that won’t do Maine much good. The governor can, however, take several steps toward covering this shortfall that will neither reintroduce the budget gimmicks of a decade ago nor leave the next governor with part of the problem.

.

Gov. King will try to avoid a special session of the Legislature to close the gap because he does not want to face months of political debate while time is short and because he does not want the laptop fund for schools cleaned out, which lawmakers surely would try to do. But for a problem of this size, he needs regular advice from legislative leadership, broadly defined, including, for instance, the chairmen of the Appropriations Committee.

At a press conference Wednesday, Gov. King mused that an across-the-board cut of all government functions would fill the budget hole and at least maintain legislative priorities, only at a lower funding level. But the sub-budgets within departments don’t work that way: homogeneous cuts protect status quo programs and leave new and potentially more important programs vulnerable. If the governor were serious about not observing such a detail, he would benefit from having lawmakers tell him, in exacting language, where his thinking errs.

In addition to the current budget crisis, Maine has an expected $500 million or so shortfall expected for its next biennium, beginning 14 months from now. This makes the current problem sound worse, but if the governor focuses on cutting on-going expenses in meeting the $180 million problem, he will at the same time be reducing the $500 million problem. That means he should avoid using one-time funds to patch this hole (he will use a large chunk of the one-time Rainy Day fund to address the immediate problem but merely as a patch to gain time to solve the entire issue over the next few months).

School funding will be cut. Health-care programs will be cut. Hiring by state government, already chilled, will go into the deep freeze. It is not yet clear how much authority the governor has to make budget decisions without legislative approval or by when he has to make the decisions, but the cuts are going to hurt however they are made. The governor understandably wants to avoid tax increases, but just as all programs are being considered, taxes should be too, as should conformity with planned federal tax cuts.

Gov. King may have envisioned his final few months in office as a more pleasant pursuit than slashing the budget, but bad news never has good timing. Maine government benefited enormously from the taxes paid on capital gains during the last few years – the wealthiest Maine residents paid an increasing share of all taxes from their successes on Wall Street. That’s over for now and not likely to return to the same level of the dot-com bubble years. Given the current state and local tax burden, the most honest way to fix the problem is through permanent structural changes in its programs. Mr. Fitzsimmons et al., be warned.