AUGUSTA – As Maine lawmakers prepare for Thursday’s special legislative session, state budget analysts were taking a new look at the persistent problem of future deficits created by built-in growth factors that are contained in many state programs and services.

The projected shortfall of between $550 million and $575 million in the two-year budget cycle beginning July 1, 2005, could quickly eat up the revenues Gov. John E. Baldacci would like to use to increase the state’s share of local education costs.

“That would suggest the need for some fairly significant adjustments,” said Grant Pennoyer, director of the nonpartisan Legislature’s Office of Program and Fiscal Review.

The governor is seeking legislative support this week for LD 1629, a bill that would place his education funding proposal on the fall ballot as a competing measure to a question advanced by the Maine Municipal Association requiring the state to fund 55 percent of the costs of local education beginning in fiscal year 2005. The state currently funds 43 percent of those costs.

If approved by the voters, the MMA proposal simply hands the question to lawmakers and requires them to come up with a funding plan by March 1, 2004. Baldacci would prefer to phase in the 55 percent goal over a five-year period and fund his initiative through the projected growth in state tax revenues that are expected to increase by about $100 million annually. The state’s share of local education costs would increase over that time period by about $300 million.

That still leaves a little more than $200 million for other legislative purposes during the next five years, but that figure could quickly be consumed by the projected shortfall over the next three state budget cycles should revenues stagnate, or worse, trend downward. The deficit’s implications loom large over both the governor’s competing measure and the MMA’s plan.

Commonly referred to as the budget’s “structural gap” by legislators, the shortfall results from increased costs stemming from the growth of many state programs that expand over successive years. The deficit rises when anticipated state revenues fail to cover those costs, forcing the governor and the Legislature to balance the budget though program cuts or other mechanisms.

“The governor is aware of the gap’s implications, but he is also very committed to increasing education [funding],” said Martha Freeman, the governor’s deputy chief of staff. “One way or the other, the governor, the Legislature and the people of Maine will have to face the structural gap and make trade-offs.”

Earlier this year, the Baldacci administration closed a $1.2 billion gap in the current state budget through a combination of layoffs, program cuts and revenue enhancements including fee increases, refunding the state retirement debt and leasing liquor distribution rights. The strategy allowed the Democratic governor to remain true to his pledge to Republicans of “no new taxes” over the next two years.

But some lawmakers, including Rep. Peter Mills, R-Skowhegan, are wondering whether the governor will be able to hold the line on taxes when he confronts his next two-year budget in the second half of his term. Baldacci met Tuesday with members of the Portland legislative delegation who want the governor to consider the inclusion of a local option sales tax as part of his competing measure package.

Several members of that same delegation, including two who hold seats on the Taxation Committee, support the MMA’s goals of expanding the sales tax to produce larger and more reliable streams of revenue.

“I’ve heard the governor has told some of these lawmakers that he will address tax reform this winter and has asked them to hold their fire until then,” Mills said.

In preparing for Thursday’s legislative session on the competing measure and the governor’s bond package, Maine Senate President Beverly Daggett, D-Augusta, and House Republican leader Joe Bruno of Raymond are hoping to complete all business within one day. Both leaders fully support the governor’s competing measure – largely because it buys the Legislature some time in order to evaluate the state’s future revenues and expenses, including the structural gap.

“I don’t think we know exactly how quickly the economy will improve,” Daggett said. “In the interim, I think a more carefully applied measure that provides us with a little more time to get there is what we need to be looking at on Thursday.”