Maine faces Catch-22 over federal funds

AUGUSTA – Maine is getting $1.34 in federal spending for every dollar sent to Washington in federal taxes, the best of any New England state, according to a study released last week.

But the analysis of why the state is doing so well in getting federal funds tempers the apparent good news.

“A key number used in the formula for many federal spending programs is per capita income,” said Matt Kane, author of the study by the Northeast-Midwest Institute, a nonpartisan, nonprofit think tank based in Washington, D.C. “Maine is below the national average [of $30,832], with its per capita income of $27,804. That gives the state the 34th ranking in the country and the lowest in New England.”

Kane said the study, based on federal fiscal year 2002, measures the total amount of federal funds flowing into a state. Those spending areas range from defense and retirement benefits to grants made to state and local governments.

Kane said Maine has received more than it pays in federal taxes for a long time.

“If you look over the last decade,” he said last week, “Maine has always been right up there on the list.”

State Economist Laurie LaChance said Friday that the additional federal money has long helped Maine’s economy, but it also points to the need to improve the state’s mix of jobs. She said a significant portion of the cash flowing into the state comes from policies and programs that Congress could easily change.

“That is a worry,” she said. “The more dependent we are on federal funds, the more we will be impacted by policy changes in Washington.”

Gov. John Baldacci, who served eight years in Congress, said he is concerned that budget changes in Washington could hurt Maine. The state needs to grow its economy so it becomes less dependent on federal funds, he said.

“The less dependent we are on federal funds, the better off we are,” Baldacci said Friday. “But it will take a while to create the economy we want to create here in Maine.

“It won’t happen right off, but I am convinced it will happen.”

The study indicates, however, that Maine is increasing its reliance on federal funds. A major reason is the increasing costs of health care. Those costs have increased the size of the Medicaid program, which now makes up about 25 percent of the state budget. Medicaid is the federal-state program that provides health care to the poor.

“There has been an effort to maximize Medicaid funds,” LaChance said, “because the state has such a good match rate.”

Maine gets 2 federal dollars for every state dollar spent on the program. The more wealthy states, Kane says, usually have to spend a state dollar to get a federal dollar. But, he said, Maine’s good match rate could have a downside.

“If Congress were to change the formula, Maine would be hurt more than most [other states],” Kane said.

While a significant portion of the federal funds coming into the state easily could be affected by budget changes in Washington, a major factor in Maine’s standing in the study is its demographics, which change slowly, Kane said.

“Maine has an older population than many states,” he said. “In the 2000 Census, Maine had the seventh-highest number in the country at 14.4 percent of the population over 65.”

The national average is 12.4 percent, and the New England average is 13.6 percent. Age is significant in the analysis because the federal funds flowing into the state include Social Security and Medicare. Kane noted a large number of the elderly also use the Medicaid program sometime during their elder years.

LaChance wrote a study a few years ago highlighting the importance of seniors to Maine’s economy. The study noted that many seniors put less demand on state services and have considerable discretionary income to spend on goods and services in the state.

“They are important to Maine’s economy,” she said.

Defense spending in Maine, long cited as important to the state by economists such as University of Southern Maine economics professor Charles Colgan, also increased. Much of the funds were for Navy shipbuilding at Bath Iron Works. Other spending was for salaries at both Brunswick Naval Air Station and the Portsmouth Naval Shipyard.

The institute study also is bolstered by work done by Christopher St. John, executive director for the Maine Center for Economic Policy, an Augusta-based think tank. In several reports, he has concluded that Maine’s population is “older and sicker and poorer” than the average population of other states. As a result, Maine has a greater demand for federal programs such as Social Security, Medicare and Medicaid.

Kane said Maine has increased its standing over Vermont and Rhode Island, the other two New England states that received more federal dollars than they paid in taxes. Vermont received $1.13 for every dollar, Rhode Island $1.10.

But, he said, Maine was a full dollar below the top receiving state of New Mexico, which got $2.34 for every dollar in taxes.

Connecticut, Massachusetts and New Hampshire all paid more in federal taxes than they received from the federal government.

“And they are all among the wealthiest states when you look at per capita income,” Kane said. “Connecticut is third in the nation.”