Maine may have to address a $1 billion budget gap for the fiscal 1994-95 biennium, according to state officials.

"The $1 billion figure is a worstcase scenario," said H. Willis Lyford, spokesman for Gov. John R. McKernan. But he added that "the governor is already working on a new two-year plan to eliminate it."

Officials say Maine's recent economic decline has been spurred by rising unemployment throughout New England, increased demands from state-supported school districts, and a recent downturn in tourism.

The state's budget is based on a two-year plan, with each fiscal year running from July 1 to June 30. State law requires the budget to be balanced at the beginning of each biennium and prohibits deficit financing as a solution.

The $3.2 billion budget for the biennium ending next year would have fallen short by $1.2 billion if not for a list of revenue measures passed by the Legislature in June 1991.

Lawmakers temporarily raised the state sales tax, to 6% from 5%, as well as enacting a 5% surcharge on a taxpayer's taxable base and a 10% surcharge on any taxable income above the base, which depends on individual earnings.

Also at that time, the Legislature imposed a 7% tax on liquor, auto rentals, hotel rooms, trailers, rental property, and apartments, according to Deputy Treasurer Maurice Stickney. Maine already had a progressive income tax ranging from 2% to 8.6%, Mr. Stickney said.

The governor intends to look the budget gap in the eye and let the new taxes expire as planned on Dec. 31, Mr. Lyford said.

"The governor believes that the way to alleviate the gap is to allow the taxes to end and cut services," he said. "We are looking at wholesale, sweeping changes in the way the state is run."

The governor's preliminary budget package, which includes measures to reduce the potential shortfall, calls for cutting or limiting state education funding and freezing certain entitlements.

"Eighty-four percent of our current budget is allocated for education, human services, mental health, and corrections," Mr. Lyford said. "That must be reappropriated more equitably. "

Medicaid and welfare programs could be frozen or decreased under the governor's final plan, Mr. Lyford said.

In June 1991, before the current budget was adopted, Standard & Poor's Corp. downgraded the state's general obligation debt to AA-plus from AAA.

Standard & Poor's officials, in their last rating report, cite "declines in key financial indicators and continued softness in the state's economy." The agency also pointed to the state's widespread unemployment problems as "contributing to the downgrade."

In the most recent rating report on the state, Moody's Investors Service reaffirmed Maine's Aa1 rating. The agency cited the state's manageable debt service burden.

But the report also warns that although the previous budget addressed a $1.2 billion budget gap, "continued economic weakness again forced budgetary adjustments during 1992."

The report says these "adjustments" include a nonrecurring bond refunding, a $63 million pension fund deferral, and an executive order cutting $96 million in late 1992 appropriations.

"The fact that certain taxes are retired in December is a great concern." said George W. Leung, vice president and managing director at Moody's.

"As an agency, we would never prescribe a certain course of action for the state," Mr. Leung said. "We are much more interested with how the state reacts to its budgetary shortfalls and get their revenues and spending in line. Permanent, versus one-shot, improvements count the most. "

Mr. Leung stressed that the rating agency is aware that the budget gap estimate could well be less than $1 billion before the fiscal period ends.

"The size of the deficit depends on many things," said John Martin, speaker of the state House. "Assuming that expenditures continue to grow as expected and that programs that were temporarily cut are restored, then it is possible."

Mr. Martin, D-Eagle Lake, acknowledged that many of the revenues the state is realizing this year will not be available next year.

"There were a lot of one-timers in this year's budget." Mr. Martin said. "We'll have to see what the impact on local governments has been from the cuts this year."

Mr. Martin said that in addressing the potential shortfall in the current biennium, the state should not increase the burden on localities and should continue distributing equitable funding to schools.

He said he cannot be more specific about what means will be used to close the gap until after the November election. Republican Gov. McKernan is not up for re-election this year, but all the state's lawmakers are.

"There were many more one-shot deals this current Legislature was interested in than last time," said Walter Whitcomb, R-Waldo, state House minority leader. "But the Democratic majority shot them down. I suspect they will be suggested again."

Mr. Whitcomb explained that one area that may suffer from fixing the budget gap is a state health-care project that subsidizes low-income working families.

"It would be nice if we could provide health care for everyone, but there has to be a ceiling, and on some families there is none," he said. "We ended up spending $15 million to $20 million on this project alone. That is a luxury we can't afford. "

Mr. Whitcomb is also concerned that the state's budget would be hurt by the "sunset" the temporary taxes.

"We agreed to go with the tax increase as long as there was a definite time frame that it would return to previous levels," Mr. Whitcomb said. "But the reality is, those additional taxes generate about $300 million per year."

The legislator suggested there may have to be a gradual reduction of taxes instead of the single-day retirement supported by the governor.

Mr. Whitcomb said the House Republicans are lobbying for the taxes to be rolled back, in addition to a reduction in state funds to schools.

"There are some schools that receive as much as 90% of their working capital from the state," he said. "In those cases, the schools will have to reduce their expenditures."

In the mid-1970s, the state embarked on one of the most aggressive educational equality movements in the nation, according to Mr. Lyford.

"The core education costs are still supported by property taxes," he explained. "But the program allowed for poor or rural areas without the degree of property tax support to receive funds from the state to equal areas with a stronger tax base." Mr. Lyford said the program has not made schools more fiscally responsible.

In addition to the challenges of funding Maine's schools and the higher unemployment rate, the state's economy and budget have been affected by a decline in vacationing visitors.

"Maine is also very dependent on tourism." said Claire G. Cohen, executive vice president at Fitch Investors Service. This, past summer really hurt them."

"It wasn't a great summer," agreed James Thompson, director of Maine's Publicity Bureau. "In recent years, the tourists coming into the state have moved from two-week vacations to, long weekends. "

Although Fitch does not rate Maine's general obligation debt, Ms. Cohen said a $1 billion deficit is a lot of money for a state like Maine."

Mr. Thompson said like much of the Northeast, Maine had a rainy, somewhat cool summer.' "Tourism brings in $200 million per year in Maine or 20%, of the yearly operating budget," he noted. "Fifty percent of that comes in the summer. "

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