In each even-numbered year, after deer hunting season and Thanksgiving but before Hanukkah and Christmas, MMA’s 70-member Legislative Policy Committee adopts through its democratic, town meeting process the Association’s legislative agenda for the ensuing two-year biennium.
On November 30th the newly-elected Policy Committee continued the tradition by adopting a four-plank legislative platform designed to address some of the most pressing concerns of Maine’s municipal leaders.
As might be expected, MMA’s legislative platform is focused on Maine’s tax policy. This article looks at the central plank in that agenda.
The centerpiece of the municipal legislative agenda is a multi-dimensional legislative package developed several months ago by a coalition of interest groups opposed to the seriously flawed TABOR initiative but committed to implementing a rational and responsible tax burden management system that would:
• Conform to the expectations of Maine’s voters;
• Establish the necessary fiscal discipline to underwrite responsible investments; and
• Lay the groundwork for structural tax reform.
The package of legislation written and now being advanced by the coalition is called The Responsible Government Spending and Investment Act.
This legislative package has been endorsed thus far by both MMA’s Executive Committee and Legislative Policy Committee, the Maine State Chamber of Commerce, the Maine Service Center Coalition, the Maine Education Association, the Maine Better Transport Association, and the Maine Hospital Association. The strength of this coalition lies in its diversity, in the breadth and depth of its members’ interests in the area of responsible tax policy, and in the high level of commitment its members are bringing to this effort. There are people within the statewide debate who seem to almost desperately hope that Maine’s taxation issues remain perpetually unsolved. The commitment of this coalition is to cut through that cynicism.
History. The roots of this effort reach deep down into the soil of Maine’s political history and the longstanding interest of Maine’s municipal leaders to address what they perceive as an outdated and unbalanced system of taxation. Years of studies at the executive, legislative, “blue ribbon commission”, and academic levels culminated in widespread agreement that structural tax reform was a task that the Legislature needed to undertake.
1996-2002, Failed Attempts. Ten years ago, MMA attempted to advance a comprehensive tax reform package that was decisively killed within the legislative process, but which was followed up by successor efforts, such as the Saxl Commission and the McGowan reform plan. Those efforts suffered a similar fate.
2002 – 2004 and Question 1A. Four years ago MMA, with the support of the Maine Education Association, initiated what became known as the “Question 1A” proposal to effect the state’s 55% financial commitment to public education and stimulate a comprehensive tax reform effort. On June 8, 2004, the voters of Maine adopted Question 1A.
Although the press, the pundits and the politicians were unable to grasp much of Question 1A beyond its call for 55% state funding of education, the voters’ adoption of that initiative put into law several other key directives. A centerpiece of Question 1A was a directive to the Legislature to implement a comprehensive tax burden management plan. Specifically, the language in Question 1A that was adopted by the voters called for the Legislature to “develop and report out legislation that consists of a comprehensive plan that integrates the efforts of state, county, local governments and schools to reduce unnecessary spending, identifies cost savings in the delivery of governmental services and otherwise addresses the issue of the overall tax burden in this State.” In many respects, we have been struggling as a state over the last two years to get that part of Question 1A right.
Enter Palesky. Overlapping the campaign to adopt the Question 1A initiative was the first citizen initiative to cap property taxes by adopting a system roughly equivalent to California’s “Proposition 13”. Advanced by Carol Palesky of Topsham, this initiative would have prohibited municipalities from having a property tax rate greater than 1% (or 10 mills in full value) and would have also established caps on the assessed value of all property. The impact on municipal services caused by the Palesky proposal was so severely negative, the voters easily rejected the ballot initiative in November 2004 by a 37% to 63% margin.
Enter the Maine State Chamber of Commerce. In the fall of 2004 prior to the Palesky vote and before legislative implementation of Question 1A, the Maine State Chamber of Commerce developed an alternative spending limitation initiative called the “Maine Plan” because, unlike the Palesky and TABOR initiatives, it was designed with Maine’s legal and intergovernmental infrastructure in mind, not to mention the culture of town meeting direct democracy at the local level.
2005-2006 – LD 1 v. TABOR. Instead of becoming a citizen initiative, however, the Chamber’s Maine Plan was proposed by Governor Baldacci to be the spending limitation component of the legislation to implement the Question 1A initiative. That comprehensive package of legislation, known as “LD 1”, was enacted by the Legislature on January 20, 2005. Although some major structural components of the Maine Plan’s spending limitation system were adopted as part of LD 1, other elements of the Maine Plan were modified or discarded. Specifically, the Maine Plan’s formulas governing the year-to-year growth allowances for all levels of government in Maine were generally adopted as part of LD 1, but the Maine Plan’s procedures for the legislative bodies at each level of government to override those allowances were softened by the Legislature prior to enactment.
Just as the Palesky tax cap initiative overlapped the campaign to adopt Question 1A, a second tax capping initiative – TABOR – was being advanced by Mary Adams and the Maine Heritage Policy Center at the same time as LD 1 was being implemented throughout the state. The TABOR campaign in 2006 centered around the relative effectiveness or ineffectiveness of the governmental spending limitation systems in LD 1 and the significantly different approach taken by TABOR. Specifically, TABOR would have established volatile and unpredictable spending limitations (especially for all local governments), extremely restrictive and expensive override procedures, and applied restrictions simultaneously to year-to-year changes in governmental spending and any tax or fee increases. On November 7, 2006, Maine’s voters rejected the TABOR initiative by a 46%-54% margin.
Responsible Government Spending and Investment ACT
With all of that history in mind, the coalition (described above) came together in October in response to a genuine request from the Maine State Chamber to see if there was a better approach than TABOR to improving upon LD 1’s first cut at establishing a tax burden management plan for Maine. From the perspective of the coalition partners, the TABOR initiative had five primary flaws that compelled the development of a more responsible alternative: (1) the TABOR system was legally unenforceable with respect to state spending; (2) TABOR upended the conservative but rational governmental growth allowances established by LD 1 and replaced them with volatile and irrational formulas; (3) TABOR went too far in the establishment of override procedures, usurping some of the legitimate authority of both representative and direct (town meeting) democracies; (4) TABOR’s simultaneous application to both spending limits and revenue/fee increases would paralyze any and all structural tax reform efforts; and (5) TABOR focused so singularly on governmental spending restrictions it crowded out or eclipsed other important dimensions of Maine’s economic landscape, especially in the area of necessary capital investments.
Drawing from the energy of TABOR but smoothing out some of its rougher edges, the coalition developed a multi-dimensional approach that addresses both spending and investments, the state’s tax burden and its economic climate. Organized under three guiding principles, here are the details of the eight specific elements of The Responsible Government Spending and Investment Act.
PRINCIPLE 1: Maine Governments Should Adhere to Annual Fiscal Benchmarks
• The LD 1 spending benchmarks should be retained but LD 1 loopholes should be closed;
• The override provisions of the State Chamber’s “ Maine Plan” should be adopted, with the LD 1 limits for the Legislature adopted as a “joint rule” for enforceability purposes; and
• Maine’s progress in reducing its overall tax burden should be more aggressively monitored and reported in a manner that is easily accessible to the general public.
Most of these changes to the existing governmental spending limitation system in Maine are contained in Part A of the submitted bill. The Responsible Government Spending and Investment Act establishes new procedures to govern the act of exceeding or increasing the various spending limitations that currently apply to the state, county, municipal and school governments.
The state’s spending limit and the joint rule approach. On the state level for example, the bill closes a loophole in the system by making the determination of compliance with the spending limit an accurate year-to-year comparison if the Legislature decides to fund a traditional General Fund expenditure outside of the General Fund appropriation process.
More significantly, the coalition is also supporting notching-up the process the Legislature would need to follow in order to override the State’s LD 1-based spending limit. As described below, the coalition’s bill strengthens the LD 1 override process for all municipal, school and county local governments. Fairness, parity, equal-handedness and common sense all indicate that the state-level spending limit override process should similarly be strengthened, specifically by requiring the Legislature to approve the spending limit override by at least a two-thirds vote in both chambers.
A seemingly simple way to accomplish that would be to establish a two-thirds voting threshold within the bill itself (as was the case, originally, in the Maine Plan). Ironically, this straightforward approach turns out to be not very effective because all statutory two-thirds voting requirements are unenforceable. The two-thirds voting requirement can be ignored (the technical term is “notwithstood”) by any simple majority vote.
Therefore, the coalition is urging the Legislature to adopt the two-thirds override requirement not as a matter of state law, but rather as a matter of self-imposed rule. (see sidebar explaining the Joint Rule process).
By adopting what is know as a “joint rule” (a rule governing both the House and the Senate), the Legislature can agree to abide by the two-thirds override provision in an entirely effective and enforceable way. Once the joint rules are adopted by the Legislature, they can only be amended by a two-thirds vote. Therefore, any two-thirds voting agreement established as a “joint rule” becomes legally enforceable, unlike its statutory counterpart.
The success or failure of the coalition’s entire effort rests on the willingness of the Legislature to impose upon itself the two-thirds override requirement with respect to its LD 1 spending restriction for the duration of this biennium. The Responsible Government Spending and Investment Act contains within it numerous limits, restrictions, belt-tightenings and restructurings that are being self-imposed by the coalition partners on local governments. Unless the Legislature is willing to lead by example by imposing a parallel restriction on itself, all of those changes will be very difficult to achieve.
On the local level. For local government, all existing approval procedures to exceed the current spending limitations would still be required, but in addition, if the local government — whether county, school or municipal — was proposing to exceed or increase the applicable limitation and the local government was the recipient of net new funding from the state, the approval will have to be accomplished by a referendum vote under the terms of The Responsible Government Spending and Investment Act. For the municipal and school governments, the bill further provides that a two-thirds vote of the legislative body, such as the town meeting, school district meeting or city council, would effect the adoption of the budget and thereby avoid the expense of conducting a validation referendum.
PRINCIPLE 2: Maine Governments Should Adopt Enforceable Plans to Achieve Long Term Fiscal Goals.
• Maine should regularly compare its state and local expenditures for all categories of governmental services according to national and peer-state averages to identify and better manage areas of expenditure that exceed reasonable norms.
• The first such management program should focus on the provision of educational administrative services, which should be regionalized to the extent practicable through the creation of delivery systems within the existing vocational educational regions; and
• Maine should regularly compare its state and local governmental revenues according to national norms to help identify and address inequities, imbalances, over-reliance’s, under-reliance’s, and impairments to economic vitality.
These elements of The Responsible Governmental Spending and Investment Act are found in Parts C and D of the submitted bill.
Part D requires the State Planning Office to perform calculations of Maine’s state and local government payroll and expenditure levels in comparison with other states for the purpose of identifying categories of governmental employment and expenditure that deviate significantly from national and peer-state averages.
This provision would regularly continue the work that was done by a University of Maine professor as background material for the Brookings Institute’s project “Charting Maine’s Future”. The analysis is based on a U.S. Census report generated every five years called the “Census of Governments”. The most recent “Census of Governments” was released in 2004 on the basis of 2002 data. The next “Census of Governments” release will be in 2009. Therefore, the legislation accomplishes two goals. First, the work that has already been done by the University of Maine professor and the Brookings Institution would provide a starting point to begin the identification of areas of expenditure that need to be addressed. (The first area, K-12 administrative expenditures, is immediately addressed in the bill in the manner described below.) The bill also organizes the process to establish the analytical framework in preparation for the next “Census of Governments” report in 2009.
Part C of the submitted bill establishes as a goal a 10% reduction by the year 2010 in the statewide expenditure for school administrative services, measured as a percent of total personal income. This part of the bill implements a recommendation in a report on K-12 education recently developed under the auspices of the Maine Children’s Alliance called “A Case for Cooperation”. Along the lines of many recently-released reports, “A Case for Cooperation” advocates directly addressing the issue of the administrative costs associated with K-12 public education. Unlike many of the other reports, however, “A Case for Cooperation” advocates a specific process that utilizes specific goals guidance set by the state but relies on local decision-making authority to meet the goals by restructuring all educational administrative services that can be practicably regionalized. To accomplish all of that, the bill establishes a comprehensive system of analysis, recommendation, outreach and implementation to be accomplished on the local level to achieve that goal within the 26 vocational education regions in Maine. Specifically, the bill creates a “planning alliance” within each vocational educational region made up equally of school officials, municipal officials and members of the general public.
In addition, The Responsible Government Spending and Investment Act directs the Maine Development Foundation to compile a comprehensive analysis of the governmental revenue systems in all states. Tax reform involves both spending control and structural rebalancing, and the starting point of any true structural tax reform effort is a complete understanding of the tax structures and other-source revenues that are being utilized by the other states.
PRINCIPLE 3: Maine Governments Should Invest More Wisely, More Aggressively and More Responsibly
• De-politicizing borrowing for investment should be accomplished through the establishment of rules that establish reasonable limits on debt; and
• The creation of long-term liabilities, such as retiree health benefits for governmental employees, should be funded on an actuarially-sound basis.
Part B of the submitted bill deals with these issues through additions to an existing chapter of law that governs state debt. The bill codifies as a law a 5% limit on the amount of General Fund and Highway Fund revenues that may be allocated for tax supported debt service in any fiscal year. The bill also directs the State Treasurer to annually calculate and report to the Legislature on the aggregate unfunded actuarial liability of the State taking into consideration not only the unfunded liability associated with the pension benefits to be provided to retired governmental employees, but also their health and life insurance benefits. There is a great deal of political confusion today around the State’s debt profile, much of which is associated with a co-mingling of normal debt with unfunded liability. The Responsible Government Spending and Investment Act establishes an organized system under the chapter of Maine law governing state debt to define, categorize and responsibly limit all types of future financial liabilities, each according to its respective category.
That’s the package. The Responsible Government Spending and Investment Act does not pretend to be a sweeping tax relief measure or represent in its enactment comprehensive tax reform. If those are the expectations, they will not be fulfilled. The coalition’s bill is much more fundamental than that, more primary – it is a spending limitation and tax burden reduction bill, pure and simple. In the view of the coalition that supports it, the legislation is the necessary step for the Legislature to take for three reasons. First and foremost, to reduce Maine’s overall tax burden in a responsible way. Second, to lay the foundation for structural tax reform by controlling and reducing Maine’s tax burden. Third, to establish the rules that will allow the necessary investments to be made to support a vibrant Maine economy.