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State House: The 124th Legislature will be sworn in Wednesday, and it faces a daunting fiscal scenario.

By MATT WICKENHEISER, Staff Writer November 30, 2008

When the members of Maine's 124th Legislature take the oath of office Wednesday, they will do so in a State House ceremony rich in protocol, tradition and history.

Once sworn in, they will have to deal with a financial crisis almost unprecedented in modern history.

Maine is facing a daunting $838 million budget shortfall for the two-year period starting July 1. Dealing with it is likely to result in drastic spending cuts and affect state spending priorities for years to come.

Gov. John Baldacci is crafting a budget that will include across-the-board cuts. He is also talking with President-elect Barack Obama about possible federal help.

Legislators say that until they get the governor's budget, it's hard to anticipate what cuts will be needed. Overall, they expect state government will be smaller and offer fewer services. But some also see it as an opportunity to change how state government runs. The two-year legislative session officially gets under way Jan. 6.

"We're all trying to get our heads around what this means," said Sen. Philip Bartlett, D-Gorham, incoming Senate majority leader. "It's something of a very different magnitude than what we've been dealing with, and we also don't have the prospects for revenues picking up.

"We need to be bold in our approach to this problem," he said. "We're not going to be able to sort of nibble around the edges."

WHY WILL REVENUES DROP?

The projected $838 million gap in the $6.3 billion two-year budget can be broken down to simple math: The cost of programs and services is expected to rise, and tax revenue is expected to fall.

It's a nationwide problem. According to the nonprofit Center on Budget and Policy Priorities, at least 41 states are facing gaps this year or next.

In Maine, just to keep providing the current services will cost an additional $508 million. That includes increases for staffing, materials, food, contracted services – everything is getting more expensive.

And the state's Revenue Forecasting Committee recently revised its tax revenue projection for the two years, dropping it by $329.9 million.

Where's that revenue gone?

The state had anticipated collecting roughly $1 billion in sales and use taxes in the first of the two budget years. That forecast has dropped by $37 million – retail sales are down, but a drop in anticipated vehicle sales accounts for most of it, said Mike Allen, director of economic research at Maine Revenue Services.

The individual income tax projection dropped by $74 million for the first year. Allen said 30 percent of that reflects anticipated job losses, and lower wage and salary growth. The other 70 percent reflects a drop in capital gains – people's investment portfolios are worth less, so they're reporting less – if any – income from them.

Likewise, estate tax revenue is expected to fall by $17 million, reflecting falling real estate and stock portfolio values.

Bear in mind, those projected drops are only for the first year of the two-year cycle. The committee forecasts similar drops for the second year, and there's a separate $359 million shortfall in the state's $1.5 billion highway fund.

"You're going to have a fairly sizable imbalance between revenues and expenditures that has to be brought back into balance," Allen said. "There's only three things you can do – cut spending, raise taxes or some combination of the two. I don't envy anybody who has to sit around and do this."

IMPACTS 'ACROSS THE BOARD'

That will be the job of Baldacci and the new Legislature. Baldacci will submit his two-year budget proposal to the Legislature on Jan. 9.

"Every area across the board is going to be more impacted than they've been in the past," Baldacci said. "In terms of the expansiveness of what's going to be done, from A to Z,...