Governor Announces Fiscal Reform Package

May 29, 2003

Introduction

Last November, as Maine voters headed to the polls, they were asked to sign not 1, not 2, but 3 citizen's initiatives calling for tax reform. One of those initiatives, put forward by the Maine Municipal Association, garnered a record number of signatures, assuring its place on the November 2003 ballot. Through circulating and signing these initiatives, you have sent a message that the time is here to slow the growth of Government and to bring down the heavy burden that is stifling economic vibrancy in Maine.

I've heard you, loud and clear, and I am putting forth a plan for wholesale fiscal reform that is honest, responsible and sustainable.

The MMA proposal that will be on the ballot in November has put policymakers squarely between a rock and a hard spot. This proposal asks us to simply trust that additional money from Augusta will lead to a dollar-for-dollar reduction in local property taxes.

In addition, the MMA proposal is worded so as to call into question whether meaningful reform can be enacted by the Legislature without being considered a competing measure. Constitutionally, a bill that competes substantively with an initiated bill must be put out to the voters too. Therefore, I have decided to propose the Legislation that provides the details of the plan I will outline for you today as a competing measure.

The fiscal reform proposal I'm putting forth includes a direct response to the MMA proposal. I propose to increase funding to education to 55%, but I want us to do this honestly and responsibly.

My proposal gets us to 55% education funding over 5 years in 2 ways:

1) It builds on the Essential Programs and Services method of school funding currently before the Education Committee. We need the Legislature to pass the Governor's bill this session. 2) And, it provides significant State funds to municipalities that form Municipal Service Districts and direct savings to property tax relief and education.

While I've only been in office about 150 days, I have learned a great deal. · I've learned that State, County and Local Governments are truly a system, and you can not enact meaningful reform by focusing on only one part - you must deal with the whole. · In fact, I've learned that 41% of all General Fund expenditures are sent back to the municipalities and counties. When you combine that with the Property Tax revenues that are raised and spent locally, it means that roughly 60 cents out of every tax dollar raised in Maine is spent at the municipal and county levels. · I've learned that fixing our problems is not as simple as it may first appear - that one person's "waste" is another person's "lifeline". · And I've grown to appreciate that Maine's economy is fragile, and major change, just for the sake of change, could cause tremendous dislocation and pain.

Our challenges are great and they require bold action, but we must take every caution to ensure that the changes we seek are sustainable and won't completely unravel our system as we know it.

Because of this, I am proposing a three phased fiscal reform package, recognizing that putting Maine on the right course is like trying to turn a huge ship - it doesn't turn on a dime and, in fact, if we try to turn it too quickly, we risk capsizing - a risk I am not willing to take at this tenuous juncture.

Goals of Fiscal Reform - Phase I

The primary goals of this first phase of Fiscal Reform are twofold:

1. To Reduce Maine's Tax Burden 2. To Increase Competitiveness

If there is one thing that I heard throughout my campaign, it is that Maine's tax burden is just too high and it is making it extremely difficult for Maine's businesses to compete. And in my short tenure as Governor, I've already seen, first hand, how our cost structure is absolutely strangling Maine industry, leading to the closure of mainstay businesses and devastating our communities.

While there are many laudable tax reform goals worth pursuing, if we fail to gain control over the elements of our spending that continue to drive our burden higher, we will have done little to stop the downward spiral of our foundational industries and the economic activity they support.

Elements of Fiscal Reform

To achieve these goals, we will commit to these critical first steps:

To reduce Maine's Tax Burden: · Create a Municipal Service District framework to incentivize voluntary regional consolidations of municipalities and school districts · Adopt Essential Programs and Services to gain control over educational spending · Provide Municipal Service Districts and qualifying Service Centers with a mechanism to fund projects of regional benefit through a Limited Purpose Local Option Sales Tax · Consciously move away from general property tax relief towards targeted property tax relief by redirecting the broad Homestead Exemption and greatly strengthening the Maine Residents Property Tax Program (a.k.a. Circuit Breaker).

To Increase Competitiveness:

Eliminate the Personal Property Tax on Machinery and Equipment going forward and phase out the BETR program · Lower the Individual Income Tax Top Marginal Rate · Take steps to lower Maine's Tax Burden

Vehicles of Fiscal Reform

We have already taken some essential first steps towards reform:

Part I Budget - through the Part I Budget we closed a $1 billion gap without raising taxes. · Economic Development Bond Package - through the Economic Development Bond Package we made foundational investments in Municipal Infrastructure, Affordable Workforce Housing, and R&D, all central to growing Maine's economy.

There are 2 major vehicles through which we can enact further reform:

1) Adoption of Essential Programs and Services

Currently, expenditures on k-12 education account for approximately 35% of total General Fund spending and roughly 40%-70% of municipal budgets across this state. We can not make progress towards reducing Maine's tax burden without gaining some control in this area. I sponsored the Essential Programs and Services legislation to create a basis for defining and, ultimately, controlling educational costs, and I urge the Legislature to adopt this program right away.

2) Initial Fiscal Reform Legislation / Competing Measure

Today I am presenting to you the rest of Phase I of my fiscal reform package that offers an honest and responsible alternative to the MMA proposal and takes measured but critical first steps towards providing targeted tax relief and creating an improved competitive position for Maine.

Phase I of Fiscal Reform - Competing Measure

Phase I of Fiscal Reform seeks to put us soundly on the right track by adding fiscal discipline to the entire system, by putting in place measures to control costs and contain spending, and by beginning to remove the barriers to investment in Maine.

This package includes the following key elements that reduce Maine's tax burden by creating efficiencies and imposing fiscal discipline on State and Local Governments, and that make Maine more competitive by eliminating barriers to investment:
To lower Maine's tax burden and to make Maine more competitive:

Provide for the creation of Municipal Service Districts - An important piece of this new fiscal reform package is the creation of a Municipal Service District structure that will allow for the long term reduction of state, county and local costs, and, ultimately, property tax burdens.

In the 1950's, Maine established the Sinclair Act, which provided state financial incentives to schools that joined into school administrative districts. For decades, SADs have saved school funds and relieved property taxes. Half a century later, we are proposing a "Sinclair Act II" focused on creating efficiencies in school and municipal structures through a voluntary, incentive-based system for municipalities (and the school districts coterminous with them) to form a new level of general purpose local government, the Municipal Service District.

For a 5-year window, the State will offer municipalities and school districts who voluntarily agree to form a Municipal Service District (MSD) the following financial incentives: Ø The State will assume 50% of the general obligation debt owed (as of June 2003) by each municipality and school that is part of the District, Ø The State will provide a 10% bonus in GPA over the 5 year period following MSD formation, Ø The State will pay certain county costs (jails, district attorney, courts, registries) of participating municipalities Ø The State will provide technical assistance grants to groups of municipalities to prepare for Municipal Service Districts

Eliminate, prospectively, the Personal Property Tax on Machinery and Equipment and phase out the BETR program - For years, Maine has been at a major competitive disadvantage by assessing a personal property tax on new investment in machinery and equipment. While the BETR program developed in the mid-90s was successful in spurring a good deal of investment, the program is a bit cumbersome and becomes the center of heated political debate annually, adding risk to the investment and undermining the program's effectiveness. I have concluded that if we truly want to spur new investment in Maine, we need to get rid of the tax - period. This will eliminate a major barrier to capital investment, placing Maine squarely in a better competitive position for attracting investment essential to our long term growth and viability. State savings in BETR reimbursements will be used to fund the formation of Municipal Service Districts.

Provide Targeted Tax Relief through a greatly strengthened Maine Residents Property Tax Program (a.k.a. Circuit Breaker) - Circuit Breaker is a highly efficient and effective tax relief program which has been weakened through the years by changes in the program's parameters. Through the 3 citizens' initiatives that you were asked to sign last November and the explosion in tax reform bills currently before the Legislature, it is clear that property taxes have reached a breaking point for many Maine residents. This proposal that I put before you today seeks to provide essential relief to those who most need it through a targeted, means-tested program where the parameters are greatly strengthened.

I am proposing that the current Circuit Breaker program be changed in the following significant ways: 1) the income eligibility will be moved from the current levels of $30,300 for single and $46,900 for a joint return to $39,000 and $51,200, respectively, 2) the tax to income ratio will be reduced from 4% to 3%, and 3) the maximum refund will be doubled from $1,000 to $2,000. Ultimately, my goal is to further strengthen this program, but, frankly, this is what we can afford at this time.

Re-direct the general Homestead Exemption to fund the targeted Circuit Breaker The cost of greatly strengthening the Circuit Breaker program is $34 million. The Homestead Exemption is a very broad property tax relief program that, ultimately, provides little relief to the people who need it the most, paying an average benefit in the vicinity of $110. The Homestead Exemption currently costs the State $35 million annually.

Provide Communities that have demonstrated efficiencies with a mechanism to fund investments in regional infrastructure - There are many communities in Maine that are absolutely dying under the weight of providing regional services, the cost of which is being borne on the backs of local taxpayers. Maine's service center communities and those municipalities that choose to form a Municipal Service District will be given the ability to strengthen regional infrastructure critical to the region's vibrancy by providing a new tool, a limited-purpose local option sales tax. The Local Option Sales Tax will only be offered to qualifying Service Centers and MSDs, can only be used for funding certain types of investment, can only be collected for a maximum of 5 years, and requires local voters' approval.

Lower the Top Marginal Income Tax Rate - Maine currently ranks 7th in the nation in terms of highest marginal income tax rates. Two-thirds of Maine's businesses are taxed under this tax line, placing them squarely at a competitive disadvantage. Throughout my campaign I heard that this is a major disincentive to investing in new businesses and growing existing businesses in our state. Significant lowering of this top rate is the ultimate goal, but I must tell you that this is no simple feat. The current structure is so progressive that lowering the top rate by even one-half of one percent is a $40 million dollar venture - a costly move at a time when there are no excess revenues to pay for this change. This proposal takes small, but important steps towards bringing that rate down and paying for it by reducing the indexing that was put in place last session. We will continue to index the brackets, but at a slower pace.

Phase II of Fiscal Reform

Phase II builds on the efforts of Phase I to reduce tax burden and increase competitiveness by attacking the issue of sprawl which is driving costs across all levels of government, by assembling a comprehensive relief package to strengthen Maine's service center communities, by actively seeking energy efficiencies and by implementing key recommendations from the Blaine House Conferences on Natural Resource-Based Industries (including working waterfront proposals) and the Creative Economy.

Phase III of Fiscal Reform

Once efficiencies are well in place, Phase III will consider further re-balancing of the system to achieve the other principles of reform such as stability, fairness, tax mix, and exportability.

Conclusion

Is this fiscal reform package simple? NO · Is the fiscal reform package a quick-fix to Maine's economic woes? NO · Is this fiscal reform package pain free? NO

This proposal is honest, in that it does not try to fool you into thinking we can easily correct a flawed system by just shifting the burden from localities to the State. We are all the same! It is one system!

This proposal is responsible, in that it sets a course that takes measured steps towards fundamentally changing the way we deliver public goods and services. It does not recklessly abandon the old structure, wreaking havoc on our institutions and causing unknown and unanticipated economic dislocation.

This proposal is sustainable, in that we are re-engineering our systems to serve a new, dynamic economy going forward rather than adopting gimmicks that merely gloss over the underlying challenges.

The time for action is now! I urge you to help me make fiscal reform meaningful and a reality for Maine.

MUNICIPAL SERVICE DISTRICTS: A SINCLAIR ACT FOR THE 21ST CENTURY

A Bottom-Up Strategy to Dramatically Reduce the Cost of Local Government in Maine

Goal: Ultimately reduce the cost of local government in Maine, including K-12 education, by a minimum of $125 to $150 million annually, or about 10%.

Is it realistic? Yes, based on the performance of several rural, northern peer states. For example, if Maine delivered municipal services with a number of full-time equivalent employees per 10,000 population similar to these peer states, we would reach this goal.

How do the peer states do it? Fewer general purpose units of governments deliver local services. They tend to rely on "small counties" and regional service districts (such as fire districts). Maine has 492 municipalities. Idaho, with the same population, has just 200. But it also has 44 counties that serve as general purpose units of government and a number of regional service districts. The counties average 29,000 people each. In addition, Idaho, with more K-12 students, has 115 school districts compared with 283 in Maine.

A blueprint for Maine

We propose a far-reaching "Sinclair Act II" - a voluntary, incentive-based system for municipalities (and the school districts coterminous with them) to form a new level of general purpose local government, the municipal service district, which would:

Consist of 5 or more contiguous municipalities, including at least 2 coterminous school administrative units, containing at least 20,000 people and 3,000 students, or in rural parts of the state, containing at least 250 square miles and 1,000 students; · Have a charter adopted at referendum by voters within the proposed union; and · Have a popularly elected council, and a single popularly elected school board.

The municipal service district would have final authority to set budgets for municipal and school services, would set a single district-wide property tax rate, and have exclusive authority for planning and development. Member municipalities would continue as legal and political entities and, within the approved budget, continue to deliver key services, such as police and fire. The municipalities, based on budgetary and other considerations, would choose which of these should be consolidated at the district level. This aspect of "self-organization" - allowing participating towns to decide when and how to consolidate specific services - is an integral part of this "bottom-up" approach to regionalization.

What are the incentives?

For municipalities that help create and join a municipal service district within 5 years, the State will:

Assume 50% of the general obligation debt (incurred as of June 2003) of participating towns and school districts payable by property taxes; · Provide a 10% bonus in General Purpose Aid to Education over the subsequent 5 years; · Pay certain net county costs (jails, district attorney, courts, registries) of participating municipalities. · Provide technical assistance grants to groups of municipalities to prepare for municipal service districts. How will it be paid for? A Municipal Service District Fund will be created and funded with a portion of the dollars available as the result of repeal of the homestead exemption and with dollars formerly available under the BETR program.

The expected outcome: Over time, an estimated 60-80 municipal service districts in Maine, each with an elected council and a single school board, would be created. Most would be town or small city-sized in terms of population, but with much more clout. They would control larger tax bases and larger land areas, with many more options for local economic development, while maintaining local identities. For example, a mid-sized municipal service district might have a population of 25,000, a tax base of $1 to $2 billion, and a jurisdiction of 300-500 square miles. It would have much greater opportunities for economies of scale, efficient growth, and reduced costs.