January revenues lower than projection, Stress Test shows at least 10 percent of prior year’s revenue needed in rainy day fund
FOR IMMEDIATE RELEASE: Monday, March 4, 2019
MEDIA CONTACT: Julie Rabinowitz, Director of Policy and Communication, 207-292-2722 ext. 102, Julie@mainepbp.com
AUGUSTA—In light of the recently released Mills Administration biennial budget, Maine People Before Politics has reviewed the 2018 budget stress test conducted jointly by the Consensus Economic Forecasting Commission and the Revenue Forecasting Committee and available on the website of the Office of the State Economist.
The stress test report includes analyses and findings on the effect of two potential economic recession scenarios—moderate and prolonged—on the mid-2018 General Fund revenue projections of sales and income tax revenues. It also analyzes whether the current level of the Budget Stabilization Fund (BSF), also known as the rainy day fund, will be sufficient to offset recessionary declines in revenue.
The most recent post on the Maine Budget Blog, which chronicles the day-by-day deliberations of the Legislature’s Appropriations and Financial Affairs Committee relating to the biennial budget, noted that January revenues are lower than expected in relation to the revised upward revenue forecast issued last fall. That forecast was issued prior to the December stock market slump, and capital gains revenue does have an effect on state revenue, as noted in the stress test report.
“Governor Janet Mills in her inaugural address warned that, ‘We know that a recession is possible in the next few years,’” stated Julie Rabinowitz, director of policy and communication for Maine People Before Politics. “It appears that the stress test results, although available, were not taken into consideration in drafting the Administration’s budget. The stress test tells us it is imperative that Maine continues to grow our BSF—and not spend virtually every penny of projected revenue—in order to protect the integrity of state programs during an economic downturn.”
She continued, “Spending all but $400,000 of the projected revenue coupled with increasing spending by double digits, as the Mills Administration’s proposed budget does, means that Maine’s BSF is insufficient to sustain state spending levels during a recession. Maine People Before Politics raised concerns about the revenue projection in our analysis on the proposed budget last month. We look forward to the release of the next Consensus Economic Forecasting Commission report, due out last month, to get a clearer picture of the state’s finances. Taxpayers should be concerned that in a recession, they could be on the hook for hundreds of millions of dollars in increased taxes just when they need those dollars the most to support their families.”
In the report on the stress test, the two forecasting committees estimated that a moderate recession beginning in early 2019, “would reduce sales and individual income taxes relative to the current baseline revenue forecast such that General Fund revenue would decline by 2.2 percent in FY2019 and approximately 6.0 percent in each year of the FY2020–21 biennium.”
In that scenario, the current BSF level could cover the balance of FY2019 and “all but $17 million of the base spending limitation level of appropriations for FY2020” at the time of the test and a smaller budget, but would be depleted by the start of FY2021.
For a severe recession beginning in early 2019, the two forecasting committees estimated that, “General Fund revenue would decline by 4.0 percent in FY2019, 11.0 percent in FY2020, and 13 percent in FY2021 and FY2022.” The current BSF level of $272.9 million would be sufficient to maintain current FY2019 appropriations, but revenue shortfalls relative to the current baseline forecast would range between $400 and $525 million over the FY2020–2023 period.
Economists cited in the report and Moody’s Analytics recommends Maine have a BSF of 10 percent of prior year’s revenue to offset a moderate recession and a BSF of 15 percent of prior year’s revenue to offset a severe recession to provide the governor and Legislature 18 months to institute budget savings to bring the budget back into balance. Maine’s FY2019 began with a BSF balance equal to 7.6 percent of the 2018 General Fund revenue according to the stress test report.
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