A recent “stress test” of the state’s finances shows a severe recession would trigger a deep decrease in government revenue that could last years, even as it was spared from the worst short-term economic impacts of the coronavirus pandemic.
The potential for a deep, prolonged recession has sparked more calls from some analysts and Maine’s congressional delegation for federal stimulus that includes local government funding to avoid devastating cuts to public services.
“The latest stress test, which measures the state’s fiscal health against the ongoing pandemic recession, further confirmed what we have known for months: The state is experiencing an economic shock that cannot be resolved without an influx of new revenue or major budget cuts,” said Sarah Austin, a tax and budget analyst at the progressive Maine Center for Economic Policy and a member of the state’s Consensus Economic Forecasting Commission, in a statement.
Under a moderate recession, state revenues would decline by 5 percent or less annually between 2021 and 2023, before rebounding in 2024 to exceed the amount the state earned before the pandemic, according to a recent model by Maine Revenue Services, the state tax agency. Under that scenario, the state’s $258 million budget stabilization fund would be enough to cushion potential shortfalls and cuts to government services.
But in a severe recession, state revenues would fall sharply, contracting 13 percent in 2021 and more than 10 percent a year – between $430 million and $500 million – until 2025, quickly evaporating the stabilization fund. Maine Revenue Services conducted the last stress test on its finances in 2018.
“This isn’t really all that different from two years ago – you can build up a pretty solid budget stabilization fund, but in a serious scenario it gets pretty quickly depleted,” said Michael Allen, the state’s associate commissioner for tax policy, in a joint meeting with Maine’s Consensus Economic Forecasting Commission and Revenue Forecasting Commission on Thursday.
So far, the state’s financial position has not been as severely impacted by the economic contraction as budget analysts expected. The state will end its 2020 fiscal year $80 million to $90 million below budget, less than the $200 million shortfall estimated in March, Allen said. The 2020 fiscal year ended June 30.
State revenues were helped by stronger-than-expected sales and income taxes, even with significant drops in spending on hotels – 40 percent down – and restaurants – 30 percent down – based on July sales. Federal aid, including household stimulus checks this spring and a $600 per week unemployment benefit that expired in July, further bolstered state revenue.
Without additional aid, state budget officials expect a $422 million shortfall in the current fiscal year. Gov. Janet Mills has proposed a spending plan that freezes state hiring and technology upgrades and shifts some money from state liquor revenues to cover the anticipated hole. The state received $1.25 billion from the federal CARES Act, most of which has been spent to refund the unemployment trust fund, help schools prepare for instruction and provide up to $200 million in grants to businesses.
“That means only 3 percent in cost reductions – that is because the governor wanted at this point to avoid any deep programmatic cuts,” said Bureau of the Budget Director Beth Ashcroft. “It preserves infrastructure, critical public health and it preserves education.”
Maine’s economy has recovered significantly from the sharp downturn in March and April, when many businesses were closed and residents stayed home in an effort to blunt the spread of coronavirus infections.
Consumer spending by mid-September was about 4 percent below January levels, according to a real-time economic tracker from Harvard and Brown universities. Vehicle miles traveled in the state rebounded from the spring but were still 10 percent below pre-pandemic levels by mid-August, State Economist Amanda Rector reported to the joint economic commission meeting.
Personal income grew by 41 percent in the second quarter, which ended in June, according to the state. But wages and salaries fell by almost 29 percent, and owner-operated business income fell by 37 percent in that quarter. Overall income growth was driven by the influx of federal aid in the form of stimulus checks and enhanced unemployment benefits.
“Looking at wages and salaries, all of those took major hits in the U.S. and in Maine,” said state economic analyst Angela Hallowell.
As of August, Maine had gained back about half the jobs lost at the beginning of the pandemic but still had 55,000 fewer jobs than at the beginning of the year, and the pace of job creation has slowed, according to the Maine Department of Labor. The official unemployment rate in August was 6.9 percent, but because of inaccurate data collection it is likely closer to 10 percent, state labor economists have said.
Maine is ranked first in the country in a “back-to-normal” index created by Moody’s Analytics and CNN, with its economy operating at 96 percent of the level in early March.
While encouraging, that metric may be misleading, said Rector, the state economist. The index captures real-time spending, employment and housing data. The state’s booming housing market, driven in part by out-of-state buyers, may have an outsize impact, she said, and the index does not take into account seasonal spending variation – spending on restaurants and lodging peaks in the summer months.
“Clearly the economy in Maine in early March is not the same as what it normally is in September – there is some seasonality in our economy,” Rector said. ” Being at March levels in the middle of summer is not really where you want to be.”
Congress and the White House moved swiftly in March to pass significant federal aid but have since been unable to agree on a new stimulus package. Talks on a new package that could include funding for enhanced unemployment benefits and other aid to state and local governments broke down in August.
Members of Maine’s congressional delegation said Friday that they agree a new bill should include government funding to avoid budget shortfalls and service cuts.
Sen. Angus King, an independent, declared that those who oppose support for local governments are hurting local police and fire department budgets.
“I think we need to face the fact that those who are opposing aid to our cities and towns are the people who are defunding the police,” King said, referring to a demand by some racial justice protesters that has been fiercely opposed by conservative politicians.
Since states cannot borrow to pay for operations like the federal government can, they are left with two unattractive options: raise taxes or cut services, he said, “neither of which is an acceptable alternative in the midst of a recession; neither of which makes any sense for the American people.”
Republican Sen. Susan Collins, in the midst of a tough re-election campaign, introduced the SMART Act in May, which would provide state and local governments in Maine $2 billion. Collins wants to include the funding in a new stimulus bill, a spokesman said.
“I have talked to city and town managers all over the state of Maine. They did not receive much from the initial allocation of funding that went to state governments, and they need help now,” Collins said in remarks Thursday on the Senate floor.
Democratic Rep. Chellie Pingree was one of the House members who voted to pass the HEROES Act in May, which included $875 billion for state and local governments, including $5 billion for Maine.
“Maine governments – from the state government to small, rural towns – have stepped up in unprecedented ways to keep their communities safe during this global pandemic while simultaneously facing devastating revenue shortfalls,” Pingree said in a statement. “Without federal assistance they’ll have to make impossible choices to stay solvent.”
Democratic Rep. Jared Golden’s spokesman Nick Zeller said Golden led a bipartisan effort of 34 lawmakers to urge House leadership to pass a compromise COVID-19 relief bill. The proposal he backs, from the Problem Solvers Caucus, provides $500 billion to state and local governments, allows greater flexibility around existing CARES Act funds, and has support from some Democrats and Republicans.
“Congressman Golden believes that proposal represents the best path forward to quickly provide relief to struggling state and local governments, averting property tax hikes and cuts to local services across Maine,” Zeller said.
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