Republican radio address: The Next Budget

For the weekend of July 17-18, 2010

Greetings, this is Rich Cebra, state representative from Naples.

One of the great challenges facing the next governor and the next Legislature will be writing a state budget during this time of severe economic stress. Let’s look at a few numbers to set the stage. The last two-year budget came in at $6.3 billion. The current budget, which ends next June, totaled about $5.4 billion. That means we reduced General Fund spending by approximately $900 million. Besides cutting programs to save money, we also used $800 million in federal stimulus cash to basically maintain level spending. But the stimulus program ends in December and there is no more money where that came from. The federal government itself is running on empty. The stimulus provided a sugar high for the state, but that high is fading fast as legislators contemplate the next budget that may require cuts of well over $1 billion.

In percentage terms, a billion-dollar cut is nearly 20 percent of all General Fund spending, which would have major implications for those sectors that receive the vast majority of state money – specifically, Maine schools and MaineCare, which now provides free medical and dental care for 290,000 people. The stimulus program and the new ObamaCare health law block changes in MaineCare. That means the state’s public school system will be squarely in the crosshairs once the budget writers begin work this winter.

You will hear much more about that issue in the future, because Maine is not alone. Many states are on the edge of bankruptcy, and ObamaCare demands that they add 16 million more people to their Medicaid rolls. The cost of insuring this new population will be staggering. States can’t afford that massive increase without huge cuts to schools, road maintenance and other important programs. Their only other option would be financial default. But no one expects the states to sit back quietly and become insolvent just because the Democrats passed this thing called ObamaCare, and signs of a revolt are already spreading across the country.

Against this grim backdrop, the news this month from Maine’s pension fund came as an especially bad jolt. On July 8th, the executive director of the Public Employees Retirement System announced that the state will have to contribute more money in the next budget to cover investment losses – a lot more. In the current budget, the state is spending $629 million to cover normal pension contributions and the unfunded liability payment. In the next budget, the state will have to pump in $916 million. This huge increase -- $287 million – combined with the end of the stimulus cash, means that balancing the next budget without a major tax increase will require a Houdini act.

What we’re looking at is a perfect storm of economic trouble, with bad news converging from several directions and no way out. When the next governor takes office, this mess will be sitting on the desk like a steaming pile of toxic waste. You can’t ignore it and you can’t easily dispose of it. But this crisis presents an opportunity to make some changes that would set the state on stronger financial footing in the future.

A good place to start would be the Public Employees Retirement System, which pays out pensions to retired teachers and state employees. We have what’s called a defined benefit program; pensions are guaranteed based on length of service and the three highest salary years. All the risk is on the shoulders of the people who pay the pensions – that is you, the taxpayer.

The problem with the system is that when state coffers are full, legislators hand out benefit sweeteners. It’s a great way to buy votes with other people’s money. Indeed, Maine’s system got into serious trouble after the post-Watergate election of 1974, when Democrats took control of the Legislature for the first time. But when state coffers are empty, the politicians short-change the system. That’s how we ended up with an unfunded liability that now stands at $4.43 billion. By the time it’s paid off in 2028, it will cost taxpayers about $8 billion.

Current retirees and people already in the state workforce have to remain covered by the current system. But we need to end the unaffordable cost of a defined-benefit plan and transition to a new system for new hires, one based perhaps on Social Security and a 401(k). That would provide portability for people who alternate between government service and the private sector, and it would shift some of the risk from the taxpayer to the employee. This is not an instant solution to Maine’s problems, but it would be a good step towards long-lasting fiscal health.

This is Rich Cebra. Thank you for listening.