AUGUSTA – After a difficult recession, the state is expecting to end the current fiscal year Wednesday with a $50 million surplus, but much of that will not be applied to state programs.

State law requires that much of the money be set aside in the state’s rainy day fund, a working capital account, or to pay for retiree health insurance liabilities, Finance Commissioner Ryan Low said.

“We don’t start off the year with $50 million in a bank account,” he said.

Looking ahead into the second year of the two-year budget cycle, the state faces a number of budget challenges.

Maine officials will continue to work with Congress to try to secure $85 million in Medicaid money already counted as revenue on the books. Some federal lawmakers are trying to change the formula for distributing the funds, which would mean a reduction in the amount coming to Maine, Low said.

“It seems like, if this is going to move forward, it will be some amount less than $85 million,” he said. “We’d be happy with $80 million over zero.”

When the new governor takes over in January, he or she will have less than two months to prepare the next budget. And though initial estimates peg the possible state budget shortfall at $1.1 billion, Low said this is based on an artificially high estimate for state aid to education. It could be reduced by $450 million if K-12 education is flat-funded.

He and others who prepare estimates are required to assume that the state will contribute 55 percent to the cost of running public schools, something that isn’t likely to happen, he said.

“I don’t know anyone who thinks the state is going to be at 55 percent in 2012,” he said.

Another factor to consider is that the state will not get the kind of federal support it received through stimulus funds designed to help states weather the recession.

Low said the state got $400 million in Medicaid funds alone and “several hundred million more” for K-12 and higher education. But most of that money was spent on one-time rather than annual costs so it won’t create a deficit moving forward, he said.

“I think we’ve set it up in a way to wean ourselves off the funds,” he said.

Before it adjourned for the year in April, the Legislature decided how to spend the $2.7 billion that will carry the state through the next 12 months.

Nearly all the revenue that supports general fund spending comes from the individual income tax, sales and use taxes, cigarette tax, and corporate income tax, according to the Legislature’s Office of Fiscal and Program Review. This does not include the highway budget — a separate document that’s supported by the state’s gas tax, license and other fees, and federal funds.

MaineToday Media State House Reporter Susan Cover can be contacted at 620-7015 or at:

[email protected]