With sales and income tax revenues dropping and the federal government threatening to cut Medicaid reimbursement, the state could be looking at an additional $99 million budget shortage on top of the $95 million one already recognized, prompting the governor to say he will consider tax and fee increases as a last resort.

The gloomy fiscal forecast came out in the form of a letter to legislative committees and agencies asking them to identify the additional cuts.

“We obviously can’t take anything off the table,” said Gov. John Baldacci’s spokesman, David Farmer, in regard to filling a new budget hole, but he stressed expense cuts would be considered first.

“We’ll look at it in the context of cuts first,” Farmer said, adding if the deficit really grows to nearly $200 million, “We will consider all the options.”

Possible cuts include $37 million in promised state education aid, leaving funding for K-12 virtually at the same level it is now. There is also a proposed cut of $34 million in the Health and Human Services Department, which already was asked to cut $65 million to fill the $95 million hole.

Senate President Beth Edmonds has said since January that every option, including taxes, must be considered, and that was before the fiscal news got as bad as it is today.

Farmer said $50 million of the projected $99 million additional shortage is from anticipated lower tax collections, and the rest is attributable to changes in federal Medicaid rules that could cut $45 million directly from state coffers. The federal rule changes could cut another $141 million to community providers, who have contracts with the state.

A bill is being discussed in Congress to delay those rule changes until April 2009, but that would still affect the last several months of the current two-year state budget, which covers operations through June 2009.

The state’s Revenue Forecasting Committee, which is scheduled to meet Feb. 25 to officially determine the size of the new budget shortage, already lowered estimates by $95 million in November, forcing the governor to curtail spending and submit a supplemental budget to fill the hole.

That reforecast, however, didn’t go far enough. Preliminary numbers for January show personal income tax collections are down by $9.5 million for the month; sales taxes are down by $3.5 million; and corporate income taxes are down by $2.5 million. If you add the losses in those three revenue lines to those already chalked up in December, the state is down more than $20 million to budget.

The state also paid out $10 million more than expected in January in Business Equipment Tax Reimbursements or BETR payments – a payout the state hopes is a timing issue that will right itself. If not, the additional BETR payments also would add to the deficit.

News of the worsening fiscal situation spread gloom in the State House last week where the Appropriations Committee was holding hearings along with the Health and Human Services Committee to find some of the $95 million in cuts.

“I heard on the way up this morning, we’re going to have more cuts. These cuts are very large, as large as this supplemental budget,” said Sen. Joe Brannigan, D-Cumberland, the chairman of the human services committee, addressing Health and Human Services Commissioner Brenda Harvey.

“I would like you, commissioner, to come to us with large pieces,” he said, ticking off ideas clearly designed to provoke, like ending payments to hospitals, cutting out health and human services funding to schools and cutting payments to nursing homes.

Advocates for the poor have called on the governor to dip into the state’s reserve funds, now totaling $160 million, but Farmer said it was too early to tap that resource.

With the economy getting worse, Farmer said the reserve funds should not be used until the true depth of the state’s deficit is known.

“It’s too early to go to the rainy-day fund,” Farmer said, adding it is there to use later in the fiscal year, “when it’s too late to do anything else.”

In the short-term, state agency and department heads have been asked by the governor to determine what programs are most central to their missions and how they can help fill the $99 million hole.

Their priority lists and proposed cuts are due back this week, and they will then be considered by the legislative committees that oversee them.

In addition to the cuts, Farmer said the agency heads are allowed to suggest new sources of revenue.

“We have told the departments they can propose fees and fines or other revenue offsets,” Farmer said, but not in lieu of cuts.

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