Maine’s new biennial budget underserves its cities and towns because it fails to provide adequate state funding for local K-12 education, according to a report from a major credit-rating agency.

In a public finance report released Thursday, Moody’s Investors Service called out Maine for failing to meet its statutory obligation, in place since 2004, to fund 55 percent of the cost of providing local K-12 education. The Maine Legislature on June 30 overrode Gov. Paul LePage’s veto and approved a two-year $6.7 billion budget that provides municipalities with roughly $1.13 billion to help cover the cost of local K-12 education, which is only 50.1 percent of total cost.

Moody’s claims the state budget is a “credit negative” for the municipalities because it increases the burden on local property taxes and leaves cities and towns with tough decisions about how to make up the difference.

“The budget is credit negative for cities, towns and school districts, all of which bear financial responsibility for K-12 education, because they will continue to face a choice between cutting services or increasing local property taxes,” the Moody’s report says. “These local units are especially constrained because property taxes are already subject to a statewide limit.”

Christopher Lockwood, executive director of the Maine Municipal Association, confirmed the state’s new budget doesn’t meet the 55 percent threshold, but made clear the state has never met that obligation.

“I’m not sure this is any startling news, but it certainly confirms concerns we’ve had for many years regarding the financing for local governments and the real heavy reliance on local property taxes,” Lockwood said. “Maybe this will help draw a little bit more attention to the importance of looking holistically at how we finance not only state government, but local governments as well.”

Lockwood said he wasn’t sure of how this “credit negative” label could affect Maine’s municipalities or their bonding ability. The rating agency said the “credit negative” label “does not connote a rating or outlook change,” according to David Jacobson, a Moody’s spokesman. “It is indicative of the impact of a distinct event or development as one of many credit factors affecting the issuer.”

In its report, Moody’s also addressed the fact that Maine’s new budget fails to adequately share 5 percent of state sales and income tax revenue with local municipalities in accordance with a statutory formula. The state has been obligated to share revenue from these broad-based taxes with municipalities since the early 1970s as a way to reduce municipalities’ reliance on property taxes, but it has failed to do so since 2009 when the state held back millions of dollars to balance its own budget, according to Lockwood.

Lawmakers in the new budget held municipal revenue sharing at roughly $60 million for the next two fiscal years, which is less than half the amount municipalities should be receiving based on the 5 percent formula. Moody’s estimates that if lawmakers didn’t waive their statutory obligation, the state would be liable to provide municipalities with roughly $160 million in fiscal year 2016. This, coupled with the lack of education funding, requires municipalities to rely more heavily on property taxes or cut services and expenses.

“Property taxpayers continue to shoulder the burden at a time when, statewide, Maine’s economy remains weak years into its recovery,” the report says, citing its own study that predicts Maine’s economy is expected to grow at a slower pace than the rest of New England and the country.

It uses Bangor’s experience as an example of how the state’s failure to meet its obligation affects municipal government. Bangor has increased property taxes and eliminated 55 positions to offset a $10.8 million cut in state revenue sharing since 2009, according to Moody’s.

 

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