What’s behind Maine’s new budget gap and how to address it

At a glance:

• The recent four-year forecast of state revenues and expenditures predicts a $1.3 billion shortfall in 2028-2029
• This forecast is based on incomplete information — the fiscal picture may change before lawmakers begin writing the next budget, which will have to be balanced
• Rising health care and education costs are the biggest contributors to the budget gap

The Department of Administrative and Financial Services recently released its regular four-year forecast of the state’s expenditures and revenues, projecting deficits of $1.1 billion in the general fund and $260 million in the highway fund over the next biennium (2028-2029). While this is a sizable shortfall, it is not unprecedented, and lawmakers have several tools to address it.

What’s driving the budget shortfall?

The areas of state spending with the biggest cost increases are health and human services and education. These are already the biggest pieces of the almost $12 billion state budget, and even modest proportional increases to their costs are large in dollar terms.

Health and human services costs are expected to increase $612 million over the next two fiscal years. Most of that is due to increased reimbursement rates to providers, including pay increases for direct care workers, which are tied to the state’s minimum wage; these changes account for $345 million in new costs. There are also $30 million in new costs for the Medicare Part D program, with the state covering some premiums for older Mainers. There’s also a $21 million cost due to a reduction in the matching rate the federal government pays for Medicaid services.

Education costs are set to rise by $417 million in the next biennium, of which $281 million is needed just to maintain the state’s 55% share of school funding which is set in law. This cost rises alongside the cost of teacher salaries and health insurance and other factors in the funding formula that accounts for schools’ annual costs. The $281 million includes two changes to the funding formula which have increased the cost since the last budget was enacted: increasing funding for low-income school districts, at a cost of around $89 million over the biennium, and increasing the minimum teacher salary in stages to $50,000 a year, which adds $15 million over the biennium.

Another $151 million in new education spending comes from a 2023 law that requires Maine’s public school districts to provide services to preschool-aged children with special education needs. The final phase of that law goes into effect on July 1, 2028. The forecast does include savings of $177 million for fiscal year 2029 as the state finishes paying off pension liabilities under a 1995 constitutional requirement.

Approximately $65 million of additional funding over the biennium goes to the state’s public higher education systems.

Personnel costs across state agencies are increasing by $91.5 million over the biennium, due to increases in wages and health insurance costs. The state is saving $26 million over the biennium from the end of the 1995 obligation to pay down pension liabilities for state workers. There is a separate cost across all departments of approximately $57 million over the biennium because the forecast assumes the attrition rate for state workers will revert to the standard 1.6%, rather than the 6% rate assumed in the most recent state budget. Essentially, this means the forecast assumes a number of currently empty positions across state government will be filled.

Key general fund cost increases

Source: MECEP analysis of four-year forecast

The Highway Fund faces its own $257 million shortfall. This is not a new phenomenon and continues to be driven by increasing costs and flatlining revenue. Maine’s 30 cents per gallon gas tax has remained the same since 2011, even as the cost of materials and labor has since increased greatly. If the gas tax had increased with inflation, highway fund revenues would be $279 million higher over the biennium, closing the budget gap.

What’s not accounted for

The forecast does not include any provision for the state’s new obligation to pay a portion of the cost of benefits in the Supplemental Nutrition Assistance Program (SNAP) included in the so-called “One Big Beautiful Bill.” Beginning October 2027, the state will have to pay up to 15% of the cost of the SNAP benefits. This amount will vary depending on the error rate in the state program but is expected to be around $94 million in additional costs in the upcoming biennium.

The forecast also does not assume any decline in enrollment from new work reporting requirements in the Medicaid program. Maine DHHS has previously said these could result in 31,000 Mainers losing their health care coverage, which would reduce state costs by approximately $76 million over the biennium.

On the revenue side, the four-year forecast relies on projections from Maine’s revenue forecasting committee dating back to March. These numbers are out of date in two respects. First, they don’t account for changes made in this year’s budget which will affect revenues. For example, Maine’s new “millionaire tax” will raise an additional $141 million over the biennium. At the same time, changes to Maine’s tax code to conform with new federal laws will cost the state around $125 million in the upcoming biennium.

Secondly, there are reasons to believe the forecast will be revised upwards due to economic conditions. The state finished fiscal year 2026 in June with $119 million more in revenue than the committee had anticipated. Early tax receipts for this fiscal year are slightly higher than expected. And the state’s consensus economic forecasting committee, which met in August, also pointed to a stronger than expected economy. The forecasting committee has a history of underestimating revenues, especially in recent years.

Key items not included in the forecast

What lawmakers can do

Lawmakers should neither shrug off the budget gap as irrelevant, nor should they assume it is an insurmountable obstacle. The true budget picture will emerge in December with the updated revenue forecast. With that complete picture, the new Governor and legislature can work together on a plan to close any budget gap that remains. To do so, they should look to protect key supports that Mainers rely on and raise revenues from wealthier Mainers to do so.

Additionally, one consistent theme of the budget forecast is the impact of rising health care costs on the state budget. Even outside the programs directly supported by the Department of Health and Human Services, the state is paying more for health insurance benefits for its employees and for school district employees across the state. Reining in runaway prices and keeping down the cost of care needs to be a priority for the next legislature.