June 30 marks the end of the state’s fiscal year, meaning the state’s books for revenue and appropriations are settled and we know how well the state was able to balance the two sides of the ledger.
In the recently ended fiscal year, revenues exceed expenses, leaving Maine with a year-end positive balance of $167.8 million. Of that total, legislators had anticipated $139.2 million of these revenues and transferred it into the budget for the current fiscal year. The remaining $28.6 million represents a budget surplus — a variance of less than 1 percent of all revenues this year.
Why is there a surplus?
The year-end surplus is a function of two things. Revenues coming in higher than expected and/or spending being less than expected. Maine’s Constitution requires a balanced budget, so a modest surplus is a signal that the state’s finances are healthy.
State budgets are built based on a revenue forecast compiled by the state’s Revenue Forecasting Committee. The state revenue forecast tries to predict how economic fluctuations in wages, income and employment will affect the amount of money the state raises through taxes and fees. Surpluses are common because the Committee generally errs on the side of reasonable caution when it releases its predictions twice a year. Only twice in the last 20 years has the state closed a fiscal year with revenues below projections and both times were following a recession.
Approximately half of this year’s surplus is a result of the state taking in more revenue through taxes and fees than predicted in the Committee’s forecast. In this way, the process is like planning a family budget; It’s better to build a budget around a conservative estimate of income and be pleasantly surprised with a surplus than it is to presume more income than might be realistic and end up with a shortfall.
On the spending side, unappropriated revenues in the budget and line items coming in under the anticipated cost contributed to the surplus. The latter happens for any number of reasons: staff attrition, lower than anticipated fuel prices, lower than anticipated bids on state contracts, etc. The other half of this year’s surplus comes from these factors.
What happens to the surplus?
Each year any surplus revenues are distributed to several accounts. A small portion is allocated for things such as operating capital, health insurance for retired state workers, and the governor’s contingency account. The bulk of the surplus, though, is split into two funds:
The Budget Stabilization Fund, also known as the “Rainy Day Fund,” receives 80 percent of the remaining surplus. This fund prepares the state to weather a recession while maintaining essential programs and services. This year, $18.1 million was deposited in the Fund, bringing the balance to $236.9 million.
The other 20 percent is placed into a fund designed to drive down Mainers’ taxes. Earlier this year, the Legislature passed a law allocating these funds to property tax relief. The $4.5 million in surplus funds added to the account this year will trigger a $100 property tax rebate to Maine homeowners who received the Homestead Exemption this year.
A small budget surplus is a sign that our budgeting process is working. This year’s surplus is routine and shows forecasters are effectively anticipating the many variables at play in our economy and lawmakers are delivering budget plans that balance revenues and expenditures.
However, it’s important to note that while the state ended the year with surplus revenue, there are still unmet needs.
While the state’s new budget increased funding for schools and communities, it still falls short of meeting the state’s commitments for education and local services. The surplus means taxes and fees came in slightly higher than projected, but observers should not infer from the surplus that additional revenue is unnecessary for Maine to make good on the core investments that put Mainers on a path toward prosperity.