The state for the first time in history is proposing to float bonds to pay its day-to-day operating costs.

What makes the move even more unprecedented is it was crafted with the help of a Republican legislator on the Appropriation Committee, who believes it is an imperfect but preferable alternative to Gov. John Baldacci’s original plan to sell future lottery revenue.

The Democratic majority on the Appropriations Committee voted for the plan early Saturday morning as part of its overall approval of the 2006-2007 budget, which now must be approved by the full Legislature.

The budget was introduced to the House on Tuesday and could be voted on by the end of this week or early next. Democrats say they will get a budget passed by April 1, so it can go into effect by the start of the fiscal year on July 1.

Republicans ultimately opposed the plan because it didn’t do all they wanted – namely put cuts in place now that would reduce the projected $650 million deficit in the 2008-2009 budget by one-third.

The proposal calls for floating $447 million in revenue bonds – at a 5 percent interest rate – to fund $250 million more in education aid in Baldacci’s $5.7 billion budget for the upcoming biennium. Another $120 million would be used to make early payments on the almost $3 billion debt the state owes to the retirement system – a move that saves the state millions in interest. The rest is going into the state’s rainy day or budget stabilization fund, and to help pay the first year’s interest and administrative costs on the bond.

“The state is so broke, we’re borrowing money for the application, insurance policy and interest on the bond,” said Rep. Darlene Curley, R-Scarborough, a member of the Appropriations Committee.

The bulk of the bond money will be funneled through the state’s existing account to fund the retirement system, freeing up money in the general fund to pay for education. That’s being done, observers say, because Wall Street frowns on bond revenue being spent directly on operating expenses.

Rep. Sawin Millett, R-Waterford, a member of Appropriations and a former finance commissioner for the state, was one of the key draftsman of the plan. While “disappointed” the Democrats only went for revenue bonds, but rejected the cuts, he said it was better than putting the state further in debt under the governor’s original plan.

“I see this plan as incomplete,” said Millett, who continues to propose the Legislature adopt a temporary “quarter budget” that would keep the doors open, but allow lawmakers more time to work on budget details.

A major concern Millett has is the looming $80 million in Medicaid cuts coming this fall from the federal government that have not been taken into account in this budget. The governor’s own commissioner of health policy, Trish Riley, has admitted the cuts are real – based on Maine’s rising per capita income – but no adjustments have been made to cover them.

Late-night amendments

For their part, Democrats were happy to get a budget out that gives $250 million more to local education and limits cuts in the Department of Health and Human Services to $100 million or less, versus the $140 million originally in Baldacci’s budget.

Democrats also added some late-night amendments to the budget to help assure their own members support the bonding plan on the floor. They include:

• making big-box retailers ineligible for the state’s business equipment tax reimbursement (BETR) program;

• requiring a $10 registration fee for kayaks, canoes and sailboats to help pay for the Inland Fisheries and Wildlife Department. The registration comes for free for those who get a fishing license;

• giving all state employees a 3 percent raise for an estimated $40 million in costs over the next two years;

• increasing the University System’s funding by $6 million;

• conforming with federal tax law when it comes to income tax deductions on student loans and child-care payments. This move was supported by both sides of aisle;

• amending proposed cuts in the DHHS budget to try and save programs for the state’s poor. Even those involved in the process didn’t know what the final cuts added up to on Monday;

• And, putting a 5 percent tax on satellite dish TV service – similar to the tax on cable. This proposal was apparently in budget documents, but never mentioned at public hearings.

Sen. Richard Nass, R-York, who sits on Appropriations, said amendments were coming in fast and without paper backup during the marathon committee session.

“I’m concerned with the process,” he said. “For Democrats and Republicans, none of us has a good idea of what’s in this budget.”

Senate President Beth Edmonds, D-Freeport, said communication “fell through the cracks” on some amendments the committee was being asked to vote on in the all-night session. She also admitted that some amendments were designed to assure Democrats stuck together on the budget, now that the lottery sale was out and the revenue bonds were in.

Sen. Ethan Strimling, D-Cumberland, and Sen. John Nutting, D-Androscoggin, were both opposed to the lottery plan, calling for elimination of the BETR program or broadening of the sales tax to make up shortfalls in the budget. Given the slim Democratic majority in the Senate, their votes could tip the scale on the budget vote.

“There was a lot of rewarding of their constituency,” in the Democrats’ approval of amendments, said Appropriations Committee member, Rep. Stephen Bowen, R-Rockport, who said he objected most “to the way that they did it.”

“There was complete and utter disregard for the public committee process,” Bowen said.

Filling the hole

In his original budget released in January, Baldacci had proposed selling $400 million in lottery revenue for $250 million in upfront cash – essentially paying an 8 percent-plus interest rate to whomever gave the state $250 million in exchange for 10 years of lottery receipts.

Baldacci also was going to spread out the state’s payments on its $2.9 billion debt to the Maine State Retirement System until 2028 – triggering billions more in interest, if future legislators stuck with the payment schedule.

The constitution was amended in 1997 to require the state pay the retirement debt by 2028, but the King administration had accelerated payments to save money similar to the way homeowners make extra payments on their mortgages.

Under the revenue bond plan, the state would make early payments to the retirement system for the next two years, reducing the overall debt and saving about $320 million in interest over the longer payment schedule.

The revenue bond package is unlike the general obligation bonds that voters are asked to consider on the ballot every year or so. General obligation bonds are backed up with the taxing authority of the state, and therefore require a two-thirds vote of the Legislature and majority support of voters statewide. Revenue bonds are sold on good faith. While the state’s credit rating with Wall Street would crumble if it defaulted on such bonds, the state cannot raise taxes to pay them off. Instead, the state will rely on a number of revenue streams, including the lottery money and anticipated revenue from the state’s only racino, being built in Bangor.

The interest rate the state has to pay on the revenue bonds is around 5 percent, compared to 3 percent on the more secure and tax-exempt general obligation bonds.

Revenue bonds have never been used to pay state operating costs before, but have been floated for such things as the renovation of the Statehouse and for capital projects in the University System.

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