Commentary: Hard Spending Choices for FY 2018 (Jan, 2017)

By John McClaughryJohn McClaughry

Two weeks from now new Governor Phil Scott will give his inaugural address to the legislature, and a week or so later they’ll receive his budget proposal for FY2018, which begins in July.

Gov. Scott campaigned on the attractive idea that “state budget spending will not grow faster than the economy or your wages.” Exactly what that means remains unclear. Is it General Fund spending, or that plus Transportation and Education Fund spending? Does it also include Federal funds? And whose wages?

Keeping that promise requires overcoming the “Hungry Alligator”. This is the open-jawed gap between expected revenues and promised spending, as viewed on a multiyear graph. The Joint Fiscal Committee estimates that gap to be $55-$75 million for the General Fund. But as former Finance and Management Commissioner Tom Pelham has repeatedly pointed out, much, though not all, of that shortfall is based on requested increases from the previous year’s spending levels, that can be modified or rejected.

Some budget categories simply can’t be cut: interest on the state debt ($71 million); the ironclad transfer of $303 million to the Education Fund to hold down property taxes; and the annual required contributions to keep the liabilities of the state employees and teachers retirement plans from falling even further behind. The former is 70.9% funded; the latter 55.3%; the two plans’ total unfunded liability is now $4.6 billion.

Another imperative is new money to combat the runoff pollution that afflicts the north end of Lake Champlain. Vermont is under an agreement with the EPA to come through with $67 million from somewhere.

The tendency of the legislature’s liberal majority, of course, is to raise more revenue to meet the inexhaustible supply of desirable things to do with taxpayer dollars. Raising income tax rates or the sales tax rate won’t fit with the Governor’s idea of “affordability”. He was boosted into office largely because of his firm promise to veto a carbon tax and any extension of the sales tax to services. No new revenues there.

The past three legislatures have raised taxes on a wide range of things, from soda to health insurance claims to home heating oil, but finally balked on Gov. Shumlin’s proposed payroll tax increases to fund more health care experiments. They’ve pretty much squeezed out all that can be had from new revenue sources or higher tax rates.

Gov. Scott has promised a “pro growth pro jobs” economic policy that would increase revenues, plus serious efforts to “make government work better.” Both are difficult, and both will take more time than the 2018 budget process can wait for. About the only immediate choice is to find ways to reduce or postpone spending.

A number of states – Texas, Michigan, Arkansas, Washington – have improved state finances and economies by a thoroughgoing performance review, managed by a dedicated and fearless commission not under the thumb of politicians. In fact, Vermont Democrats proposed just such an effort in 2004, but their candidate didn’t win the governor’s race, and the liberal Democratic majorities in House and Senate had little interest in any such confining process.  They would do well to put their proposal back on the agenda.

But even if everyone gets on board with that idea – far from likely – that can’t happen between now and June.  That will leave the budget writers with the painful task of shaving here, stretching out there, providing less, and trying to kick the fiscal can down the road. The trouble is, that after six years of galloping government, that can is now a lot bigger than the feet hoping to kick it.

In March 2015 the House Appropriations chair Mitzi Johnson put some sensible language into the 2016 bill. It called for

  • bending the rate of spending growth to bring the expenditure pressures in line with revenue growth to end the cycle of annual budget gaps;
  • moving toward budgeting based on using less than 100 percent of forecasted revenue to build a reserve which can help offset the variability of revenues that comes with a progressive tax system and the risk of reliance on federal funds; and
  • exploring a two-year budgeting cycle where the interim year will be such as to allow time to be spent focusing on program performance, results-based analysis, and evidenced-based program evaluation.

This is sound thinking. As the next Speaker, Johnson will have a great opportunity to take the lead in making this happen, although it will not come without pain.

Phil Scott has shown over the years that he can work with Democrats. This is one area in which they all really need to cooperate, beginning on Day One.

John McClaughry is vice president of the Ethan Allen Institute (ethanallen.org).    

{ 2 comments… read them below or add one }

Jim Bulmer January 3, 2017 at 1:14 am

Bottm line – welcome Phil Scott. Enough of Shulmin’s incompetence!!!!

Reply

Willem Post February 10, 2017 at 3:31 pm

EXCESSIVE STATE GOVERNMENT GROWTH DAMAGES PRIVATE SECTOR GROWTH

This article shows the following:

– Gross state product growth was 13.08% faster than state budget growth, a desirable condition, during the Douglas years,
– GSP growth was 45.5% slower than state budget growth, an undesirable condition, during the Shumlin years.
– The state government needs to decrease the burden of taxes, fees and surcharges on the anemic private sector.

See attached spreadsheet with sources of information.

The Douglas Years

Douglas increased Dean’s fiscal 2003 budget during 2003 to become $1.45 billion for fiscal 2003.

Douglas’s adjusted budget was $1.76 billion for fiscal 2010; for a compounded growth of 2.80%/y.

Gross State Product growth was a compounded 3.16%/y for the 2003 – 2010 period.

GSP growth was 3.16/2.80 = 13.08% faster than budget growth, i.e., the government was LESS of a burden on the private sector.

The Shumlin Years

Shumlin increased Douglas’ fiscal 2011 budget during 2011 to become $1.87 billion for fiscal 2011.

Shumlin’s adjusted budget was $2.44 billion for fiscal 2015; for a compounded growth of 5.25%/y.

GSP growth was a compounded 2.86%/y for the 2010 – 2015 period (latest available GSP data).

GSP growth was (1 – 2.86/5.25) = 45.6% slower than budget growth, i.e., the government was MORE of a burden on the private sector.

NOTES:
– Scott will adjust (increase or decrease) Shumlin’s fiscal 2017 budget during 2017.
– Nominal GSP data are available for the 2010 – 2015 period.
– Shumlin budgets for the 2010 – 2015 period were used for growth comparisons.
– The year 2016 will be added to the Shumlin section after nominal 2016 GSP data becomes available.

Government Actions: It is no wonder there were revenue shortfalls, year after year, during the Shumlin years, because the state government was growing and the private sector was shrinking, as percentages of the total economy, an untenable situation. It is much better to have GSP grow faster than the state budget, as during the Douglas years, than to have GSP grow slower than the state budget, as during the Shumlin years.

The House Ways and Means and Senate Finance Committees, controlled by left-leaning Democrat politicians, already had prepared “tax increase ideas for 2017”, based on advice of outside tax consultants. Ideas included increasing various fees and surcharges and limiting/eliminating various deductions to “enhance” revenues from higher-income households to pay for various programs and “government initiatives”. That standard procedure of the past six years has finally come to a grinding halt, due to Scott’s election victory.

Scott in Campaign Mode: Scott stated a goal to have state budget growth no faster than wage growth or GSP growth of the prior year. However, that goal was inadequate, because it merely preserved the status quo. As a minimum, the excessive government spending of the Shumlin years needed to be rolled back, because it had adversely affected the already-weak private sector.

Scott in Governor Mode: Scott, to his credit, proposed to level fund the 2018 state budget, and to level fund education spending, to stabilize state property taxes*. Thus, if the GSP, or household income, or wages, grew at 1%, then state government spending would become a smaller slice of the Vermont economy, instead of a bigger slice, as during the Shumlin years. After some years in this mode, there finally would be more breathing room for the anemic private sector. Scott’s proposal caused great consternation among legislators, because it meant the usual state budget increases of the past 6 years would not take place. It meant state operations would need to become more efficient!

*The claims by legislators, et al., were Scott is too late, because the education budgets already are at the printers, or local education budgets, likely up about 2%, would be impossible to cut by 2% on such short notice, and other such lame excuses; anything to obstruct Scott’s reasonable approach.

However, if Vermont private sector growth remains anemic, Scott’s level funding may not enough to invigorate the private sector. Scott may need to shrink the state budget and education budget by at least 1%/y, to unburden the private sector and finance items, such as:

– The about $50 million projected deficit for this fiscal year (courtesy of the Shumlin), which, in knee-jerk fashion, would have been offset by increasing taxes, fees and surcharges, but, this time, will not be offset in that manner, per Scott’s campaign pledge.

– The about $50 million per year needed for cleaning up Lake Champlain; adding that to the state debt by issuing bonds would be unwise. Vermont is under a court order to clean up the lake and Trump’s EPA likely will not be providing as much of the expected federal funds.

Joint State Efficiency Committee: Leaders of the Legislature and the Governor should set up a Joint State Efficiency Committee that aims to reduce state operations in many areas during the coming years. That implies, the state must be in belt-tightening mode by:

– Cancelling and modifying some programs.
– Operational cost cutting and becoming more efficient.
– Reducing headcounts.
– Lengthening the terms to allow retirement with full benefits.
– Having state workers, teachers, etc., pay a greater percentage of their healthcare premiums.
– Reducing post-retirement benefits.

The state has not practiced such measures during the Shumlin years, as evidenced by above excessive budget growth percentages.

Education: Below are some statistics compiled by the NEA, which show Vermont, a poor state, spending excessively on education. Significant reductions in the order of 10 to 15 percent are long overdue.
http://www.nea.org/home/rankings-and-estimates-2014-2015.html

States with the greatest declines in enrollment in 2013 were:

– Michigan (-3.8%)
– Rhode Island (-2.3%)
– New Hampshire (-1.2%)
– Vermont (-1.0%) (Tables B-2, B-3)

States with the lowest student-teacher ratios were:

– Vermont (10.0)
– New Jersey (11.8)
– New Hampshire (11.9)
– North Dakota (12.1)
– Maine (12.1)

States with the highest per student expenditures were:

– Vermont ($21,263)
– New York ($20,428)
– New Jersey ($20,117)
– Alaska ($19,244)
– Rhode Island ($18,627)

Summary: The lesser budget growth and budget shrinking would begin to roll back the excessive state spending, and roll back the excessive burden of taxes, fees, surcharges and mandates imposed on the private sector during the Shumlin years. The rollback likely would enable the private sector to grow again, i.e., make investments and create steady, full-time jobs, with good pay and good benefits, and likely would attract skilled workers to the state, instead of losing them. That would be a long-overdue change for the near-zero, real-growth Vermont economy and already-struggling Vermont families, which have more than enough temporary, low-pay, part-time jobs, without benefits. The lesser budget growth would create a long-overdue shrinking of the government sector relative to the private sector, with fewer subsidized programs and fewer subsidized government/private partnerships.

Vermont Not a Business-Friendly State: Vermont ranks 43rd out of 50. See URL. That means the political/economic climate has been dampening the entrepreneurial spirit. Instead of increasing its ranking, left-leaning Democrat politicians have adopted an unwritten “economic development policy”: Maximize federal funds into Vermont to start/subsidize government programs, and start/subsidize government/business partnerships, which, as a side benefit, create a spectrum of subsidy-dependent constituencies, that produce reliable votes year after year.

These programs and partnerships usually pay too little in state and local taxes to more than offset their subsidies, i.e., provide a significant net gain. Annual government budget deficits are offset by means of increases of taxes, fees and surcharges exacted from the near-zero, real growth private sector. The “policy” has failed to create a vibrant, growing private sector, with prosperous households and businesses, since 2000. Unless these trends are reversed, Vermont will keep its disgraceful 43rd ranking.
http://www.cnbc.com/2014/06/24/americas-top-states-for-business.html

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