Commentary: Vermont’s Fiscal Future – Cloudy at Best (October, 2014)

by John McClaughryJohn McClaughry

The Shumlin administration is touting its “conservative fiscal policies” – but there are at least six unavoidable and daunting fiscal issues for 2015.

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            How fares the State of Vermont from a fiscal standpoint?

According to the Shumlin administration, state finances, though under pressure, are also under responsible control. A year ago the administration rebutted critics by pointing out that Vermont continues to have a Moody’s AAA bond rating, resulting from “conservative fiscal policies and the maintenance of healthy reserve accounts.”

The governor also argues that under his four year tenure there have been no increases in the three major tax rates – income, sales, and rooms and meals.  He reminds us that he stifled a move in the Democratic House last year to raise a number of taxes to produce new revenues to increase state-funded programs. The state’s three stabilization reserve (“rainy day”) funds are filled to the required levels.

That’s all to the good. However here are six unavoidable issues for 2015.

Falling Revenues, Rising Shortfalls:  Last July the state’s revenue estimators revised their FY 2015 revenue projection downward by $31 million. The governor rescinded $16 million in unspent funds, redirected some one-time funds, and said that the gap had been covered.

But on October 5 Vermont Digger reported that chief fiscal officer Steve Klein concluded that the 2015 legislature will face an expected shortfall of from $90-120 million for FY2016. The governor immediately directed all state agencies to find a way to reduce spending by 5%. Shumlin offered this not too reassuring observation: “We may well be coming to the end of tight budgets, but you just never know, anything could happen.”

Making the fiscal situation worse is a reduction in Federal Medicaid cost sharing, higher pay and fringe benefits under the Pay Act signed by Shumlin in May, and the pressing need for increasing contributions to pay for retired teacher health costs (see below). Jim Reardon, commissioner of the Department of Finance and Management, said in August that he’s running out of one-time pots to raid.

A fair conclusion:  Vermont is maintaining a more costly government than the governor and legislature can make the taxpayers pay for.

Obama Bucks: Vermont profited immensely from a flood of funding from Washington. This included four years of  “stimulus” funds, $170 million to create the failed Vermont Health Connect, $45 million to figure out what health care “payment reform” means, and $37 million to subsidize universal pre-kindergarten. That flood of dollars has driven the national debt to a staggering $18 trillion. Now it’s likely slow down significantly.

Pension Liabilities: The state employees and teachers retirement funds are 40% and 23% underfunded. The total unfunded liability for these funds (pensions plus retiree health benefits) is now over $3.2 billion. A total of $118 million will have to be appropriated next year just to meet annual contribution requirements.

Of particular concern is the retired teachers’ health benefit, which is funded simply by sucking money out of the teachers’ pension fund. Treasurer Beth Pearce persuaded the legislature to (grudgingly) make a small dent in this problem last spring. Solving this problem is likely far beyond the capacity of a legislature eager to keep the spending coming for a wide range of popular programs.

School Property Taxes: The governor and legislature increased the homestead and non-residential property tax base rates in 2013 and 2014, and will have to do it again in 2015. If they don’t, the Education Fund will come up $42 million short. The increasingly likely – and long avoided – response may be Agency of Education school district budget caps.

Unaccountable Taxation: The shortage of revenues to pay for an oversupply of programs has led to the practice of the state forcing other parties to pay the bills, thus avoiding visible taxation. Peter Shumlin has long been a master of this practice.

Over the past eight years the state has extorted millions of dollars from Vermont Yankee to pay for renewable subsidies and algae cleanup in Lake Champlain, and has directed the Public Service Board to make ratepayers finance ever-increasing subsidies for renewable electricity. In 2012 Shumlin personally engineered a utility merger that stiffed CVPS ratepayers to shift even more millions into renewable subsidies.  Such unaccountable taxation is arguably unconstitutional, and not a dependable source of revenue.

Green Mountain Care: Looming over the legislature is the grim prospect of voting $2 billion in new taxes – income, sales, payroll, assets, perhaps others – to underwrite Shumlin’s  single payer health care plan for 2017. Whether he can keep his liberal majority from fleeing panic stricken out of the state house before a vote on a $2 billion tax increase may be the key question of 2015.

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

 

 

 

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