Commentary – Vermont’s Shaky State Government (December, 2015)

by John McClaughryJohn McClaughry

In two short weeks the Vermont legislature will be back in Montpelier. The central issue will be contriving some way to produce a balanced General Fund budget for 2017 – without any visible increases in taxes.

Every year for the past five the legislature has faced nagging deficits. For the current fiscal year (FY16) the legislature will have to find at least $28 million to fill the gap, plus withdrawing at least $10 million from the Human Resources Reserve Fund.

But solving the FY16 budget problem will be a minor chore compared with the FY17 problem, especially since Gov. Shumlin has (so far) ruled out new taxes for that purpose.

The Joint Fiscal Committee, the legislature’s budget monitor, projects what’s called “the hungry alligator”: a FY17 deficit of $58.5 million. For FY18: $80 million. For FY19: $75 million. For FY 20: $95 million.

Former finance and tax commissioner Tom Pelham has pointed out that the “2011 to 2016 spending increase of 22.1 % compares to a state population growth of three tenths of a percent, inflation growth of 7.7%, and an estimated Gross State Product growth of 15.4%… State spending has grown by a staggering and unsustainable amount over the past five years.”

The Vermont State Employees Retirement System is only 74% funded, and the retirement fund for teachers is only 58% funded. For the first time the state is borrowing $30 million from its own cash flow to cover unfunded retired teacher health benefits. This gives the state a slightly higher interest rate return than does the credit market, but also opens a tempting opportunity for fiscal mismanagement.

Looking beyond the General Fund, the Transportation Fund spends about $250 million a year. JFO observes that of four thousand bridges in the state, 569 are obsolete and 279 are structurally deficient. Gov. Shumlin wants more incentives for (affluent) people to buy electric vehicles which, whatever their merits, do not pay the motor fuel tax that is the main revenue source of the T-Fund.

Each year for the past six years the legislature has increased one or both of the two school property tax rates that feed the Education Fund. In the coming election year, legislators are likely to be asked to explain why public education spending has increased 42% over the past 10 years, while the number of pupils has decreased by 21.5% over the same period.

Many voters who pleaded for homestead property tax relief last election day are disappointed – if not angry – to learn that the legislature’s “solution” is not property tax relief, but consolidation into mega-districts. Last spring the legislature and governor offered homestead property tax rate reductions to prod school district voters to rapidly consolidate (Act 46). The reductions for districts that accept the offer will have to be made up by taxpayers in the districts that do not.

These new unified districts may (conceivably) be more efficient, when they shut down smaller high-cost schools. Whether those savings will survive the inevitable growth of educational bureaucracies remains an open question. Many people believe that the combination of tax incentives and pressure from Montpelier to consolidate will have the practical effect of shrinking parental choice in education.

As a backdrop to the budget struggle, consider that Vermont now exhibits the second lowest fertility rate in the country (the lowest six states are all in New England). And despite a reported unemployment rate of less than four percent, the trend of Vermont’s age 25-64 labor force population has been negative since 2010.

This is a picture of a high-tax fiscally stressed state, fewer babies being born, its working population shrinking, and the over-65 share of the population growing, with their increased medical costs.

Vermont does offer some economic advantages – a clean environment, good schools, low crime rate, reliable labor force. Whether those advantages can overcome cold weather, high taxation, regulatory excess, artificially high electricity costs (to combat “climate change”), deferred infrastructure maintenance, unfunded pension obligations, and a regrettable reputation for being the incubator for advanced governmental experiments remains to be seen. One has a right to be skeptical.

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

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