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September 23rd, 2019

 

Three Threats to Vermont’s Fiscal Position

By Don Turner

This year, legislators and Governor Scott crafted a budget that is quite reasonable in the aggregate. New taxes and fees are fairly limited; important investments are made in a number of areas (from clean water to broadband deployment); and the budget growth rate is just 2.6%.

Over the past five years, spending increases have been reasonable as well, with just 2.2% annual growth. This stands in contrast to the budgets of the Shumlin administration, where spending was growing faster than the underlying economy and well beyond Vermonters’ ability to pay.

However, despite the good and bipartisan work to produce a genuinely reasonable budget, there still remain three systematic issues in the state budget that threaten the long-term financial stability of Vermont. These three issues are: systemic holes in the Education Fund; growing required payments to address our unfunded liabilities; and a new social services crisis that’s relatively recent. When the next recession hits, our ability to finance these continued trends will be put to the test.

Holes in the Education Fund have become a routine expectation under the Golden Dome. When legislators deal with shortfalls in the General Fund, they have two choices: raise taxes and fees, or cut spending to cover the losses. But in the Education Fund, repeated annual holes are filled by just raising property tax rates to cover the new spending. This happens year, after year, after year–without any examination of what’s causing the structural deficits in the first place. [One exception to this trend was the FY18 budget, when Governor Scott successfully managed to hold statewide property tax rates level.]

Why do we have repeated holes in the Education Fund? The first is our demographic trends: we’re losing students, but spending more on the fewer students we have. In some cases, this is very much needed–especially as those who have been impacted by the opioid crisis enter our preK-12 school system. However, in other cases, it is unsustainable. Act 46 was supposed to “right-size” our education system, but we all know it is far from perfect.

A second cause is a fundamental disconnect between the budgets voters approve and the property tax bills they pay. Seventy percent of Vermonters are desensitized from the full impact of their vote (which explains why only about 18% of voters showed up on Town Meeting Day this year). In other words, a vote for a dollar more of education spending doesn’t equate to a commensurate impact on one’s property tax bill. These sensitivity programs, known as property tax adjustments, cost hundreds of millions of dollars each year. This is further complicated by the fact that, since we have a statewide Education Fund, the spending decisions of one town impact the property taxes of residents in another town. If Town A spends a lot, Town B could face higher property taxes too.

If we enacted simple reforms to adjust the level of these adjustments, we could lower property tax rates significantly, better connect voters with the consequences of their decisions, and reduce the recurrence of these funding gaps. Other solutions to this disconnect include changing the “yield” to reward low-spending districts, or adjusting the local vote threshold to pass unsustainable budget increases to 60 percent instead of just a simple majority.

What about the other two looming threats? Well, our unfunded liabilities continue to take up a greater and greater share of General Fund revenues. Because of poor past fiscal management, and sub-par rates of return today, we have to make greater payments today to catch up. This year, over 40% of General Fund growth went to just paying down our debt. And last month, Fitch downgraded Vermont’s previous AAA bond rating, further adding to debt-related costs. But what happens when we stop having organic General Fund growth–as is the case when a recession hits? The answer is simple: major budget holes will have to be filled by either drastically raising revenues, or dramatically cutting spending. Not an ideal situation, in either case.

The last threat is recent increases in our social services spending. Vermont has very generous social welfare programs, and we should be proud of our work to support the most vulnerable in our communities. But just this year alone, we’ll spend millions and millions more to boost social welfare with additional Reach Up benefits. We can afford this today because the economy is growing, and fewer Vermonters need social services. But when the next recession hits, more and more Vermonters will qualify and need this assistance. These spending increases today will create even greater budget gaps next year, or the year after.

Legislators would be well-advised to look at long-term solutions to address these structural problems, rather than just plugging the holes year after year. Because when the economy takes a turn for the worst, we won’t be able to anymore.

Don Turner is a former State Representative from Milton, former House Minority Leader, current Milton Town Manager and longtime member of the Milton Fire and Rescue Departments. He was a candidate for Lieutenant Governor in 2018

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