Why is this a big deal? Because inevitably the next recession will hit Vermont and we are woefully unprepared. The state's economists track the pattern of recessions. Since 1974, there have been six - an average of one every six to seven years. Nationally, the last recession was the most severe, but not here in Vermont. The recession of 1991 cut deeper into the Vermont economy. You can view Vermont's recession pattern here on page 8. State Economist's Report - January 16, 2014
The most recent recession began seven years ago in 2007, so the clock is ticking toward the next. If the next one hits in the near future, the financial underpinnings of state government, and the people it serves, will be devastated because our elected leaders grew state spending at an unsustainable rate on sketchy revenues and failed to pursue cost saving reforms, like Challenges for Change, to help pay for spending priorities. Here are some of the problems.
Reliance of One-time Funds: It's quite astonishing that seven years after the start of the last recession that our Governor willfully crafts a state budget relying heavily upon one-time, non-recurring funds. By the time Governor Dean reached the seventh year following the 1991 recession, one-time revenues were used for one-time expenditures like the purchase of the Champion Lands or to fund prison construction, for example, but not for supporting or expanding on-going programs.
Governor Shumlin's budget speech tries to smooth over this inconvenient truth, but just a cursory review of the technical budget documents reveals otherwise. Here's a list of some of the one- time, non-recurring funds upon which the Governor's spending proposals rely: The R.J. Reynolds tobacco settlement ($8.33 million); the Vermont Yankee settlement ($5 million); alternate year cycle of insurance surplus receipts from the Department of Financial Regulation ($11.5 million); the loss of the electric energy tax on Vermont Yankee ($8.9 million); the use of Supplemental Property Tax Relief funds to pay a small portion of retired teachers health care benefits ($2.5 million); the annualization of a lower level of federal Medicaid reimbursement ($4.1 million); and the loss in calendar 2016 of the 2.2 percent enhanced Medicaid reimbursement from Obamacare ($25.8 million). You can see a profile of these one-time funds here: FY 2015 Supplemental Documents.
The above alone total more than $66 million and keep in mind the legislature has yet to add spending to the 2015 budget and next session there's the annual budget adjustment mid-way through the fiscal year. This year, the GovernorÕs 2014 mid-year adjustment recommended spending increases of almost $40 million. Growing State Spending Too Fast: The Governor's 2015 proposal increases over-all spending by $257. 8 million with $163 million coming mostly from the pockets of Vermonters and the rest coming from the federal government. (See Governor's Executive Summary - page 17) On a percentage basis, the overall increase is 4.9 percent and the state funds increase is 5 percent. Such increases are not responsible in the face of stagnant population growth, negative job growth, low inflation and tepid economic growth.
Further, the Governor's budget increased general fund spending by 5.1 percent or $70.5 million. The general fund is the mainstay fund for state government and is the least restrictive as to usage. Traditionally, the general fund is used to support all areas of state government. Of this $70.5 million, the Governor directs $42.5 million, or 60 percent, to human service programs. In contrast, the Governor recommends only an $847,000 general fund increase for Higher Education, a $1.1 million increase for Natural Resources and a $344 thousand increase for Commerce and Community Development. Overall the Governor recommends the Human Services budget be increased by 8.2 percent on top of a 14 year annual growth rate of 6.8 percent going back to fiscal 2000. Over that time, the Human Services budget has grown from $863.1 million to $2.18 billion while VermontÕs population has grown by only 3.5 percent. Today, the poverty rate is higher than that of 2000.
As with our K-12 education system, it's not clear that more and more money buys better outcomes for Vermonters. Yet, despite major increases in funding over many years, appeasing the ever vocal human service advocates for some is more important than measuring the success of these past investments, especially in an election year. It was President Eisenhower that said "beware the military-industrial" complex. Vermont's parallel might be "beware the education-human services complex." Further, the consequences on other important areas of state government that are sparsely funded are sometimes acknowledged but mostly ignored.
More Pension underfunding: Here on pages 39 to 40 of the Governor's Executive Summary, one can read the statutorily required Retirement Systems Financial Integrity Report. Note, that as of June 30, 2013 the state employees' pension was funded at 76.8 percent and the teachers at only 60.5 percent. These respective percentages were 77.6 percent and 61.6 percent for 2012 and 79.6 percent and 66.5 percent in 2011.
For long term context, in 2000 the state employees pension fund was 92 percent funded and the teachers at 88.4 percent. Clearly, the Governor is letting this important fiduciary trust slide in the wrong direction. State Treasurer Pearce has been a bit more vocal about this problem recently and hopefully outraged that the Governor's budget proposal does not comprehensively address this growing problem. If the Governor won't craft one, Treasurer Pearce must.
Property Tax Bag Holders: The excesses of our education system are well documented. The Governor's response is to sponsor symposia and scold school boards and voters for these excesses. From the legislature's Picus Report to the Vermont School Boards Association's recent Situational Analysis, to Representative Scheuermann's reform proposal, the facts are in. Tax payers want the best schools possible but at a fair cost.
At his recent symposia, the Governor rhetorically asked, "Do we have a challenge with income sensitivity driving school spending beyond sustainable rates?" But then, according to VT Digger, the Governor wondered "if that theory is just a myth." Such ambivalence in the face of recent Tax Department data 2012 Statistics - Property Tax Adjustment clearly showing that for the 107,900 beneficiaries of income sensitivity in 2012, their school tax bill on their house and 2 acres was reduced on average by a bit more than 50 percent and their total tax bill by 39 percent. From Federal Reserve Chairman Ben Bernanke to kids at a lemonade stand, all know that subsidizing the price of something by 50 percent will induce higher levels of demand. Possibly the Governor is trying to steer clear of the hornets nest of education funding reform. After all, the tensions among tax payers, parents and the NEA are not a comfortable place to be nor easy to resolve. But, candidate Shumlin first ran for the Governor's office in part with TV ads claiming to protect the interests of property tax payers. In the face of double-digit tax rate increases, hopefully he becomes a little less ambivalent.
I've experienced how tough it can be to guide a state budget through a recession and position it for the next. I have great respect for the team I worked with in this regard and the stable fiscal environment and security we produced for Vermonters. Secretaries of Administration Bill Sorrell and Kathy Hoyt, Human Services Secretary Con Hogan and his budget chief Jim Reardon, Commissioner of Education Marc Hull, my Deputy Commissioner Nancy Clermont and of course Governor Dean worked hard to balance fiscal responsibilities with the needs of Vermonters. At the State House there were Republican and Democrats alike that we could work with like Senators Bob Gannett, John Carroll, Tom Macaulay, Dick Sears and Dick Mazza and in the House the Blue Dog Democrats like Mike Flaherty, Mike Vinton, Rene Blanchard, Jim Colvin and Maureen Dakin along with the minority Republicans let by Walt Freed. Governor Douglas stayed the course on sustainable spending.
But today, we are now well into a post-recession period yet our state budget is patched together more, it appears, for short term political advantage than long term budget sustainability. The Governor has put his proposal on the table and in my view, abandoned the fiscal helm.
It's now Speaker Shap Smith's opportunity on the ship's bridge. The pending question is whether he will continue to play a supporting role to the Governor's excesses that risk fiscal implosion when the next recession arrives or carve a different legacy that embraces the advantages and benefits of sustainable spending?
Tom Pelham, formerly finance commissioner in the Dean administration, tax commissioner in the Douglas administration, a state representative elected as an independent and who served on the Appropriations Committee, and now a co-founder of Campaign for Vermont.