An Open Letter to Minority Leader Don Turner

An Open Letter to Minority Leader Don Turner

I write to you because legislation dealing with state spending and taxes are first considered by the House of Representatives. Truth be told, the current fiscal dysfunction of state government has been a tri-partisan affair. All republicans and democrats on the House and Senate Appropriations Committees voted favorably for the current 2016 budget. Now, near halfway through the fiscal year, that budget appears seriously out of balance by about $40 million. Similarly, the school consolidation bill, now Act 46 and driving school boards nuts, was supported favorably by all House and Senate Education Committee members on a tri-partisan basis.

During the Dean administration, we worked very hard to successfully build centrist support for the Governor’s common sense positions on state spending and education funding. Now that the public sees the fumbled roll-out of the 2016 budget and Act 46, hopefully these matters can be revisited in the coming legislative session and that you can organize a “coalition of the sensible”, including corralling your own caucus as well as moderate democrats and mindful progressives, to unwind the poor choices recently enacted.

In addition to the budget and Act 46, the accumulation of credit authority and interfund borrowing from the state’s cash flows is another risky fiscal adventure, especially as the 2016 budget adjustment and the 2017 budget seem on track to further Vermont’s fiscal train wreck. You might consider a provision in the 2016 budget adjustment that walks back the use of these newly created lending authorities and requires that any unused authority allowed the Treasurer pursuant to Act 199 of 2014 be rescinded.

Vermont’s budget stabilization reserves were established to better accommodate annual fluctuations in state revenues as well as buffer general, transportation and education fund appropriations during revenue shortfalls. They are especially important to Vermont’s most vulnerable as a stabilizing resource supporting program appropriations. These supposedly undesignated reserves are embedded in the cash flows of their respective funds. At their origin, it was never conceived that these reserves be utilized as pools of cash for loans to fund expansions of state programs. Unfortunately, over recent years the legislature and administration now obligate these funds for terms up to 10 – 12 years. Thus, should an economic downturn or revenue short fall squeeze the state’s cash flows, rather than cash available to underpin appropriations, Treasurer Pearce now holds loan receivables that are not useful to that purpose.

First, Act 179 of 2014 allowed the Treasurer to execute an interfund loan to the Retired Teachers’ Health and Medical Benefits fund (RTHMBF) in an amount up to $30 million. Here’s a link to this statutory provision (see Sec. E.514.1) and a power point slide profiling the associated cash flows on page 12.,%20Act%20179~3-11-2015.pdf

Further, Act 87 of 2013 Section 8 as amended by Act 199 of 2014 Sections 23-25 allows the Treasurer, in addition to that authorized above for the RTHMBF, to create credit facilities equaling 10 percent of average monthly cash flows. The calculation of this percentage equates to about $35 million as summarized on the last page of the Local Investment Advisory Report linked here.

Given the above, the loan authorizations from cash flow amount to $65 million. Keeping in mind that the general fund budget stabilization reserve target is just over $70 million for fiscal 2016, one can see that authorized interfund loan and credit facilities relative to this target are sizable.

A few observations.  

First, as noted above, budget stabilization reserves are not available for their intended purposes when they are simultaneously committed to interfund loans and credit facilities.

Second, state government already sponsors and funds programmatic areas such as affordable housing and energy efficiency, among the targets for these new “credit facilities”. The establishment of another layer of effort in these areas at the Treasurer’s Office is an unnecessary and duplicative expansion of state bureaucracy that end runs the appropriations process.

Thirdly, the interfund loan to the RTHMBF is specific to the general fund while the 10 percent provision of Act 199 is more generally stated at “10 percent of average cash balance”. However, given that the “average cash balance” intermingles cash from restricted/dedicated funds such as Federal Funds, Special Funds, Transportation Funds, Education Funds, Fish and Wildlife Funds, among all others, such restrictions may limit the interim use of these funds for loans beyond their statutorily established purposes. Thus, should the state’s cash flow get squeezed, the burden of these loans from cash flow will primarily diminish the general fund stabilization reserve.

Hopefully you can bring together a “coalition of the sensible” so that legislation leaving the House for the Senate in areas such as those profiled above gets Vermont back on a sensible, less risky fiscal track.

This commentary is by 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.

The Crippling of State Government

As Vermont turns toward winter, cold winds blow over more than just our beloved landscape.  The holes in our state budget are now open windows not easily shut against cold realities. Despite last year’s $30 million general fund tax increase, we once again face another year of general fund over-budgeting ranging from $90 million to $130 million. By the time we get to January and the start of the next legislative session, both those who rely upon government services and taxpayers who fund government services will feel the chilling squeeze of the fiscal vice our statehouse leaders have crafted.

The Medicaid/global-commitment budget alone has grown (with more to come) by $310 million to $1.38 billion since 2011, equaling an annual growth rate of 5.2 percent. However, as one-time federal stimulus funds totaling over $110 million used to support this growth diminished, state general funds increased 187 percent from $72.5 to $208.7 million to fill the gap along with rapid growth in other state funding sources such as Special funds and State Healthcare Resources Funds. But it gets worse; we now learn even more money is needed. The Joint Fiscal Office (JFO) reports looming Medicaid shortfalls of $105.8 million ($38.1 million in general funds) in the current year and $133.2 million ($58.2 million in general funds) in fiscal 2017.

Inclusive of the projected 2016 shortfall, the Medicaid/global-commitment spending since 2011 tracks at a deeply troubling 6.8 percent annual growth rate.

Further, the VtDigger article linked below profiles the management chaos at Vermont’s rapidly expanded Medicaid program. Vermont’s top fiscal officers reveal that, “Medicaid has been auto-re-enrolling folks because of the difficulties of the exchange. It makes the forecasting really difficult.” says JFO’s Stephanie Barrett. Barrett reports that exchange difficulties resulted in a federal waiver that keeps more people on Medicaid without confirming whether they were qualified.

In return for such fiscal largesse and management chaos, what have Vermonters gained? Well, the needle tracking the number of insured Vermonters has moved slightly favorable from 93.2 percent in 2012 (1st in the nation) to 96.3 percent, now 2nd in the nation. But, along with this slight improvement came the 46.5 percent growth in state sponsored health care plan enrollments from 139,900 in 2011 to 205,000 or one-third of all Vermonters today, in part because certain private insurance plans were outlawed by statehouse leaders in favor of taxpayer funded plans.

Such fiscal uncertainty was avoidable if Governor Shumlin, Speaker Smith and other legislative leaders had taken their fiduciary responsibilities seriously. As an example of being responsible, during the 1995 legislative session Governor Dean recommended and the Legislature passed the Vermont Health Access Program (VHAP), Vermont’s first major expansion of Medicaid. Then, unlike today, fiscal accountability was a paramount concern. We included in the VHAP law this “manage to the money” requirement to prevent revenue shortfalls.


(a) Enrollment in the health access program shall be limited by the amount of money available for that purpose in the Vermont Health Access Trust Fund established in Sec. 9 of this act. The office of Vermont health access shall track enrollment on a monthly basis to assure that enrollment does not exceed either appropriations or the capacity of the health plan to serve enrollees.

(b) The oversight committee shall monitor the implementation of the health access program as required in Sec. 13 of this act. “

Given the sad shape of our state budget and the fiscal tourniquets on areas less favored than healthcare like Higher Education, the Judiciary and Commerce and Community Development, among others, it’s time for state house leaders to give healthcare expansion a rest and maybe, of necessity, take a step or two back. These days there is little appreciation under the Golden Dome that taxpayer dollars are a precious and scarce resource. Their credit card approach to expanding taxpayer funded health care is crippling state government.

A step back might include the following. During the 2004 state budget process, Representative Patti O’Donnell (R-Vernon) and I (I-Calais) sponsored legislation to revamp the co-pay and premium system for Medicaid. Our proposal was to make the system more progressive with premiums based on the ability to pay while diminishing regressive co-pays. Premiums were to be paid prospectively rather than retrospectively. This proposal received broad bi-partisan support in the House and Senate and was signed by Governor Douglas. In a thank you note, then lobbyist for the Council of Vermont Elders and now State Senator Michael Sirotkin recognized the progressive benefits of the new law. He wrote, “We’ve been trying to raise that point for a long time, but this was the first time through this premium model that it was expressly noted.” You can read this legislation here starting in Section 146 (d).

As the last recession took hold, the Douglas Administration established Tiger Teams, one of which focused on Medicaid. ”A Path to Medicaid Savings” was published in December, 2009. The members of this Tiger Team, an accomplished bunch including key managers of the Medicaid EDS system at the Agency of Human Services, a representative from Blue Cross Blue Shield, and Sarah Clark, a rising fiscal star recently appointed Chief Financial Officer at the Agency of Human Services, among others. One area the Report explored was whether the premium system established in 2004 had been updated for inflation and program expansion over time. They found that it had not and therefore offered an opportunity for enhanced revenues to support Medicaid. Their easy- to-read report can be found here:

The Executive Summary reads in part:

“The original goal of the EDS/Medicaid Tiger Team was to identify expense reductions or revenue enhancements that save 5% ($50 million) of the $1 billion total spending in FY09. We believe this paper identifies options of this order of magnitude. While substantial and specific amounts of savings have been identified, more importantly the EDS Tiger Team has developed an approach that will help guide Medicaid’s programmatic and financial managers towards reaching fundamental fiscal goals and contribute to resolving Vermont’s current economic crisis while sustaining as best as possible Vermont’s relatively high standing among states in the health care arena.”

Unfortunately, with the “easy money” of one-time federal stimulus funds in hand, Governor Shumlin and the Legislature abandoned this Tiger Team effort and other budget reform opportunities like Challenges for Change, a legislative initiative. To abate the fiscal pneumonia now threatening state government, maybe it’s time to put away the credit card and revisit some of these cast aside reform opportunities.  

This commentary is by 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.

We saw this coming

Excerpted from an article in the Bennington Banner.

Superintendent Judy Pullinen said she would like to have a discussion with board members about budget drivers at their Oct. 14 meeting. "We've already found out that the health insurance is projected to go up 7.9 percent," she said, "which is the biggest increase we've had in years, at least five."

Under this year's legislation, Act 46, BVSU will be prohibited from increasing its budget by more than $85,000 from last year. Tax rates in districts that exceed the cap, which is variable based on the district in question, could see their tax rates double.

Board Chair K. John Smith was concerned that that increase, as well as a 3 percent negotiated raise for teachers, a 2.75 percent raise for support staff, and the implementation of pre-K for three-year-olds, will push the BVSU well over that limit. Doing the math on paper, Smith estimated that those increases alone would equate to a budget increase of over $170,000, which business manager Eleanor Frechette estimated would be closer to $200,000.

"You're at $170-200 thousand, and you've got an $85,000 cap, so you've already got to cut $150,000 from the budget," said Smith.

Shaftsbury Reluctantly Considers Merger

This story appeared in the Brattleboro Reformer on September 13th. Read the full story here.

"After much discussion and disagreement, the Shaftsbury School District board voted to send Jeff Leake to represent their interests at the Southwest Vermont Supervisory Union's Act 46 study committee."


"Board member Larry Johnson brought the board's attention back to the Regional Education District meetings of 2010, which did not end up resulting in consolidation, and asked what the difference was this time.

'What's different is that the state has put teeth into Act 46 that is king of holding our feet to the fire on this,' said Culkeen. 'We can't ignore it, we have to study it, or we run the risk that within five years they could come down here and consolidate us to their liking, and not ours."


"Johnson brought up the efforts by members of the legislature and outside groups to overturn Act 46, most notably a threatened lawsuit by the American Civil Liberties Union, on the grounds that the spending cap imposed by the law violates the state's equity provision, and Campaign for Vermont, which is also targeting the spending cap, and says that the law will actually raise taxes for Vermonters, rather than lower them. Tom Pelham, co-founder of Campaign for Vermont, has pointed out that the tax relief incentives for districts that merge is being paid for by other districts.

'That doesn't come from God, it comes from the districts that decide not to merge,' he was quoted by Vermont Digger as saying."


Pelham: Act 46 is not a solution

The following opinion editorial was first published by Vermont Business Magazine.

Vermonters and taxpayers will be stunned by Act 46 come the fiscal 2017 school budget cycle that starts in earnest this Fall. Act 46 is a poorly constructed legislative initiative of state enforced school consolidation with debilitating effects on effectively managed school districts, both large and small, and resulting in increases in property taxes statewide. Here are just some of the burdens local school boards, parents and taxpayers will face due to Act 46 this Fall through Town Meeting Day.

Higher Property Taxes: Among schools districts that pursue Act 46’s consolidation offer there will be a range of spending amounts per pupil.  Average school spending per pupil among adjacent school districts typically ranges in the thousands of dollars. For example, for fiscal 2016 Calais spends $15,131 per each of its 133 students while neighboring East Montpelier spends $20,160 per each of its 205 students. It is wishful thinking to believe that East Montpelier will allow its spending level to be cut to that of Calais or that Calais will not seek additional spending should they decide to merge. This is especially true given the temporary Act 46 tax rate subsidies that will mask for a few years any spending increases of merged districts.

Given the statewide nature of the property tax system, school districts that decide to preserve their local school and are effectively managed and have no inherent need for consolidation will end up paying higher property taxes to support the higher spending and tax subsidies allowed under Act 46 for school districts that merge, whether or not these merged districts are effectively managed.

Inequitable Spending Caps: The temporary, two year spending caps are a mathematical derivative that is blind to actual school district needs. Historically high spending districts may well absorb the restraints of the cap while a lower spending district may need more than the cap allows due to particularly local circumstances. Local school boards best know local circumstances and are better regulators of the ups and downs of local needs rather than an arbitrary, state imposed cap that allows different school districts access to educational resources regardless of a district’s educational needs.

Further the cap is derived from legislatively manufactured data. For example, “equalized pupils”, a legislatively created substitute for an actual student count, are used in the calculation of the cap. However, across Vermont’s school districts the relationship between “equalized pupils” and actual students varies widely. For example, the number of equalized pupils the state assigns to Lincoln and Moretown, for example, equals 84 percent of actual student counts while the assigned ratios for Rochester and Canaan are 125 percent and 128 percent respectively. Further, the system of “equalized pupils” is based upon confidential information at the Agency of Human Services. Thus, “equalized pupils” calculations cannot be independently verified. Similar problems exist with the legislatively crafted term “education spending”, which across all school districts accounts for only 78 percent of total school budgets.

Given the above, the caps are inequitable. Further, even if they were fair and effective spending controls, they will only exist for two years after which they sunset, returning taxpayers to the same failed, unfair and byzantine system that fosters the current education funding mess.

Bigger Isn’t Necessarily Better: The distribution of school districts by size is not a determinant of student academic outcomes. Anecdotal examples of solid student outcomes at large districts must be acknowledged but so must examples of weak student outcomes at large school districts. In the end, on an overall basis, school district size is not a determinant of student outcomes when viewed across the entire population of Vermont’s school districts. In comparing school district size to academic outcomes, as measured by test scores across all Vermont school districts and using Agency of Education data, Campaign for Vermont found the following:

“NECAP test scores appear unrelated to both school district ADM and Equalized Pupil counts except for a possible very slight relationship for 11th grade math. The Burlington school district with 3,944 students, for example, has test results similar to Royalton with 320 students. Again, this finding does not speak favorably to the concept that large consolidated school district’s offer students greater educational opportunity than smaller school districts.”

“NECAP test scores appear unrelated to levels of total spending per pupil, whether ADM or Equalized Pupils. Eden, for example, spends $20,074 per ADM with 3-8th grade math and reading proficiencies of 56.2% and 62.53% respectively. Pomfret spends about the same at $20,577 but achieves proficiencies of 89.5% for math and 100% for reading.” (link is external)

Further, large school districts are not necessarily better managed. Just look at the largest school district in the state, the Burlington school district, to find an expensive per pupil district ($20,124 per pupil), running large operational deficits and struggling to hire a new school superintendent because of poorly researched work visa requirements.

A Blow to Local Control and Local Democracy: Vermont’s constitution first gives direction to towns to maintain schools with the legislature provided with back-up authority. Article 68 reads:

“and a competent number of schools ought to be maintained in each town unless the general assembly permits other provisions for the convenient instruction of youth”

Once size-fits- all school districts of no less than 900 students were not envisioned by Vermont’s thoughtful founders. Vermont has certainly changed over time but there is no need for the state legislature to now eviscerate local school districts, especially those that are competently run. Whenever possible, local parents and taxpayers should guide the availability of education resources and the associated tax burdens while assuring such conforms to the Brigham decision. Act 46 further separates parents and taxpayers from directly guiding their students’ education as originally anticipated in Vermont’s constitution. The Vermont legislature has engineered an almost complete take-over of Vermont’s education system and its $1.5 billion budget to the detriment of parents and taxpayers.

School Choice Undermined: While school choice has been an option chosen by almost 90 Vermont school districts, Act 46 has muddied the water regarding this option and some might say intentionally so. School choice has been an area of controversy, opposed by some advocates of a public school only system. As this Vermont Digger article with comments reveals, school choice or parts thereof maybe on the chopping block, further undermining options available to parents and students. (link is external)

Act 46 is destructive and detrimental legislation founded upon the false premise that consolidation will yield more cost effective educational outcomes for students. In fact, Act 46 will induce additional spending, increase property taxes, undermine local parent and taxpayer involvement in their school district and isolate and fiscally punish well managed small and medium sized school districts that choose not to merge. Better options were presented to the Legislature but fell by the wayside as so much else has at the State House in recent years.

This commentary is by 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.

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