The Governor's Speech

Governor Shumlin’s recent budget speech is a vain attempt to craft a legacy of fiscal responsibility.  But, it’s too late for that; the damage is done to both Vermont’s fiscal standing and the Governor’s legacy.

Some housekeeping is in order.  Governor Shumlin points a finger at former Governor Douglas for the state’s fiscal woes; but state fiscal records reveal otherwise. Governor Douglas vetoed the fiscal 2010 budget not because it spent too little, but because it spent too much. It was Senate President Pro Tempore Shumlin and House Speaker Smith who in June, 2009 lead the veto override and henceforth set Vermont on its current unsustainable spending trajectory.

Governor Shumlin’s speech didn’t mention the $938 million in one-time federal stimulus funds Vermont received through fiscal 2011. Shumlin used these funds to both supplant general funds eroded by the Great Recession and grow base spending until these funds ran out in 2012. Then, Governor Shumlin, not Governor Douglas, raided $23 million from the education fund to prop up his unsustainable spending trend line.

About taxes - Governor Shumlin says, “This will be my sixth budget that does not increase income, sales, or rooms and meals tax rates”. Tax rates, maybe; but taxes, certainly not. Over the past 6 years income taxes (capital gains and deduction restrictions), sales taxes (sugary drinks), rooms and meals (vending machines), gas taxes, cigarette taxes, health insurance claims taxes, property taxes, and numerous fees,  among others, have all increased by the Governor’s actions.  For fiscal 2017, the Governor can say he’s not raising “income, sales, or rooms and meals tax rates” while increasing fees on mutual funds and new taxes on doctors and dentists. And so it goes.

Bottom line, since 2010 general fund and state fund spending generally, exclusive of federal funds, have grown at the respective rates of 5.3% and 5.2%, inclusive of the 2016 budget adjustment now before the legislature. In a Vermont economy experiencing 2 to 3 percent growth, the Governor’s (and legislature’s) aggressive spending of state taxpayer dollars drives the now annual fiscal hazards of budget gaps and higher taxes.

Each year there are two major budget bills before the legislature known as the Big Bill and the BAA (short for Budget Adjustment). The Big Bill covers the coming fiscal year while the BAA makes adjustments to the current fiscal year. When the legislature left Montpelier last year, they approved and the Governor signed the 2016 Big Bill with year-over-year general fund increases of 4.2 percent and all state fund increases of 3.8 percent. But now, with the 2016 BAA currently before the legislature more spending is proposed. The result, if approved, will be year-over-year increases of 5.1 percent and 5 percent respectively.

The Governor’s 2017 budget proposal is a 4.1 percent and 3.2 percent general fund increase over the 2016 Big Bill and 2016 BAA respectively. Relative to all state funds, the increases are 4.0 percent and 2.8 percent respectively. As is happening this year, these increases may rise next year with the 2017 BAA; but that will be next Governor’s worry.  The proposed increases again exceed underlying economic growth and require $13.2 million in higher mutual fund fees and $17 million in new taxes on doctors and dentists.

More of the Governor’s 2017 budget proposal will be uncovered as the legislative process unfolds, but interesting details already stand out. For example, the Governor’s proposed general fund increase totals $45 million. Of this, he directs $12.3 million or 27 percent of these new general funds to the Teachers’ Pension and Retired Teachers Health Care funds, now totaling $101 million - an amount greater than the $83.3 million general funds proposed for Vermont’s institutions of higher education. During Governor Shumlin’s term, the funding ratio of the Teachers’ Pension fund has dropped from 66.5 percent to 58.6 percent; not a great legacy and certainly a red flag to bond rating agencies. It must be noted, however, that the core cost drivers for teacher retirement benefits are not driven by state decisions, but by the salary and benefit contracts between local school boards and the NEA. While the Governor, legislators and Secretary of Education lament the excessive staffing in Vermont’s schools, they remain silent and paralyzed about the general fund bankrolling the retirement benefits driven by Vermont’s lowest-in the-nation pupil to teacher ratio of less than 10 to 1. This costly conflict between fiscal and educational policies and politics now consumes a whopping 27 percent of all new general funds, inclusive of new revenues from fees on mutual funds. With budget pressures ranging from higher education to human services, it’s unfortunate that state house leaders won’t resolve these conflicting and costly policy tensions.

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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