Are we Headed for Another Fiscal Cliff?

July 1 has come and gone, and with it the end of Vermont’s 2024 fiscal year on June 30 and the start of fiscal 2025 on July 1. Given it’s an election year in Vermont, now is a good time to consider important fiscal trends within the budget that might bite taxpayers going forward.

Below is a profile of major fiscal trends in the state budget, using data from the legislature’s Joint Fiscal Committee. The column totals for these four funding sources amount to 93% of total state spending.

Here was the fiscal year growth rate from 2019 to 2024:

The above data reveals overall annual spending growth of 7.5%, with General, Education and Federal funds exceeding the overall annual growth rate. This number in a vacuum isn’t particularly helpful, but when taken into the context of growth in revenue sources it becomes much more relevant.

Take for example the Emergency Board Economists’ Consensus Revenue Report. The latest such report was issued January 18, 2024, with the next release due this July, and will include additional revenues raised by the Legislature this past session. The current report projects organic Education Fund revenue growth for 2025 and 2026 at 1.7% and 2.6% respectively, General Fund growth at -0.8% and 3.7% respectively and Transportation Fund growth at 5.4% and 1.5% respectively.

Clearly the above spread between high spending rates and estimated low revenue increases is worrisome (a differential of -11.9% for the Education Fund and -9.1% for the General Fund in FY2025). But Vermonters have been in this situation before and hopefully we should learn from our past.

From fiscal year 1986 to fiscal 1989, state General and Transportation Fund spending grew at combined rates of 5.9%, 13.5%, 10.9% and 13.3%. Then came the 1990-1991 recession and Vermont’s economy and state budget hit the recessionary wall.

In a VPR story, economist Art Woolf described the fallout: “How bad was it?” he asks rhetorically. “Vermont’s unemployment rate stood at a record low level of 3% in the summer of 1988.  By the spring of 1991, it had risen to 7.7%, and it stayed above 7% for a full year,” he continued. “Vermont lost 15,000 jobs between 1989 and 1991, a job loss of more than six percent — the worst job loss in Vermont since the Great Depression and four times the national rate.”

Woolf added: “Declining state revenues led to a huge budget deficit, which took Governors Snelling and Dean four years to pay off. State government spending remained virtually unchanged for several years, and sales and income taxes were raised to help retire the deficit.”  

Furthermore, Vermont’s Bond Rating was cut, not recovering until 1998, while General and Transportation Fund expenditures were limited to a growth rate of just 2.24% from FY 1991 to FY 1995, including negative growth in 1993 at -2.16%.

It’s not hard to make the case that Vermont’s Legislature is about to repeat the above history. Maybe the trigger will be a recession; or maybe the loss of Senator Leahy as Chair of the Senate Appropriations will reduce Vermont’s access to federal funds; or maybe Vermont’s shortening ski season will undermine state revenues; or maybe the national election will bring to the White House forces unfriendly to liberal Vermont. Whatever the cause, should there come even a mild recession, Vermont’s fiscal profile appears vulnerable.

One lesson from the recovery of the 1991 recession is the importance of having legislators willing to put fiscal reforms into place despite opposition from their political party. Republican Governor Snelling was able to work with Democratic House Speaker Ralph Wright to pass a package of temporary tax increases to help mitigate the recession’s impact. Similarly, Governor Howard Dean was able to work with Republican Walter Freed and a handful of “blue dog” Democrats led by Representative Charles Flaherty to pass state budgets with modest increases during the 1990’s. When it comes to fiscal common sense, it’s important to elect Vermonters who can embrace such and not be handcuffed by the dogma of their political party affiliation.

 

Tom Pelham, of Berlin, Vermont, is a Co-Founder of Campaign for Vermont and was a Finance Commissioner in the Governor Howard Dean’s Administration and Tax Commissioner in Governor Jim Douglas’ administration. He also served on the Appropriations Committee in the Vermont House as an Independent.

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