Mind the gap...

April 5, 2015

As the House took on the task of addressing the $113 million budget gap last week, one of the first questions a constituent asked was, “you’ve got a fiscal year that doesn’t start for three months, you haven’t added any new programs to speak of, and you’re already over $100 million in the hole?!?  How can that be?”  It’s been a perfect storm of circumstances that has brought Vermont to this point.  Before discussing this year’s House budget bill, let’s review what got us here.

 

There are some very specific policy drivers, along with a macroeconomic overlay, that have put Vermont in its current budgetary bind.  About $37 million of the gap can be attributed to Medicaid.  Medicaid is a joint federal-state program that subsidizes medical care for low income Vermonters.  The federal government pays about half and Vermont pays about half.  The federal match to states varies depending on a state’s economic health.  Because VT’s economy has performed well relative to many other states, the federal government reduced our Medicaid match this year opening up a $22 million funding hole. The other $15 million Medicaid shortfall, ironically, resulted from an increased caseload in Vermont; more people require Medicaid benefits.

 

About $31 million of the FY’16 budget gap relates to state employee compensation and retired teachers’ benefits.  This will be the second year of a state employees contract with a 3.2% increase in compensation.  This is also the second year the state’s contribution to the teachers’ retirement and health insurance fund has increased significantly.  As a result of a decade of the state underfunding these benefits, the air pocket in the stock market in 2008-09, and continued inflation in health care costs, contributions to this fund have had to be increased.  In this budget, when it comes to the teachers’ retirement system, we are appropriately beginning to atone for past budgetary sins.

 

In recent years, Vermont has benefited from an influx in federal money related to federal economic stimulus programs and post-Irene recovery dollars.  With the continued tightening of the federal budget, that funding, which has filled state budget gaps for several years, is now gone.

 

Regarding the macroeconomic issue affecting Vermont’s state budget, you may have heard Jim and me refer to the “alligator mouth.”  Coming out of the Great Recession, Vermonters’ incomes have been growing at about 3% annually, which translates to tax revenue going into the state treasury increasing at about 3% annually.  Those with higher incomes are seeing income growth in the 3% to 10% range; those with incomes in the bottom 90% are seeing income growth in the 0%-1% range.  At the same time, demand for government programs, particularly Medicaid and other human service programs, is increasing at 5% annually.  Each year with state tax revenue going up 3% and state spending increasing 5%, the gap (the alligator mouth) has gotten worse.

 

Voila.  A $113 million hole.

 

There is recognition in Montpelier that we cannot tax our way out of this $113 million bind – incomes aren’t increasing fast enough to make that solution sustainable.  At the same time, whacking $113 million of spending out of a $1.4 billion budget that is primarily directed at growing human service needs is not only unrealistic, it’s draconian.

 

The budget package the House settled on closed the budget gap with $54 million in long term spending cuts, $35 million in tax increases, and $23 million of reserve drawdowns and one time funds.  Regarding the spending cuts included in this budget, an understandable reaction would be that, surely in a $1.4 billion budget there’s plenty of easy cuts.  There’s not.  As evidence I would offer the things that wound up on the cutting room floor: $6 million of low-income heating assistance, funding for various mental health and autism programs, $1.7 million for the Dept. of Children & Families Reach Up program, $1 million of developmental disabilities funding, $1.7 million for 911 call centers, a 50% reduction in state funding for VT public television, and $10.8 million in anticipated cuts from state employee labor costs.

 

The tax increases in the budget package were contained in two proposed changes to VT’s tax code.  The first eliminates the tax deduction for prior year VT state tax payments.  Vermont is one of a dwindling number of states that allows taxpayers to reduce this year’s tax bill based on what they paid last year.  This tax deduction is only available to folks who itemize their deductions, which is less than 30% of filers in VT.  The second proposed change caps allowable tax deductions at 2.5x the federal standard deduction.  For married filers, this caps state income tax deductions at $31,500.  Less than 7% of VT income tax filers have deductions exceeding $31,500.  For those that do, those deductions are most typically generated from large mortgage interest expense and from significant contributions to charitable organizations.  Even in capping tax deductions, Vermont would be more tax-friendly than many states.  Massachusetts, Rhode Island, and Connecticut allow no federal deductions on their state income taxes.  Maine caps deductions at $18,000 for married filers.  (NH has no deductions; nor do they have an income tax.)

 

I supported the bills to close the $113 million budget gap, not because I liked the fixes.  No one wants to cut needed services or raise taxes.  The Appropriations and Ways & Means Committees focused cuts on fast growing programs where they felt the least damage would be done.  Tax increases were focused on the faster growing income segments.  No doubt next year will also be a tough budget year, though with this year’s efforts I am hoping for an alligator with a mouth less agape.

 

 

Some pictures to share with you this week.  The photo was sent to me by Andrea Nolon who helped chaperone Becky French and Rick Wilson’s Marion Cross 4th grade classes.  Here I’m speaking with the students in the House chamber pointing to where all the power resides (in the Speaker's chair).

 

 

This is a picture I took of Janis Boulbol's 6th grade class from Sharon Elementary viewing the enormous painting of the Battle of Cedar Creek in the Cedar Creek Room at the State House.  The students had great questions – do you raise your hand to speak?  how do you vote? do you have to wear a tie?  do you get paid to do this?  how do you pick your seat?

 

 

This final picture is from an x-ray of the broken PIP joint in my little finger which happened in a recent basketball game with the Majority Leader and the Chairman of the Education Committee.  It probably was a clean play, but I’ll always have a glimmer of doubt as to whether my vote against the education bill (H.361) played a role.

 

 

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