Friday, December 2, 2016

Legislative Update: Gloom and Doom Day

Legislative Update: Gloom and Doom Day
December 1, 2016
Rep. Anne Donahue

In the past decade, the state’s Joint Fiscal Office has begun holding a one-day “preview” in the late fall so that legislators don’t get taken off guard about Vermont’s financial situation when they arrive at the statehouse in January. Some have begun to call it “gloom and doom” day, since it is never about good news.
This year, the state revenue forecast indicators that were presented looked pretty decent, but our fiscal experts said they “are worse than they look.”
Part of that is due to the huge uncertainty that comes with a new federal administration. Vermont’s highest risk factor in this area was a surprise to me: Exports are more important to Vermont’s economy than many other states. It’s 10.7 percent of our gross state product.
The national average is 8.4 percent, but for our immediate neighbors in New England, it’s 5.4 percent. So the share of our economy that is dependent on exports is nearly twice that of the rest of New England, and we were told that this puts us at higher risk if new federal economic policy includes increased tariffs that lead to wider trade wars. 
Rising exchange rates have already resulted in a 33 percent decline in our exports in the past four years. The strengthening dollar compared to a weak Canadian economy has hammered our exports to Canada, which have dropped from around 45 percent to 35 percent of our shrinking overall export market.
Our demographics also paint a scary longer-term issue. This is not a surprise, but it is getting worse. Our fertility rate has dropped to lowest in the nation, and our rate of change in the percentage of the working age population continues to drop.
Our aging “baby boom” bubble has a particular risk impact, because highest income years (i.e., income-tax-paying-years) are between ages 47 and 61; our big population drop-off begins to hit below age 55 and goes pretty straight downhill from there.
Meanwhile, our home price index has not yet returned to pre-recession levels (though it’s inching up and very close to that return.) That means it will continue to be education property tax rates – rather than increased grand lists resulting from increased home values – that will assume the brunt of increased education costs.
In some ways, that is a more legitimate indicator of the effect of larger school budgets. When I first came to the legislature, I used to point out that our comfortable position of being able to routinely reduce the tax rate created a fiction. Property taxes were skyrocketing because home values were increasing rapidly – rapidly enough that the rate could be reduced because the increases were covered by the inflation in values.
Ever since that ended with the recession, we have had to increase the statewide property tax rate, which is a more transparent reflection of the impact of increases in school budgets.
The fiscal presentation also reminded us of how heavily we rely on federal funds for our state budget (it makes up 35 percent of the total). Vermont is number four among the 50 states in the amount of federal funds received per capita, at close to $3,000 per capita compared to a national average of less than $2,000.
 That significantly increases our budget risk if federal policies change on funding of health care and social programs.
In terms of the immediate budget future, our annual structural gap between maintaining current state services and our projected revenues is $40 to $50 million this coming year. That is the pressure point that has resulted in new taxes being imposed every year in recent history. Closing the gap requires cutting spending, raising taxes, or supporting economic growth to increase the base for tax revenues (or some combination of those).
Increasing the base has been Governor-Elect Phil Scott’s mantra, but that isn’t something that can produce results instantly, so it will be a real challenge to avoid both major program cuts or new taxes or fees. We’ll receive his budget proposal in January.
There are other big budget pressures. We face a $68 million gap between current revenues (state and federal) and the costs required to clean up our state waters.  The needed investment is $120 million annually to meet federal requirements for a 34 percent phosphorus reduction over 20 years.
Not enough gloom and doom for you yet?
In January we are also being hit with a $5 million loss in federal funds for the current year budget plus another $6.2 million in the upcoming budget because of disallowed programs under our Medicaid waiver,  That waiver is our special deal (called the Global Commitment) that allows us greater flexibility in the uses of federal Medicaid money.
The feds have changed some rules, but we’ve also stretched the rules and gotten caught. The changes will amount to $64 million in lost funding for existing programs over the next 10 years.
The biggest chunk of that is for money we’re spending on psychiatric hospitals – the Brattleboro Retreat and our own new Vermont Psychiatric Care Hospital in Berlin – that are not integrated into a medical center, which is the usual requirement for federal funding.
The “good news” that was presented regarding the renewal of our Global Commitment was an increase in the federal funding we can access for investment in new health care programs over the next two years.
The increase from the current $127 million to $148 million is aimed specifically at Medicaid’s share of the start-up costs for health care reform under the All Payer waiver.
More federal money may sound good… but the catch is always that it is matching fund money, in other words, we only get more from the feds if we also spend more in new state money to meet our 46 percent share.

I look forward to providing my regular updates again after we convene in January. Please feel free to contact me at any time with questions or concerns. You can reach me at 485-6431 or by email at