Pre-Session Update

 Pre-Session Update

Rep. Anne Donahue

December 11, 2021

Every year before the new session begins, legislators have an opportunity for a preview of the state of the state from our contracted fiscal experts. (Copies of the power points for the briefing can be found at ljfo.vermont.gov/publications/legislative-briefing.)

The picture is more optimistic this year than it has been in many years, which may sound like a surprise. The economy is roaring back faster than expected, with the state gross domestic product “poised to grow at its fastest rate in 30 years… (a) growth of nearly 10 percent, the highest since 1989.”

This year’s revenues came it at 3.5 percent above projections, with some $188 million available for base budget expenditures. Inflation is increasing but expected to readjust and level off. Education property taxes are actually going down, not just rates, but actual taxes to be paid. Still more federal money is projected to be coming. Because of small state minimums, we get more per person than almost any other state.

So what’s to worry about?

There are a lot of embedded “ifs,” and also a stark warning for where our budget will be just a year from now. The economic growth prediction has the biggest “if” of all:  that “poised to grow” is conditioned on “if the pandemic recedes.” The experts told us that “the path of the pandemic will largely determine the path of the economy in 2022,” and right now we’re not doing so hot in curbing the pandemic. 

And although they predict that inflation rates will recede as the markets adjust to supply and demand imbalances, markets can’t turn on a dime, and inflationary pressures – as well as price swings caused by consumer behavior in response -- will last well into 2022. When demand plummeted, gas went to an all-time record low (looking as far back to 1969) and is now spiking with the surge in demand, though still lower than half the peak level reached in 2009. That increased demand includes the robust tourist revenue we’ve been seeing from folks from nearby states who are driving for vacations since air flight is still seen as more risky. Contrast that with consumer items that actually have dropped significantly in price. Should be no surprise; it’s men’s suits followed by women’s dresses. All those jokes about appearing on Zoom in sweat pants aren’t jokes.

The current housing price boom is our third “bubble” in the past 40 years, and the prior two both ended in a bust. Our fiscal experts predict a leveling of the increases in 2022 and an end by 2025. In the meanwhile, although the housing values increase the grand list (thus property tax revenues), they also price many people out of the market, and our shortage of affordable housing is dramatic. The overall growth in home prices the past year was 17 percent – though spread very unevenly around the state. The recommended budget balance for individuals is to spend not more than 30 percent of income on housing. Fifty percent of Vermonters spend more than that, and of them, a staggering 50 percent (25 percent of all renters) are paying 50 percent of their income or more on housing.

The lack of housing contributes to our workforce shortage, which in turn remains the largest ongoing threat to our economy and to vital services, like health care and childcare, and the costs of them. Wages are increasing as a result of that workforce shortage, but not enough to fill the workforce gap, which has increased due to mismatches, to high “quit rates” as people see more options in a buyers’ market, and to moves towards earlier retirement.

Property taxes – the actual amount paid, not just the rate – are only going down because of a surplus from last year due to unusual factors. As the grand list increases and is averaged over three years, rates will go down but actual taxes will go up as your house increases in a valuation that you cannot convert to cash. Increases in education spending have not changed. The impacts of this will vary greatly by town, depending both on the common level of appraisal -- the differences in increased values – and local spending.

Finally, the stark warning that I referenced earlier.

We have a long history of an “alligator’s mouth” in annual budgeting. Revenues increase, but so do costs, the costs at a faster rate; the mouth gets bigger. We scramble to fill in the gap, but the cycle simply returns. It’s gone for this year, thanks to the federal funds and the surpluses. Our general fund base budget carryover balance is $188 million (some will be used in the January mid-year budget adjustment), plus there are $528 million remaining in the existing federal relief funds.

The alligator will be back by next year, however, with base revenue projected at a 2.2 percent increase and a typical spending growth rate of 3.5 percent. Because of some significant needs, there will be strong pressure to spend this year’s revenue surplus, but if it is added to base funding, it will worsen next year’s pressures. It is very difficult politically to cut a program once it’s been started. Those needs will mean major competition for funds between the different committees in the legislature.

As the vice-chair of the House Health Care Committee, I’ve been part of years of efforts to increase workforce incentives and to increase affordability for health care for years. We have almost 97 percent of Vermonters covered by insurance, but for many folks, health care is unattainable because of high deductibles or co-pays. And affordable healthcare is worthless if providers aren’t available.

Nowhere has the crisis existed longer or worsened more dramatically than in mental health services.  Our committee held a special off-session hearing this past week to get an update, and everything is worse than it was when we left in May.

Rooted in historic discrimination, services still suffer from reimbursement disparities. Emergency room backlogs are only a symptom. If you have to wait two or three months for a referral to a psychiatrist, is it any surprise that your condition worsens? Or that emergency departments are seeing more patients and more acute illness? Unlike other health care, we have no “urgent care” system for mental health. If you can’t access outpatient help when you need it, your only option is the ED.

Having half the emergency department beds in our hospitals filled with people awaiting an inpatient psychiatry bed is not sustainable. And it is fundamentally wrong to leave people waiting for days in an emergency room cubicle before they can access a hospital bed. A majority of those seeking care wait more than 24 hours, and some wait more than a week, including children.

The entire budget surplus is not enough to resolve the chronic short funding of mental health care. And then that need will compete with the housing needs, childcare access needs and more, with each committee fighting to meet their pressing funding gaps.

And then…

The urgency of addressing climate change looms before us. The Climate Council created two years ago has released its initial Climate Action Plan, with 234 specific action steps it says are all necessary to meet our carbon reduction goals. I’ll be honest; I haven’t read all 273 pages. But I’ve seen the highlights and part of our fiscal briefing included a review of it. (For the outline from the legislative briefing, see ljfo.vermont.gov/publications/legislative-briefing; for an initial analysis of what the legislature needs to consider, see the issues brief on the home page of the Joint Fiscal Office at ljfo.vermont.gov; for the full report, go to climatechange.vermont.gov/)

The Plan includes recommendations for aggressive action. It needs to. I support a significant majority of it, in concept. And I regret my vote against the bill two years ago, which was not a vote against the goals but a vote against the over-delegation of decision-making – and ergo lack of public accountability – from the legislature to the new council. Based on the report, that is not happening. It will all be back on our lap because the majority of the plan requires funding, and only the legislature can appropriate money.

Before the Plan even went to press, one key component had a hole blown in it. It recommended joining the regional Transportation and Climate Initiative Program, something I have long supported. The economic impact of a single, small state taking on an issue like carbon assessment makes it a non-starter. It requires a significant group of states to work together. That was the thinking behind the TCI-P, under development with the collaboration of 13 northeast and mid-Atlantic states. Although a few states had bowed out early on, it was still viable. As of the end of November, though, Massachusetts and Connecticut had dropped out. 

Thus, the Plan itself notes, “As of the date of adoption of [the Plan], the future of the TCI-P is uncertain, and it is not immediately clear how Vermont’s adoption of the action to participate in the TCI-P would be implemented without partnership from other states in the region.” (There is a strong analogy here to health care reform. Despite what some people want to believe, Vermont could never create a go-it-alone single payer system. This is uniformly understood by all those – of all parties – on our current Joint Task Force on Affordable, Accessible Health Care. Yet we are still getting emails from folks urging us to pursue a single-payer system for Vermont.)

The costs of the Climate Plan will be staggering. To say nothing of the workforce needed to implement it. All our overlapping needs cascade together on that one.

The first follow-up step is a required analysis by our Joint Fiscal Office to identify what the actual costs are likely to be: “an analysis of the economic, budgetary, and fiscal costs and benefits of the Plan.” I’m glad that we will get a (somewhat) clear picture of that up front and be able to enter the discussion with clear eyes.

I’ve seen some estimates that suggest in the end it will save money, based on lower energy costs and the like. The problem is that it is a pay first, reap benefits afterwards, process. And if you are paying for all these new initiatives, what happens to the costs you are already bearing for housing, health care or childcare?

So how do we juggle this critical need against others?

So much for the rosy fiscal picture for our state that I opened this update with.

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Anne Donahue is the state representative for Northfield and Berlin along with Representative Ken Goslant. Please reach out to us at any time with questions or input at adonahue@leg.state.vt.us or kgoslant@leg.state.vt.us. It is an honor to represent you.