Tough, tougher
Toolbox
Published: July 19, 2009
The budget battle, part two, is now under way with economists reporting the plunge in state revenues that caused so much havoc earlier this year promises more havoc to come.
The new budget year began on July 1, and already state economists have seen a $28 million decline in projected revenues. Continuing weakness in the economy could balloon that budget shortfall to an even more damaging level.
As a result, legislators and the Douglas administration are facing the prospect that they will have to replay the budget battle they waged this winter and spring, with an ever grimmer outcome. Gov. James Douglas has already acknowledged that layoffs of state workers, beyond the hundreds already laid off, may be necessary.
Vermont is feeling the pain of a recession that has battered the nation more brutally than any downturn since the Great Depression. As economist Thomas Kavet said last week, the nation has already lost 6.5 million jobs, which exceeds the total of jobs added during the previous boom. The nation's economy is going backward. That translates, not only into rising unemployment, but also into stagnant wages for those who are working and underemployment for millions who are not working full-time. The official unemployment rate is approaching 10 percent, but economists say that when underemployment is added in, the number is closer to 16 percent, and worse in some areas.
Unemployment in Vermont has been on the rise. Previously the state enjoyed one of the lowest unemployment rates in the nation. Now it is ranked 17th lowest. Laid-off workers at the Ethan Allen plant in Beecher Falls or at Rutland Plywood or at numerous other businesses across the state constitute the reality behind that statistic.
Fewer people earning money means less income tax paid to the state. And the decline in incomes produces a decline in economic activity, thus depressing sales tax revenues. Big losses on Wall Street have also taken a toll on Vermont's wealthy residents, who are responsible for a significant portion of Vermont's income tax revenues.
During the last legislative session, the Legislature sought to stave off cuts proposed by Douglas that legislators believed to be too damaging. They were able to save a number of important programs with the help of about $20 million in tax hikes, most of which Douglas opposed. The impasse between the Legislature and governor produced the first-ever veto of a budget and the first-ever override of a budget veto.
Douglas did not say "I told you so" last week, but he came close. "The projected shortfall for 2011 was $67 million. What we heard today was that it was $23 million more than that. So it's $90 million now for 2011. Added with what we're looking at for fiscal '10 and '12, we're looking at a billion dollar problem for these three years," he said.
And yet the latest decline in revenues would have undermined the budget even if the Legislature had adopted Douglas's plan. Thus, the revenue shortfall is not strictly the Legislature's problem or the governor's. It is a problem for the entire state, and both sides need to work together to fashion a response.
Legislative leaders were quick last week to urge a cooperative approach, and Douglas said he would work with legislators, but he said he did not foresee a "kumbaya moment" that would achieve a magical new level of bipartisanship. He said his confidence in the Legislature needed to be restored.
The Legislature has a tough job ahead of it. It worked to preserve programs serving vulnerable citizens, and that is a guiding principle it ought not to abandon. It avoided cuts that would have done long-term damage to valuable programs, such as the Housing and Conservation Trust. It refused to shift the burden of the budget to property tax payers as Douglas had proposed. And yet it pared back the state budget to a level lower than the previous two years — with the help of federal stimulus money.
New sources of revenue will be hard to come by, and certainly any additional tax increases will face stout resistance from the governor. Legislative leaders knew they had some serious additional budget cutting ahead of them to meet revenue projections in the coming year. That job just became harder.
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