• Refusing to face fiscal reality
    June 29,2014
     

    Inevitably, violating principles of sustainable spending has both fiscal and political consequences. At its core, sustainable spending requires that growth in government spending reasonably equate to growth in the underlying economy supporting such spending, especially in relatively high tax states like Vermont. In recent years, our state leaders have wandered from these core principles and the consequences, both fiscal, and soon political, are now unfolding.

    Primary data on recent rates of change in Vermontís economic and demographic profile are readily available. For example:

    ó The U.S. Bureau of Economic Affairs recently reported that the growth in Vermontís real gross domestic product (GDP) for 2013 was 1.9 percent.

    ó In April 2008, there were 341,550 employed Vermonters vs. 339,650 just this past April. Thus, despite a rosy unemployment rate, the level of Vermonters actually employed, and upon whose shoulders substantially rests the costs of state government, has languished over the past six years. Vermontís low unemployment rates are driven more by fewer people in the workforce.

    ó Overall, Vermontís population growth is essentially flat-lined, but the mix is changing dramatically and not for the better from a fiscal perspective. Over the past five years, the rate of annual population growth has been just over one-tenth of 1 percent. But, while the growth for those between 25 and 64 is negligible, totaling only two one-hundredths of 1 percent, the growth of those over 65 has been 13 percent.

    ó Personal income tax revenues are not tracking as forecasted. Through the month of May, the year-over-year growth has been only 1.1 percent vs. projected growth of 4.9 percent. For the coming fiscal year which starts on July 1, projected growth is 6.5 percent, a rate clearly unrealistic relative to current revenue reality. But for a couple of extraordinary inheritance tax returns putting inheritance tax receipts 133 percent or $19.7 million over the prior year level, fiscal year 2014 would be ending substantially off target.

    Primary economic and demographic data indicate Vermont is living in a zero to 2 percent growth environment. Yet, since fiscal 2012, Joint Fiscal Office data profiles total state budget growth at the annual rate of 5.3 percent, from $4.72 billion to $5.50 billion, with the non-federal portion of the budget growing at a rate of 4.5 percent or $288 million.

    For fiscal 2015, relative to the 2014 state budget approved last spring, the recently adjourned Legislature passed a 5.2 percent overall budget increase, inclusive of a 5.1 percent increase in the portion funded by state dollars. Surprisingly, the governorís recommended budget submitted to the Legislature in January called for even higher levels of spending, at 5.6 percent, than the Legislatureís approved budget.

    If over the past three years the budget had grown by a more responsible but still generous 3 percent annually, the portion of the 2015 budget funded with state taxpayer dollars would be $99.7 million less. Additionally, at a 3 percent growth rate, education fund spending would be $42.5 million less, for total savings or new investments, such as cleaning up Lake Champlain or increased support for higher education, of over $140 million just this year.

    The fundamental reason why such savings have not been achieved is the abandonment by the governor and the Legislature in 2011 of every effort to reform state spending patterns in response to recessionary pressures. By relying on the easy ďstimulusď money flowing from Washington back then, our leaders avoided the more difficult tasks of making state government more cost-effective. One such effort abandoned in 2011 was the legislatureís own Challenges for Change. In December 2010, this legislatively sponsored effort had identified potential savings totaling $79 million in 2011 and $161 million in 2012.

    However, the failure of the Legislature and governor to respect sustainable spending principles will have consequences. In the end, economic and demographic forces prevail over the fiscal sloppiness of State House leaders. Examples include the recent downgrade of the Vermont State Colleges bond rating, the inability of state leaders to identify resources to clean up Lake Champlain, borrowing $28 million from the stateís cash reserves to pay the health care costs of retired teachers, and propping up the fiscal 2015 budget excessively with one-time funds and one-time budget gimmicks, among many others.

    For fiscal 2015, the current official revenue estimate projects a 4.8 percent General Fund revenue increase. Given the weakness of actual 2014 revenues, the 2015 projection to be revised this July will likely be decreased, causing politicians to scramble in an election year to balance the budget from the very start of the fiscal year.

    Additionally, there will be political consequences. In August 1991 a Democratic tracking poll conducted by the Becker Institute profiled the erosion of support for Gov. Madeleine Kunin and the Legislature from 1985 through 1991. During this same period, rapidly increasing state budgets resulted in a $65 million deficit to which taxpayers were harnessed with higher tax rates. In 1985, the governorís favorability rating was 76 percent and the Legislatureís 73 percent. By 1991, the governorís favorability had fallen to 39 percent and the Legislatureís to 50 percent.

    Vermonters should look carefully over the coming weeks and months and note the names of their elected leaders, inclusive of Democrats, Republicans and Progressives who failed to practice sound fiscal principles. As evidenced by the elections of Republican Gov. Richard Snelling and Democrat Howard Dean in the 1990s and Dean and Gov. James Douglas in the 2000s, fiscal responsibility is not a partisan matter.

    Voters should reject candidates of all political stripes who willfully put Vermont in its current fiscal mess while seeking out and supporting those who will put Vermont back on a sound fiscal path.



    Tom Pelham was finance commissioner in the Dean administration and tax commissioner in the Douglas administration. He also served as an independent member of the Vermont House from Calais. He lives in Arlington.

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