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Fewer Newcomers Call Vermont Home

Posted by jack on January 31, 2012 at 3:47 pm

Since the early 1990s, when the IRS started tracking migration and income, people moving to Vermont have consistently reported higher average annual incomes than the Vermont residents who were leaving.¹ The most recent data for 2010 shows that trend has continued.²

The numbers of people coming and going over the past 18 years have seesawed. For 10 of those years more came; for eight, more left. But since the peak of inmigration in 2001, when a little more than 17,000 people relocated to the state, the number of newcomers has been declining. And since 2005, the number of Vermont residents moving out each year has exceeded the number of new arrivals.

Those coming to the state still have higher average incomes. So, even in years when out-migration has exceeded in-migration, the total personal income in the state has increased.

In 2010, however, that changed. Vermont saw a net loss of income for the first time since the IRS began to publish this data. According to the latest report, 13,422 people moved into Vermont in 2010. Their total adjusted gross income was $353.9 million. The same year, 14,071 Vermonters moved away. Their income added up to a bit more: $356.3 million.

Download a PDF of the report.

 

 

 

 

 

 

1.  The IRS reports the number of income tax returns filed each year and the number of exemptions, including dependents, that are taken on those returns. The number of exemptions is considered to be a close approximation of the number of people who are moving into or out of Vermont. So “exemption” means “person” in this report. There may be additional people moving into or out of Vermont who have not filed an income tax return or who have not been claimed as an exemption on a filed return. [↩]
2.  The numbers presented in this report involve the change from one year to the next. The data labels reflect the most recent year of the two (e.g., data labeled “2010” refers to the change from 2009 to 2010). [↩]

Vermont’s Middle Class: The Facts

Posted by sarah on January 3, 2012 at 8:00 am

Download a PDF of this Issue Brief

We typically think of a middle-class family as owning a home, having health insurance, a decent car, and a college degree (or aspiring for their children to gain one), and earning a reliable income that’s good enough to support a yearly vacation and a secure retirement. Polls tell us that most people consider themselves middle class.

A large middle class is evidence that the wealth in society is shared by a broad base of citizens. It’s an indication that a majority have hope for the future—their own and their children’s. 

This issue brief shows that Vermont’s middle class is slipping. This slippage is not an accident; it’s the result of state and federal policies over the last several decades. And these policies can be reversed to help rebuild Vermont’s middle class. 

 

Increased income inequality
Occupy Wall Street protests have focused public attention on growing inequality: a greater portion of the economic pie is now going to the top 1 percent, while the remaining 99 percent hold on to a dwindling slice. The pattern in Vermont has paralleled the national trend of the last 30 years. While the share of total income going to Vermont’s top 1 percent declined following the Great Depression, reaching a low of 5.9 percent in 1981, its share rose to 19.1 percent by 2005—more than tripling in 24 years.

 

 

 

 

Gains not trickling down
From 1990 to 2010, Vermont’s economy saw respectable growth, almost as good as the nation’s as a whole. Real gross state product (after adjusting for inflation) grew 56 percent; national growth was 61 percent. During the same period, Vermont’s real personal income rose 64 percent. However, inflation-adjusted income for the median Vermont household—half the households make more and half make less—rose just 1.5 percent over those 20 years.

 

 

 

 

 

Anemic job creation
A decent job has long been the route to the middle class, but Vermont has not created any net jobs in the past decade. Even before the start of the Great Recession in 2007, Vermont was creating jobs at the slowest rate since records have been kept. By 2010, Vermont was seeing a net loss of jobs. This poor showing occurred in a decade when the wealthiest Vermonters—the so-called “job creators”—saved hundreds of millions in federal taxes thanks to the Bush tax cuts.

 

 

 

 

Higher-cost higher education
A college education is key to a decent income and provides another entrée to the middle class. But while median household incomes have stagnated—even fallen by some measures—college costs have grown at more than twice the rate of inflation. The result is that the cost of college now takes a bigger bite of the income of the median household, making college unaffordable for more Vermonters.

 

 

 

 

Rising health insurance premiums
Access to doctors, hospitals, prescription medicines, and other care is a life essential. But rising health care costs and Medicaid cutbacks have driven up health insurance premiums and squeezed the middle class. Between 2003 and 2009, Vermont employees’ share of health insurance premiums rose 54 to 88 percent, depending on the type of plan. Premiums rose even though average deductibles more than doubled during the same period.

 

 

 

Download the issue brief in PDF

© 2012 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation. We thank it for its support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundation.

State of Working Vermont 2011

Posted by sarah on December 31, 2011 at 3:32 pm

By Jack Hoffman & Paul Cillo

Download this report in PDF

Three years after the start of the Great Recession, Vermont was faring better than many other states.¹ Its annual unemployment rate for 2010 was one of the lowest in New England and lower than in most other states.² The under-employment rate, which includes people who would like to be working more hours, was also among the lowest in the country. The percentage of non-farm jobs that Vermont lost between 2007 and 2010 was the second lowest in New England and 15th lowest nationwide. And the wage gap between male and female workers in Vermont was the smallest in New England and fifth smallest overall (Table 1).

That’s the good news—if we just want to know how Vermont workers are faring relative to workers in other states. But if the goal as a state is to improve Vermonters’ lives and give them hope for the future, it’s not terribly useful to know that things are worse elsewhere.

The bad news is what’s happened to working Vermonters over the last 20 or 30 years. The gap between the rich and everyone else—brought to dramatic light this year by the Occupy Wall Street movement—is widening in Vermont as it is nationwide. The real earnings of middle-income Vermonters weren’t much higher in 2010 than they were in 1990. And Vermont’s private sector is no longer creating new jobs at a rate sufficient to keep up with population growth. The number of Vermonters living in poverty is increasing. And we’re losing what we knew to be our middle class. This adds up to a society that works for only the few at the top.

Peter Shumlin, who won the governor’s office at the end of 2010, campaigned on a promise to rebuild Vermont’s middle class. He described Vermonters who were “fearful that they cannot send their kids to college; that they cannot pay their mortgage; that they cannot retire as they had hoped; that their dreams in Vermont to succeed may not happen in the way that they had hoped.”³

Too many working Vermonters have lost ground in the past 30 years because of state and federal policies that favor the wealthy and put money considerations ahead of people’s needs—profits ahead of job creation, low taxes at the expense of adequate public services, and weak regulation in place of sound public interest protections. It should come as no surprise that these policies have resulted in social and economic ills. It will take the focused attention and commitment of elected officials to reverse these policies—to put people first again and rebuild a vibrant society.

This report seeks to provide an understanding of where working Vermont stood at the close of 2010. It also helps explain how we got here, by putting this first decade of the 21st century into historical context.

Employment and Jobs

Many Vermonters lost jobs during the recession and many are still out of work. In December 2007, at the official start of the recession, Vermont reported 14,420 unemployed workers.⁴ Unemployment peaked in May 2009 at 26,397—an increase of 83 percent. During 2010, an average of 22,470 Vermonters were unemployed—60 percent more than before the recession began.

Joblessness worse than it looks
Vermont’s official unemployment rate in 2010 was 6.2 percent. But this rate doesn’t count people who had gotten discouraged and stopped looking for work. Vermont’s unemployment rate including discouraged workers and those who are under-employed was twice the official rate—12.5 percent.⁵

As bad as that was for Vermonters, they fared a lot better than workers in most other states (Figure 1). Vermont’s 60 percent increase in unemployment between 2007 and 2010 was the fifth-lowest growth rate in the country and the lowest in New England (New Hampshire’s rose 72 percent).

Fewer new jobs even before the recession
By the end of 2010, Vermont still had not recovered the jobs lost during the recession, which officially ended in June 2009. Vermont averaged 297,500 non-farm payroll jobs in 2010, a decline of 3.5 percent from before the recession. That was better than most of the other New England states. Only Massachusetts had a smaller job deficit in 2010; it was down 2.9 percent from its pre-recession level.

All in all, though, 2000-2010 was a dismal decade. Vermont was one of 28 states that had fewer jobs in 2010 than it had a decade earlier. The rate at which Vermont created new jobs during the decade was the slowest since the 1940s, the first decade on record (Figure 2). Even before the recession hit in 2007, Vermont’s pace of job creation was slower than during any of the previous six decades.

Less manufacturing, more health and education services
The biggest job loss in the last decade, in both percentage and number, was in manufacturing—traditionally the sector with some of the best wages. Vermont had a third fewer manufacturing jobs in 2010 than in 2000, and that didn’t include any adjustment for population. Vermont manufacturers employed more than 46,000 people in 2000; by 2010, the number fell to 31,000. Manufacturing accounted for 17 percent of the jobs in Vermont in 1990, and just 10 percent in 2010 (Figure 3).

The manufacturing sector has been shrinking in the U.S. for at least two decades, although Vermont bucked the trend in the 1990s, when manufacturing jobs here increased by 8 percent. From 2000 to 2010 the drop grew even steeper nationally. All but one state lost manufacturing sector jobs. Vermont’s 33 percent decline in manufacturing jobs that decade was the same as the U.S. decline overall.

The biggest sector for job growth—in the past decade as well as in the 1990s—was education and health services, which includes health care workers as well as non-medical workers who provide “social assistance” services.⁶ Education services in this sector include training programs, but not public schools. Jobs in health care and social assistance services nearly doubled in 20 years—from 25,000 in 1990 to more than 46,000 in 2010. Even during the decade ending in 2010, despite the recession, this sector added more than 12,000 jobs. Historically, most of the new jobs in the education and health services sector have been social assistance jobs, which pay the lowest wages of any jobs in this sector.⁷

In essence, over the past two decades, Vermont has seen the steady loss of higher-paying manufacturing jobs and gains in lower-paying service jobs. This means that to maintain its previous level of income, a family would need to work more than one job or reduce spending. Either way, many Vermonters are seeing a reduced standard of living.

Workforce

Vermont continues to have an older and better-educated workforce than many other states. Seven in 10 Vermonters were in the labor force, including those who are employed and unemployed, and 66 percent of Vermont’s population was working in 2010.

Older, more experienced workers
Half of all Vermonters 55 and older were in the workforce in 2010, which was the highest participation rate for that age group in the country (Table 2). These older workers accounted for a quarter of Vermont’s labor pool, which made Vermont’s the greyest workforce in the U.S. for the fourth year in a row.

Some worry about the aging of Vermont’s workforce, citing statistics about the needs of the elderly for more health care and other state-funded services. But in fact older workers offer the economy many benefits.

“While I feel sorry for every American who … wants to retire but can’t, there is a lot to like in this surge of experienced workers,” Harvard economics professor Edward L. Glaeser wrote recently in the New York Times. “Longer work lives mean more tax dollars, and that helps with America’s fiscal problems. Older workers also bring a diversity of perspectives and experience to the workforce.” Noting that “the mid-20th-century retirement boom seems like something of an aberration” historically, Glaeser added: “While some older workers will have to work because they can’t afford not to, there remains the sunny possibility that others … will do so because they find fulfillment in their jobs.”⁸

Better educated, at least nationally
Vermont traditionally has a better-educated workforce than most states. Since 1999, it has been among the top 10 states in the percentage of college graduates in the workforce.⁹ For the last six years, a third of Vermont’s workforce has held at least a bachelor’s degree (Figure 4).

While the education level of Vermont’s 25-to-34-year-olds is good by U.S. standards, the U.S. lags internationally, according to the College Board Advocacy and Policy Center.¹⁰ By the Center’s measure, Vermont would rank eighth internationally, behind Korea, Canada, the Russian Federation, Japan, New Zealand, Norway, and Ireland. Other countries, especially developing countries, are making investments to raise the education level of their younger workers.

To make the U.S. more competitive economically, President Obama has set a national goal of a 60 percent college graduation rate by 2020. The College Board center has a somewhat less ambitious—some would say more realistic—goal of 55 percent of 25-to-34-year-olds attaining associates’ degrees or higher by 2025. Forty-four percent of Vermonters from 25 to 34 had reached that educational level in 2009.

Wages and income

One bright spot in 2010 appeared to be the narrowing wage gap between men and women in Vermont. The gap in real median wages did close—from a male advantage of 16 percent in 2009 to 12 percent in 2010. But the spot wasn’t really so bright. Women’s wages did not rise; they just fell less than men’s. The real median wage for women dropped 0.5 percent in 2010, to $15.27 an hour, while the real median wage for men fell nearly 5 percent, to $17.37 an hour.

The median wage is right in the middle of the wage scale—half of the workers in the group make more than the median and half make less. But it wasn’t just this middle wage that fell in 2010. Wages at nearly all wage levels declined that year. Only those at the top saw their real wages rise (Figure 5).

While this latest drop can be attributed to the recent global economic collapse, typical Vermonters have experienced income stagnation in recent decades. The same has happened in households across the country, fueling the income inequality that ignited the Occupy movement.

Vermont saw strong growth in household income in the 1980s (Figure 6). Real median household income—that is, after adjusting for inflation—rose almost 23 percent between 1980 and 1990, which was the sixth-highest rise in the country. But that was the only decade in the last four that Vermont saw such growth of median household income.

Income disparity and poverty

In the last 20 years—1990 to 2010—inflation-adjusted median income rose less than 2 percent. That was 2 percent for the entire period—not 2 percent per year. Meanwhile, over the same 20 years, the combined real personal income of all Vermonters increased 63.6 percent, and the overall state economy grew 56 percent (Figure 7). In other words, Vermont’s income grew—but most Vermonters’ didn’t.

While the richest Vermonters gained a bigger share of the economic pie, more than 70,000 Vermonters lived at or below the poverty level in 2010.¹¹ Vermont’s poverty rate had been steadily dropping over the past several decades, but it was up again in 2010 (Figure 8). More than 15,000 Vermonters drifted into poverty over the last decade.

Historical patterns
Historically, Vermont’s pattern of relative income equality mirrors what has happened nationally, according to research by Sam Houston State University economist Mark W. Frank. Frank used IRS data going back to 1916 to calculate the share of income going to the top 10 percent and the top 1 percent of taxpayers in each state.¹²

A wide gap between rich and poor persisted through the 1920s, but after the Great Depression the disparity began to decrease. For almost 50 years, from 1930 until the late 1970s, the gap steadily narrowed. During that time, union membership rose, taxes on the wealthy increased, and new banking regulations curbed the kind of financial speculation that contributed to the Crash of 1929 and the Depression.

For the last 30 years, however, the gap between the rich and everyone else has widened again. In the late 1920s, 14 percent of Vermont’s income went to the top 1 percent of taxpayers. That share reached a low of 6 percent in 1981, before income disparity began to grow again. By 2005, the latest year for which we have Vermont-specific data, the share of income received by the top 1 percent of Vermont taxpayers had climbed to 19 percent—more than tripling in 24 years (Figure 9). Meanwhile, the share of income for the bottom 99 percent shrank from 94 percent in 1981 to 81 percent in 2005.

A Vermont that works for everybody

The first step to moving Vermont in a new direction is acknowledging the problems we face—and face what those problems say about us.

Governor Shumlin identified an important part of the problem when he described the fears of many middle-class Vermonters who don’t see their lives getting better. The commitment to rebuild the middle class is a good place to start, but Vermont’s problems go beyond the middle class. Income disparity is growing. Do we want to be a state where a few continue to amass greater wealth while tens of thousands live in poverty? Continued rhetoric about the benefit to all of making Vermont more attractive to the wealthy—the approach that got us to this place—will not suffice. To reduce poverty and income inequality, the state needs to make real investments that benefit all Vermonters.

Such investments will also enhance Vermont’s economic position. For instance, if Vermont wants to be competitive in the nation and the world, it will need to invest more in higher education, while maintaining its investment in pre-K through grade 12.¹³Indeed, our per-pupil education spending is already high relative to other states. But other states, and the U.S. as a whole, lag behind much of the developed world. Simply aiming to top the list in the U.S. will not make Vermont a world-class educator.

Aiming for increased total wealth or a “better economy” is not enough. The goal should be a state that works for all Vermonters. Our political leaders can take steps right now to move toward that goal.

Adopt policies explicitly aimed at improving the lives of all Vermonters.
For example, if the Legislature wants to rebuild the middle class, then rebuilding the middle class should be a policy objective, and major legislation should be judged against that goal. When the governor presents his budget or a committee proposes new tax changes or economic development plans, the proposals should be measured by how much they will help or hurt the middle class.

In recent years, we have seen proposals to reduce eligibility for paying school taxes based on income, an option available to most resident homeowners under Vermont’s school funding law. Such a change would increase taxes on middle-income Vermonters and lower taxes for second-home owners and for those in the highest income brackets. It would not advance the objective of strengthening the middle class, and it would not serve to narrow the gap between rich and poor—another policy goal Vermont should adopt.

Develop easily understood indicators that show whether Vermont is moving toward its new goals.
The Agency of Human Services used to collect data and publicize a set of indicators that measured Vermonters’ wellbeing. The indicators included things like school graduation and dropout rates, teen pregnancy, college enrollment, drinking and drug use, poverty, and employment. The administration and Legislature should resurrect those Human Services indicators and develop others for other areas of state government.

For example, the Department of Economic Development could use median household income as one of the indicators of whether its economic development efforts are working. Instead of focusing on the amount of tax credits awarded to businesses, the department should be looking at whether all Vermonters are sharing in the state’s economic growth.

Part of the stated mission of the Department of Economic Development is “to enhance Vermonters’ quality of life through expanded economic opportunity.” We need indicators that clearly show whether Vermonters’ quality of life is improving, and then measure the department’s initiatives in terms of contributions toward that goal.

The Legislature tried to move toward this results-based approach with the Challenges for Change program in 2010. The program was supposed to save money while maintaining or even improving the delivery of public services through greater efficiency. But Challenges for Change became a pretext for more budget cuts, and, rightly, was abandoned.

Create tools and restore the capacity to measure the effectiveness of public programs and services.
One problem Challenges for Challenge revealed was that recent budget cuts and staff reductions have diminished state government’s ability to collect and analyze information about its own performance. We need to rebuild that capacity, which means the governor’s administration and the Legislature need to invest more money to improve the government’s efficiency and effectiveness before it can ultimately save some money.

Vermont also needs better tools to measure effectiveness: what works and what doesn’t—or which programs or services produce the best results for the dollars spent.

The Legislature is exploring a new system that could help. Results First, developed by the Pew Center for the States, measures the return on investment—that is, the cost effectiveness—of public programs by calculating the benefits of things like reduced crime or higher graduation rates and comparing them to program costs. The state also is investing in a computer upgrade that is supposed to make it easier to track each program’s costs.

The spirit of Irene

In late August, after the period covered by this report, Tropical Storm Irene hammered Vermont. Responding to the worse disaster to hit the state since the 1927 flood, Vermont showed a unity of purpose and commitment to do what needed to be done that was refreshing in this era of political and cultural polarization. Unlike this summer’s floods, though, our current economic problems didn’t just happen. They are the result of policies adopted over the last 30 years. We can choose different policies that will move us in a better direction. We can hold onto that post-Irene spirit and rebuild the hopes that many Vermonters have lost over the last 30 years.

© 2011 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation. We thank it for its support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundation.

1. Rankings in this report exclude the District of Columbia. [↩]
2. Vermont’s unemployment rate is typically below the national average. [↩]
3. Vermont Public Radio, “Governor-elect Vows To Focus On Creating Jobs,” Nov. 3, 2011, http://www.vpr.net/flash/audio_player/audio_player.php?id=32209 [↩]
4.  Jobs and employment figures for specific months in this report are seasonally adjusted; annual averages are not seasonally adjusted. [↩]
5. Vermont Department of Labor, Alternative Unemployment Rates, U-6, http://www.vtlmi.info/unempaltrate.cfm [↩]
6. Detailed descriptions of industries in the North American Industry Classification System (NAICS) can be found at the U.S. Bureau of Labor Statistics, http://www.bls.gov/iag/ [↩]
7. Paul Cillo and Doug Hoffer, “State of Working Vermont 2007,” Fall 2007, Figure 5, http://publicassets.org/wp-content/uploads/2008/05/pai-ib0701.pdf [↩]
8. Edward L. Glaeser, “Goodbye, Golden Years,” New York Times, Nov. 19, 2011, http://www.wehaitians.com/goodbye,%20golden%20years.html [↩]
9. Ranking does not include District of Columbia, which always has a higher percentage of college graduates than any of the states. [↩]
10. A study by the College Board Advocacy and Policy Center ranks the U.S. 11th among 24 countries in the education level of 25-to-34-year-olds. See “The College Completion Agenda,” http://completionagenda.collegeboard.org/ [↩]
11. Research shows a link between the rich getting richer and the poor getting poorer. See Public Assets blog, “A Bigger Pie Doesn’t Mean a Bigger Slice for All,” http://publicassets.org/blog/a-bigger-pie-doesn%E2%80%99t-mean-a-bigger-slice-for-all/; and Jeffrey Thompson and Elias Light, “Searching for the Supposed Benefits of Higher Inequality: Impacts of Rising Top Shares on the Standard of Living of Low- and Moderate-Income Families,” April 2011, http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP258.pdf [↩]
12. Mark W. Frank, “U.S. State-Level Income Inequality Data,” Department of Economics and International Business, Sam Houston State University, http://www.shsu.edu/~eco_mwf/inequality.html [↩]
13. For research on long-term economic benefits of education, including early childhood education, see the work of Timothy Bartik, W.E. Upjohn Institute for Employment Research, http://www.upjohninstitute.org/Research/EducationandTraining/K12 [↩]

Vermont Education Spending: The Facts (2011 Update)*

Posted by sarah on October 19, 2011 at 5:25 pm

 

Download a PDF of this Issue Brief.

Education spending is not out of control.
Education spending as a percentage of the Vermont economy (gross state product) has remained remarkably steady since the early 1990s. Contrast that with health care, which has been growing much faster than the underlying economy. Should the education line trend down because Vermont’s enrollment is declining about 1 percent a year? Perhaps. But remember: Education spending includes those rapidly rising health care costs. Regardless of the number of pupils, the cost of Vermont’s public education is neither “skyrocketing” nor “out of control.”

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School boards have curbed spending growth.
The growth in education spending has been declining since 2005. Fiscal 2009 saw a bump following passage of legislation that required voters in school districts with high spending growth to vote twice on the school budget. Districts may have anticipated being subject to the two-vote requirement in fiscal 2010 and shifted certain purchases to fiscal 2009 to keep their 2010 growth below the threshold. In fiscal 2011 and 2012, education spending was lower than the previous year.

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Property taxes now pay a bigger share of costs.
The Legislature reduced the General Fund transfer to the Education Fund in fiscal 2010, 2011, and 2012. Other dedicated revenue sources of the Education Fund, such as proceeds from the Vermont Lottery and a portion of the sales tax, have grown slowly or not at all since the recession of 2007. Even with modest education spending growth, property taxes have had to cover the shortfalls in the General Fund transfer and dedicated taxes. In 2005, property taxes paid 61 percent of education costs; in 2012, 67 percent. If the General Fund and dedicated revenues provided the same level of support as in 2005, property taxes would be $77 million less in fiscal 2012.

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Even with Act 68, school taxes are regressive.
Act 68 went far in reducing the burden of the property tax, which used to fall disproportionately on middle-income residents. More than six in 10 Vermont households now pay school taxes based on ability—on income rather than assessed property value. Even with this change, however, upper-income households pay a much smaller portion of their incomes to support schools than their less-wealthy neighbors. The chart is based on a 2010 Vermont Tax Department analysis of homestead taxes as a percentage of personal income across all tax brackets.

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 Investing in education strengthens the economy.
A 2010 study by economist Jeffrey Thompson at the Political Economy Research Institute documents the benefits to states and regions of investment in education, including pre-K and higher education. The benefits include higher personal income, employment, and tax collections and reduced crime and welfare dependence. Because education is labor intensive, such spending creates more jobs per dollar than many other sectors. Those jobs are direct (teachers and school staff), indirect (electricians who wire the school), and induced (workers at the market where school staff buy groceries).

 

* The original report was published October, 2010.

 

© 2011 by Public Assets Institute
This research was funded in part by the Annie E. Casey Foundation. We thank it for its support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundation.

 

Lessons from ’27: Crisis as Opportunity

Posted by sarah on September 30, 2011 at 9:36 am

By Jack Hoffman
September 2011

Download a PDF of the report or read the text below:

On Nov. 30, 1927, a little less than a month after floods ravaged the state, Vermont Gov. John Weeks opened an emergency session of the General Assembly with a summary of the damage that had been done to the highway system. “Approximately 1,258 bridges were destroyed or severely damaged,” the governor said. He put the estimated cost of the bridge damage at just over $5 million—and added $2.7 million in destruction of federal aid roads, state roads, and town roads. The Vermont State Hospital in Waterbury suffered extensively too—as it did during the floods last month when Tropical Storm Irene came through Vermont. In 1927 the water reached the second floor of the hospital, taking a heavy toll on the buildings and equipment. And, Weeks told the Legislature, “the entire dairy herd and nearly all of the other livestock [at the hospital] were drowned.”

Private property—railroads, businesses, farms, and houses—was devastated too. Estimates varied, but most put the physical damage at around $30 million. In 1928, Vermont Congressman Ernest Gibson testified that, counting lost business and other indirect losses, the cost of the storm came to $100 million.¹  To get an idea of how much that was in 1927, to run the entire state government for fiscal 1928 the Legislature had appropriated about $7 million.²

Challenges and Dangers
The governor understood that the toll of the Flood of 1927 was unprecedented. He also recognized the possibilities that lay in moving past the crisis. “Vermont has a future before her that she has not realized,” Weeks said in his address to the emergency session. “I want to personally consecrate every ounce of my strength to the work of making Vermont a stronger force in the outside world and a happier place to live in.”³

Much has changed in Vermont and the U.S. in 84 years. But Irene—whose damage in Vermont is likely to total $1 billion or more⁴—is not unlike the Flood of 1927 in this way: The calamity, like every crisis, holds challenges, dangers, and opportunities. Vermont can respond with actions and policies that strengthen its future and make it a happier place for all its citizens—or not.

As Naomi Klein argues in Shock Doctrine, the chaos of a crisis can provide cover for the consolidation of wealth and power. She documents the way Sri Lankan fishing families were prevented from re-building after the tsunami in 2004 so that large corporations could build luxury hotels on the beachfront property.⁵ Crises can lay bare government’s failure to respond with competence and compassion—as during Hurricane Katrina in 2005, when Washington left thousands of people on their own to find food, drinking water, and shelter. In part thanks to government policies, New Orleans is a different city now. The historically low-income African-American population has been displaced by middle-class whites.

And crises, like Tropical Storm Irene, can open the way for policies that strengthen an economy and make all citizens’ lives better. As Vermont rebuilds, what lessons can we learn from 1927 and the policy choices, intentional or not, that were made at the time?

Rethinking Government

Washington’s relationship to the states
The lore that has grown up around the 1927 flood is that Vermont refused to accept outside help—that Governor Weeks vowed, “Vermont will take care of its own.” In fact, Vermont, albeit reluctantly, did ask President Calvin Coolidge for help and in the spring of 1928 received $2.6 million as part of a federal aid package approved by Congress.⁶

Such aid was also a new idea for Washington. But in the spring of 1927 there had been massive flooding along the Mississippi, and the southern and midwestern states devastated by those floods had been appealing to the federal government to help with both disaster relief and flood control.

In 1928, six months after the Vermont floods, Congress approved a relatively modest package of less than $5 million in aid for Vermont and Kentucky. Reluctant to set a new precedent, however, Congress included language in the bill declaring the relief aid was a “contribution” that did not imply any liability on the part of the federal government.⁷

At the same time, Congress also approved the flood control plan for the Mississippi Valley with an estimated cost of $325 million. According to Deborah and Nicholas Clifford, in The Troubled Roar of the Waters, the flood control project sowed the seeds for the massive public works projects that President Franklin Roosevelt would propose a few years later to try to pull the country out of the Great Depression.⁸

Today, we have FEMA—the Federal Emergency Management Administration. Only a few hardcore libertarians question whether the federal government should help states when natural disasters strike. But federal support is not necessarily a given, either. The U.S. House wants any disaster relief funding to be offset by cuts elsewhere in the budget. The Senate has resisted, and the fight has been put off to another day. But if the House prevails, it will mark a major shift in the federal government’s role in times of emergency.

The state and its towns
Just as Vermont prized its independence from the federal government prior to the flood, its towns preferred autonomy to centralized state control, especially when it came to roads. At the time of the flood, state law limited aid to towns to $5,000 per bridge. But nearly 800 town bridges had been destroyed or damaged, and local communities couldn’t cover the repairs on their own.

In his Inaugural Address 11 months earlier, Weeks—a longtime advocate of modernizing the highway system—had urged the Legislature to raise taxes to pay for the expansion of “hard-surfaced” roads in the state. “For the necessary and convenient purposes of daily use, as a public investment and as a means of attracting visitors who may become permanent residents, good roads are no longer a luxury but a necessity,” Weeks said. The towns had balked, because they didn’t want to bear the cost or give up local control in return for state funding.

Now the governor used the flood as clear evidence that the state had to step up and take control. The federal aid the crisis brought could be used not only for reconstruction but also for modernization. “Bridges and highways are no longer built and maintained principally for the good and convenience of the people of the town where they are located, but for the good and convenience of the people of our entire State,” he told the Legislature. He proposed that the repair of the highway system be put under control of the State Highway Department.

In its first statute of the special session, the Legislature agreed to “aid all municipalities…to the full extent of the flood damage to public highways and bridges.” In return, it placed the supervision for all work in the hands of the state highway board and gave the state emergency board ultimate authority to resolve any disputes between the highway board and the municipalities.

The state and individuals
The governor’s message to the Legislature focused exclusively on the loss of public property, and the action of the Legislature was limited largely to repairing and replacing public buildings and infrastructure. There was no mention of appropriating money to help flood-stricken individuals and families directly in either Weeks’s address or any of the bills passed in the daylong special session. That job was left to a large, voluntary fundraising effort, as well as extensive efforts by the Red Cross.⁹

The closest the Legislature came to providing aid to individuals was in the creation of the Vermont Flood Credit Corporation, which provided loan guarantees for businesses or individuals who borrowed money to repair flood damage. The loan guarantees reduced the risks for banks that made loans to flood victims.

Providing loan guarantees to individuals and businesses turned out not to be much help, however. All of the farmers and most of the businesses that applied for loans received them—but very few applied. Only 38 individuals and businesses received guarantees on loans that totaled about $270,000.¹⁰ It’s possible the program wasn’t well advertised or well run or, as the Cliffords suggest, that many farmers simply couldn’t afford to take on more debt.

Today FEMA provides grants of about $30,000 to individuals to help with cleanup and repair. Clearly, that is not enough to help a family whose home has been washed away. Low-interest, guaranteed loans also will be available through a variety of agencies and programs. But many Vermonters will be in the same straits as people in 1927: They already have debt—a mortgage on the house they lost, college tuition loans, or car payments—and they can’t afford to take on more.

As Vermont began to do in 1927, the administration and the Legislature, along with help from Vermont’s Congressional delegation, will have to find creative ways to aid Vermonters who cannot borrow more—at least through conventional means—to replace their losses.

Modernizing after disaster
Governor Weeks seized the opportunity presented by the flood to modernize Vermont’s highway system. After Irene, some state officials appear to be thinking along similar lines. Lt. Gov. Phil Scott, for ex­ample, has suggested that restoring the State Office Complex in Waterbury might not be the wisest use of the tens or hundreds of millions of dollars it could cost. Mental health officials are going forward with strategies already under way to move residents of the Vermont State Hospital into therapeutic community settings. Whether or not the state decides to use the complex in Waterbury, the administration and the Legislature should be looking beyond simply renovating or replacing the facilities the state had prior to the flood. The opportunity now is to reassess the state’s needs and determine how best to invest public money on infrastructure that will adequately serve Vermonters for the next 50 to 100 years.

Gov. Peter Shumlin has drawn the connection between global climate change and the change in Vermont’s own weather patterns. One adjustment to that change, which the Agency of Transportation is reviewing, will be how to redesign bridges, culverts, and the built landscape to accommodate a new, wetter climate.

Fiscal policy: People before money
Governor Weeks had been an advocate of “pay as you go” fiscal policy. It wasn’t as rigid as the “manage to the money” approach Vermont has followed in recent years—the idea that the state can only spend whatever revenue comes in at current tax rates, regardless of Vermonters’ needs or larger economic conditions. Pay-as-you-go meant that while Vermont shouldn’t spend money it didn’t have, the state could raise taxes to cover necessary spending.

In the 1927 crisis, Weeks saw the urgency of breaking with the usual way of doing things. In his address to the emergency session he asked the Legislature to borrow $8.5 million to tackle the immediate job of rebuilding the state. “It will be expensive,” he said, “but let us not eliminate from our minds what it means to restore the waste[d] places of Vermont.” The Legislature also moved into new territory when it instituted a system by which the state could help individuals and businesses borrow in times of general crisis.

It will be expensive to rebuild after Irene, as well. But the state has no choice. This is one of those events that requires people to shift their thinking and accept that the next several years won’t be what they expected. That includes shifting expectations about public spending and taxes.

Once all the damage estimates are in and it’s clear how much federal aid is available, Vermont should look for the fairest and most efficient way to raise the money it needs to rebuild state and municipal roads, bridges, buildings, and other public infrastructure. Just as Governor Weeks recognized that many local communities simply couldn’t afford to replace their roads and bridges, the administration and the Legislature will need to look beyond the property tax as a source of recovery revenue. The hardest-hit towns not only lost bridges, roads, and culverts; some of their property tax base was washed downriver, as well.

All of Vermont has a stake in helping these communities rebuild for the same reasons that residents of these towns are helping their neighbors get back on their feet. In the end, it’s not about the money, it’s about people—Vermonters, their quality of life, and their hopes for a brighter future. In Weeks’s words, the task ahead is to make “Vermont a stronger force in the outside world and a happier place to live in.”

 

© 2011 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation. We thank it for its support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundation.

 

 

1. Deborah and Nicholas Clifford, The Troubled Roar of Waters (University of New Hampshire Press, 2007), 32-33. [↩]
2. Vermont General Assembly, Public Acts of 1927, 24-37. [↩]
3. Vermont Press Bureau, “Text of Governor Weeks’ Message to the Legislature,” Burlington Free Press, December 1, 1927, 2. [↩]
4. Anne Galloway, “Irene damage edges toward the $1 billion mark,” VTDigger.org, September 20, 2011. [↩]
5. Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism (Metropolitan Books, 2007), 9. [↩]
6. Clifford, Troubled Roar, 73. [↩]
7. Ibid., 123. [↩]
8. Ibid., 124. [↩]
9. Ibid, 105-106. [↩]
10. Ibid., 107-108. [↩]

Vermont Must Address Both Budget Problems

Posted by sarah on April 8, 2011 at 1:41 pm

By Jack Hoffman and Paul Cillo
April 2011

Download a PDF of the report or read the text below:

Vermont faces two fiscal problems. One is temporary, brought on by the recession: Tax receipts are down, Vermonters’ need for state services is up, and the state doesn’t have enough money to provide those services. The other problem—papered over for years—is structural. Parts of the state budget are unsustainable, either because costs are growing faster or revenues are growing slower than the economy overall. The cost of health care, which has doubled in less than nine years, is the primary culprit, but it’s not the only one.

Both problems are daunting, and solving either in isolation would be a challenge. But as the current tragedy in Japan demonstrates, crises don’t always come one at a time. If Vermont had dealt with its structural problems earlier, it might have been in better shape to handle the temporary difficulties of the recession. Unfortunately, it did not.

To his credit, Gov. Peter Shumlin understands the importance of addressing the rapidly rising cost of health care. He took office determined to reform the way Vermonters pay for doctors and other health services—not just to bring costs under control but to achieve the important goal of providing quality, affordable care to all Vermonters. But health care reform is at least three years away, and between now and then at least three budgets will be written in the face of inadequate revenues. Who will shoulder the burden of bridging the gap? At present Montpelier is asking low- and middle-income Vermonters to take the hit in order to balance the budget, even while they struggle in a down economy. A better approach would be to have every Vermonter, including the wealthiest, go the extra mile to sustain the state—and its values—until reforms are accomplished and the economy is back on its feet.

Structural reform essential, but takes time

Just like businesses and households in Vermont, the state has been covering the rising cost of health care in part by cutting back in other areas. From 1999 to 2009, statewide health care costs increased 8.6 percent a year on average,¹ more than twice the rate of Vermont’s economic growth during that period.² Many businesses have responded to these increases by pushing more of the cost of health insurance onto their employees. Families, in turn, have cut back on other expenses, switched to cheaper but riskier policies, or dropped their coverage altogether.

Health care costs also have been rising faster than the state budget. Medicaid and publicly supported health care programs now account for more than 30 percent of state-funded expenditures.³ For much of the 2000s, Vermont used one-time revenue—extra federal funds or year-end surpluses—to pay for health care cost increases. But over the long run, health care has crowded out funding for other important state services.

Health care isn’t the only structural problem. Corrections costs also have been increasing faster than the state’s economy, while revenue sources such as the sales tax and motor fuel taxes have been growing more slowly. This above-average growth in expenditures and below-average growth in revenue have exacerbated the budget gaps brought on by the recession (Figure 1).

This all adds up to the urgent need for reform to solve these structural problems and put the state on the road to balanced budgets in the future. Without fundamental reform, simply making cuts or raising tax rates, or both, will not put the state on a sustainable budget path. The expenditures and revenue need to grow more in sync with one another, or Vermont will continue to struggle—and tinker—each year to make ends meet.

During his campaign, Governor Shumlin talked about the need for structural budget reform, and since his election he has followed through with proposals to begin accomplishing it. He is promoting an ambitious plan to overhaul Vermont’s health care system and moving to reduce the state’s prison population. So far, his plans have focused on the spending side. He has not addressed the structural problems on the revenue side. In fact, he rejected the Blue Ribbon Tax Structure Commission’s proposal to extend the sales tax to services and lower the rate, which would bring tax revenue growth more in line with economic growth.⁴

In the long run, the governor is probably correct that his plan will ease pressure on the state budget. But the needed reforms will take several years to put in place. In the meantime, to ask Vermonters to absorb another round of budget cuts—and Governor Shumlin is proposing to spend even less than his predecessor—is to ignore the cause of the state’s current budget problem: a shortage of revenue, not overspending.

Recessionary measures versus permanent downsizing

When the economy collapsed in late 2007, it drove down revenues and pushed up the demand for public services. Vermonters lost their jobs, many more cut back spending, and state tax receipts declined. Meanwhile, more families turned to unemployment insurance, food stamps, Medicaid, and welfare to make ends meet, and the pressure for more public spending rose.

The response at the time from the Douglas administration was to push for permanent downsizing of state government, and in large part the Legislature obliged. The recession was a temporary, downward phase of the economic cycle. But both the administration and the Legislature acted as though there would be no recovery and Vermonters needed to adjust to a new, lower standard of living. The Legislature made $4 in cuts for every $1 in new revenue it raised. Between the fall of 2007 and the fall of 2010, nearly 700 state employees—8 percent of the workforce—were laid off or not replaced when they left.

State funding for education was cut in fiscal 2010 and 2011. Even with the help of federal stimulus funds, Vermont’s General Fund spending on human services programs other than Medicaid fell by 5.6 percent from fiscal 2009 to 2011.

A new revenue problem: ARRA ends

The flow of federal funding from the American Recovery and Reinvestment Act (ARRA) is ending. For fiscal 2009 through 2012, Vermont will have received more than $900 million to help pay for health care, human services programs, highway maintenance and construction, job training, economic development, and education.⁵ A little less than half of the stimulus money—about $423 million—was used to support core programs in the General Fund budget (Figure 2). About $276 million went to transportation projects. The balance of the money funded programs designed to create jobs and help the economy—programs and projects Vermont probably would not have funded on its own.

The fiscal 2012 budget presented by Governor Shumlin in late January is the first in four years that doesn’t rely heavily on federal stimulus funds. It uses some ARRA funds, but much of that is stimulus money carried forward from the previous year.

ARRA funds that were used in 2011 for core General Fund services will be gone: $158 million. In addition, Vermont will lose almost $17 million in other federal funds related to Medicaid.

There are also new demands for public services next year. As an indication of how the recession has hit Vermonters, the number of people receiving food stamps through the 3SquaresVT program rose 67 percent from the start of the recession in late 2007 through December 2010. The number of people in the Reach Up program, which replaced Aid to Needy Families and Children (ANFC), increased 30 percent over the same period. According to the administration’s projections, General Fund spending for Medicaid and other human services programs needs to increase about $67 million for fiscal 2012—nearly 12 percent over this year—to meet new demand (Table 1).

In addition, the administration acknowledged the obligation to restore General Fund support for education, which was cut for the last two years. That added another $22 million to next year’s budget. In all, the administration identified almost $110 million in new General Fund spending needed for fiscal 2012—a 10 percent increase.

On the revenue side, receipts are starting to grow again, after declining 8 percent in fiscal 2009 and almost 6 percent in fiscal 2010. General Fund taxes, which include the personal income tax, sales tax, rooms and meals tax, and corporate income taxes, are forecast to increase by $66.4 million. Most of that increase—$60 million—is expected to come from the personal income tax, which is projected to grow by more than 11 percent in fiscal 2012.

Counting growth, transfers, and carry-forward revenue, the administration anticipates about $108 million in new money for next year. But the loss of federal funds, primarily from ARRA, leaves a gap of $176 million—13 percent of the General Fund budget—from what is needed.

Closing the gap

In late January, Governor Shumlin outlined a plan to close next year’s budget gap with about $81 million in additional cuts and $95 million in new revenue, including reserve funds and other money carried forward from fiscal 2011 (Table 2). The governor has rejected any increases in broad-based taxes, such as the personal income tax or sales tax. However, he proposed additional taxes on health care providers, including hospitals and dentists.⁶

He also proposed a permanent reduction in the annual transfer from the General Fund to the Education Fund. For fiscal 2012, about $19 million in federal funds are going directly to school districts, which will offset most of the reduction in General Fund support for schools. In fiscal 2013, however, the governor’s proposed cut in the General Fund transfer would mean school districts either have to cut spending or increase property taxes. In either case, property taxes will be higher—approximately $20 for each $100,000 of property value—than they would have been if the General Fund continued to maintain its pre-recession levels of support for education.

Including federal ARRA funds that were used for base appropriations, Vermont’s General Fund spending is projected to be about $1,310 million this year. The General Fund budget the governor has proposed for next year is $1,234 million⁷ —a reduction of 5.8 percent (Figure 3).

The Vermont House of Representatives passed a General Fund budget in late March that is about $7 million higher than the governor’s plan, but it is still lower than the amount Vermont spent this year, including stimulus funds used for core expenditures.

ARRA provided funding for essential state services over the past three years, so the loss of those funds has created a big hole for the administration to fill in fiscal 2012. Both the governor and the Vermont House have done what they can with all available revenues to minimize the pain for Vermonters least able to weather it. But neither the governor nor the House has been willing to increase any of the broad-based, General Fund taxes, so their proposed budgets reduce General Fund spending by more than 5 percent next year. Included in the cuts are programs that protect Vermonters most in need of support.

Human services hardest hit

Human services, the largest area of the state budget, accounts for $574 million (44 percent) of the $1,310 million in General Fund spending this year.⁸ If cutting dollars is the goal, it follows that this area of the budget is being targeted for the biggest reductions.

In budget documents, the administration said this year’s General Fund appropriation needed to increase by $67 million just to maintain existing human services programs in fiscal 2012 (Table 1). That would have brought the General Fund total for the Agency of Human Services to $641 million. However, the governor proposed $554 million for the agency—$87 million less than the acknowledged need.

Some of that will be made up in other parts of the human services budget. The governor proposed raising about $47 million through health care provider taxes and transfers from other state funds, which would reduce some of the pressure on General Fund spending for human services. Still, the governor’s budget leaves General Fund support for human services about $40 million short. And this reduction in state spending will be compounded by a loss of federal matching funds.

The Legislature’s Joint Fiscal Office estimates that the governor’s human services budget, when all state and federal funds are counted, will be about $80 million less than the amount needed to maintain existing services. The House budget, which restored some of the cuts the governor proposed, is still about $68 million short, according to the JFO estimate.⁹ The effect of these cuts will be felt most by low- and middle-income Vermonters.

This squeeze in human services has meant that agency programs have been pitted against one another. For example, Vermont has programs to provide varying levels of services that allow elderly and disabled Vermonters to remain in their homes. These Choices for Care programs offer a better quality of life for people who don’t want to go into nursing homes, and they cost much less than institutionalized care.

In the fiscal 2012 budget, the Human Services Agency plans to maintain essential services for people now served by Choices for Care, which include assistance in bathing, using the toilet, meal preparation, and similar routines of daily living at home. However, to reduce overall spending, the governor proposed cutting the next level of services, such snow shoveling, grocery shopping, and banking. His budget would reduce services for these so-called “instrumental activities of daily living” to two hours a week from the current four and a half hours.

The governor’s budget included other cuts in programs that serve somewhat less needy Vermonters in order to protect those most in need. He recommended that respite care be reduced for Vermonters who care for sick or disabled family members. In some cases, respite care provides the caregivers with time to earn outside income that allows them to continue to help a bedridden parent, spouse, or sibling. However, the governor’s budget would halve the maximum amount of respite care services—to 360 hours a year from the current maximum of 720 hours. The assumption seems to be that these families will make do and find other relatives or community members to provide the help political leaders insist Vermont can no longer afford.

The House version of the budget restored some of the governor’s cuts in Choices for Care and respite services. Still, the decision boiled down to how much to cut, rather than weighing the reduction in services against the options for replacing the lost revenue.

Needed: Temporary revenue—and strong Vermont values

Structural reforms show the greatest promise of achieving sustainable fiscal policy over the long term. But even the most optimistic forecasters project we won’t start seeing results from health care reform—the reform with the greatest potential to bring the state budget under control—until 2015. For the next few years, times will remain tough, as federal stimulus funds dry up, state tax revenues stay low, and thousands of unemployed Vermonters continue to look for work. Until the economy recovers, the state faces continued budget gaps.

A plan for temporary revenue increases is needed to provide a bridge until the benefits of planned reforms become real. The state can use temporary funds, including untapped reserves¹⁰ and a surcharge on those who are doing well in this economy, to help balance the budget.

Fortunately, a source of revenue for that surcharge is available. With the extension of the Bush tax cuts, Congress has given the top 5 percent of Vermont income tax filers a big federal tax break, amounting to $190 million each year for 2011 and 2012. This windfall to the wealthiest Vermonters stands in stark contrast to the plight of families now forced to decide whether to spend time bathing an elderly parent or shoveling her snow—or the myriad untenable tradeoffs being asked of the elderly, children, people with developmental disabilities, and all low-income and middle-class Vermonters.

The state budget—a plan for how money is both raised and spent—is an expression of a state’s values. Vermont’s progressive income tax reflects a belief that those who prosper the most from our economy should contribute the most to the support of the courts, police, schools, public works, and public welfare programs that make civilized society possible. We have a property tax rebate program because we believe Vermonters should not be forced to sell their homes to pay their taxes, especially after they retire and their incomes decline. Our higher-than-average spending on schools reflects the importance we attach to educating our children.

We now have a choice: Abandon the values that have shaped and sustained our state, or require that everyone, including the wealthiest, make an extra effort so that the burdens of this recession and Vermont’s recovery are not borne primarily by poor and middle-class Vermonters.

States across the country are wrestling with this same two-part budget problem: lagging state revenues and greater human need in the aftermath of the Great Recession on top of soaring health care costs and other structural deficiencies that have been building for decades. Some states are showing just how bad things can get as governors and legislators slash services—education, care for the elderly, safe roads and bridges, and other essentials—in order to protect those with the highest incomes from additional taxes.

Vermont could well become a model for addressing both parts of the state’s budget problem in a sane and civilized manner: Raise temporary revenue to help Vermonters climb out of this recession, and address the biggest budget buster, health care.

© 2011 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

1. Vermont resident health care expenditures, Department of Banking, Insurance, Securities, and Health Care Administration, Vermont Health Care Expenditure Reports, 1999-2009. [↩]
2. According to U.S. Bureau of Economic Analysis data, the compound average annual growth rate of Vermont’s gross domestic product was 4.2 percent 1999-2009. [↩]
3. The cost of Medicaid and health programs (not including state employee health care benefits) are projected to rise at an average annual rate of 4.4 percent FY2008-2012. Overall, state-funded expenditures, excluding the Education Fund, are projected to rise at an average annual rate of 2.9 percent for the same period. [↩]
4. The Vermont Blue Ribbon Tax Structure Commission recommended that Vermont extend the sales tax to most retail services, (Final Report, Recommendation 2, page 49). Governor Shumlin rejected that recommendation (vtdigger.org, Tax reform: Part 1, Feb. 3, 2011). [↩]
5. This is only the money received by the state and does not include approximately $340 million in tax cuts to individual Vermonters in 2009 and 2010 or federal grants and loans to private businesses. [↩]
6. The so-called “provider taxes” have typically been paid by health care providers, matched by federal Medicaid dollars, and then re-paid to providers. This would be the case for the dentists, but other health care providers would no longer receive the repayment. [↩]
7. Including $4.9 million in ARRA money carried forward from fiscal 2011. [↩]
8. Including $116 million in ARRA funds used to cover what the administration and Legislature characterize as base appropriations. [↩]
9. “Total Appropriations FY09 (actual) – FY12 HAC Proposed March 2011,” Joint Fiscal Office, http://www.leg.state.vt.us/jfo/appropriations/fy_2012/FY08_-_FY12_Total_Appropriations_Comparison.pdf#page=19. [↩]
10. Vermont is projected to have nearly $58 million in the General Fund Stabilization Reserve at the start of FY2012. According to a new report from the Center on Budget and Policy Priorities, of the 44 states that had reserves in 2006—either “rainy day funds” or General Fund reserves—28 used at least half of those funds during the recession to avoid budget cuts. Vermont is one of 15 states that increased their rainy day funds during the recession. Elizabeth McNichol and Kwame Boadi , “Why and How States Should Strengthen Their Rainy Day Funds,” Center on Budget and Policy Priorities, September 2011: Table 5, p. 22. [↩]

Federal Tax Cuts Can Help Close Vermont’s Budget Gap

Posted by sarah on January 21, 2011 at 12:19 pm

Download a PDF of the issue brief or read the text below:

Vermont’s wealthiest taxpayers will save $190 million this year, thanks to Congress’s decision last month to extend the Bush tax cuts.

According to an analysis prepared for Public Assets Institute by the Washington-based nonpartisan Institute on Taxation and Economic Policy (ITEP), the tax cut extension will save the top 1 percent of the Vermont income tax filers about $102 million in 2011. The average personal income for these taxpayers is $940,000; their average savings will be a little more than $34,000 this year.

The next 4 percent of tax filers—those with average annual personal income of about $233,000—will save a little more than $88 million. The average savings per household for that group in 2011 will be about $7,300.

The tax cuts were extended for two years, so these Vermonters will reap a similar savings in 2012.

Two major tax bills were passed in 2001 and 2003, during President George W. Bush’s first term. The laws lowered income tax rates, reduced taxes on capital gains, and cut the estate tax, among other provisions. The cuts were due to expire at the end of 2010. Had that happened, federal income taxes would have returned to pre-2001 levels.

Analyses show that the extension of these tax cuts was among the least effective ways to get the economy back on track.¹

Nevertheless, the cuts give Governor Shumlin and the Legislature one more option for closing Vermont’s $150 million projected budget gap for fiscal 2012. A temporary state income tax increase on the highest 5 percent of Vermont taxpayers—similar to the tiered tax rates adopted in 1991 under Gov. Richard Snelling—would generate additional revenue to maintain critical public services. Vermont could reduce—even eliminate—its budget gap and still leave the state’s most prosperous residents paying less in state and federal income taxes than they would have if Congress had allowed federal tax rates to return to pre-2001 levels.

© 2011 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

1. “The Economic Outlook and Fiscal Policy,” Congressional Budget Office, Sept. 28, 2010. [↩]

State of Working Vermont 2010

Posted by sarah on December 27, 2010 at 9:58 am

The last decade’s policies have not led to needed job creation. It’s time for a new strategy

By Jack Hoffman

Download a PDF of the report or read the text below:

But the challenge facing Vermont is not just to restore the jobs lost in the last three years. The state’s economy was not producing enough jobs before the recession hit. In fact, from 2000 through 2007 Vermont was having its worst decade for job growth in the 70 years that records have been kept.

The immediate task is to get the economy moving again, so that Vermonters who lost jobs through no fault of their own can go back to work. But the state also needs to develop a new strategy to meet the demand for jobs over the long term. The policies of the last 10 years, both nationally and within Vermont, did not work. And if we look back even further, we can see that the majority of ordinary Vermonters—like the majority of people across the country—have seen little real improvement in their economic well-being in the last 30 or 35 years.

The economy is not governed by laws of nature. It is shaped by policies. If we make different decisions, we can achieve different—and better—results.

Unemployment Rates
In good times, Vermont’s unemployment rate tends to be lower than the national average. The same has held true for the recession. For 2009, Vermont’s unemployment rate averaged 6.9 percent, which placed it 37th when the states were ranked highest to lowest.

Vermont’s highest monthly unemployment rate since the recession began was 7.3 percent, in May 2009 (Fig. 1). The U.S. rate has been above 7.5 percent for almost two years and above 9 percent for the past 19 months.

What many economists call the “real” unemployment rate is even higher. The official unemployment rate, technically known as U-3, does not include people who have gotten discouraged and stopped looking for work, those who have largely given up, or those who would like to be working more but can find only part-time jobs. By an alternative measure that includes discouraged workers and people who would like to be working more—the U-6 rate—Vermont’s “real” unemployment rate averaged 11.8 percent for 2009. For th

e last four quarters—October 2009 through September 2010—this broader measure of unemployment has averaged 12.9 percent, double the official unemployment rate.

Even by this truer measure of unemployment, Vermont had the lowest rate in New England in 2009 and one of the lowest in the country. Nationally, the U-6 rate averaged 16.2 percent in 2009.

This recession has hit men harder than women (Fig. 2). In 2008, the unemployment rate for both men and women was about 5 percent. For 2009, the annual rate for men had jumped to nearly 7.5 percent, while women’s remained under 6 percent. Unemployment rates also are above the state average for workers with less than a high school education and for younger workers, ages 16 to 25 (Fig. 3).

Longer Recession, Longer Joblessness
The National Bureau of Economic Research determined last September that the recession officially ended in June 2009, which means the economy contracted for 18 months before it hit bottom. That makes this recession the longest since the Great Depression of the 1920s and 1930s, which officially lasted 43 months. But while the economy is now expanding again, the rate at which new jobs are being created is not enough to meet the demand of new people entering the labor force. The economy is growing, but too slowly to restore the jobs that have been lost.

Vermont’s unemployment rate has been declining, but that’s largely because people have dropped out of the labor force, not because they’ve gone back to work. Last spring, the U.S. Bureau of Labor Statistics counted about 362,000 people in the Vermont labor force. This November, the number was about 357,000. If those missing people were officially unemployed—that is, out of work and actively looking for jobs—Vermont’s unemployment rate would still be above 7 percent.

While doing better than many other states, during this recession Vermont experienced its worst stretch of high unemployment in almost 30 years. In the early 1980s, the state’s unemployment rate stayed above 6.5 percent for 19 consecutive months. During this recession, the rate was 6.5 percent or higher for 14 straight months, from February 2009 through March 2010.

Because the recession lasted so long and the recovery has been so slow, there has been a steep rise in long-term unemployment—joblessness that lasts more than 26 weeks. Prior to the recession, Vermont’s long-term unemployment rate was about 15 percent of all unemployed workers. In 2009, 25 percent of workers had been out of work for more than 26 weeks. Even so, Vermont had the lowest long-term unemployment rate in New England in 2009.

Emergency Compensation
State programs typically provide Unemployment Insurance for 26 weeks for people who have been laid off because their employers have no work for them. The federal government has stepped in to provide emergency unemployment compensation, which also helped to stimulate the economy. But long-term unemployment causes more than just a loss of income. Workers also lose their job skills, which makes it even harder for them to get back to work when the economy picks up again. There also is evidence that employers are more reluctant to hire people who are unemployed, and most reluctant to hire those who have been out of work for long periods of time.²

Unemployment insurance programs in Europe are designed to help people maintain their skills and at least some of their income by reducing workers’ hours rather than throwing some people out of work entirely. So-called “work share” or “short-time compensation” programs exist in the U.S., which allow employers to reduce payrolls by cutting back hours for all employees instead of laying some off; the workers then receive Unemployment Insurance for days not worked. However, the programs are voluntary and so far not widely used.

As the recession dragged on, workers in Vermont and many other states exhausted the 26 weeks of unemployment compensation typically available through regular state programs. To deal with the swelling ranks of long-term unemployed workers, Congress stepped in to provide additional federal compensation (Fig. 4).

Depending on a state’s unemployment rate, people who’ve exhausted their state compensation could qualify for up to four additional periods—or “tiers”—of federal emergency unemployment compensation. In the hardest-hit states, jobless workers were eligible for up to 53 weeks of emergency compensation and, in some cases, extended state payments of 13 or 20 weeks. Even with these extensions, many people have exhausted all state and federal unemployment compensation. An extension of unemployment insurance through 2011 is part of the tax cut plan President Obama negotiated with congressional Republicans, which passed this month.

The extensions allowed Vermonters to qualify for the third tier of federal emergency insurance. And for about 15 months, until July 2010, Vermont also had an extended insurance program that provided 13 weeks of unemployment compensation to those who were still out of work after the regular state program and the three federal emergency periods had ended.

Still, almost 13,500 Vermonters ran out of unemployment insurance between July 2009 and June 2010.

Unemployment compensation not only provides support for individuals and families who have been thrown out of work, it is also one of the quickest ways to get money into the economy and thus help preserve jobs.³ Since the start of the recession, Vermonters have received nearly $600 million in unemployment compensation through both state and federally funded programs. Almost half (49 percent) of unemployed Vermonters are covered by unemployment insurance.

Jobs From Federal Stimulus
As in the rest of the country, Vermont’s unemployment rate would have been worse without the hundreds of millions in stimulus dollars that went to state and local governments and contractors in the private sector. In 2009 and 2010, Vermont received nearly $1 billion through the American Recovery and Reinvestment Act, or ARRA (Fig. 5). The bulk of the money was awarded as grants, and about $120 million came in the form of contracts and loans. As of the end of September 2010, a little more than a third of the money had been paid out.

The federal government maintains a website to track stimulus funds and the number of jobs created or retained by the recipients of the grants, loans, or contracts.⁴ According to the federal data, recipients of ARRA money for Vermont projects reported that they had retained or added almost 3,000 jobs in 2009 and 2010. If those people had instead ended up in Vermont’s unemployment lines, the state’s unemployment rate would have been higher. The rate, which dipped below 6 percent in September, would be above 6.5 percent without the stimulus money.

Worst Decade for Job Creation
Nationally, the first decade of the 21st century was terrible for job creation. During President George W. Bush’s eight years in office, fewer new jobs were created per year than under any other president dating back to the late 1930s.⁵ The huge tax cuts Bush promoted to stimulate the economy and generate jobs did not achieve what they promised.

In Vermont, it was also a dismal decade for job creation. From 2000 to 2007, the state had the slowest period of job creation since the U.S. Bureau of Labor Statistics started keeping records in 1939 (Fig. 6). Between 1940 and 2000, Vermont’s job growth ranged from 11 percent to 37 percent per decade. By contrast, job growth for the entire first seven years of this decade came to just 3.2 percent. By the end of 2009, after the recession had begun to take its toll, Vermont was showing a net loss for the decade. In the fall of 2010, Vermont’s private employers were providing 10,000 fewer jobs than they were 10 years ago.

Vermont has not been alone. Many states saw slower job growth this decade. But most other states rebounded better from the recession of 2001 than Vermont did, especially in private sector job growth. From the end of that previous recession to the start of the 2007 recession, Vermont’s private sector job growth was just 1 percent—45th in the country when the states were ranked from highest to lowest.

By comparison, between the two previous recessions —1991 and 2001—private sector jobs in Vermont increased 23 percent, which placed Vermont 29th.

It’s not only job growth that has been stagnant. Typical Vermonters did not see any gains in income during the decade, either. After adjusting for inflation, Vermont’s median household income has fallen for three consecutive years. At the end of 2009, median household income was $50,619— in inflation-adjusted dollars, slightly lower than it was in 1999.

From an even longer perspective, data show that since the 1970s there has been a widening gap between the wealthiest Vermonters and everyone else. The top 10 percent of households now have a greater share of total Vermont income (42 percent) than they did before the start of the Great Depression in the late 1920s. Said another way, the 90 percent of Vermont households not at the top have seen their share of income shrink from 70 percent in 1970 to less than 60 percent in 2005 (Fig. 7).⁶

Big Income Tax Cuts, Little Effect
Although Vermont did not lower income taxes in the name of job creation during the 2000s, wealthy Vermonters did get a windfall from the Bush tax cuts. Between 2003 and 2008, Vermonters with incomes of $200,000 or more paid a total of $660 million less in federal income taxes than they would have if income tax rates and other tax rules had not changed.⁷

While Vermont did not pursue broad-based tax cuts this decade, it did expand tax credits for businesses that promised to create new jobs.

It is impossible to know what happened to the $660 million in federal tax savings that went to wealthy Vermonters. Some of the money may have been invested in the new financial instruments created by Wall Street during the decade. Some of it undoubtedly was lost in the recession. But given the record over the last 10 years in Vermont and nationally, the money did little for job creation.

When the Congressional Budget Office analyzed various ways to stimulate the economy in early 2009, it concluded that cutting taxes for businesses was the least effective approach.⁸ As the CBO explained, tax cuts are small compared with the cost of hiring a new employees, so employers won’t take on that additional cost until they start to see increased demand for their products.

Conclusion
The most urgent task facing the state is to put Vermonters back to work so they can provide for their families and focus again on building for the future. It’s time to look at new strategies for getting the economy moving again. We can think of the economy as a plane with two engines—the private sector and the public sector. As we’ve seen both nationally and in Vermont, the private sector engine is barely sputtering. It’s going to take public investment to prevent the entire economy from crashing.

Vermont state government cannot provide economic stimulus the way the federal government can. It’s true that Vermont is the only state in the Union that can run budget deficits the way the federal government can. But Vermont is far too small to affect the national economy, which is where stimulus needs to be applied.

Some actions undertaken in Vermont would result in short-term job creation and provide tools to help the economy grow, however. A study released in August showed that Vermont, New England, and the nation prospered more in the past when collective resources were invested in things that benefited the public broadly and strengthened the overall economy—such as public infrastructure and education.⁹ We have neglected these investments in recent decades. We’ve fallen far behind in maintaining our existing infrastructure, especially roads and bridges; and the new infrastructure we need, such as broadband, is nonexistent for too many Vermont households and businesses.

Ongoing investment in education cannot be slighted either. Although Vermont students perform well relative to the rest of the country, as a nation we’ve lost ground in providing our children with the skills in math and science they need to succeed. Vermont’s educational achievement is due in part to voters’ willingness to dig deep and support their children’s education, even when the economy tanks. Still, while Vermont spends more per pupil than many other states, Vermont’s education expenditures as a percentage of the overall economy are no greater today than they were in the early 1990s. To keep up with the rest of the world, we need to think about investing more, not less, to educate children and re-educate adults.

Investment that leads to sustained, long-term job growth also has the best chance of solving the state and nation’s fiscal problems.¹⁰ The recession has made it more difficult to balance the state budget because a poor economy reduces revenues at the same time as it drives up demand for state services. Tax collections shrink when people are laid off and cut back their spending. And as their incomes decrease, more and more people are forced to rely on state government for food, health care, home heat, and other essentials.

Putting people back to work reverses both of those trends. Revenues increase, the demand for public assistance declines, and the state can once again balance its books and still provide adequate funding for the public services that Vermonters need.

© 2010 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

1. The recession officially started in December 2007, according to the National Bureau of Economic Research. [↩]
2. Catherine Rampell, “Unemployed, and Likely to Stay That Way,” New York Times, Dec. 2, 2010, http://www.nytimes.com/2010/12/03/business/economy/03unemployed.html [↩]
3. Douglas Elmendorf, “Policies for Increasing Economic Growth and Employment in the Short Term,” Congressional Budget Office, Feb. 23, 2010. [↩]
4. www.recovery.gov/Transparency/RecipientReportedData/Pages/RecipientReportedDataMap.aspx [↩]
5. Sudeep Reddy, “Bush on Jobs: The Worst Track Record on Record,” Wall Street Journal, http://blogs.wsj.com/economics/2009/01/09/bush-on-jobs-the-worst-track-record-on-record [↩]
6. Mark W. Frank, “A New State-Level Panel Of Annual Inequality Measures Over The Period 1916 – 2005,” October 2008, http://www.shsu.edu/~tcq001/paper_files/wp08-02_paper.pdf [↩]
7. Public Assets Institute calculation using effective federal tax rates prior to the Bush tax cuts and adjusted gross income reported for Vermont filers with incomes of $200,000 or more for 2003-2008. [↩]
8. Elmendorf, op. cit. [↩]
9. Jeffrey Thompson, “Prioritizing Approaches to Economic Development in New England: Skills, Infrastructure, and Tax Incentives,” Political Economy Research Institute, August 2010. [↩]
10. James K. Galbraith, Robert Skidelsky, and Paul Davidson, “Statement on Evans’ Stimulus Letter,” July 21, 2010, http://www.newdeal20.org/2010/07/21/statement-on-evanss-stimulus-letter-from-davidson-galbraith-skidelsky-15498/ [↩]

Increasing Pre-K Enrollment: Small Investment, Big Benefits

Posted by sarah on November 6, 2010 at 12:45 pm

By Jack Hoffman

Download a PDF of the report or read the text below:

Vermont has long supported preschool. For 40 years, the federally funded Head Start program has served disadvantaged children whose families meet income-eligibility requirements. Since 1991, Vermont has required local school districts to offer Essential Early Education (EEE) services to young children with disabilities whose families seek assistance. And since the passage of Act 60 in 1997, local districts have had the option to provide pre-kindergarten (pre-K) education and include three- and four-year-olds as part of the student population eligible for state funding.

In 2007, the Legislature passed Act 62, which strengthened some of the requirements for school districts operating pre-kindergarten programs. However, the new law also set limits intended to slow the growth of pre-K enrollment.

Investment in pre-kindergarten is good for the economy in both the short and long term. Expanding early education creates jobs right away, and investment in education can increase a region’s income and employment over time. Research shows, for example, that money invested in pre-kindergarten education produces many more jobs than spending the same amount on business tax incentives.¹

Questions about whether and how to expand voluntary access of pre-kindergarten to more Vermont children revolve, at least in part, around the cost and tax implications of doing so. This report offers a preliminary estimate of the cost of increased pre-K education enrollment in Vermont.

Enrollment
In fiscal 2010, almost 4,900 children—about 37 percent of the state’s three- and four-year-old population—were enrolled in publicly funded pre-K education.² Because Vermont’s policy is to continue to offer voluntary pre-kindergarten, there will always be some families who choose not to participate.

It is beyond the scope of this report to try to estimate the level of enrollment Vermont might ultimately achieve or to suggest how quickly it should strive to increase enrollment. However, in order to project the cost of expanding access to pre-K services, it was necessary to make some assumptions.

Looking to a state with long experience in publicly funded pre-K education can help to inform the development of this estimate for Vermont. Oklahoma—which has been providing state funding since 1998—achieved 71 percent enrollment of four-year-olds by 2009.³ Oklahoma does not have a program yet for three-year-olds, and nationally the three-year-old enrollment rate is considerably lower than the rate for four-year-olds.

If Vermont increased its pre-K enrollment at 15 percent a year, approximately 65 percent of the state’s three- and four-year-olds could be receiving pre-K education by 2015. Fifteen percent a year would be a faster growth rate than Vermont has seen over the last few years, but enrollments did increase at that rate earlier this decade. At that rate, Vermont would have an additional 3,400 pre-K students by 2015. A 15 percent annual growth rate is a reasonable assumption, if somewhat ambitious. Using that assumption, we looked at the increased cost for a five-year period.

Cost
Accurate figures on the cost of Vermont’s existing pre-K programs are difficult to find. In the past, school districts did not separate expenditures for EEE programs from other pre-kindergarten expenditures. Because districts are required to provide EEE, these children will continue to be served regardless of the extent of other pre-kindergarten programs. The Department of Education has begun to collect segregated data from the school districts in their annual expenditure reports, but the reports are not yet consistent, and the department acknowledges more work is needed to produce more accurate cost estimates.⁴

School districts are using three basic models for providing pre-K education: school-based programs, partnerships with Head Start, and partnerships with local, qualified child care providers that receive tuition payments or some other form of compensation from the district or supervisory union.

In fiscal 2010, 4,878 children were enrolled in pre-K and receiving EEE services. About 22 percent of them received services through private child-care providers, and the rest were in school-based programs or in Head Start partnerships. Of this total enrollment, 1,089 children were receiving EEE services.

Based on figures currently available from the Vermont Department of Education and the National Institute for Early Education Research (NIEER), Vermont spent about $4,000 per student for pre-K education in fiscal 2009. That figure was supposed to exclude EEE expenditures. But it appears that not all school districts segregated costs the same way.

Vermont’s per-pupil cost is about average for the 38 states that now provide publicly funded pre-kindergarten programs.⁵ However, Vermont’s programs are typically open 10 hours a week, fewer than in many other states. NIEER estimates the per-pupil cost of half-time pre-K programs (15 hours per week during the school year) to be about $4,400 a year. That would suggest that Vermont’s average cost is somewhat high, but the Institute also has found that per-pupil costs decline as enrollment increases and efficiency improves. Based on available information, $4,000 per pupil is a reasonable assumption for projecting the future cost of expanding Vermont’s pre-kindergarten programs.⁶

Cost Analysis
As noted above, at 15 percent annual growth, pre-K enrollment would increase by about 3,400. Assuming Essential Early Education continues at its current rate of about 4 percent per year, total pre-K enrollment, including children receiving EEE services, would reach about 8,400 by 2015, or about 65 percent of the projected population of three- and four-year-olds. At $4,000 per student, projected education spending for the additional 3,400 pre-K student would increase by about $13.6 million (Figure 1) over five years, or about 1 percent of Vermont’s total K-12 education expense.

Assuming this growth were to occur evenly over the five years, to cover the additional spending Education Fund revenues would need to rise about 0.2 percent each year. For the average Vermont resident with a $200,000 home, homestead taxes would go up a little more than $5 each successive year for five years. By the fifth year, the additional tax would be $27 (Figure 2). For an average family paying income-based homestead taxes on an annual household income of $60,000, expanding pre-kindergarten education would mean an increase of just over $3 each successive year for five years.

Vermont businesses, which also have a stake in improving education in Vermont, would see their school taxes increase about $2.65 each year on every $100,000 of assessed property value. At the end of five years, business school taxes would be about $13 higher on each $100,000 of property value.

Conclusion
Many Vermont organizations and members of the business community recognize the long-term educational and social benefits of early education.⁷ The economic benefits also are well documented.⁸ In these difficult economic times, the good news is that expanding pre-K education in Vermont can be achieved for a relatively small investment.

© 2010 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation with support from The Permanent Fund for the Well-Being of Children. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

1. Jeffrey Thompson, “Prioritizing Approaches to Economic Development in New England: Skills, Infrastructure and Tax Incentives,” August 2010. [↩]
2. Vermont Dept. of Education, “Report to the Legislature: Implementation of Prekindergarten Education in Accordance with Vermont’s Act 62,” January 2010, p. 10. (The enrollment figures include some, but not all, children receiving Head Start services.) According to latest U.S. Census estimates, Vermont’s three- and four-year-old population averaged 13,100 for the period 2005-09. [↩]
3. National Institute for Early Education Research, http://nieer.org/yearbook/pdf/yearbook_OK.pdf [↩]
4. Op. cit., Vermont Dept. of Education, p. 20. [↩]
5. Op cit, National Institute for Early Education Research. [↩]
6. This analysis does not adjust the per-pupil cost for inflation over the next five years. The National Institute for Early Education Research estimates that per-pupil cost will decline 10 percent to 30 percent if enrollments can be increased to 70 percent of the three- and four-year-old population. And the Institute’s data show that per-pupil costs have dropped 8 percent in the last five years. Finally, Vermont’s per-pupil expenditures include some fixed costs that schools would be paying if they had no pre-kindergarten programs. The $4,000 figure, therefore, is likely to be an overestimate. [↩]
7. http://www.prekvt.blogspot.com/ [↩]
8. Op. cit., Thompson; Vermont Business Roundtable, http://vtroundtable.org/filemanager/download/8756/ [↩]

Vermont Education Spending: The Facts

Posted by sarah on October 14, 2010 at 5:31 pm

Download a PDF of this issue brief.

Education spending is not out of control.

Education spending as a percentage of the Vermont economy (gross state product) has remained essentially flat since the early 1990s. Contrast that with health care, which has been growing much faster than the underlying economy. Should the education line trend down because Vermont’s enrollment is declining about 1 percent a year? Perhaps. But remember: Education spending includes those rapidly rising health care costs. Regardless of the number of pupils, the cost of Vermont’s public education is neither “skyrocketing” nor “out of control.”

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School boards have curbed spending growth.

The growth in education spending has been declining since 2005. There was an anomalous bump in fiscal 2009, following passage of legislation that required voters in school districts with high spending growth to vote twice on the school budget. Districts anticipating that they might be subject to the two-vote requirement in fiscal 2010 may have moved certain purchases to fiscal 2009 to keep their 2010 growth below the threshold. In fiscal 2011 spending was actually lower than the previous year.

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Property taxes now pay a bigger share of costs.

The Legislature reduced the General Fund transfer to the Education Fund in fiscal 2010 and 2011. Other dedicated revenue sources of the Education Fund, such as proceeds from the Vermont Lottery and a portion of the sales tax, also have not grown. Even with modest education spending growth, property taxes have had to cover their share, plus the growth that should have been covered by the General Fund transfer and dedicated taxes. In 2005, property taxes covered 61 percent of education costs; in 2011, 68 percent, even with the help of federal recovery funds (ARRA).

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Even with Act 68, school taxes are regressive.

Act 68 went far in reducing the burden of the property tax, which used to fall disproportionately on middle-income residents. More than six in 10 Vermont households now pay school taxes based on ability—that is, based on income rather than assessed property value. Even with this change, however, upper-income households pay a much smaller portion of their incomes to support schools than their middle- and lower-income neighbors. The chart is based on a new analysis by the Vermont Tax Department of homestead taxes as a percentage of personal income across all tax brackets.

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Investing in education strengthens the economy.

A recent study by economist Jeffrey Thompson at the Political Economy Research Institute documents the benefits to states and regions of investment in education, including pre-K and higher education. The benefits include higher personal income, employment, and tax collections and reduced crime and welfare dependence. Because education is labor intensive, such spending creates more jobs per dollar than many other sectors. The jobs resulting are direct (teachers and school staff) and also indirect (e.g., electricians who wire the school) and induced (workers at the market where school staff buy groceries).

Download a PDF of this issue brief.

Vermont’s Income Taxes Are Lower than Many Other States

Posted by sarah on September 28, 2010 at 2:24 pm

By Jack Hoffman (September 2010)

Download a PDF of the report or read the text below

Tax rates tell only part of the story when comparing state tax policies. To determine what people actually pay, you also need to know what the rates are applied to.

Vermont has a progressive income tax system. There are five tax rates—3.55 percent to 8.95 percent—with higher rates applying to higher levels of taxable income. The state’s top tax rate is comparatively high, but few people pay at that rate because it applies to taxable income above $372,950. Other states have top tax rates that are lower than Vermont’s, but they apply to income far lower than $372,000.

What’s counted as taxable income also makes a difference. Vermont allows more deductions and exemptions than many other states.

A 2007 study for the Legislature, for example, showed that a typical couple making $1 million a year would pay less income tax in Vermont than in New York or Maine, where the top rates were lower.

Another way to compare states is to look at the effective tax rate—total income taxes paid in the state, divided by the total of residents’ adjusted gross income (AGI); AGI is income before deductions and other adjustments are made.

Vermont’s effective tax rate in 2008 was 3.9 percent. By that measure, Vermont comes in 23rd when the states are ranked from highest to lowest.

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© 2010 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

2012: With Federal Protection Gone, Education and Human Services Are in the Crosshairs

Posted by sarah on July 1, 2010 at 6:26 pm

By Jack Hoffman (July 2010)

Download a PDF of  the report or read the text below:

A little more than a year ago, the federal government stepped in to help the states weather the recession. When Vermont’s next fiscal year ends on June 30, 2011, the state will have received $874 million through the American Recovery and Reinvestment Act (ARRA). That money has been supporting the delivery of state services. In addition, Vermonters have received hundreds of millions in federal tax cuts, and other stimulus funds have been available to private businesses.

ARRA—commonly known as the stimulus program—has been a boon to Vermont during these hard times. But the temporary funds also have masked weaknesses in the state’s fiscal policy. There are structural problems, including the unsustainable rise in health care costs and outmoded tax policies, that have grown over the years. More recently, there has been a concerted effort to reduce the size and cost of government without changing what it is expected to do.

In 2012, when the ARRA funds cease flowing from Washington, a crucial debate over Vermont’s budget priorities, especially education and human services, will resume. Its outcome will determine whether we return to having a state government that competently and efficiently delivers the services that individuals can’t provide on their own, or we continue to underfund government and make it less effective.

How to Face a Downturn
Recessions are a difficult time for any government. The economy contracts, workers lose their jobs, and tax collections decline—so the state has fewer resources just when people are turning to it for help.

Some political leaders respond to recessions by using all the tools at hand to maintain important services: rainy day funds, budget cuts, tax increases, temporary federal funding, borrowing, even deficit spending. Gov. Richard Snelling and the Legislature used all those tools when they attacked the state’s last big recession in 1991. They recognized that Vermonters needed more, not less, from their government when the economy was shrinking. The state emerged from that slump on a firm fiscal footing, which allowed it to roll back most of the tax increases and budget cuts.

During his eight years in office, Governor Douglas has been clear about his desire to reduce the size and lower the cost of state government. He has held to that position through this recession, too. He doesn’t subscribe to Snelling’s counter-cyclical fiscal policy. Instead, he says that when families and businesses cut back, government must cut back, too.¹

In January 1991, Snelling told Vermonters: “We cannot and will not set lower standards for the education of our children, for the health of the population, for assistance to the troubled, jobless, or homeless, or for protection of the environment.”²

Eighteen years later, this was Douglas’s message: “The truth we must all accept is that we can no longer afford the level of services we have come to enjoy.”³

While the governor has sought to lower expectations, his administration hasn’t said what functions and services should be eliminated. He has pressed local school boards to reduce education spending, but hasn’t said anything about lowering performance standards. There are fewer state employees working with fewer resources, but except for the judiciary’s decision to close the courts on certain days, the basic jobs of state government have not been changed. Despite a promise not to “nickel and dime services . . . [to] a point where our programs are no longer able to serve their purposes,”⁴ that has been the result of some recent budget cuts.

The Legislature for the last three years has stood somewhere between Snelling’s counter-cyclical approach and Douglas’s determination to reduce state spending. Legislative leaders have been willing to use federal stimulus funds to make up for lost state revenue. But they, too, have called for “belt-tightening” and been almost as resistant as the governor to raising taxes.

Even with hundreds of millions in ARRA funds, the recession has left Vermont with gaps between available revenue and the cost of needed services. The Democratic-controlled Legislature passed modest tax increases in 2010, but during fiscal 2009 and 2010 it approved $4 in cuts for every $1 in new tax revenue.⁵ This year, the Legislature rolled back some of last year’s tax increase and closed the fiscal 2011 budget gap almost exclusively through cuts.

The governor also has been willing to use ARRA funds; as chairman of the National Governors’ Association, he sought federal help from President Obama and Congress. But back in Vermont, his acceptance of Washington aid seemed almost grudging.

“I am not counting on additional federal [Medicaid] assistance in my budget,” Douglas said. “But even if new aid does eventually come our way, we must recognize that federal recovery funds will not flow forever, nor should they. We must take responsibility for our own programs and begin to step down our funding levels gradually and responsibly. By starting now the difficult process of realigning human services spending within currently available resources, we will spare programs from devastating cuts when the federal spigot is inevitably turned off.”⁶

At a time when thousands of Vermonters were losing jobs, the administration resisted participating in a program to provide hot meals to poor schoolchildren that was fully funded by the federal government.⁷ (It eventually gave in.) Among the more than 700 state positions eliminated in recent years, some were funded entirely with federal money. Cutting the federally funded jobs saved no state money, took the money out of the state economy, and put workers on Vermont’s unemployment rolls.

Similarly, the administration has pushed for Medicaid cuts that end up costing Vermonters more money. For every $1 in Medicaid cuts, the state saves 30 cents and the federal government saves 70 cents. Meanwhile, the full cost of those services is shifted to low-income families—or those people go without. Where Medicaid is concerned, it costs Vermonters $1 to reduce the state budget by 30 cents.⁸

More with Less
Challenges for Change was the Legislature’s attempt to reduce spending without undercutting important public services. The government reform plan, developed by a group of Minnesota consultants, recommended ways to “do more with less”—to increase efficiency so that agencies and departments could cut their budgets and still improve or at least maintain the quality of services. Challenges for Change has provided one of the rare instances in recent years of a discussion about delivering better government services.

The plan was unveiled at the start of the 2010 session and garnered broad support. The Legislature quickly endorsed the goals laid out by the consultants and committed to the plan’s savings before knowing how they would be achieved. When legislators later saw the administration’s implementation plans, many had second thoughts.

The fiscal 2011 budget assumes $38 million of Challenges for Change savings in the General Fund, of which about $30 million have been identified so far. Of those, more than half—$18.6 million—are expected to come from human services (Figure 1).

One of the main criticisms of Challenges for Change is the absence of adequate measures to determine whether the reforms will, in fact, improve services. The problem is compounded by the fact that some of the state employees laid off in recent years were those who collected and analyzed information needed to assess the government’s performance. The Agency of Human Services, for instance, last produced its annual assessment of the state’s social programs, “Vermont Well Being,” in 2006.

Critics of Challenges for Change, including those who support its general goals, believe the administration has seized on the plan as another way to reduce the size and cost of government, regardless of the effect on Vermonters. “Efficiency savings” has begun to look like another way to cut the budget and reduce services—to do less with less.

Gaps in the General Fund
Vermont’s fiscal 2011 budget relies on $320 million in ARRA funds, including $54 million for transportation projects and a $46.7 million increase for federally funded education programs (Figure 2). The remaining stimulus money has gone into General Fund programs, most of which would have been funded with state revenue if the federal money had been unavailable. The administration and the Legislature’s Joint Fiscal Office have concluded that $181.4 million of ARRA funds were used in the fiscal 2011 budget to cover appropriations considered part of the General Fund base budget—that is, expenditures for continuing programs that the state expects to make year in and year out.

Fiscal 2011 is the last year for federal recovery money. For fiscal 2012—just a year away—Vermont will have to go back to relying on its own revenues to pay for General Fund obligations. While the state does not expect to replace all the federal funds, it is likely to cover those base budget expenditures. Looking ahead to some revenue growth and other changes, the Joint Fiscal Office is forecasting a $120 million hole in the General Fund base budget in fiscal 2012.

The budget projections for fiscal 2012, including the potential deficit of $120 million, assume that the savings from Challenges for Change will be expanded in fiscal 2012, and there will be $72 million in efficiency savings that year. If the efficiencies are not realized, the gap will be bigger.

ARRA: A Bridge to What?
It was always understood that the recovery funds were temporary. The question is how to incorporate these temporary federal funds into a budget plan that sets the state on a sustainable path.

The problem policymakers face is a compound one. The recession has reduced revenue to operate state government at time when Vermonters need government to do more. Furthermore, the downturn has come on top of long-term economic changes that have made it more difficult for the state to meet Vermonters’ needs and balance its budgets. For decades, health care costs have grown at nearly twice the rate of the overall Vermont economy. Taxable sales have diminished as a percentage of the overall economy; motor fuel taxes, levied on a per-gallon basis, have been lagging as higher fuel prices move Vermonters to use less. These and other structural issues require reform before Vermont can expect both to sustain existing services and balance its budgets. The solution will require something more creative than budget cuts.

The governor clearly has seen the ARRA money as a bridge to smaller, leaner state government. His philosophy is simple: “Manage to the money.” In this case, that means when the stimulus funds run out, cut state services to adjust.

Others have seen the recovery funds differently: as a way to maintain the state’s most critical services until the economy picks up and necessary structural reforms can be enacted. The expectation is that a stronger economy reinforced by structural reforms will provide sustainable revenue to support the services and other public structures in which Vermont has invested over the years.

Despite its over-reliance on cuts to deal with the current crisis, the Legislature also has made progress on health care and tax reforms. It established the Blue Ribbon Tax Structure Commission in 2009, which is looking at ways to modernize Vermont tax system. It also appropriated funds to design three options for a new health care system for Vermont, which will be ready for review early next year.

State revenues are beginning to grow again, but the projected budget gap for fiscal 2012 means they’re not yet growing fast enough.

Education and Human Services At Risk
Temporary federal money can be a double-edged sword. On one hand, it can be a lifesaver for maintaining critical services. But when the money is gone, those same services can suddenly become the most vulnerable. Among these are education and human services, which together account for three-quarters of state spending. Although the Legislature has resisted some of the administration’s efforts, Governor Douglas has targeted these two areas for reductions, especially as he prepares to leave office. It remains to be seen whether the next governor and Legislature will maintain Vermont’s commitments to high-quality education and the services and public structures that make the state a good place to live for all its citizens.

Much of the recovery money given to Vermont and the other states came with requirements for how it could be spent. That was true for most of the human services funding. With some of the ARRA money, states had more flexibility. Vermont chose to use these so-called Fiscal Stabilization Funds, given to the governors, to cover some of the state’s share of education funding. The administration and the Legislature could have used the stabilization funds to replace state dollars for other programs and left all of the state funds for education intact. Instead, they put the money into education, which makes it vulnerable when the federal money dries up.

Between the loss of ARRA money and other cuts to education, the Legislature needs to come up with $60 million to restore the General Fund commitment to education to its pre-recession levels. Already, this shortfall of education funding is being portrayed as a big culprit in the projected $120 million budget gap for fiscal 2012—so pressure is building to get local school districts to cut their budgets rather than make up the lost revenue at the state level. If school districts choose not to make cuts that they believe will undermine their children’s education, and the Legislature doesn’t restore education funding, local residents will face another round of property tax increases.

In human services, the loss of recovery money will leave another big hole. The General Fund appropriation for the Agency of Human Services in fiscal 2011 is expected to be about $437 million if the Challenges for Change savings are realized. That would be about $65 million less than the General Fund appropriation for the agency in fiscal 2008, before any ARRA money was available.

Assuming even the modest budget growth rate of 3.5 percent that the Joint Fiscal Office typically uses and continued savings from Challenges for Change, the Human Services Agency will need an increase of about $65 million in fiscal 2012 just to maintain existing services.⁹

Needed: New Revenue
Since the recession began, Vermont’s elected leaders have looked to budget cuts and federal help to address the revenue shortfall. Over the governor’s objections, the Legislature did raise some taxes in 2010, but these were outweighed by cuts. In fiscal 2011, new tax cuts cancelled out whatever small tax increases the Legislature approved. Meanwhile, the Legislature cut another $110 million from General Fund programs to balance the budget.

Vermont could have taken a balanced approached through the recession and used an equal measure of spending cuts and new state revenues, including reserves, to make up for the shortfalls. The result would have been a more stable budget situation going into fiscal 2012 when the temporary federal ARRA funds run out.

With the help of the ARRA funds, Vermont’s General Fund base budget grew at an average annual rate of 2.6 percent for fiscal 2007-2011.¹⁰ That is not enough to cover the normal growth in General Fund spending, let alone the increased demand for state services during a recession (Figure 3). The state workforce has been reduced, and the deterioration in the delivery of services is beginning to show. The courts have reduced their operating hours,¹¹ the state has closed bridges because it can’t afford to repair them,¹² and Vermonters with developmental disabilities have fewer support services.¹³ But if Vermont fails to find new revenue after the stimulus money is gone, the deterioration of services will accelerate.

Conclusion
So far in this recession, Vermont’s elected leaders have not asked Vermonters to step up to help maintain the essential public services that are important to their quality of life. Voters in many local communities did that on their own when they rejected calls from Montpelier to cut their school budgets. In the face of decreased state funding for education, they accepted higher property taxes rather than undermine their children’s education.

If the Legislature does not restore the lost federal funding for education in fiscal 2012, that will mean a further shift onto the property tax. And without increased revenue to restore the human services budget, poor and vulnerable Vermonters will continue to bear the heaviest burden of this recession.

.

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© 2010 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

1. “It is unfair and unacceptable for us to expect the people of Vermont—who are making difficult budget choices everyday in their homes and businesses—to pay for an unwillingness to make tough budget decisions.” Gov. Jim Douglas, Inaugural Address, Jan. 8, 2009. [↩]
2. Gov. Richard Snelling, Inaugural Address, Jan. 10, 1991. [↩]
3. Gov. Jim Douglas, Budget Address, Jan. 22, 2009. [↩]
4. Gov. Jim Douglas, Inaugural Address, Jan. 8, 2009. [↩]
5. Public Assets Institute, Reducing State Services: The Wrong Fix, December 2009. [↩]
6. Gov. Jim Douglas, Budget Address, Jan. 19, 2010. [↩]
7. Public Assets Institute, No Supper for Schoolchildren, December 2009. [↩]
8. Public Assets Institute, Medicaid Math, February 2009. Under ARRA, the Medicaid match rate for Vermont was increased to 70 percent federal and 30 percent state. [↩]
9. Public Assets Institute analysis of appropriations data from the Joint Fiscal Office. [↩]
10. Ibid. [↩]
11. Public Assets Institute, Vermont Judiciary, October 2009. [↩]
12. Public Assets Institute, Vermont’s Bridges are Going Nowhere Good, February 2010. [↩]
13. Public Assets Institute, A Step Backward for Developmentally Disabled Vermonters, April 2010. [↩]

2011 Budget: Cutting the Commitment to Vermonters

Posted by sarah on April 7, 2010 at 1:00 am

By Jack Hoffman (April 2010)

Download a PDF of the report or read the text below:

As they wrestle with the recession, Vermont’s elected leaders are backing away from their commitment to citizens. This change in public policy is reflected in their language and in their budgets.

Political leaders this biennium are talking about “reanalyzing and renegotiating the social contract between the government and the people.”¹ They are telling us: “The truth we must all accept is that we can no longer afford the level of services we have come to enjoy.”²

Recessions challenge leaders’ resolve. And the resolve they are exhibiting during this recession is of a radically different kind from what Vermont saw during the major recession of the early 1990s.

Twenty years ago, Vermont’s governor warned against using budget problems as “an excuse for turning away from our responsibilities.” He was not afraid to say: “We cannot and will not set lower standards for the education of our children, for the health of the population, for assistance to the troubled, jobless, or homeless, or for protection of the environment.”³ It’s hard to imagine Vermont’s current leaders uttering words like these, much less backing them up with the revenue needed to deliver on those vows.

During this recession, as the governor and Legislature have been cutting the state budget, they have also been relying heavily on federal funds to keep it in balance, while struggling to meet the increasing demand for services that an economic crisis brings. Up to $450 million in temporary federal funds over three budget years is helping Vermont avoid deeper budget cuts and has largely spared Montpelier from the necessity to increase taxes to maintain the services that all Vermonters use.

But using federal funds is easy. Summoning the political courage to raise revenue is not. In the early 1990s, Vermont’s political leaders did both. They kept their commitment to Vermonters by using additional federal funding and also by initiating substantial increases in state revenues to meet the increased demand for human services.

The test of today’s leaders will come when the extra federal funds are no longer available. The early signs are not good.

A Temporary Reprieve from Washington

Extra federal funding has allowed the Vermont House of Representatives to undo some of the worst human services cuts that Gov. Jim Douglas proposed when he presented his fiscal 2011 budget in January. The House version of the budget passed in late March included about $114 million more in federal funds than the governor had in his proposal.⁴  With the additional money, the House eliminated the increase in Medicaid premiums the governor recommended ($1.7 million).⁵ It also restored cuts in adult dental services ($1.5 million), in several home- and community-based services ($3.5 million), and in Catamount Health, (3.0 million).⁶

Most of the extra federal money—about $62 million—will be new Medicaid funding. Under the American Recovery and Reinvestment Act (ARRA) the federal government is paying a greater share of Medicaid costs. But these enhanced payments were scheduled to expire at the end of December 2010, right in the middle of most states’ fiscal year. Congress is expected to extend the enhanced payments for six months.

The Vermont House version of the budget also uses additional federal money by increasing taxes on health care providers, which are eligible for more matching funds. The House plans to use this additional money to launch an incentive program to encourage providers to improve care and reduce costs. The program also returns some of the new taxes to the providers.

Although the House budget includes about $88 million more in federal funds for the Agency of Human Services than the governor’s, the House increases total spending for the agency by only about $39 million (Table 1).⁷ That’s because the House appropriates about $60 million less General Fund money to the agency than the governor did and sets it aside in the “human services caseload reserve.” A future administration and Legislature will decide how to spend those reserves.

Human Services in the Crosshairs

The governor has been clear that he sees the Agency of Human Services as one of the keys to solving Vermont’s budget problems. The agency accounts for about 40 percent of General Fund spending. So, faced with a projected $150 million gap in the fiscal 2011 budget, human services is largely where he turned for cuts (Table 2). His plan also proposes to shift costs and redirect revenue. That doesn’t reduce expenditures; it simply pays from a different pocket.

The governor and the Legislature have agreed to try to close about a quarter of the budget gap by following recommendations of a Minnesota consulting firm hired to study efficiency in state government. In its report Challenges for Change, the firm identified eight areas where Vermont could supposedly spend less and still deliver services as good as or better than those now provided. They projected potential savings of $38 million in fiscal 2011 and $72 million in fiscal 2012.⁸

In February, the Legislature quickly passed, and the governor signed, a bill directing the administration to go forward with the consultants’ recommendations. In late March, “design teams” began presenting their plans for achieving the new efficiencies.

Like the governor’s cuts, the Challenges for Change savings are concentrated in human services. Of the $38 million in anticipated savings for next year, more than 60 percent—almost $24 million—is supposed to be found in the Department of Corrections, which is part of the agency, and in programs for Vermont families and the elderly.⁹ And those are just the General Fund reductions. Vermont could lose another $26 million in federal matching funds if it makes all of the cuts in human services that the consultants suggested.¹⁰

The idea of providing the same or better services for less money has broad support. The Douglas administration came into office eight years ago promising to make state government more effective and efficient and initiated at least three efforts to reform government.¹¹ The Challenges for Change bill passed with only one opposing vote in the Senate and three in the House. The administration and the Legislature have already assumed that the efficiencies can be achieved, and they have booked the savings in their 2011 budgets. But skeptics worry that the cuts are being made without any assurances of equal or better services.

Including the Challenges for Change savings, the governor proposed nearly $70 million in cuts to human services to close the projected $150 million budget gap for next year.¹² His plan assumed that the federal government would restore $8 million in funding for the Vermont State Hospital in Waterbury. However, the administration learned last month that the hospital was not recertified, so Washington will not provide that $8 million—and that amount will have to be cut unless additional funds are found.

The State Stands Down

Thanks to the federal funding that became available after the governor presented his budget, the House put more money into some of the human services he wanted to cut, especially programs for elderly, disabled, and mentally ill Vermonters.

But while the House budget allocates more money overall for human services than the governor would, the lawmakers are also reducing the commitment of state resources. The House bill appropriates 16 percent less—almost $80 million—for human services from the General Fund than Vermont spent in 2008 before the start of the recession.¹³ Meanwhile, the number of people turning to state government for help has gone up, as it always does during recessions.

So far this recession has seen a 20 percent increase in the number of households receiving assistance through Vermont’s Reach Up programs.¹⁴ However, Vermont provides families with only 49 percent of the benefit’s “basic needs allowances,” which have not been adjusted for cost-of-living increases since 2004.¹⁵

The number of Vermonters receiving food stamps is up 63 percent since the start of the recession, due in part to the economic crisis and also to a change in eligibility requirements.¹⁶  Funding for food stamps, which is all federal money, doubled from fiscal 2008 to 2011.¹⁷

Vermont’s tax revenues dropped $170 million between fiscal 2008 and 2010,¹⁸ so it’s good that federal funds are available to help fill the hole. But balancing the state budget is not the same as meeting the state’s responsibilities to Vermonters. Advocates for Vermonters with disabilities, for example, point to a shift from counseling, training, and rehabilitation services to caretaking.

While relief from Washington has allowed Vermont to cut its own spending, the danger going forward is that this reduced state effort will become permanent. The governor has stated repeatedly that he wants a permanent reduction in state spending. The Legislature has been reluctant to cut as deeply as the governor, but legislative leaders are only marginally more willing to maintain services if it means raising taxes.

A Changed View of Government

The response of the Douglas administration and the Legislature to the current recession stands in contrast with that of leaders facing the downturn of the early 1990s. Twenty years ago, a Republican governor and a Legislature controlled by Democrats didn’t try to cut their way out of the crisis. Instead, Gov. Richard Snelling—who also was governor during the severe recession of the early 1980s—advocated a counter-cyclical fiscal policy. Lawmakers agreed to raise taxes—including temporary income tax surcharges on wealthier Vermonters—slow the growth of spending, and run deficits so they could continue to meet the demand for services. When the economy improved, demand declined, and revenues began to increase again—the governor and the legislators agreed that that was the time to cut back on spending and reduce taxes.

Underlying these policies was a philosophy of government: Montpelier believed that a paramount responsibility of the state is to meet the needs of people suffering through an economic crisis.

That earlier recession began in June 1990.¹⁹ Technically, it lasted eight months, but the number of jobs didn’t return to pre-recession levels until the end of 1993.²⁰ Demand for human services rose, which is the pattern when the economy shrinks and people are thrown out of work. More people turn to the government for heating assistance, food stamps, welfare, and other services. At the same time, the recession left the state short of revenue. The projected shortfall was on the order of $150 million, which represented almost 25 percent of the General Fund budget, a larger percentage than the acknowledged shortfall today.²¹

Political leaders of the early 1990s understood the magnitude of the problem because the administration prepared a current services budget. Such a budget estimates the cost of providing all existing services for the coming year, with adjustments for inflation, caseload changes, and other foreseeable factors. It allows policymakers and the public to measure whether the state is meeting its commitments.

With a handle on both the financial shortfall and Vermonters’ needs, Gov. Snelling and the Legislature responded by making some cuts, but they also increased taxes and ran budget deficits. The long-term plan was to roll back the tax increases after the economy recovered so that the state could be prepared to respond to the next downturn. From fiscal 1989, the year before the recession began, to fiscal 1992, when Vermont was still recovering, the budget for the Vermont Agency of Human Services rose 41 percent.²² The share of the agency’s budget supported with state tax dollars grew by 40 percent during that period, and the portion funded with federal dollars rose 41 percent (Figure 1).

A Colder Response

Twenty years ago, Montpelier put people first and money second. Today, our leaders’ priorities are the opposite. They no longer view the increased demand for services brought on by the recession as a state obligation—but, rather, as a cost that must be reduced.

Those values are reflected in fiscal policy. In the governor’s latest budget, General Fund spending for human services would be 4 percent less than it was in fiscal 2008.²³ If all state funds are taken into account—the General Fund, Catamount Health, State Health Care Resources, Special Funds, and the Tobacco Fund—the governor’s budget would increase spending for human services just 1 percent over fiscal 2008.²⁴

The House bill commits even less state money for human services. General Fund spending on human services is 16 percent lower than it was in fiscal 2008; counting all the various state funds, the House budget spends 6 percent less on human services than in 2008.²⁵

The governor’s budget proposal describes the situation this way: “[W]e cannot deny that the sharp growth in the demand for human services in recent years threatens the overall stability of our budget. Nearly one-third of our population receives services from the [s]tate. Next year, the Medicaid system alone will serve 172,000 Vermonters.”²⁶

The governor is not lauding the Medicaid system for providing health care to Vermonters who cannot afford it. For him, the size of Vermont’s Medicaid rolls is not the fault of the health care system or a tough economy, but rather the sign of an overly generous social services network. The problem, as he sees it: If Vermont keeps serving its residents as it has in the past, the budget won’t balance without raising taxes. For him, as for the Legislature, additional taxes on anyone, including the wealthiest, are worse than Vermonters going without needed health care or other services.

Vermont’s history, as reflected in its budgets, has been one of making sure people were cared for. For years, when various state rankings have been published, Vermont typically had a median income lower than the national average and per-capita spending on social programs slightly higher than the national average.

That commitment to making Vermont a place that works for everybody is not as strongly evident today. Perhaps it’s the result of 30 years of anti-government rhetoric. Perhaps it’s the fear and anxiety brought on by the recession. We just don’t hear many political leaders speaking about the common good, obligations to fellow citizens, or the importance of public structures.

“We cannot and will not set lower standards for the education of our children, for the health of the population, for assistance to the troubled, jobless or homeless, or for protection of the environment.” When federal stimulus money recedes and Vermont needs to rely more on its own resources, will any of our political leaders speak such words or honor a similar vow? If not, many Vermonters will be even worse off after this recession than they are now.

© 2010 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

1. House Speaker Shap Smith, Stowe Reporter, Jan. 21, 2010. [↩]
2. Gov. Jim Douglas, Governor’s Budget Address, Jan. 22, 2009. [↩]
3. Gov. Richard Snelling, Inaugural Address, Jan. 10, 1991. [↩]
4. Joint Fiscal Office, FY2011 annotated bill (HAC), Mar. 31, 2010. [↩]
5. HAC Proposed Changes to Human Services [↩]
6. Ibid. [↩]
7. Joint Fiscal Office, FY2011 annotated bill (HAC), Mar. 31, 2010. [↩]
8. Challenges for Change—Results for Vermonters, Summary of Fiscal Impacts [↩]
9. Ibid. [↩]
10. Ibid. [↩]
11. Vermont Institute on Government Effectiveness, Vermont Program to Advance Government Efficiency, and Vermont Commission on Government Efficiency. [↩]
12. Gov. Jim Douglas, Fiscal Year 2011 Executive Budget Recommendations, Jan. 19, 2010, 3. [↩]
13. Challenges for Change [↩]
14. Vermont Department of Children and Families, Reach Up caseload count spreadsheet, RU caseload.xls [↩]
15. Report to the Vermont Legislature, Evaluation of Reach First and Reach Up, Jan. 1, 2010, 13; www.leg.state.vt.us/reports/2010ExternalReports/254471.pdf [↩]
16. Vermont Department of Children and Families, 3SquaresVT Participation Report FY1999-2010 spreadsheet, 3SquaresVT Participation Report (PET).xls. [↩]
17. Joint Fiscal Office, FY2011 annotated bill (HAC), Mar. 31, 2010; www.vttransparency.org [↩]
18. Kavet, Rockler & Associates, Economic Review and Revenue Forecast Update, January 2010. [↩]
19. National Bureau of Economic Research, Business Cycle Expansions and Contractions, www.nber.org/cycles.html [↩]
20. Vermont Department of Labor, Vermont NonFarm Employment, seasonally adjusted, 1990-2011. [↩]
21. Snelling, op. cit. [↩]
22. Joint Fiscal Office, FY2011 annotated bill (HAC), Mar. 31, 2010; www.vttransparency.org [↩]
23. Challenges for Change [↩]
24. Ibid. 22. [↩]
25. Challenges for Change [↩]
26. Douglas (2010), 9. [↩]

Migrants to Vermont Have More Income Than Those Who Leave

Posted by sarah on February 4, 2010 at 4:46 pm

By Reenie De Geus (February 2010)

Download a PDF of the issue brief or read the text below:

Fewer people moved into Vermont than out in 2008, but those who moved in had more income per person than those who left the state or stayed put. This has been the trend in Vermont for the last 15 years (Figure 1).

The Internal Revenue Service follows patterns of movement from state to state by tracking where people are living when they file their tax returns. The number of exemptions claimed on the returns and the total adjusted gross income (AGI)¹ reported reveal the approximate number of people in a family and how much income they reported collectively.

New IRS data show that 15,028 people claimed as exemptions on federal tax forms moved into Vermont in 2008, compared with 16,551 people who moved out of Vermont. The average adjusted gross income of these immigrants in 2008 was $32,862 per exemption. The average income per exemption of those who left the state was $28,806, 12 percent less. The tax filers who stayed put in 2008 had an average income per exemption of $27,397.

Overall people moving to Vermont in 2008 had more income—both in total and per person—than those who left. Vermont gained the most income from New York, Massachusetts, and New Hamphires (Table 1). The top recipients of income from Vermont were New Hampshire, New York, and Florida.

The largest flows of people both into and out of the state in 2008 were from adjacent states. New York, New Hampshire, and Massachusetts accounted for 40 percent of new arrivals and 36 percent of departures. Newcomers from New York were more numerous and had more income per person than Vermonters moving to New York. Vermont had a net loss of people to Massachusetts, but the former Massachusetts residents had more income than the Vermont emigrants who moved south across the border.

With New Hampshire, the pattern was reversed. More people migrated to New Hampshire from Vermont than the other way around, and the average income per person moving to New Hampshire was higher than than those who came from there.

The income of emigrants to Florida rose in 2008. In 2007, the average income per person of Vermonters moving to Florida was $32,568. In 2008, it rose to $39,128. Some, including Governor Douglas, have argued that Vermont’s tax policies are driving higher-income people to Florida, which has no income tax. However, those moving to Florida from New Hampshire and Vermont have had similar incomes on average. Florida-bound New Hampshire residents have in fact had higher incomes than Vermonters moving to Florida in 9 of the last 16 years. Like Florida, New Hampshire has no income tax (Figure 2).

The overall migration figures are reported below. Table 2 shows total numbers of people moving in and out of the state and their aggregate incomes. Table 3 shows the flow of people moving to and from Vermont by state.

Note – See Table 3 on page 3 of the PDF.

1. Income as reported on line 37 of the federal 1040 income tax form. [↩]

It’s Raining Hard: Tap the Fund

Posted by sarah on January 14, 2010 at 2:24 pm

By Jack Hoffman (January 2010)

Download a PDF of the report or read the text below:

More than 20 years ago, Vermont had the foresight to establish a rainy day fund to help the state through hard economic times. Today, the Legislature could spare Vermonters additional painful budget cuts and give the state economy a boost if it stopped hoarding this money and used these reserve funds as intended.

Vermont has four separate reserve funds. The largest of these, the General Fund Stabilization Reserve, contains $60 million, the statutory maximum.

Legislative leaders and the Douglas administration have resisted using the reserves. They argue that they don’t know how long the recession will last, and once the funds have been spent, they’re gone.

It is true the rainy day funds can be spent only once. But their purpose is to prevent harmful cuts to important services—or to provide those services without the need for additional taxes. If the reserves are used first and the following year sees another budget gap, people can decide then how much revenue to raise or what services to cut. What the Legislature and the governor have done is to make cuts first and hold onto the reserves—evidently hoping they will never have to be used. While that may provide comfort to Montpelier, it’s no help to Vermonters.

Vermont’s first rainy day fund was created in 1987, when the economy was booming and the state was running large budget surpluses. Initially, the fund was capped at 2 percent of the General Fund; the first year the Legislature appropriated $8.6 million in reserves.¹ Just a couple of years later the economy went south. At the close of fiscal 1991, the fund contained $8.2 million, which was used to lower the state’s year-end deficit to just under $60 million.

The recession of the early 1990s was painful. But as the economy improved, the administration and the Legislature moved promptly to refill the reserves. They increased the cap to 5 percent from 2 percent and created reserves for both the General Fund and the Transportation Fund. Later, reserves were established for the Education Fund and certain human services programs.²

Most states now have rainy day funds. In the past two years, 40 states have tapped them to some extent; 27 have used at least half of their reserves.³  At the end of fiscal 2006, the states held almost $70 billion in general fund reserves—that is, year-end surpluses and rainy day funds. By the end of fiscal 2009, the year-end balances had dropped to $32 billion. The fact that nearly half of the remaining reserves are held by just two states, Alaska and Texas, means that most states have made substantial withdrawals from their rainy day funds. In other words, most other states have recognized this economic downpour for what it is.

Vermont is among the states that seem not to know it is pouring outside. At the end of fiscal 2009 the state had almost $120 million in reserves—a balance bigger than before the start of the recession in the middle of fiscal 2008 (Table 1).

Using rainy day funds not only eases some budget pressure, it also provides a small boost to the economy. The American Recovery and Reinvestment Act passed by Congress last year was designed to stimulate the economy by generating hundreds of billions of dollars of economic activity that would not have occurred otherwise. The federal government increased food stamp benefits and unemployment compensation, which provided people money that they spent immediately on food, heat, gas, and other necessities. It gave general operating funds to state governments so they would not have to cut back as much on their spending. Additional federal funding went to education, highway construction and maintenance, energy projects, telecommunications, and other infrastructure improvements.

The $60 million in Vermont’s General Fund Stabilization Reserve, even in relative terms, is a tiny fraction of the federal stimulus package, which some economists have argued was far too small. But $60 million is not nothing, and using a substantial portion of it would generate spending that otherwise would not have occurred in Vermont. Cutting the budget by $60 million or raising taxes by $60 million does put a drag on the economy—although targeted increases on upper incomes create less of a drag than budget cuts. By contrast, spending rainy day funds would create a small but positive economic effect.

The Center on Budget and Policies Priorities in Washington, D.C., made this point two years ago in a report urging states to use their reserve funds to respond to the recession. “Is It Raining Yet? Yes, and It’s Time for Many States To Use Their Rainy Day Funds” listed four reasons for states to dip into their reserves sooner rather than later. Reason Number 1: “It’s good for the state economy.”⁴

Before Vermont created rainy day funds, it occasionally ran budget deficits when recessions hit. These deficits served essentially the same purpose: They allowed the state to avoid harmful budget cuts and big tax hikes. Taxes were raised in the recessions of the early 1980s and early 1990s, and the additional revenue went to paying off the deficits gradually. Running a short-term deficit is an option available only to Vermont; all other states have constitutional or statutory prohibitions against operating deficits. Rainy day funds should be used first. But a temporary deficit would cause less harm to individual Vermonters than some of the budget cuts that are likely to be proposed in the coming weeks.

And when the economy does turn around and Vermont starts refilling the stabilization reserves, the Legislature should increase the maximum allowed in the funds to at least 10 percent of annual expenditures. Imagine how much easier it would have been to close Vermont’s budget gaps if the state had had $150 million or $200 million in reserves at the start of this recession.

The blow this recession has dealt state budgets is worse than any other in the last several decades. Perhaps Congress will take the steps necessary to avoid a similar calamity for another couple of generations. But this crisis teaches the states a lesson: They must be prepared for precipitous drops in revenue just when people are most in need of essential public services. Like other states, Vermont needs a healthy rainy day fund—and it needs to use it.

© 2010 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

1. Deborah Sline, “Fund to Prevent Deficits Wins Legislative Approval,” Rutland Herald, May 21, 1987, 1. [↩]
2. Vermont Statutes Annotated, 16 V.S.A. § 4026; 32 V.S.A. § 308. [↩]
3. National Association of State Budget Officers, Fiscal Survey of the States, Fall 2009, table 9, 26; table A-13, 72. [↩]
4. Elizabeth McNichol, “Is It Raining Yet? Yes, and It’s Time for Many States To Use Their Rainy Day Funds,” Center on Budget and Policies Priorities, Feb. 21, 2008, http://www.cbpp.org/cms/index.cfm?fa=view&id=1094 (accessed Jan. 11, 2010). [↩]

Reducing State Services: The Wrong Fix

Posted by sarah on December 16, 2009 at 4:36 pm

By Jack Hoffman (December 2009)

Download a PDF of the report or read the text below:

Vermont has a revenue problem. The recession has meant less economic activity: Vermonters and Vermont businesses are earning and buying less. This has significantly reduced the amount the state collects, but it has not reduced Vermonters’ need for the court system, highways, schools, food inspections, and other state-funded services.

While the problem is on the revenue side of the ledger, the state has looked primarily to the spending side to solve it. The Legislature enacted some new revenue measures last session to fill the budget gap. But in fiscal 2009 and fiscal 2010, it made almost $4 in cuts for every $1 of revenue it raised. As they begin work on the fiscal 2011 budget, lawmakers are starting with a budget that has already been cut by $75 million. Yet they are facing an additional $150 million hole and proposing even more cuts to deal with it. They cannot do so without undermining the public services that Vermonters depend on and leaving the state at a disadvantage when the economy begins to rebound.

Public Assets Institute has recommended that Vermont follow the example of many other states and adopt a balanced approach to balancing the budget during this economic slowdown. The balanced approach—which includes restoring lost revenue and using rainy day funds in addition to cuts—recognizes that all Vermonters both use public services and pay taxes.

Vermont has benefited from hundreds of millions of federal economic recovery dollars to help it get through the recession. The federal money is being spread over three state fiscal years (2009 through 2011), replacing much of the state’s lost revenue needed to pay for basic public services. But even after using the federal funds, Vermont was short of revenue—almost $69 million in fiscal 2009 and $146 million in fiscal 2010 (Table 1). The Legislature relied primarily on budget cuts to make up for the revenue shortfall.

TABLE 1¹

Calculating the Cuts

The budget gap is the difference between the estimated cost of providing public services and the revenue the state expects to collect. The federal government and a handful of states prepare formal projections of costs each year. These “current services budgets” take into account adjustments for inflation, pay raises, and increased demand for services, such as the rising need for food stamps and unemployment benefits in a recession.

Vermont doesn’t publish current services budgets, but it should. If it did, people could compare them side by side with appropriations to see whether the Legislature was appropriating adequate funds to provide necessary state services like operating the courts, protecting the environment and public safety, educating children, and caring for the most vulnerable citizens. They also could see exactly how much services have been cut in recent years.

In the absence of a current services budget, the Legislature uses budget and budget gap projections prepared by the Joint Fiscal Office. These estimates typically assume that the base budget should grow at about 3.5 percent a year—although annual growth in actual General Fund appropriations has been higher than that since 2002.

Public Assets Institute used these projections as a measure of how much the state needed to spend to pay for existing services. Based on the Joint Fiscal Office estimates, General Fund spending should have been $1,319 million for fiscal 2009 and $1,350 million this year.

However, those amounts exceeded the available revenue—even with additional federal economic recovery funds—and the Legislature responded by cutting services. For fiscal 2009, lawmakers cut General Fund spending by $68 million and $99 million for fiscal 2010.

The Legislature did make up some lost revenue those years. In 2009, they used $1 million in rainy day funds (out of a total of more than $75 million).² In fiscal 2010, they used an additional $16 million of the reserves and also made some tax changes: They reduced Vermont’s tax exemption on capital gains, reduced the deductibility of state income taxes, and approved some minor tax increases. The tax changes generated about $26 million.

Over the two years, the Legislature replaced about $43 million in revenue, but cut $166 million in spending (Figure 1). While this approach was better than relying on budget cuts alone, to make nearly $4 in cuts for every $1 of new revenue cannot reasonably be described as balanced.

Before the Recession

Recessions pose especially difficult fiscal problems because state tax receipts decline just when more people need public services. But even before the recession, Vermont’s budget was not keeping up with the need for services. From fiscal 2002 to fiscal 2008, the General Fund budget grew at an average annual rate of just over 5 percent. But during much of that period, health care costs were rising at more than 7 percent.³

One way to cut costs is by improving efficiency. The Legislature has taken a good first step by hiring a consultant to look for real savings in the way state government carries out its duties. While the Legislature should be finding more efficient ways to deliver the services that all Vermonters use, simply cutting the budget does not necessarily save money. Some cuts that eliminate state funding for services merely shift costs—often higher costs—onto average Vermonters. Cuts to Medicaid, for example, increase Vermonters’ out-of-pocket expenses because the state loses federal matching money that would have helped pay for a portion of the services. Without that federal help, the full cost of health care falls to Vermonters, in many cases those who can least afford it.

The state has also been reducing the number of state employees as a way to reduce costs. It has cut more than 600 jobs through attrition and layoffs—nearly 7 percent of the state’s work force. But the gradual erosion of personnel, services, and infrastructure is beginning to show.

Growing Cracks

Bridge closings—in Middlesex and Richmond in recent years and now the Champlain Bridge to New York—are the most visible examples of a neglected public infrastructure. But other cracks are beginning to appear.

• The Burlington police recently warned that they could not be expected to care for people who are ending up on city streets because of cutbacks in mental health services.⁴

• Staff cuts at the Department of Aging, Disabilities, and Independent Living are leaving many of Vermont’s most vulnerable citizens, especially older people with disabilities, without proper care.⁵

• Inadequate staffing is blamed for the death of a young Rutland woman who did not receive proper medical care in a Vermont prison.⁶

• Poor Vermont schoolchildren are missing out on a new federally funded hot meal program because the Vermont Department of Education lacks one employee to oversee the program—an employee whose position also would be funded fully by the federal government.⁷

More Cuts Threatened

The recession hasn’t lessened Vermonters’ need for decent roads, good schools, home visits for the elderly, or health care. The annual cost of providing those services rises—whether or not the Legislature chooses to appropriate enough money to fund them. With even modest growth, the estimated cost of services needed in 2009—$1,319 million—could be expected to rise to about $1,412 million in 2011.⁸

But the Joint Fiscal Office is projecting a decline in the cost of needed services next year. The fiscal office appears to be assuming that Vermonters have no need for the services that were cut in 2010. The difference between the Joint Fiscal Office projection and even a modest growth in the cost of services is about $75 million.

That Joint Fiscal Office projection is likely to be the starting point for the 2011 budget debate. In other words, lawmakers discussing the budget are really starting with cuts of at least $75 million. And even with this lower starting point and a final round of federal recovery funds, both the Joint Fiscal Office and the Douglas administration are estimating a budget gap of about $150 million.

The real problem the Legislature faces for next year is a revenue shortfall of about $225 million—$75 million in cuts already made and the additional $150 million gap.

Legislative leaders are warning of further cuts, but they shouldn’t assume the need for services has gone away. Closing the courts two and a half days a month doesn’t eliminate Vermonters’ need for a timely resolution of their cases. Cutting home visits to elderly Vermonters doesn’t reduce their need for help on the days they’re left alone. Underfunding teachers’ retirement doesn’t mean that obligation has disappeared.

A balanced approach to solving the 2011 budget problem should mean finding new revenue to fill a significant share of the remaining $150 million gap. Montpelier must be sensitive to the limits on citizens’ ability to pay taxes during a recession. But lawmakers also must recognize that in any economy, and particularly during a recession, cutting back services that Vermonters depend on—plowed roads, good schools, a fair and efficient judicial system—has serious consequences for our state. A balanced approach that includes new revenue to address the fiscal 2011 budget gap not only helps Vermonters weather the recession, it also keeps the state on track for a solid recovery.

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

1. Data from Joint Fiscal Office file GENERAL-#244527-v7-GF_five_year_cliff_analysis.XLS. “General Fund need” calculated from available revenue and projected budget gaps; “State Revenue” for FY2010 adjusted to exclude funds contained in “Closing the Gap.” The remaining $4.6 million budget gap projected for FY2010 is expected to be addressed in a budget adjustment bill in the 2010 legislative session. [↩]
2. Fiscal Year 2010 Executive Budget Recommendations, Jan. 22, 2009, page 23, projected fiscal 2009 stabilization reserve balances: General Fund $60 million; Human Services caseload reserve $16.3 million. [↩]
3. 2007 Vermont Health Care Expenditure Analysis & Three-Year Forecast, Vermont Department of Banking, Insurance, Securities, and Health Care Administration. [↩]
4. “Mental Illness Taxes Services,” Burlington Free Press, Nov. 23, 2009. [↩]
5. Ed Paquin, executive director Disability Rights Vermont, analysis of proposed fiscal 2011 budget cuts, Nov. 30, 2009. [↩]
6. “Dying in Cell 40: Flaws in Vermont’s prison medical system were fatal for Ashley Ellis,” Terry Allen, vtdigger.org, Dec. 14, 2009. [↩]
7. Interview with Vermont Department of Education staff. [↩]
8. Assumes an annual growth of 3.5 percent, the figure typically used by the Joint Fiscal Office even though in some years that was not enough to cover the cost increase for health care services alone. [↩]

State of Working Vermont 2009

Posted by sarah on November 2, 2009 at 4:46 pm

By Jack Hoffman and Paul Cillo (November 2009)

Download a PDF of the report or read the text below

The recession dominated Vermont’s economy in 2008, as it did the rest of the country. The state lost jobs at an alarming rate, especially late in the year. Almost 5,000 jobs disappeared in December 2008 alone, Vermont’s biggest monthly loss in nearly 20 years.¹

The private sector accounts for about 4 out of 5 jobs in the state,² and the bulk of the losses in 2008 occurred there. However, Vermont also saw a drop in public sector jobs—specifically, at the state level—as Gov. Jim Douglas responded to the recession by reducing the size of state government. Through layoffs, attrition, and early retirement, he has eliminated more than 600 state jobs since the start of the recession, and at least 100 more reductions are pending.

This is a departure from historic trends. Federal, state, and local government jobs don’t fluctuate in recessions as the private sector does. In fact, demand for public sector services typically grows during recessions, when people turn to the government for help.

The administration’s policy has worsened the impact of the recession. It has increased the number of unemployed Vermonters—and the state’s cost for unemployment compensation—and reduced the availability of state services just when many Vermonters need them most.

Private Sector Job Losses

In December 2007, there were 308,700 seasonally adjusted jobs in Vermont. A year later, 10,900 of those jobs—positions in offices, factories, shops, schools, and so on—were gone. The losses continued in 2009, although at a slower pace. By the end of August, the total number of seasonally adjusted jobs was down to 294,300—a decline of 14,400, or 4.7 percent, since the start of the recession.

Job losses in the private sector over that period were actually greater than total job losses. But new jobs in federal and local government offset some of the private sector losses. Private sector jobs dropped 11,000 in 2008 and an additional 4,700 through August of this year—a total of 15,700 jobs lost. So far, the recession has wiped out 6.2 percent of the private sector jobs that existed before the slump.³ Vermont lost more of its private sector jobs than did any other state in New England (Figure 1).

These losses were spread across industries; only health services and private education showed growth in the private sector. A few private sector industries were hit especially hard: the number of construction jobs shrank almost 20 percent, and more than 15 percent of manufacturing jobs vanished (Table 1).

Big Cuts by the State’s Biggest Employer

With more than 8,000 employees, the state of Vermont is Vermont’s largest single employer. Unlike the private sector, where the demand for products and services drops when the economy slows, the public sector has seen its workload increase as the recession has forced people to turn to state agencies and programs for help. Despite this increased demand for state services, however, the state government workforce has declined by a greater percentage than the private sector since the start of the recession. From late 2007—just before the start of the recession—through late September 2009, the number of state employees was reduced by 6.9 percent. From December 2007 through August 2009, 6.2 percent of jobs in the private sector disappeared.

The administration announced plans to reduce the state work force before the official start of the recession. Initially, the administration cut vacant positions. In doing so, it eliminated the funding for those jobs, which many agencies and departments were using to plug other gaps in their budgets. In the second half of 2008 and continuing into 2009, the administration turned to layoffs as part of its drive to reduce the General Fund budget.

At the beginning of 2008, there were about 9,220 positions in state government, excluding the 180 state legislators. Almost 500 of those positions were vacant, so just over 8,700 state employees were working when the administration started eliminating state jobs.

By September 2009, the state payroll was down 600 people to just over 8,100—again excluding legislators. Another 110 jobs will be eliminated later this fall through retirements or layoffs. If these reductions are all carried out by year-end, as planned, the administration will have cut the number of state employees by 8.2 percent. Some agencies and departments have seen bigger reductions than others. The largest number of reductions came from the Agency of Human Services, which is the state’s largest agency and includes the departments of corrections, health, children and families, aging and independent living, and others. Some smaller agencies and departments lost bigger shares of their employees (Table 2).

The Fallout of Job Cuts

How have these layoffs affected services? There is no easy way to measure. The administration provided only limited information—and few details—in documents submitted to the Legislature on the effect of proposed budget cuts. News accounts have pointed out some problems caused by staff shortages—for instance, the Vermont Education Department passed up federal funding and reduced its capacity to improve school nutrition programs because it didn’t have the staff to do the work.⁴

The reduction in the state payroll, through layoffs and an early retirement plan offered in 2009, was designed to reduce state spending. But it also further weakened Vermont’s economy by increasing Vermont’s unemployment rolls. And it has increased the state’s cost for unemployment just when revenues are declining and the demand for many state services is increasing. The state, like some private employers, does not pay unemployment insurance premiums. Instead, it pays benefits for the employees it lays off. Total payments for unemployment compensation increased about 50 percent last year, from just over $1 million in fiscal 2008 to $1.55 million in fiscal 2009.

Unemployment

Monitoring the number of jobs lost or created is one of the most common ways to assess the health of an economy. The state reports job losses or gains every month. When the number of jobs available is compared with the number of people in the labor force or the working-age population, we get a sense of how well the economy is producing work for those who want it.

Another especially important indicator is unemployment. The official seasonally adjusted monthly unemployment figures tell us how many people are looking for work but can’t find it. The state’s unemployment rate was below the national rate throughout 2008; that has been true for most of the last several decades.

Vermont began 2008 with a 4 percent unemployment rate. By the end of the year, the rate had jumped to 5.9 percent. Unemployment continued to rise into 2009 and hovered above 7 percent for five consecutive months; that hasn’t happened in Vermont for more than 25 years. More recently, the unemployment rate dropped a bit, to just under 7 percent.

While the official unemployment rate—referred to as U-3 by the US Bureau of Labor Statistics—is high, it understates the problem for Vermont workers. It fails to account for “discouraged workers” who have given up looking for work, as well as the underemployed—those working part time who would work full time if the economy were stronger. The federal government tracks these groups and publishes figures—U-6—that more accurately reflect the number of people out of work. A comparison of these two measures of unemployment is provided in Table 3.

Because people who have stopped seeking jobs are not counted in the labor force—and are therefore not in the official unemployment rate—it is also important to look at employment numbers, or the number of Vermonters who are working. There were 339,598 Vermonters working at the end of 2007. A year later, that number had dropped to 335,662—a decline of 1.1 percent. At the end of September 2009, the number of employed Vermonters stood at 333,059.

The Labor Force: Who’s Working

Historically Vermont’s population has been older and better educated than the national average. Vermont ranked 10th among the states in the percentage of college-educated workers in the labor force. The state continues to have the largest proportion of older workers in the country. In 2008, 22 percent of Vermont’s labor force was 55 and older, about evenly divided between men and women (Figure 3).

Nationally, 18 percent of the workforce is 55 or older. There are eight states—including two others from New England—where this age group makes up at least 20 percent of the workforce.

Men are more heavily represented in the for-profit sector of the labor force, whereas more than two-thirds of non-profit employees are women (Figure 4). Men’s annual earnings—a statistic determined by both hourly rate and the number of hours worked—were more than 40 percent greater than women’s in 2008 (Figure 5).

Poverty

Jobs and the unemployment statistics, while crucial, tell only part of the story of what is happening to individual Vermonters. Other statistics—poverty, income, wages, and health insurance coverage—help paint a more vivid picture of the day-to-day lives of Vermont workers and their families.

The recession had little impact on the state’s overall poverty rate or Vermonters’ incomes through 2008. Those two indicators are likely to show more significant changes when the U.S. Census reports the results of its next survey in the fall of 2010.

In the latest Census survey, which covers 2008, Vermont’s child poverty rate was 13.2 percent—up from 12 percent in 2007. Vermont’s rate was lower than most other states: It ranked 14th, with number 1 being the lowest rate, or the least child poverty. But New Hampshire (1), Massachusetts (10), and Connecticut (12) had lower child poverty rates than Vermont. Vermont’s rate means more than 16,500 of the state’s children were living in poverty. For a family of four, that means trying to get by on an annual income of $22,025 or less (Figure 6).

Vermont’s total poverty rate for 2008 was 10.6 percent—14th lowest in the country (Figure 7). Statistically, the rate was unchanged from the previous year. But behind the single statistic were 63,288 Vermonters living below the poverty line, which for some older couples is about $13,000 a year.⁵

Vermont’s median household income⁶ in 2008 was $52,104, which was just above the national median, but it ranked fifth among the New England states. Median income for single men was higher than for single women (Figure 8).

According to the latest survey by the Vermont Department of Banking, Insurance, Securities, and Health Care Administration (BISHCA), 47,286 Vermonters—7.6 percent of the population—had no health insurance coverage in 2008.

Cost of Living

Almost all of the news out of the recession has been grim, with one bright spot: the downturn did reverse the rise in fuel prices. Gasoline peaked at just over $4 a gallon in July 2008. It was under $2 by the end of 2008 and has since risen to about $2.60 a gallon.⁷ Vermonters saw a 67 percent increase in the price of gasoline from 1998 to 2008, and the price of fuel oil almost tripled. The cost of health insurance has risen 231 percent in the last decade⁸(Figure 9).

The Stimulus

Vermont also got some relief from the recession through the federal stimulus package, formally known as the American Recovery and Reinvestment Act of 2009. The state will receive more than $1 billion in direct and indirect assistance over three years. The measure included tax cuts to individuals and businesses, fiscal assistance to states and to those most directly hurt by the recession, and direct government investment in infrastructure and initiatives.

In the early months, most of the funds were disbursed as individual tax cuts and similar payments or as direct payments to states. By the fall, Vermont reported that federal funds helped to create or retain almost 2,000 jobs in the state.⁹

The stimulus bill eased the burden on the unemployed in four ways during 2009. It increased unemployment compensation payments by $25 per week for every unemployed worker; extended benefits for 33 additional weeks; exempted the first $2,400 of unemployment benefits from income taxes; and subsidized premiums for up to nine months for unemployed workers to continue their health coverage.

Conclusion and Recommendations

Some hopeful signs suggest that the end of the recession is coming into view—that is, the overall economy is beginning to grow again instead of shrink. But for unemployed and under-employed Vermonters, the official end of the recession is not likely to mean a quick return to work.

After the recession of the early 1990s, it was more than three years before the number of Vermont jobs was back to where it was before the recession. That was the fastest recovery among the New England states. After the recession of 2001, it took 30 months to return to Vermont’s pre-recession job level. New Hampshire took 39 months, Connecticut 66 months, and Massachusetts never recovered: the current recession hit before that state regained all of its lost jobs.

Even if this recession officially ends soon, it has been longer and deeper than the two previous recessions. Vermont lost 6,900 jobs in the 2001 downturn; so far this one has taken 14,400 jobs.

State government and public officials may not be able to control the economy, but they can control the state’s capacity to provide the services that individuals and businesses need during a crisis like this one. They also can make sure Vermont is in good position to recover as quickly as possible.

Protecting and restoring jobs should be the top priority for policymakers—not just because it will be good for the economy, but because it will be good for Vermonters. Jobs are the means to their livelihoods and well-being. So when political leaders face a choice of cutting spending or raising revenue, one question they should ask is whether their action will help or hurt jobs.

In recent years Montpelier’s assumption seems to have been that anything that makes government smaller must be good for business and the economy. But in some cases, cutting the state budget actually increases costs for Vermonters—for example, when the state gives up federal Medicaid funds and Vermonters are forced to pay for health care out of their own pockets.¹⁰ There are numerous services—provided by the courts, schools, state highway workers, regulators, and police—that are essential for the economy to operate well.

Few among policymakers, opinion leaders, or the press have discussed, or even acknowledged, the effect of public sector layoffs on the state’s capacity to deliver services. The administration’s goal has been to reduce the payroll, not to improve efficiency or make state government more effective.

The Legislature recently hired an outside firm to look at ways the state might save money through efficiency or perhaps through discontinuing specific services that no longer need to be provided by the government. Such research should be done before state jobs are eliminated and state employees are pushed into the unemployment lines.

Public sector jobs are just as important to the economy as private sector jobs. At times like these, with the economy fragile and unemployment still rising, policymakers should do all they can to hang onto the jobs that already exist. The work these employees do is important not only to provide them paychecks, but also to help all Vermonters weather the hardships that are unlikely to abate soon.

While raising taxes and cutting budgets both involve difficult political choices, the economic benefits of increasing taxes to maintain spending—if temporarily targeted toward the upper income brackets—outweigh the harm of curbing government outlays. If the public sector pulls back when the private sector and investors are also doing so, the effects of the recession grow even more severe.¹¹

ACKNOWLEDGEMENTS

The authors would like to thank Reenie De Geus, Doug Hoffer, Jeff Thompson, and Alexander Cogbill for their research assistance and thoughtful comments on early versions of this report.

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

1. All figures for jobs, employment, or unemployment in this report are seasonally adjusted unless otherwise noted. [↩]
2. The private sector includes for-profit and non-profit jobs. [↩]
3. Vermont Department of Labor provides data for seasonally adjusted private sector non-farm jobs (254,800 jobs in December 2007 and 239,100 in August 2009) as well as private sector jobs data by industry (presented in Table 1 of this report). Total private sector jobs does not equal the sum of jobs by industry, however, due to the impacts of seasonal adjustment and rounding. [↩]
4. Shay Totten, “Gonna Eat Them Words,” Seven Days, April 15, 2009, http://www.7dvt.com/2009gonna-eat-them-words [↩]
5. U.S. Census weighted average threshold for two-person family, householder 65 or older, is $13,030. [↩]
6. All households, including single-person households. [↩]
7. Vermont Department of Public Service, Vermont Fuel Price Report, January and September 2009. [↩]
8. MVP (Single person Small Group HMO; CoPlan 25; $25 co-pay, $500 inpatient co-pay) https://www.mvphealthcare.com/ourplans/documents/MVP%20VT%20HMO%2025%2011-08.pdf [↩]
9. http://www.whitehouse.gov/assets/documents/CEA_ARRA_Report_Final.pdf [↩]
10. Public Assets Institute, “Vermonters Would Pay More with Governor’s Budget Cuts”, http://publicassets.org/publications/reports/vermonters-would-pay-more/ [↩]
11. Nicholas Johnson, “Budget Cuts or Tax Increases At the State Level, Which is Preferable During a Recession?”, Center on Budget and Policy Priorities, http://www.cbpp.org/cms/index.cfm?fa=view&id=1032 [↩]

Rescissions: More Information Required

Posted by sarah on August 13, 2009 at 4:53 pm

By Jack Hoffman (August 2009)

Download a PDF of this report or read the text below

State employees will take the biggest hit if the Legislature accepts the administration’s proposal to re-balance the fiscal 2010 budget. Property taxpayers also will pay more if the governor’s plan is adopted. And Vermont will give up $3.5 million in federal funds in order to save half that much in state general funds.¹

The latest budget gap opened last month when economists issued their annual forecast of revenues the state is likely to collect in fiscal 2010, which started July 1. They lowered the April estimate, which the Legislature used when constructing its budget, to $1,024.6 million-a drop of $28 million.²

The good news is that the administration is not relying solely on cuts to close the gap (Table 1). The state ended fiscal 2009 with a surplus of almost $6.9 million. That will fill part of the hole. In addition, various agencies and departments have small amounts left over from 2009, so the administration wants to reduce their appropriations for the coming year. The administration also has identified new revenue, including federal matching funds for certain Medicaid expenditures.

The state, however, will also lose some federal revenues, which is especially costly. Administration figures show a $3.5 million reduction in federal money Vermont receives through a special Medicaid waiver. This program currently has about a 2-1 match, so Vermont will cut about $5.1 million in Medicaid services, but only reduce General Fund spending by about $1.6 million.

Finally, the administration is proposing to reduce General Fund spending by shifting costs onto other funds. The biggest shift would be $1.8 million onto the Education Fund. In documents presented to the Legislature, the administration said the shift would have no effect on the Education Fund because of some unexpected savings in that account.

The remaining cost shifts from the General Fund include $460,000 in engineering costs, which will be paid with borrowed money, and $95,000 in costs moved to special funds.

No effect?
The Legislature took a balanced approach to balancing the 2010 budget, using a combination of cuts, federal stimulus funds, and a small increase in taxes. The administration’s proposal appears to be continuing that approach.

In what has become a disturbing trend, however, the administration again has provided little information on how the proposed cuts would affect the delivery of state services or how any negative effects would be mitigated. Without this information, neither legislators nor the public can weigh the options for balancing the budget. Raising taxes is painful, but so are many budget cuts. To choose among cuts, taxes, borrowing, or the use of rainy day funds, Vermonters need to understand the consequences of each.

State law³ requires that budget reduction plans indicate the effect proposed cuts will have “on the primary purposes of the program for which the appropriation was made.” The administration also is supposed to the tell the Legislature how it intends to “minimize any negative effects on the delivery of services to the public.”

This is the third time in the last 12 months that the administration has proposed budget rescissions-cuts to the Legislature’s approved budget outside of a legislative session. It follows two rounds of rescissions to the fiscal 2009 budget, in August and December 2008, as well as a budget adjustment that the full Legislature addressed last session.

With each of the rescission proposals, the administration has presented a document describing the “impacts,” but any negative effects tend to be understated or described only in general terms.

For example, the administration wants to cut $731,372 from the Choices for Care program, which is designed to help Vermonters with disabilities, mostly elderly, stay in their homes and avoid costly nursing home care. The proposed cut eliminates a small carry-forward in the program’s approximately $200 million budget. The administration said the cut will have “no programmatic impact.” While that may be technically true, it doesn’t explain that the proposed cut is taking money away from a program that is intended to reduce state spending in the long run. It also ignores the fact that there is a waiting list of people who need services but can’t get them. “No programmatic impact” does not mean the money is not needed.

The administration offered no information on the effects of eliminating another 200 or so state employees, either. It’s hard to believe they expect no loss of services to Vermonters; that would suggest this governor has 200 people working for him who aren’t doing anything. We know that programs have been curtailed and things aren’t getting done as a result of earlier layoffs. For instance, the Department of Education missed out on important grant funding last winter because it lacked staff.⁴

Rescissions are sometimes necessary and sometimes in the best interests of Vermonters. That’s why there is a section of state law that outlines how a rescission is to be carried out when needed. To comply with the spirit of the law, any budget reduction plan should describe the work performed by the people whose positions will be eliminated or left vacant. It also should explain what work simply won’t get done and what will be transferred to other employees. That way Vermonters and their elected representatives will have some idea what the proposed budget cuts will cost and be able to weigh them against other alternatives.

The administration’s rescissions cannot go into effect without the approval of the Legislature’s Joint Fiscal Committee. The committee can and should insist that the administration provide a real assessment of the impact of proposed budget cuts on services to Vermonters. Until they have that assessment, which is required by law, the legislators should refuse to give the plan the go-ahead.

ENDNOTE
1 Governor FY2010 Proposed Rescission Plan, http://finance.vermont.gov/sites/finance/files/pdf/state%20budget/Rescission_Proposal_to_JFC_080509.pdf
2 Thomas Kavet, July 2009 Economic Review and Revenue Forecast Update, July 16, 2009.
3 V.S.A. Title 32, Chapter 9, § 704.
4 Shay Totten, “Gonna Eat Them Words,” Seven Days, April 15, 2009.

A Cost Shift to the Education Fund: Smaller is Better

Posted by sarah on June 25, 2009 at 10:44 pm

By Paul Cillo (June 2009)

Download a PDF of this report or read the text below:

Vermont property taxpayers dodged a bullet this year. The Legislature blocked the governor from transferring the cost of teachers’ retirement to the Education Fund. Had the governor succeeded, in two or three years local voters would have faced big property tax increases or deep cuts to their education programs.

The Education Fund, set up with the passage of Act 60 in 1997, pays for kindergarten-to-12th-grade education in Vermont. Total expenses paid by the Education Fund are projected at $1.3 billion for fiscal 2010 – about the same as the state’s General Fund, which provides revenue for most of the rest of state government. But the two funds have been caught in a tug-a-war this year.

When the Education Fund was first established, some education-related General Fund obligations—including state aid to education and special education—were moved to the Education Fund, along with money that used to pay for them. The idea was that when an obligation went to the Education Fund, the funds to cover it went there too.

Over the past several years, however, this basic principle eroded, especially as General Fund expenditures, primarily from rising health care costs, exceeded revenue from existing General Fund taxes. This year, Governor Douglas proposed to transfer the state’s obligation for the teachers’ retirement system, currently a General Fund obligation, to the Education Fund as a way to relieve pressure on the General Fund. But the governor’s plan did not include a funding stream to cover this obligation.

Increasing the obligations on the Education Fund without increasing the state funds to cover them results in higher property taxes, the main source of Education Fund revenue. The governor’s proposal started with a transfer of the retirement obligation, which will be about $40 million in the coming year. But there is another, potentially larger obligation, to pay for health care benefits for retirees. Lawmakers feared the governor’s plan was just the first step in what would become more than a $100 million cost shift to the Education Fund (Table 1). At current rates, that’s the equivalent of a 10-cent increase in the property tax rate.

Fortunately, that didn’t happen. The Legislature passed a budget without moving the retirement obligation. The governor vetoed the budget in large part because the property tax revenue he needed for his budget was not in the bill. And the Legislature overrode the governor’s veto preventing this massive cost shift to the property tax.

The governor also proposed other ways to make more room in the General Fund budget by shifting costs onto property taxpayers – and he was forthright about his intentions. “Like the Legislature, I proposed changes in the Education Fund to free up general funds to support important human services programs,” he wrote in a May 15 letter to Senate President Peter Shumlin and House Speaker Shap Smith. He wanted to limit the number of Vermonters who pay school taxes based on income, which would have meant higher property taxes for them. The governor also proposed a cap on school spending, arguing that it would protect property taxpayers. In reality, what caps do is take away taxpayers’ control over how to spend school tax revenue.

While both the governor and the Legislature proposed changes in the Education Fund, there are some important differences: The governor’s cost shifts would ultimately have been much larger, but, more important, they would have been permanent.  The Legislature enacted temporary transfers.

The Legislature relies heavily on federal stimulus funds to balance the fiscal 2010 budget. The net contribution of the Education Fund to the General Fund in fiscal 2010 is about $18 million, with another $18 million slated for transfer in fiscal 2011. While zero would be a better number for both years, these amounts are preferable to the much larger $100 million annual cost shift.

Through all the rhetoric about not raising taxes, the bottom line is this: Shifting obligations to the Education Fund, without finding revenue besides the property tax to pay for them, will increase property taxes. Apparently this year the General Fund problem was so grave that some cost shift was unavoidable. But given the choice in the future between a large and permanent cost shift and one that’s small and temporary, Vermont property taxpayers would be wise to choose the latter.

ENDNOTE

1 The health care liability will vary depending on whether the benefits are “pre-funded”—that is, paid in advance on a regular basis so that payments can earn interest. With pre-funding, the liability will be at the low end of the range; without pre-funding, it will be at the upper end.

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

A Balanced Way to Balance the Budget

Posted by sarah on June 25, 2009 at 7:25 pm

Jack Hoffman (June 2009)

Download a PDF of the report or read the text below:

In the end, the Vermont Legislature found a balanced solution to balancing the state budget for fiscal year 2010, which begins July 1. After a gubernatorial veto-the first budget veto in the state’s history-and a dramatic override in a special session on June 2, lawmakers put in place a budget that uses a combination of cuts and taxes to cover part of the drop in revenues. The federal government also provided a big and timely boost, designed to help states weather the recession.

In Vermont, there were more cuts than taxes. While spending reductions totaled about $76 million, the net effect of tax changes and increased enforcement will bring in about $28 million more than had been anticipated for fiscal 2010 (Table 1). In the wake of cuts to the fiscal 2009 budget, an even split between taxes and additional cuts in the coming year would have been better. But by maximizing the use of federal stimulus money and also raising additional revenues, the Legislature protected services that could have been lost had Montpelier followed its usual practice of managing to the money-that is, balancing the budget by cutting services to make expenditures equal existing revenue-rather than raising adequate revenues to support needed services.

Cuts
The biggest budget reductions were in education and Medicaid. The Legislature cut $18.4 million, or about 7 percent, of the annual transfer from the General Fund to the Education Fund. It also cut $15.1 million from a variety of Medicaid programs. Most of those reductions will fall on providers-hospitals, doctors, and nursing homes-although seniors in the VPharm program will have to pay a $1 higher copay for their prescription drugs.

The state payroll also took a big hit: $14.7 million. It’s not clear yet what this will mean for programs and services. If all the reductions are made through layoffs, an additional 300 to 400 state employees could lose their jobs, depending on what share of their salaries are paid out of the General Fund. In the last two years, about 400 state jobs have been eliminated, leaving the total number of state employees at about 8,200.

Taxes
The Legislature made several tax changes to produce nearly $28 million in new revenue for fiscal 2010 (Table 2). These include changes to the estate tax, sales tax, and taxes on liquor and tobacco. The largest increase comes from changes to the Vermont income tax, which will also have the overall effect of making it more progressive-that is, taxes will increase more for those in the highest income brackets. The Legislature also lowered tax rates, so many Vermonters will see their income taxes drop. Overall, the income tax changes will generate an estimated $9.5 million in additional revenue for fiscal 2010¹.

The main income tax changes were:
• Reducing the deductibility of state income taxes. In the past, taxpayers who itemized their deductions could count the full amount of their state income taxes among those deductions. Now they will be able to claim no more $5,000. This change will affect primarily those with incomes of $125,000 or more.

• Limiting the exclusion of capital gains income. Previously, 40 percent of capital gains income was not subject to income taxes. Under the new law, which takes effect this July 1, taxpayers will be allowed to exclude a fixed amount of capital gains income rather than a percentage. From July 2009 through 2010, the fixed amount will be $2,500. However, during that period, taxpayers over 70 years old will be allowed to choose the fixed amount or 40 percent. Starting January 2011, the amount will increase to $5,000, and the exclusion will be the same for taxpayers of all ages. Taxpayers with capital gains on farm sales and timber sales will continue to be eligible for the 40 percent exclusion.

By stepping up tax compliance and blocking a tax break on the purchase of new vehicles that was included in the federal stimulus bill, the Legislature expects to bring in another $6.3 million.

Difficult Choices
Vermont’s budget struggles are far from over. There will be about $100 million in stimulus money available for the state’s fiscal 2011 budget, not nearly as much as in fiscal 2010. While forecasters predict the economy will begin to improve in the next 12 to 18 months, tax revenues will still be below pre-recession levels. Even after the stimulus funds are applied, the state is projecting a $67 million deficit in fiscal 2011.

Health care is a critical problem. Health care costs in Vermont were growing at a much faster rate than the economy even when the economy was doing well. Rising health care costs have pushed General Fund spending for health care up at a rate of 15 percent each year. Since health care accounts for about a quarter of the General Fund budget, reform that slows health care spending is critical. That’s why it is imperative that Congress make significant changes in the health care system. A federal solution would be better, but failing that, Vermont will have to find its own solution if it is going to have a sustainable budget.

When the Legislature returns next January, it can expect to confront the same basic choices it faced this year. Policymakers need to keep in mind that the ultimate goal is not simply to balance the budget, but to provide the services Vermonters need. That means ensuring that the state takes in sufficient revenue to pay for those services. Once again, a balanced approach will be the best policy.

ENDNOTE
1 A summary of all tax changes is available on the Vermont Tax Department website: http://www.state.vt.us/tax/pdf.word.excel/legal/legislation/Highlights%20of%202009%20Legislation.pdf

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

Vermont Modernizes its Unemployment Insurance

Posted by sarah on June 25, 2009 at 6:54 pm

June 2009

Download a copy of the fact sheet or read the text below:

The American Recovery and Reinvestment Act (ARRA), the federal economic stimulus plan signed by President Obama in February 2009, contains provisions for the modernization of the Unemployment Insurance (UI) program so that it better reflects the realities of today’s workforce. A portion of the federal stimulus money was made available to states on the condition that they update their UI programs. Vermont needed only one change to bring its program into compliance with the new law and garner $14 million in federal funds (see our March 2009 report).

As part of Act 54, Vermont’s own recovery and reinvestment act, the Legislature changed unemployment eligibility rules to allow workers who run out of benefits while in an approved training program to get up to 26 additional weeks’ benefits during the completion of the training¹.

Governor Douglas signed Act 54 on June 1, 2009. Vermont joins 24 other states to date that have made legislative changes to modernize their UI programs.  The portions of the Vermont legislation affecting UI program modernization are provided below.

Act 54. The Vermont Recovery and Reinvestment Act of 2009²

Unemployment Insurance Program excerpt, pages 63-64

Sec. 33. ARRA AND UNEMPLOYMENT INSURANCE

(a) The American Recovery and Reinvestment Act of 2009 (ARRA), Pub.L. No. 111-5, authorizes the federal government to transfer up to $13,918,000.00 into Vermont’s unemployment insurance (UI) trust fund for UI modernization incentive payments.

(b) Vermont already qualifies for one-third of its allotted incentive payments because the state allows for the use of an alternative base period in determining UI eligibility. In order to qualify for the remaining two-thirds of its allotted incentive payments, Vermont’s UI program must meet two of four expanded-coverage requirements.

(c) The state already meets one expanded-coverage requirement: namely, coverage of part-time workers. It is the intent of the general assembly to adopt one additional expanded-coverage requirement, namely the training program specified in Sec. 34 of this act, and to apply to the secretary of the United States Department of Labor for certification of UI modernization so that the state may receive its remaining allotment of incentive payments.

Sec. 34. 21 V.S.A. § 1423b is added to read:
§ 1423b. EXTENDED BENEFITS; APPROVED TRAINING PROGRAMS

(a) An individual who is otherwise eligible for benefits under this chapter, but who has exhausted his or her maximum benefit amount under section 1340 of this chapter, shall be entitled to an additional 26 weeks of benefits in the same amount as the weekly benefit amount established in the individual’s most recent benefit year if the individual is enrolled in and making satisfactory progress in a state-approved training program as defined in subsection (b) of this section.
(b) A state-approved training program is any training program or job training program that meets all of the following criteria:
(1) It is authorized by the Workforce Investment Act of 1998, PL.105-220.
(2) It is designed to assist individuals who have been separated from a declining occupation or who have been involuntarily and indefinitely separated from employment as a result of a permanent reduction of operations at the individual’s place of employment.

ENDNOTES
1 Approved training programs include classroom and/or jobsite training provided by colleges, nonprofits, or private companies for jobs in a range of fields including computer programming, home weatherization, carpentry, nursing, and truck driving.

2 Act 54 was passed by the legislature as House Bill 313: An Act Relating to Near-Term and Long-Term Economic Development

Can’t Beat Florida’s Weather—But Property Taxes Are Another Matter

Posted by sarah on June 18, 2009 at 1:42 pm

Jack Hoffman (June 2009)

Download a copy of the report or read the text below:

Vermonters usually cite two reasons for moving to Florida: weather and taxes. For those who want to avoid snow and cold, the Sunshine State is the clear choice (Table 1). For those looking to reduce their taxes, Florida may not be the haven it seems.

Anecdotes about tax flight are not new. But the stories rarely are told with enough information to verify the claims about tax savings or the advantages of Florida over Vermont.

Now, thanks to an op-ed by a prominent Burlington accountant stating that he was leaving Vermont because of taxes, we have a case to analyze.³ We don’t have all of the numbers. The accountant did not disclose his income, though one of his complaints was that the Legislature wanted to increase taxes on some capital gains and reduce the deductibility of state income taxes. He also criticized Vermont’s property taxes-and provided numbers to support his claim.

It’s tough for Vermont to compete on the income tax, because Florida doesn’t have one. However, a case could be made that it’s really the weather-not the lack of taxes-that lures people from the North. Like Florida, New Hampshire has no income tax, yet more people from New Hampshire-and a greater percentage of its population-migrated to Florida in 2007 than from Vermont. There’s also no evidence that those migrating from Vermont took more income with them than those migrating from New Hampshire. The average income of those leaving the two states for Florida is virtually identical. In fact, among the New England states, Vermont had the least migration to Florida (Table 2).

At first blush, according to the accountant’s article, Florida beats Vermont when it comes to property taxes, too. The accountant said he had homes of similar value in Vermont and Florida, but that the property taxes in Vermont were three times those in Florida: $4,000 in Ocala, Fla. versus $12,000 in South Hero, Vt.

According to public records, the accountant does have a smaller property tax bill in Florida, but the value of his Florida property is not the same as the Vermont property. The fair market value of the Florida property is less than half the value of the property in South Hero.

In addition, the accountant’s Florida property is assessed as working agricultural land, which entitles him to a use-value reduction similar to the reduction he gets on some of his 87 acres in South Hero. Both result in a lower assessed value (Table 3).

As Table 3 indicates, the effective tax rate on the Vermont property is actually lower than on the Florida property. The accountant pays higher taxes in Vermont because he has a more valuable property. He didn’t need to move to Florida to lower his property taxes. He could have reduced them as much or more by purchasing a more modest Vermont property similar in value to his Florida property-a $500,000 farm in Vermont enrolled in the current use program. The 2008 grand list available from the Vermont Division of Property Valuation and Review lists numerous properties-in Ferrisburgh, Georgia, Landgrove, Ludlow, Pawlet, and other towns-with fair market values, assessed values and taxes all comparable to the accountant’s Ocala property.

Additionally, it appears that Vermont’s current use program is less restrictive. In Florida, the agricultural classification is only available to working farms. If the sale price of the property is more than three times its agricultural use value, the presumption is that the land is not used primarily for agriculture. Vermont does not impose such a test.

Again, we don’t know anything about the accountant’s income. But if he retired on less than $90,000 a year, he could qualify for income sensitivity, a provision of Vermont’s school funding system (see inset), and dramatically reduce his property taxes while continuing to live in his South Hero home.

Under income sensitivity, qualified resident homeowners can reduce their school property taxes by as much as $8,000.⁶ With an income of $89,999 and a primary residence valued at more than $1 million, the accountant could reduce his school taxes by almost $7,800.⁷ His municipal and school tax bill would then total less than $4,700. He would still pay somewhat more than in Florida-but on property worth more than twice as much.

With no tax on income, Florida clearly is a better deal for those with high incomes who want to avoid paying state taxes. Vermont has a long tradition of progressive income taxes, which are based on ability to pay. This policy follows the ancient concept that those who benefit most from society have the greatest responsibility to support it.⁸ In Vermont, those with the lowest incomes do not have to pay income taxes, but as incomes rise, the rates increase on successive levels of income.

Other tax policies-including some of the changes approved by the Legislature this year-also are targeted to low- and middle-income taxpayers rather than the few at the top of the income scale. The Legislature reduced the tax deduction for state income taxes, for example, but the vast majority of Vermonters won’t be affected. The Legislature capped the deduction at $5,000, which is the tax on about $115,000 of income for a married couple. More than 95 percent of Vermonters still will be able to take their full income tax deduction.

Tax flight stories all assume that states with the lowest taxes are the most desirable places to live. Yet Vermont consistently scores well in education,⁹ as a healthy place to live,¹⁰ and in quality-of-life measures like the rate of violent crime and people in poverty,¹¹ which are the result of policies that help to make Vermont the kind of state Vermonters want and are willing to support.

But there’s still all of that snow to plow every winter.

Addendum

The analysis in this report was based on properties in Ocala, Fla., and South Hero, Vt., that are currently owned by the accountant cited. His op-ed referred to “our residence in Ocala, Fla.,” and the property values and taxes used in our report apply to the residence he now owns. After the publication of the report, the accountant contacted the author and stated that the figures he used in his article referred to a residence he is scheduled to purchase in August, not his current Florida residence¹. He also provided additional details about the new property (Table 1).

Our report points out that there is a difference in the fair market value as well as the assessed value between the Florida and Vermont properties that the accountant owns. However, the price of the Ocala property he is about to buy is approximately the same as the South Hero property’s fair market value, which was the scenario described in the op-ed.

The purpose of the report was not to suggest that the accountant’s claims were inaccurate, but to examine the reasons for the large difference in taxes he reported. The conclusion reached in our report applies to both Ocala properties—the current residence and the new one. The reason that the Vermont property has higher taxes is that it has a higher assessed value than either of the Florida properties.

Both Florida properties, which are each approximately 10 acres, are classified as agricultural land and are therefore taxed on use values that are unrelated to the purchase price or fair-market value. Use-value appraisal is a distinct method that bases the taxes on the income the land will produce in harvestable crops or livestock rather than on what it will bring at sale. Despite the $1.3 million purchase price of the new Florida property, it is not taxed on that value. It’s taxed on its use value. Vermont also has a use-value appraisal program, and there are properties here with fair-market values of a million dollars or more whose use values are $300,000 or $400,000. Fair-market value is one basis for taxing property, but it is not the only method states use.

To understand how Vermont taxes compare with other states’, it is important to look at comparable assessment policies. A use-value tax program should be weighed against another use-value program, residential property taxes against residential property taxes, non-residential against non-residential. Comparing apples to apples, our conclusion is the same: the accountant’s Florida taxes are not lower than those he’d pay on a property of comparable value in Vermont.

ENDNOTES
1 National Weather Service, Orlando, Fla., monthly averages, www.srh.noaa.gov/mlb/normals.html.
2 Op. Cit, Burlington, Vt., monthly averages, www.erh.noaa.gov/btv/climo/BTV/monthly_totals/avgtemp.shtml.
3 Glen A. Wright, “Why We Abandoned Vermont,” Rutland-Herald and Times Argus, May 31, 2009.
4 IRS state-to-state migration data, 2006-2007.
5 South Hero’s common level of appraisal is 110.22, which means the listed valued is about 10 percent above the fair market value. The Marion County, Fla., property appraiser’s offices says the listed valued-the so-called “just value”-is approximately 85 percent of full fair market value.
6 The Douglas administration had proposed to reduce the maximum adjustment to $6,000 this year, but the Legislature declined to make the change.
7 Vermont Department of Taxes, 2009 Property Tax Adjustment Worksheet, HS-122 2009 Calculation.xls.
8 Holy Bible, Luke 12:48.
9 American Legislative Exchange Council, “2007 Report Card on American Education,” www.alec.org.
10 America’s Health Rankings, www.americashealthrankings.org/2008.
11 Statistical Abstract of the States, 2009, http://www.census.gov/compendia/statab/rankings.html.

ADDENDUM ENDNOTES
1 While researching the original report, the author called the accountant in Florida with questions about the op-ed article, but the call was not returned.

2 Florida’s term for fair market value.

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

Vermonters Would Pay More with Governor’s Budget Cuts

Posted by sarah on May 28, 2009 at 1:38 pm

Jack Hoffman (May 2009)

Download a copy of the report or read the text below:

In proposing his latest budget to the Legislature, Governor Douglas says he will show a balanced state budget with a minimal increase in taxes. But his plan is obsessively focused on reducing the General Fund bottom line, the most visible part of state spending, while hiding other costs-and ignoring other needs-of Vermonters.

To achieve his goal, the governor would make cuts that would lose Vermont millions of dollars in matching federal revenue-money to cover expenses that Vermonters then would have to pick up. He would not really reduce the financial burden on Vermonters, either, because his proposal shifts costs from the General Fund onto local property taxpayers, health insurance premiums and co-pays, and individual Vermonters who are most in need. The plan would reduce the size and cost of state government, with little consideration of what the state should be doing to address the needs of Vermonters during this difficult recession.

Administration documents show $43 million¹ in cuts from the spending plan approved by the Legislature – including $10.8 million that would have been paid for with federal Medicaid matching funds. However, the administration’s figures don’t reflect another $14 million to $16 million in federal funds for human services, farmland conservation and the Americorps program the state would have to forgo as a result of the proposed cuts.²

The governor’s plan would also begin the process of dismantling the Vermont Housing and Conservation Board, which would be cut by 85 percent,³ and the state’s education funding system, the one public structure that Vermonters have successfully maintained even in the economic downtown.

Human Services Cuts
The proposed cuts target human services programs simply because that is where the money is. The human services budget represents the largest share of state spending: the Legislature appropriated $1.87 billion for human services for fiscal 2010⁷-about $2 of every $5 the state is projected to spend.

But the plan shows little regard for what the cuts mean to the people affected. The $21 million cut from human services programs⁸ is a relatively small percentage of total human services spending, but it is a critical amount to providers and recipients of services.

Several cuts would reduce payments to Medicaid providers-hospitals, doctors, chiropractors, and dentists. Administration officials suggested these cuts would help drive down the cost of health care. But lowering the amount the state pays to doctors and hospitals doesn’t reduce the demand for services or reduce overall health care costs. When hospitals receive smaller Medicaid payments, they typically pass those costs on to those with private health insurance. We also know from past experience that when payments to family physicians are reduced, they are forced to cut back on the number of Medicaid patients they serve. Those patients still need care, but they turn to emergency rooms, often after they have gotten much sicker-and that is the most expensive health care, both in dollars and in patients’ wellbeing.

With many of the Medicaid cuts the administration has proposed, Vermont will save only 30 cents for each $1 reduction in spending. That is because the cost of Medicaid is shared with the federal government. The plan cuts $15.4 million in Medicaid services to save $4.6 million in state funds.⁹ Administration officials have said that any federal matching funds they don’t draw in fiscal 2010 still will be available in fiscal 2011. But the state can use the federal money only it if puts up its share of matching funds. Given all the governor has said about reducing state spending even further, it seems unlikely he will suddenly propose an increase in Medicaid spending next January in order to take advantage of federal funding. For all practical purposes, the federal money passed up in fiscal 2010 will be lost.

In addition to cuts to Medicaid providers, the plan would reduce Medicaid patients’ maximum annual benefit for dental services from $495 to $200.¹⁰ It would also eliminate coverage for chiropractic services, even though the state currently requires all private insurers to provide that coverage.

Housing and Conservation Board
The Vermont Housing and Conservation Board (VHCB) was created in the mid-1980s to invest in affordable housing and land conservation. The Legislature initially appropriated $15 million for the VHCB in fiscal 2009, but the funding was reduced to $13.2 million in midyear budget cuts.¹¹ For fiscal 2010, the Legislature reduced the board’s funding to $7.1 million, and now the governor has proposed another $5 million cut. Besides sharply curtailing investments in housing and land conservation, the administration’s proposal would jeopardize $6.5 million – $9 million in federal money available for farmland conservation, Americorps volunteers, and lead paint abatement.

With state funding pared to $2 million in fiscal 2010 from $15 million in fiscal 2008, the VHCB would become largely a pass-through for federal funding provided by the American Recovery and Reinvestment Act. It is not clear what would become of the board after the federal stimulus money runs out.

Education Funding
With the latest budget proposal, the governor has renewed his complaint about “skyrocketing education spending” and his call for an overhaul of Vermont’s education funding system. The administration keeps warning that, without reform, more than 25 percent of all general funding spending-about $320 million in fiscal 2010-will go to education.

But these claims are not borne out by facts. Education spending as a percentage of the state’s overall economy varied little from 1992 to 2007, the latest year data are available. Education spending remained between 5.1 percent and 5.6 percent of Vermont’s gross state product during the period (Figure 2).

As a percentage of the general fund budget, the amount transferred to the Education Fund has declined-not grown-since fiscal 2003. At that time, the annual transfer to the Education Fund amounted to nearly 28 percent of the General Fund¹² (Figure 3). It dropped to 24 percent in fiscal 2005 when Act 68 took effect and the percentage has remained flat ever since. The Education Fund has remained stable, which is not the case with the state’s other major accounts. There is no indication that education costs are putting undue pressure on the General Fund.

With his new plan, the governor has proposed to shift General Fund costs to the property tax. He would have the Education Fund pay for retired teachers’ pensions and health care. Those costs have traditionally been a General Fund obligation, although in recent years the state has fallen behind in its payments to the retirement fund.

For fiscal 2010, the payment should be about $40 million, and in fiscal 2011 nearly $60 million.¹³ To cover this additional cost to the Education Fund, the governor is proposing to use one-time funds and a property tax increase in fiscal 2010 and to freeze per-pupil spending for fiscal 2011. Schools could spend no more per pupil than they’re spending for fiscal 2010. The two-thirds of school districts that are expecting enrollments to decline in fiscal 2011 would have to reduce their total spending-probably by laying off teachers.

If forced to freeze spending, local school districts should be able to reduce the property tax. The residential rate, which will be 86 cents per $100 of assessed value this year, could drop by as much as 6 cents in fiscal 2011. However, the governor has proposed to drop the property tax rate only 1 cent and use the rest of the saving from the budget freeze to cover the cost of teachers’ retirement.

The plan would force local school officials to make the difficult budget cuts, which would certainly increase pupil-teacher ratios around the state. But most of the savings would only cover costs that are now General Fund obligations. In other words, the administration wants to shift costs from General Fund taxes, primarily the progressive income tax, onto the property tax.

The governor’s plan relies on federal stimulus funds to help pay for education and cover some of the cost of teachers’ retirement in fiscal 2010 and 2011. But the plan does not show what happens in fiscal 2012, when the federal stimulus money is expected to run out. According to the Joint Fiscal Office, the Education Fund could have a shortfall of more than $100 million if the liability for teachers’ retirement and health care is shifted from the General Fund.¹⁴

Unspecified Cuts
The plan includes more than $10 million in unspecified cuts.¹⁵ These include:
• $5 million in “structural changes”
• $2.3 million in “workforce savings”
• $3 million in “personal service contract reductions”.

The structural changes are to be drawn from a report on ways to improve government efficiency that was prepared for the governor four years ago. While they believe they can cut $5 million in fiscal 2010, administration officials said the ultimate goal was to save $20 million a year through government reorganization and reform. The budget plan does not say precisely what changes will be made, but it lists some structural reforms to be analyzed and suggests new names for some reorganized state agencies, such as the Agency of Regulations and Permitting, the Agency of Public Safety, the Agency of Health Care Reform, and the Department of Revenue.

It is also not clear what cuts would have to be made to achieve the workforce savings and reduce personal services contracts. The administration set a target of $17 million to cut from the state payroll-a reduction of about 6 percent.¹⁶ The legislature approved $14.7 million in cuts. Despite negotiations with the Vermont State Employees Association to find other ways to reduce the payroll, it appears most of the savings will come through layoffs. With fewer state workers, Vermonters will see a reduction in the level and efficiency of the services they receive from state agencies.

Conclusion
The state budget is a policy document, not a bureaucratic balance sheet. A good state budget is not simply one where expenditures equal revenues. A good state budget is one where expenditures and revenues are sufficient to meet the needs of all the state’s citizens.

Balancing the state budget is responsible fiscal policy. Reorganizing state government to make it more efficient is a worthy goal-although the upfront costs usually make it easier to do when the economy is growing, not shrinking.

But reducing the size of government does not necessarily make it more efficient or effective, and balancing the budget simply by shifting costs does not reduce what Vermonters ultimately have to pay. Because the governor’s budget proposal is focused on reducing the General Fund bottom line at all costs-even when that means returning federal funds and increasing costs to Vermonters-it fails to map out a viable policy direction for the state’s future. This is not a plan the legislature can or should follow.

ENDNOTES
1 Gov. James H. Douglas, “Alternative Approach to FY 2010 Budget,” May 19, 2009.
2 Joint Fiscal Office estimate
3 Vermont Housing and Conservation Coalition analysis of governor’s budget proposal, May 19, 2009.
4 Includes loss of $10.8 million in federal funds recognized in administration’s figures, but does not include additional lost federal funding associated with other human services programs, such as long-term care and “Temporary Aid to Needy Families” (TANF).
5 Proposal includes shifting teachers’ retirement and other costs to Education Fund after fiscal 2010.
6 Will likely result in loss of an additional $6.5 million – $9 million in federal funding for farmland conservation, Americorps volunteers, and lead paint abatement.
7 Joint Fiscal Office, unduplicated state and federal funds.
8 Douglas, op. cit.
9 Ibid.
10 Ibid.
11 Vermont Housing and Conservation Coalition, op. cit.
12 Joint Fiscal Office, Appropriations History 1983-2008; Five Year Outlook, FY2009-FY2013, 5/9/2009; History of GF transfers to the Education Fund, FY2000-2011, “total transfers.”
13 Douglas, op. cit.
14 Joint Fiscal Office, Draft Issue Brief, “Teachers Retirement Obligations and the Proposed Transfer to the Education Fund,” May 20, 2009.
15 Douglas, op. cit.
16 Based on Department of Finance and Management calculation that approximately 40 percent of the state’s payroll expenses fall to the General Fund.

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

Federal Tax Cuts

Posted by sarah on April 15, 2009 at 1:16 pm

Jack Hoffman (April 2009)

Download a copy of the report or read the text below:

Vermonters will save more than $490 million in federal taxes in the next two years through the economic stimulus provisions in the American Recovery and Reinvestment Act.

A new analysis shows that more than half the savings will come from the “Making Work Pay” program-a middle-class tax credit that will go to more than 250,000 Vermont taxpayers.¹ The credit amounts to $400 a year for workers earning up to $75,000 and $800 for couples with incomes up to $150,000. Instead of a lump sum payment, however, the tax cut is showing up as a reduction in federal withholding taxes in each paycheck. Eligible workers should take home an average of about $40 more a month.

The stimulus package also corrected problems with the alternative minimum tax (AMT), which was originally designed to target wealthy taxpayers who had been avoiding taxes. The “alternative minimum” was never adjusted for inflation, however, so over the years it has affected people who were never meant to be included in the category to which the tax applies. The change will mean a two-year savings of about $150 million for some 50,000 Vermont taxpayers.

Expansion of child tax credits, a temporary increase in the earned income tax credit (EITC), and increased disability and retirement payments will provide almost $60 million in additional tax savings for 2009 and 2010.

The tax cuts are intended to put money in the hands of people who are likely to spend rather than save it. The goods and services they buy with the extra cash will keep the economy going, allow businesses to continue, and prevent job cuts.

The federal cuts also give Vermont an opportunity to avoid devastating budget reductions and layoffs of state workers that are compounding current unemployment problems. The Legislature is considering raising about $60 million in new state income taxes over the next three years. The proposed increases are modest: $9 a year for a single person earning $28,000; $34 a year for a family of three with income of $85,000; and $300 a year for a family of three making $250,000.² These relatively small increases would allow Vermont to continue to provide prescription drugs to poor seniors and save the jobs of state employees. And Vermonters would still have a net savings in their state and federal income taxes of more than $430 million.

ENDNOTES

1 Joint Fiscal Office, Miscellaneous Tax Bill analysis, document VTLEG 243 197.vl, 4/9/2009.
2 Joint Fiscal Office calculations assume standard deductions.

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

Keeping an Eye on Vermont’s Stimulus Funds

Posted by sarah on April 15, 2009 at 1:12 pm

Reenie De Geus (April 2009)

Download a copy of the report or read the text below:

The American Recovery and Reinvestment Act (ARRA)-the federal stimulus plan-is intended to kick-start job growth in the short term while building the foundation for future economic prosperity. Since the plan involves a large sum of federal money distributed in a short period of time-Vermont will receive more than $1.2 billion over the next two years-it will be a test of democracy, transparency, and accountability.

The ARRA is meant to stimulate the economy is several ways. Tax cuts and unemployment benefits provided through the law are directed to people who are likely to spend it immediately and thereby increase demand for goods and services. The major public infrastructure projects the plan is funding, such as transportation, health care, broadband, and energy, not only provide jobs directly to the designers and construction employees who work on the projects but also will help support economic growth once they are completed.

The plan also is providing massive aid to state governments, allowing them to continue to provide essential services and avoid budget cuts and layoffs of public employees that would increase unemployment and worsen the downturn. The chart below contains a breakdown of how the funds that Vermont is slated to receive will be allocated.

Keeping track of all this money is a major undertaking. At the federal level, a website is in place with details about programs, timelines, state efforts, and accountability standards.¹ Federal agencies are expected to provide weekly updates with new rules, progress reports, and detailed accounting of how and where money is spent.

In Vermont, that oversight will be the job of the newly created Office of Economic Stimulus and Recovery (ESR). Governor Douglas has appointed high-tech entrepreneur Tom Evslin to head a staff of seven-all borrowed from other departments-who will coordinate the distribution, expenditure, and accounting of the stimulus funds the state will receive directly or manage. Evslin expects the office-located on the fifth floor of the Pavilion Office Building in Montpelier, next to the governor-to be open for the three years it will take to expend and account for the stimulus dollars.

Like every other state, Vermont has a website where citizens can keep up on how it is handling the stimulus funds. Vermont’s site-at http://recovery.vermont.gov-eventually will contain information on the more than 300 programs included in the ARRA. One of ESR’s early tasks will be to provide descriptions, contacts, deadlines, and eligibility criteria for the federal grants available through the ARRA so that Vermonters can access these opportunities. As the state’s allocated funds are spent, the site will contain information on where and how that was done, including who received contracts, how much was awarded, and how many jobs were created.

Federal stimulus funds fall into three general categories that can be directly tracked to each state:

• Fiscal Relief: replacement money to allow the state to continue to provide existing services despite revenue shortfalls
• Supplemental Funding: increased funding for existing federal programs such as special education or highway construction
• Direct Benefits: funds in the form of tax cuts or increased unemployment benefits that go directly to citizens

Additionally, the ARRA includes competitive federal grants to encourage states, individuals, businesses, and other organizations to develop new ideas to expand the economy, particularly in areas of energy, telecommunications, and health care. It is unknown how much of this money might come to Vermont, since these grants are not allocated by state. Instead, the money is distributed in response to grant applications.

The Vermont Agency of Transportation is one of the first state agencies to begin reporting on the use of stimulus funds. The agency has identified and prioritized road and bridge projects and has begun obtaining permits. Details about projects and the contracts already awarded are available on the agency’s website.²

As for fiscal relief, the stimulus money comes at a time when the Douglas administration has been eliminating state positions and laying off state employees. The influx of federal funds over the next two years may mean that agencies and departments will need to hire temporary personnel to manage the programs funded with stimulus dollars.

The federal government has yet to spell out many of the rules controlling the use of stimulus funds. For example, job creation is one of the fundamental goals of the stimulus plan, but there is no consensus among federal agencies on how a job should be defined. Will they count individuals or positions? How will a part-time job be counted? Those details will determine how Vermont will account for the use of its funds in compliance with federal transparency requirements and how the success of the stimulus plan will ultimately be judged.

Vermont’s own budget process will determine how the directly allocated federal money is spent. Although the governor officially applies for the federal funds, the Legislature ultimately appropriates the money. If the state is awarded any competitive grants while the Legislature is not in session, there is a special committee, the Joint Fiscal Committee, with authority to accept the funds and approve their use.

Many states had taken steps to bring transparency to government finances before the stimulus. Others are doing so now that the plan has become law.³ In the state of Washington, for instance, the governor has issued an executive order directing that the process for stimulus finds be streamlined, transparent, and efficient.⁴ Pennsylvania has a 14-member Stimulus Oversight Commission including the governor, his accountability officer appointed from the private sector, an administration implementation officer, state and federal legislators, and representatives of the AFL-CIO, United Way, and the Pennsylvania Chamber of Business and Industry.⁵

Establishment of an oversight office and a website is a good start, but Vermont should do more to make the ARRA expenditure process publicly accessible and accountable. While the ESR is coordinating formally with the State Auditor’s Office, only informal links have been established between the new office and the Legislature. The Legislature should formalize its relationship with the ESR by establishing a House/Senate ARRA Oversight Committee that regularly hears from ESR Chief Evslin. Most important, the Legislature’s committee should provide the opportunity for broader public input in the decisions about the use, management, and accounting of ARRA funds.

ENDNOTES
1 http://www.recovery.gov/
2 http://www.aot.state.vt.us/stimulus/
3 http://www.recovery.gov/?q=content/state-recovery-page
4 http://www.governor.wa.gov/execorders/eo_09-03.pdf
5 http://www.recovery.pa.gov/portal/server.pt/community/about/6015/oversight_commission

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

Unemployment Reform: Do the Job Now

Posted by sarah on March 30, 2009 at 10:08 am

Jack Hoffman and Reenie De Geus (March 2009)

Download a copy of the report or read the text below:

Vermont could get almost $14 million in federal money to help laid-off workers if it reforms its unemployment insurance law to provide new or expanded jobless benefits. These changes are laid out in the federal Unemployment Insurance Modernization Act (UIMA), which is part of the stimulus package that became law in February.¹ The package also includes money to give laid-off workers an additional $25 a week.

Washington’s assistance will help the jobless weather the current recession, while also injecting money into Vermont’s economy to help the state move toward recovery.

But the new parameters for eligibility also represent an understanding that work and family life have changed for good. Montpelier should adopt these reforms, not because it is being paid to do so, but because they are sound policy for now and for the future.

Vermont already qualifies for some of the new money-about $4.6 million-because it has adopted more timely methods for calculating a person’s eligible work history, as is required to get stimulus money.

To receive the remaining $9.3 million in federal funds, Vermont must make additional reforms, all of which are designed to increase benefits or expand the pool of workers eligible for benefits. The UIMA outlines four reforms; to qualify for funding, states must adopt two:
• Cover part-time workers.
• Provide benefits of $15 per week for each dependent.
• Allow unemployed workers enrolled in training programs to continue to be paid if their benefits are otherwise exhausted before training is completed. The training must be either a state- approved program or one authorized under the Workforce Investment Act.
• Provide benefits to workers who leave a job for compelling family reasons, including domestic abuse, following a spouse who must relocate for work, and illness or disability of the worker or a family member.

These new provisions reflect the changing nature of the workforce and a broader concept of compensation for unemployment. In the past, employers have been expected to contribute to the cost of unemployment for workers they laid off. The new rules reflect reasons for leaving a job that are not only beyond the worker’s control, like a layoff, but also beyond the employer’s.

Since the unemployment insurance system was established in 1935, many more women and part-time and temporary workers have joined the workforce-so more people now are potentially eligible for unemployment benefits. Another change from decades past is that people tend to remain without work for longer periods of time. Many are exhausting standard benefits, which run for 26 weeks. And although two-worker families are common, there is no help for a person who is forced to give up a job because a spouse has been relocated, even if the relocated worker is in the military. One of the proposed reforms would address this problem.

Vermont does better than many states in providing for its jobless workers. While its weekly dollar benefit is about average for the country, Vermont covers more laid-off workers than many other states. Still, fewer than half of unemployed Vermonters receive benefits, and its benefit amount is below average for New England, where costs of living are higher than the national average (Figure 1).

Vermont has a head start on qualifying for federal funds. It already covers part-time workers, which meets the requirement of one of the four reforms. It needs to enact one more reform to get the additional $9.3 million. Since the state allows benefits for workers who leave a job because of domestic abuse or the worker’s illness or disability,6 it is part of the way to meeting a second federal requirement: broadening the definition of “compelling family reasons” for leaving a job. The state could complete this requirement or do one of the other two.

The Vermont Department of Labor has estimated that adopting the new compelling family reasons would run at least $1 million a year; so would extending benefits to a worker completing training. Providing additional benefits to dependents could reach $5 million. The stimulus money could be used to offset any or all of these costs initially. But Vermont would have to pay them when federal funds run out.

These costs may look daunting at a time when unemployment is rising: Vermont’s jobless rate is now 7 percent, and the state is paying over $6 million a week in unemployment benefits.⁷ That is stressing its unemployment trust fund. In good times, the trust fund grows and serves as a reserve against the next economic downturn. During times of high unemployment, though, the fund can be depleted-as is likely to happen later this year (Figure 2).

States can borrow from the federal trust fund to meet their obligation to unemployed workers. Those borrowed funds usually must be repaid with interest. As part of the federal stimulus package however, through 2010 Washington will waive these interest charges.

To try to head off the shortfall, the Vermont Department of Labor has proposed increasing the taxes that employers pay into the fund and reducing benefits for unemployed workers.⁸ Currently, employers pay the tax on the first $8,000 of earnings; the rate is determined by the employer’s history of layoffs and, in part, by how much those layoffs have cost the unemployment fund.

The department is recommending increasing the wage base, the amount of wages on which employers pay taxes. That amount would rise to the first $14,000 of earnings in 2010 and the first $20,000 in 2011. In 2014, the wage base would drop to half the average wage, which is currently about $36,000. The department estimates that expanding the wage base would generate an extra $44 million in the first year and an additional $4l million the second year. The department also proposes an administrative fee on employers who lay workers off and a charge to those who do not respond promptly to requests for verification information.

Raising these new revenues is a good idea. But Montpelier also wants to achieve savings by hitting jobless workers when they can least afford it. The department wants to reduce weekly and total benefits, tighten eligibility, and increase penalties. Currently, weekly benefits are figured as 57 percent of a worker’s former earnings. The department would lower that to 50 percent. It also has proposed changes that would make it harder for people to qualify for benefits, penalize them more for part-time work, and increase work requirements to qualify for unemployment compensation. And unemployed workers would be liable for paying back any benefits paid in error.

The department estimates these changes could reduce jobless benefits by $20 million in 2010. But it’s counterproductive to enact the reforms recommended in the stimulus package and then take away existing benefits.

Vermont should adopt the federal reforms, even though they will cost the state money when the stimulus funds run out. Putting more dollars into the hands of laid-off workers is an effective way to boost the economy because it leads to immediate spending. The money tends to get spent locally, where it is then recycled within the community, keeping local businesses afloat and their employees in jobs. According to the National Employment Law Project, every dollar paid to the unemployed gets spent immediately on basics like food, gasoline, diapers, and heating bills and puts $2.15 into the local economy.⁹

But the immediate boost is not the only reason to adopt the federal reforms. Work and family life have changed not just since last year, but in the three-quarters of a century since Unemployment Insurance was established. In fact, in December Governor Douglas joined 17 other governors in urging Congress to pass the Unemployment Insurance Modernization Act. It is time to bring that commitment home, and take the protection of jobless workers into the 21st century.

Download a copy of the report

ENDNOTES

1 http://nelp.3cdn.net/c763952a5b73e8852c_3iim6sj65.pdf

2 U.S. Department of Labor, Office of Workforce Security, Division of Fiscal and Actuarial Services, December 2008

3 Bureau of Labor Statistics, Local Area Unemployment Statistics, February 2009, www.bls.gov/lau

4 U.S. Department of Labor, Office of Workforce Security, (Note: when two amount are given, the higher includes a dependent allowance).

5 U.S. Department of Labor, Office of Workforce Security, Division of Fiscal and Actuarial Services, monthly program data, January 2009. http://atlas.doleta.gov/unemploy/claimssum.asp

6 Although Vermont provides benefits for workers who leave a job because of domestic abuse, the benefits are not paid directly from the unemployment insurance fund and therefore may not satisfy the requirements of the UIMA.

7 As of week ending March 21, 2009.

8 http://labor.vermont.gov/Portals/0/UI/UI%20Brief.pdf

9 http://www.nelp.org/index.php/site/issues/category/modernizing_unemployment_insurance

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

The Stimulus Package: Fixing Problems Now Can Help Vermont Face its Bigger Problems

Posted by sarah on February 26, 2009 at 8:28 pm

Jack Hoffman (February 2009)

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The federal stimulus package President Barack Obama signed recently–the American Recovery and Reinvestment Act–is meant to stimulate job growth, or at least reduce job losses, in the face of the economic downturn. Vermont ended 2008 with almost 11,000 fewer jobs than December 2007. With more than 80 percent of the losses coming in the last quarter and Governor Douglas planning to eliminate 660 more state jobs, the boost cannot come too soon.

As the recession forces many Vermonters to turn to their government for help, the federal money can aid the state in maintaining services and keeping its commitments to its citizens, especially the most vulnerable.

But the federal aid is temporary, and it won’t solve the budget problems that have been dogging Vermont for years. To make the best use of this one-time money, elected officials need to incorporate these hundreds of millions of federal dollars into a five-year plan to restore fiscal stability to the state. And they should be thinking even longer-term than that.

Nearly $750 million will flow from Washington to Vermont over the next two years. These funds will come as aid to the state and communities and as tax credits to individuals. The biggest block–about $235 million for this year and next–is aimed at providing health care services to low-income families. There also will be federal money for additional food stamp benefits, child care and child support services for low-income families, job training, emergency food and shelter, and housing.

Other money will go to big infrastructure projects, which will provide jobs and pump money into the economy: bridge and highway construction, water treatment and sewage plants, public transit, home weatherization, schools, and law enforcement. And an estimated 252,000 working Vermonters will be eligible for a $400 tax credit, adding $100 million to the state economy this year.

Aside from the tax credits, direct aid to the state could total $654 million, according to the latest estimates by the Center on Budget and Policy Priorities in Washington and other organizations tracking the package. The money will be spread out over three state fiscal years, which run from July to June. President Obama announced that the first federal funds would start going to the states in late February, and they will continue through December 2010.

In addition to spurring the economy, one of the aims of the stimulus package is to help states cope with the huge budget deficits brought on by a sharp drop in taxes and other state revenues. A lot of the money will help to close the budget gaps, because it can be used to replace funds the states would have had to raise on their own to maintain services.

A critical question for the Vermont legislature as it prepares the state budget for the coming fiscal year is how much of the stimulus money should be used to close the projected deficit-a gap that could be as much as $250 million in fiscal 2010. Additional Medicaid funding of $235 million can go directly to deficit reduction. The cost of Medicaid, the health care program for low-income families, is split between the state and federal governments. Currently, the match is about 60-40, with the state picking up the smaller share. Under the stimulus plan, the state’s share will drop to less than 32 percent; Vermont is expected to receive additional Medicaid money that is tied to the state’s unemployment rate. The bottom line is that all of the additional Medicaid funding is money that will not have to come out of Vermont’s General Fund.

Vermont can expect to receive about $94 million in “fiscal stabilization” funds, which also can be used to reduce General Fund spending and therefore close the budget gap. The bulk of the fiscal stabilization funds–$77 million–is earmarked for education. The money was aimed at those states that were planning to cut state funding for education, to help them maintain support to local school districts. Any portion of this funding that is not used by the state is distributed to local school districts. However Vermont chooses to allocate these funds, it should be able to do so in a way that relieves pressure on the General Fund.

The remainder of the fiscal stabilization money-$17 million-is designated as “general purpose” funding, which means it can go directly to General Fund expenditures.

Some of the other funding in the stimulus package, however, cannot help close the budget gap by replacing state dollars. It is clearly intended to expand services to meet additional demand during the recession. For example, Vermont is expected to receive more than $60 million for primary and secondary education programs, much of it targeted at disadvantaged children and special education. That money cannot be used to supplant other sources of funding.

Depending on the depth of the recession, it could take five years or more before the economy regains enough strength to produce the revenue needed to support the services that Vermonters need. The stimulus package can help Vermont weather the crisis and create a strong recovery. There have been repeated discussions in the state over the years about how to rebuild Vermont’s economic base. Some themes that have emerged from these discussions include infrastructure for value-added agriculture, expansion of the state’s broadband network, and investment in energy efficiency and renewable energy.

The stimulus bill, aside from the aid for state and local governments, includes money that could help Vermont strengthen its economy. There is new money to increase high-speed internet service, especially in rural areas. The plan also includes the Clean Energy Financing Initiative to increase the availability of renewable energy. If state leaders develop a plan for where we are going, federal funding could help us get there.

But the federal money is no panacea for Vermont’s continuing fiscal problems. It has been apparent for several years that the state is not generating enough revenue to cover our Medicaid and other health care costs. We also know that our motor fuel taxes, which are levied by the gallon and not as a percentage of the sale, are inadequate to fund our transportation budget. Fuel usage is declining as oil prices rise and people drive more efficient cars. Meanwhile, the cost of road repair and bridge construction is going up.

Perennially inadequate healthcare and transportation funding are just two of the structural problems the state budget faces. They and other issues will not be resolved quickly. But the aid from Washington gives Vermont the breathing room to start tackling them.

In his address to Congress on Feb. 24, the President said that while the government must move quickly to dig its way out of this recession, it can no longer afford to put off facing the problems that have dogged America’s economic and social progress for decades. In Vermont, as well, even as political leaders and elected officials wrestle with the crisis at hand, they must turn their attention to a plan to regain fiscal stability for the years to come.

1 Estimates of most, but not all, of the stimulus funding expected to be available to Vermont during fiscal 2009, 2010, and 2011. Source for all data unless otherwise noted: Center on Budget and Policy Priorities; and Federal Funds Information for States, The American Recovery and Reinvestment Act Becomes Law, Feb. 23, 2009.

2  Increased federal share of Medicaid from October 2008 to December 2010. Part of the increase based on Vermont’s future unemployment rate, so the amount could change. Money can directly reduce Vermont’s General Fund spending.

3  General education, $77 million; general purpose, $17 million. Funds can be used to reduce state General Fund deficit.

4  Includes food stamp, employment services and unemployment insurance program administration.

5  Includes special education funding and funding for disadvantaged children.

6  Provides training and employment services to dislocated workers, adults, and youth through the Workforce Investment Act.

7  Restores some federal funding to help states collect child support payments. Center for Law and Social Policy report, Feb. 13, 2009.

8  Extends benefits for low-income parents who are working or participating in education or job training programs. Center for Law and Social Policy report, Feb. 13, 2009.

9  Byrne Justice Assistance Grant program.

10  Approximately 252,000 Vermonters will qualify for $400 per worker. The credit is available to all workers (except those claimed as another taxpayer’s dependent) earning up to $95,000 and married couples earning up to $190,000.

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

Medicaid Math

Posted by sarah on February 26, 2009 at 8:03 pm

Steven Kappel (February 2009)

Download a PDF of the issue brief or read the text below:

When is a dollar only worth 40 cents? When the state cuts Medicaid spending. When does saving 40 cents cost Vermonters a dollar? When the state cuts Medicaid spending.

Before the Legislature takes the ax to Medicaid in hopes of balancing the budget, it needs to understand Medicaid math. Cutting Medicaid may appear to save the state money, but it’s a false economy, because it ultimately costs Vermonters more than it saves.

The key to Medicaid financing is the matching mechanism. State dollars are matched with federal dollars in a ratio known as the federal medical assistance percentage, or FMAP. Currently, Vermont’s FMAP is about 60 percent. This means that every dollar of Vermont Medicaid spending costs the state 40 cents and the federal government 60 cents. FMAP is determined by a state’s per capita income and varies among the states from about 50 percent to about 80 percent.

As part of the stimulus package just passed by Congress, the FMAP is being increased to help states balance their budgets. That means any changes to Medicaid policy in Vermont will be magnified for the next three years: the 40 cents we have to spend on each Medicaid dollar could be reduced to 32 cents—and the feds’ share increased to 68 cents. So it is essential that policymakers and elected officials do the math.

Two Examples

Raising premiums. One technique for reducing Medicaid spending is to increase the premiums that beneficiaries pay. The money collected in premiums is not treated as state dollars—that is, it doesn’t qualify for the federal match. Under federal law, the premiums are deducted from the overall cost of Medicaid, and the balance is divided between the state and federal governments. Suppose the state Medicaid program spends $1 billion on care and collects $5 million in premiums. The federal share is calculated based on $995 million ($1 billion minus $5 million).

This means that higher premiums reduce federal contributions as well as state costs. If we raise a beneficiary’s premium by $1, the state saves only 40 cents—and loses 60 cents from Washington. With the FMAP increase contained in the stimulus plan, every dollar of cost shifted to premiums will save even less for the state budget. Increasing deductible payments has the same effect.

Provider Reductions. Another common technique for saving Medicaid spending is to reduce payments to doctors and hospitals that provide services. Medicaid math kicks in again. Out of every $1 reduction, the state saves only 40 cents and the federal government saves 60 cents. Meanwhile the service provider loses the entire $1.

Who Really Pays?

The logic of cutting a dollar to save 40 cents arises from a phobia of taxes and a narrow definition of state spending. State government spending—call it the “tax pocket”—is just one of the pockets we have to pay for health care. We also have a “premiums pocket” and an “out-of-pocket pocket,” which we use to pay providers directly. When we reduce spending out of the tax pocket, we give up federal funds and have to spend more from our other pockets. Health care that would have cost us—the people of Vermont —40 cents if we paid it out of the tax pocket is going to cost $1 because it is coming out of our premiums pocket. By cutting state government spending, the amount Vermont pays for health care actually goes up.

Another perverse consequence of cutting Medicaid is that it shifts costs onto those who are least able to pay. The money that comes out of our tax pocket is based largely on taxpayers’ ability to pay. That’s not the case with money coming from the premiums or out-of-pocket pocket.

Some people might argue that when times are tough, as they are now, getting only 40 cents to the dollar is worth it if we can reduce our overall spending. But we aren’t reducing it. When we cut Medicaid spending, the state and federal government save a dollar, but the cost is simply shifted to someone else in Vermont.

There’s no doubt that we need to slow the growth of health care costs. But what we learn from Medicaid math is that cutting state spending for health care isn’t the same as cutting the cost of health care for Vermont.

© 2009 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

Download a PDF of the issue brief.

Health Care Reform: Obama and Vermont Are Moving in the Same Direction

Posted by sarah on December 31, 2008 at 11:05 am

Steven Kappel (December 2008)

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President-elect Barack Obama’s health plan includes features to make health coverage accessible to more Americans, to make health insurance markets work better, and to broaden the base of people who pay for the system. At the same time, the federal plan allows states to continue their own reforms. Several aspects of the Obama plan are already in place or under development in Vermont, and the proposed flexibility should enable the state to continue to make progress with its reforms.

Like Vermont’s recent efforts, the Obama plan leaves much of the existing system in place, while attempting to control costs, reduce the number of uninsured people, and improve prevention and public health activities. Along with its commitment to provide coverage for all Americans, the plan’s emphases on health information technology, coordination of care, disease management, and wellness, mesh well with Vermont’s efforts, including the state’s Blueprint for Health, Catamount Health, and Vermont Information Technology Leaders (VITL).¹ Guaranteed eligibility, a cornerstone of Obama’s health insurance market reform, has been a requirement in Vermont’s individual and small group markets since the early 1990s.

For nearly 20 years, Vermont has been a national leader in health care reform. Further progress in Vermont—especially when it involves integrating Medicare beneficiaries and funds into a new system—will require cooperation from the federal government. The compatibility of Obama’s and Vermont’s visions greatly improves the odds that cooperation will be forthcoming.

The tables below compare major features of the Obama plan² with Vermont’s current health care system and reform efforts. The initiatives are categorized into four major policy areas: pharmacy, clinical care, insurance reforms, and federal changes.

Suggested Reading

The Obama plan is available at http://www.barackobama.com/pdf/issues/HealthCareFullPlan.pdf

President-elect Obama has written about his plan in several places, including:

• Journal of the American Medical Association 300 (2008): 1927-8.

• New England Journal of Medicine 359 (2008): 1537-41.

A critique of the plan was published in Health Affairs 27 (2008): w462-71.

Additional information on the Obama plan can be found at:

• The Commonwealth Fund – http://www.commonwealthfund.org/newsroom/newsroom_show.htm?doc_id=707967

• The Economic Policy Institute – http://www.epi.org/content.cfm/pm126

ENDNOTES

1 Vermont Information Technology Leaders is a nonprofit whose mission is to expand the use of information technology in health care. http://www.vitl.net

2 All information on the Obama plan from http://www.barackobama.com/pdf/issues/HealthCareFullPlan.pdf downloaded 11/9/2008

3 Generic drugs have active ingredients that are identical to brand-name drugs, but are sold at a lower price after the

original patent on the drug expires.

4 See http://www.i-saverx.net/

5 For information on the Blueprint, see http://healthvermont.gov/blueprint.aspx

6 See http://www.vitl.net

7 See http://healthvermont.gov/hc/patientsafety.aspx

8 Community rating guarantees that the same insurance coverage costs any individual or group the same premium, regardless of health status.

9 Federally funded State Children’s Health Insurance Program.

10 See http://www.bishca.state.vt.us/HcaDiv/HRAP_Act53/doorway_hospital-report-cards_BISHCA-comparisons.htm

11 See http://healthvermont.gov/local/mhealth/minority.aspx

Download a PDF of the report

© 2008 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

The State of Working Vermont 2008

Posted by sarah on December 31, 2008 at 10:03 am

Jack Hoffman and Doug Hoffer (December 2008)

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Officially, the economy was still growing in 2007, but it probably didn’t feel that way to many Vermonters. There was no job growth. After adjusting for inflation, the median wage for Vermont workers remained flat, and median household income declined. Only workers at the top of the pay scale saw real gains in their wages. Meanwhile, the cost of basic necessities, particularly food and energy, climbed sharply.

The Vermont labor force aged a little in 2007, and workers 55 and over comprised the biggest share of the labor force of any state in the country.

The data in this report paint a picture of the state of working Vermont at the end of 2007. Since then, Vermont,along with the nation and the entire world, has been gripped by a sharp economic decline. While the current crisis is the focus of immediate attention, it is important to keep sight of how the state’s economy was performing—or not—leading up to the  recession. Even before the bottom fell out, the state’s policies were not producing the number or quality of jobs needed to meet demand—or to lift Vermonters out of poverty and strengthen the middle class.

This report is presented in cooperation with the Economic Policy Institute in Washington, D.C.

Private Sector Staggers

Vermont had no job growth in 2007. Average non-farm employment for the year was 307,800, which is where it stood the previous year.¹ Over the longer term, the number of new jobs has not kept pace with the demand from new people entering the labor force. And while there was some job growth in Vermont since the recession of 2001, it was anemic compared to the recovery after the recession of the early 1990s (Figure 1.)

The picture is more troubling when it focuses on where the limited job growth occurred. The private sector—both for-profit and non-profit—accounts for just over 80 percent of the jobs in Vermont: about 254,000 jobs. By December 2007, Vermont had only 1,300—0.5 percent—more private-sector jobs than it had in December 2000, just before the beginning of the 2001 recession. By contrast, federal, state, and local government jobs, which account for less than 20 percent of the total, increased by 4,500—9.1 percent—over the same period.2

New data available from the National Establishment Times Series (NETS) provide some information on the source of jobs lost and jobs created in Vermont. These data show that between 1993 and 2007, nearly all new jobs came from within Vermont—either through the expansion of existing businesses or from start-ups. Only 1 percent of the new jobs during this period were created by companies moving into the state (Figure 2).

These facts suggest that Vermont might want to re-examine tax incentives and other policies designed to attract companies from other states. The NETS data show a similar pattern for job losses. For the same period, nearly two-thirds of the losses (63 percent) were the result of business closures, and another 35 percent came from lay-offs or other job cuts by existing business. Business moves out of state, which are often blamed on Vermont’s allegedly poor business climate, accounted for just 2 percent of the jobs lost from 1993 to 2007.

Demand Outstripped New Jobs

Vermont is not alone in the struggle to create new jobs. Its job growth for 2007 was one of the lowest among the New England states, which lagged behind most other regions in the country (Figure 3).

While it helpful to see how Vermont stacks up against its neighbors, another factor is important to consider: How many jobs does the state need to produce to meet the demand?

According to the 2000 Census, just before the start of the last recession in 2001, 71 percent of Vermonters

between the ages of 16 and 69 had jobs. Since then, the working-age population has increased more than 25,000. That means Vermont should have created roughly 18,000 new jobs to maintain the same participation rate. Instead, the labor market met only about a half of the new demand (Figure 4).

In contrast, job growth exceeded population growth during the 1990s. According to the Census, the working-age population increased by nearly 34,000 between 1990 and 2000. During that time, Vermont gained 41,400 jobs. The workforce participation³ rate climbed from 66 percent in 1990 to almost 71 percent in 2000, but has slipped back more recently to 67 percent.

Only Top Earners Saw Wage Gains

Looking at wage gains across the entire workforce, only those at the top end of the scale saw any real increase. The median hourly wage, after adjusting for inflation, remained essentially unchanged, as it has for the last five years. Hourly wages for those in the top 20 percent rose at least 5 percent, even after adjusting for inflation (Figure 5). For women, however, the real median wage dropped for the first time in 11 years.

Cost of Living Rose

Information about wages and jobs help to tell the story about what’s happening to Vermonters on the income side. But that’s only half the story. The other side of the equation is the outflow, the cost of living.

The price of housing, food, and gasoline rose faster than average wages in 2007 (Figure 6). The rising price of oil was a worry for many households, especially in the second half of the year. The latest figures from the Federal Highway Administration show that the average Vermont driver travels about 13,700 a year, including commutes to work.⁴ That’s less than drivers in many other states, but it’s still expensive when gas reaches $3 and $4 a gallon.

Workers: Older and Well Educated

The profile of Vermont’s 2007 labor force reconfirms what other recent studies have shown: the state has more prospective workers in the upper age bracket than other states: 22 percent of Vermont’s labor force is 55 or older, compared to 17.5 percent nationally.⁵

People alarmed about the graying of Vermont’s population have called for new policies to attract and retain younger workers. They worry that without such workers to fill the jobs being created the state’s tax base will be insufficient to support services for the older population. As noted above, however, since 2000 Vermont’s economy has not been creating enough jobs to meet the demand of the growing population: the workers are here, but the jobs are not.

Also, the data on the number of older workers suggest that they are available to fill new job openings. Whether by choice or necessity, a higher percentage of baby boomers remain in the labor force in Vermont than in any other state (Figure 7).

Vermont’s labor force is also among the best educated. It ranked eighth nationally in the percentage of eligible workers with at least a bachelor’s degree. Just over a third (36 percent) of workers have at least a bachelor’s degree; nationally, the rate is 30 percent. Despite the negative stereotypes about the competence or qualifications of people who go into government service, Washington, D.C. has the best-educated labor force by a wide margin. In 2007, 58 percent there had at least a bachelor’s degree—nearly twice the national average. Massachusetts ranked second, with 44 percent.⁶

While Vermont’s labor force is better educated than most, the jobs of the future may not require such high levels of education. The Vermont Department of Labor estimates that only 27 percent of new jobs created between 2006 and 2016 will require a bachelor’s or post-graduate degree.⁷

Poverty Also On the Rise

As with job creation, Vermont’s poverty rate started heading in the wrong direction even before the current recession hit. The poverty rate rose in 2007 after four years of steady decline. The three-year-average poverty rate increased to 8.4 percent in 2007 from 7.7 percent in 2006. The changes mean more than 4,000 people sank below the poverty line (Figure 8).

Vermont’s efforts to reduce poverty over the past 20 years have shown some success. While the poverty rate has gone up and down over this period, the overall trend has been toward reduced poverty. But it’s also true that Vermont’s poverty rate today is about where it was in the late 1980s.

It remains to be seen whether the rise in poverty in 2007 was the start of a new trend. But it’s important to note that the increase occurred before the start of the current recession. Experience has shown that the poverty rate increases quickly when the economy sours, so it is likely we will see more Vermonters sinking into poverty in 2008 and 2009.

Conclusion: Beyond Recovery

The Legislature and the governor are struggling to close actual or projected gaps in the 2009 and 2010 fiscal year budgets. Unemployment is rising sharply. Help could be coming soon if President Obama and Congress deliver on the massive economic stimulus package under consideration. But there are no signs that the decline is slowing, and at least one prominent economist has predicted that the recession will last until the summer of 2010.⁸ Given the current climate of uncertainty and fear, it is not surprising that most people are focused on the crisis at hand.

But the problems with Vermont’s economy did not start in December 2007, the official beginning of the current recession. Vermont barely recovered from the last recession. Much of the job growth between 2000 and 2007 was simply regaining what had been lost.

We don’t know yet how many jobs will be lost before this recession hits bottom. But one goal of the next recovery cycle has to be a net increase in jobs—real growth over where Vermont was at the start of the downturn. The state also needs to find ways to match the performance of the 1990s, when new job creation kept pace with the supply of new workers entering the labor force.

Improving the quality of Vermont jobs should be another goal of the next recovery. Nationally, income data show that the divide between rich and poor has grown wider in the last 30 years. Wage data from Vermont tell a similar story. From 1979 to 2007, those at the top have seen their wages grow three times faster, on an annual basis, than those at the bottom of the wage scale.⁹ Government and business also need to increase the income of low- and middle-income Vermonters—or reduce their costs for major expenditures like health care—so that when prosperity returns, all residents can share in it.

Maintaining essential public structures—courts, highways, public education, health services, a safe food supply, affordable and renewable energy, modern communications, and a sound regulatory system—will be key to rebuilding a sustainable Vermont economy as we pull out of the recession. But the kinds of budget cuts proposed by the administration and legislative leaders in response to the recession threaten these structures. Making deep cuts now risks wasting years of effort and millions of dollars of resources that have gone into building these public structures. And neglecting—or worse, dismantling—this public infrastructure will just leave Vermont further behind when the recovery begins.

ENDNOTES

1 Vermont Department of Labor, annual average non-farm employment 2006, 2007.

2 Vermont Department of Labor, non-farm employment, seasonally adjusted.

3 “Workforce participation” used here is the number of jobs divided by the number of working age Vermonters, 16-69 years old. This estimate of the percentage of working age people who are working differs from the “labor force participation” definition used by the Vermont Department of Labor and cited in The State of Working Vermont 2007, which includes people who are unemployed but does not include those too discouraged to seek work.

4 Federal Highway Administration figures for 2005, the most recent available, show Vermont ranked 37th among the states in vehicle miles traveled per driver.

5 Economic Policy Institute, analysis of U.S. Census current population survey data.

6 Ibid.

7 Vermont Department of Labor, Occupational Projections 2006-2016, Vermont statewide, released July 10, 2008.

8 Mark Zandi, chief economist, Moody’s Economy.com, “When Will It End?,” speech delivered to Center on Budget and Policy Priorities Conference, Nov. 19, 2008.

9 EPI data: average annual growth of real wages in 10th percentile was 0.4 percent 1979-2007, average annual growth of real wages in 90th percentile was 1.2 percent for same period.

10 Vermont Department of Labor, local area unemployment statistics, seasonally adjusted.

11 Vermont Department of Labor, non-farm employment, seasonally adjusted.

12 Vermont Department of Public Service, Vermont Fuel Price Report.

© 2008 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

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Recessions Past: What Worked Then Can Work Again

Posted by sarah on December 18, 2008 at 9:40 am

Jack Hoffman (December 2008)

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Major recessions like the one we’re in demand wrenching decisions: how to balance maintaining needed government services, especially for the most vulnerable, against taxpayers’ ability to support those services. The country has faced two other big recessions in the last 25 years—in the early 1980s and in the early 1990s—and Vermont’s response to those downturns is instructive about what the state can do this time.

Contrary to conventional wisdom, it is possible and even desirable to raise tax rates in a recession. In fact, that’s just what political leaders did in 1983 and 1991. They made difficult cuts, but they drew a line on how far they were willing to go in dismantling state services, and general fund budgets still went up from one year to the next. They also matched the cuts with tax increases. When they did as much as they could with cuts and taxes, they resorted to deficit spending—buying time to work their way out of the crisis with the confidence that things would get better. Both times, the strategy worked.

The increases imposed in 1983 and 1991 pushed Vermont’s top income tax rate higher than it is today. By 1993, Vermont’s highest income-earners were paying a top rate more than 40 percent higher than they do now. Those rates were rolled back after the economy recovered. But the temporary increases allowed Vermont to keep its courts open, continue to educate its children properly, provide health care, food, and shelter to its neediest citizens, and keep state government functioning.

It wasn’t just Vermont that defied conventional wisdom. To cope with the recession of the early 1980s, 33 states enacted permanent or temporary revenue

increases in 1983 (Figure 1). Some raised taxes a second time: the following year 29 approved permanent or temporary revenue increases. In the early 1990s, states again raised new revenues, some for several years in a row, as part of their efforts to maintain services.

Comparable Shortfalls

In many ways, the deep economic declines of the 1980s and 1990s were like the one we’re undergoing now: a lot of people were out of work, states struggled to balance their budgets, and there was real fear about the future.

As it happened, the same man was in the Vermont governor’s office during both of those periods. Governor Richard Snelling was just starting his fourth consecutive term in 1983 when the state was hit with a large budget deficit at the end of the fiscal year. He called the Legislature back for a special session in July, and he and lawmakers negotiated a package of cuts and new taxes. Snelling retired after that term, but he came out of retirement six years later to run for governor in 1990, specifically to deal with another looming fiscal crisis.

The shortfall of 1983 was on a similar scale to the one confronting Governor Jim Douglas and the Legislature now. The general fund budget in 1983 was $333 million, and when the fiscal year ended on June 30, the general fund was $30 million in the red—a deficit of nearly 10 percent. Now the general fund budget has grown to about $1.2 billion. The gap between projected expenditures and projected revenues for this year—fiscal 2009—is roughly $114 million, or 9.4 percent of the general fund (Figure 2).

The problems were even bigger in the early 1990s than in the 1980s. When Snelling returned to the governor’s office in January 1991, the state was halfway through the fiscal year, and there were clear signs of trouble ahead. When the fiscal year ended in June, the red ink totaled $65 million—again about 10 percent of the general fund. But another, even larger potential shortfall loomed for fiscal 1992, not unlike the projected shortfall forecast for fiscal 2010. During the 1991 session, Governor Snelling and the Legislature again negotiated a deal to slow spending and raise taxes.

Taxes Then and Now

So far during the current budget crisis, the administration and legislative leaders have rejected the idea of increasing revenues. Each time the revenue forecast has been lowered this year—in April, July, and November—the response has been to propose more budget cuts. Montpelier has refused to use any of Vermont’s reserve funds, which total more than $100 million. And over and over we hear the mantra that Vermont has no capacity to raise more revenue, especially from the income tax.

But Vermont’s top income tax rate is lower than it was in either 1983 or 1991 (Figure 3).³ Today the rate is 9.5 percent and applies to any taxable income in excess of $349,700. This rate is the one critics point to when they argue that Vermont’s taxes are too high. Because this is the rate that would be paid by successful entrepreneurs, they say Vermont’s rate discourages economic growth.

In 1983, Vermont’s top rate was 12.5 percent, and as part of the deficit reduction plan, the Legislature pushed it to 13 percent. That rate applied to taxable income of $109,400, which is equal to about $216,454 in 2007 dollars.⁴

Even Vermonters with taxable income over $45,800—about $90,600 now—paid a higher rate than they would today.

The tax increases in 1991 came on top of a sizeable hike the previous year. In 1990, as the economy was starting to slow, lawmakers saw a need for additional revenue and approved an across-the-board increase in the personal income tax rate.⁵

With the large deficit looming in 1991 and a shortfall projected for the following year, the governor and legislative leaders negotiated another package of tax increases—on income, sales, and rooms and meals. Because of the hikes the previous year, Democratic leaders insisted that additional income taxes come from those in the upper income brackets. Two new surtaxes were added: one on taxable income between about $23,000 and $63,000, and a higher one on taxable income in excess of $63,000.⁶

The result was that in 1991, Vermonters were paying a top marginal tax rate of 10.5 percent on incomes over $82,150. In 1993, after Congress increased federal income tax rates, Vermont’s top tax rate jumped to 13.5 percent on taxable income over $250,000.⁷

President George W. Bush rolled back many of the increases of the 1990s. Today, the portion of Vermonters’ income that goes to federal and state income taxes combined is lower than it was during the recessions of 1983 and 1991 (Figure 4). Federal and state income taxes as a percentage of income hit a peak in 2000, and now the portion is about 15 percent lower.

Knowing the Options

In both 1983 and 1991, Governor Snelling went on television to explain the problems Vermont faced and what had led to the fiscal crises. In 1983, he told the public that the budget shortfall was a result of declining revenues, not overspending. While he agreed that cuts were required, he also said there was a limit to how deeply the state could cut without hurting people.

Before Vermont can come together to solve the current crisis, the administration, legislators, and the public need to understand what all the options are. They need to understand who would be hurt by proposed cuts and how badly. They need to know who would be asked to pay if taxes were increased. The income tax, for example, reflects people’s ability to pay, whereas the sales tax or property tax lands harder on those least able to pay. Vermonters need to know how the reserve funds could be used most effectively. Finally, they need to know the implications of using the last tool Vermont has in its toolkit—carrying a small budget deficit until the economy recovers.

Vermonters also need to separate myth from reality—especially when it comes to conventional wisdom. We hear over and over from pundits and politicians that you don’t raise taxes in a recession. In fact, Vermont raised taxes in the two worst recessions of the last 25 years—and so did a lot of other states—with positive results. The rejection of this practical option is purely ideological. It damages the critical state services Vermont has worked for years to build and that Vermonters need more than ever in these hard times.

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ENDNOTES:

1 Some states are counted more than once because they enacted revenue increases in consecutive years.

2 The general fund budget approved for fiscal 2009 was $1211.1 million. Since then, the Legislature’s Joint Fiscal Office identified a $23 million shortfall in August (addressed with budget cuts and transfers between funds), a $66 million shortfall in November, and another potential revenue downgrade of as much as $25 million in January.

3 With a progressive income tax system, which Vermont has, tax rates increase as income increases.

4 The amount of deductions and other allowances can vary widely from one taxpayer to another. On average, according to IRS statistics for 2006, taxable income is about 70 percent of adjusted gross income (AGI).

5 The increase, which affected all income taxpayers, amounted to an extra $12 on every $100 of Vermont income tax.

6 The effect of the 1990 and 1991 rates changes was that taxpayers paid an extra $24 for every $100 of Vermont income tax on taxable income between approximately $23,000 and $63,000, and an extra $36 for every $100 of Vermont income tax on taxable income of more than about $83,000. These taxable income amounts are in 1991 dollars.

7 Until 2002, Vermont income taxes were calculated as a percentage of federal tax liability. An increase at the federal level, therefore, increased state income taxes unless the Legislature adjusted the Vermont rate.

© 2008 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

Medicaid Woes Highlight Budget’s Pre-Existing Condition

Posted by sarah on October 28, 2008 at 10:04 am

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Steven Kappel and Paul Cillo (October 2008)

The federal government recently delivered two bits of bad news that will cost the state money. First, the Vermont State Hospital (VSH) will not be federally recertified. Second, the state’s federal Medicaid match rate—the percentage of Vermont’s Medicaid costs that Washington pays—will go down next year.

The current budget (fiscal 2009) that the governor signed in June assumed VSH recertification, and the federal funding that would come with it, beginning in January 2009. Without that seal of approval, Vermont will receive $4.2 million less in federal money for health care this year. Losing hospital certification for a full year, coupled with the lower match rate, will cost Vermont $15 million in federal funding in fiscal 2010.

With Vermont health care costs growing at about 8 percent each year¹ and state revenues growing at less than 3 percent,² the state cannot come close to paying for current services in the short term without severe cuts to Medicaid, cuts to other areas of the state budget, or new revenue. In the long term, the state needs to enact reforms that can slow health care cost growth rates.

The administration has already made adjustments to deal with a $32 million drop in revenue since the budget was signed June. The loss of expected federal Medicaid funds puts even more pressure on a budget that is already in trouble both this year and next.

Vermont State Hospital

In order for a hospital to receive federal funds (both Medicare and Medicaid), it must be certified. Certification is a process that involves both state and federal agencies. It judges whether the institution provides adequate services on measures including patient safety, patient rights, and quality of care.

VSH, which opened in 1890 and is the only public psychiatric hospital in the state, has been decertified several times since 2003. Decertification costs the state money because it must replace federal funds with state funds. In the case of Medicare, this is a dollar-for-dollar swap. For Medicaid—where most of VSH’s federal money would come from—the state must make up Washington’s share: about 60 percent.

Assuming the hospital’s recertification effective January 1, 2009 (halfway through the fiscal year), the budget included revenues of about $7 million in Medicaid funds ($4.2 million in federal funds and $2.8 million of state funds³). The state now faces replacing the $4.2 million in federal funds in fiscal 2009. For fiscal 2010, the potential full-year loss could be over $8 million in federal matching funds. The state is appealing the decertification.

Federal Medicaid Match

Medicaid is a federal-state partnership that provides health care financing to two main groups of people: low-income families and people with disabilities. In Vermont, Medicaid also provides coverage for other groups not eligible in most states, such as low-income adults without children. Unlike Medicare, which is fully funded and fully regulated by the federal government, the Medicaid system is a state-federal partnership.

First, there is shared regulatory authority. Within broad federal limits, states have latitude both in whom they cover (eligibility) and what services they cover (benefits).

Second, the costs of the Medicaid program are shared. The federal government reimburses states at a fixed percentage of their spending within legal parameters. This match, known as the Federal Medical Assistance Percentage, varies by state and over time. Vermont’s match rate has historically been about 60 percent. This means that it costs the state 40 cents to purchase $1 worth of care for a Medicaid beneficiary. Vermont was notified this month that its match rate is going down by about one-half of one percent. With a total Medicaid budget of nearly $1.4 billion that’s a loss of about $7 million in federal matching funds in fiscal 2010.

The Big Picture

Here’s how the Vermont State Hospital and match rate developments fit into Vermont’s budget picture:

In 2001, the Vermont legislature enacted a requirement that the Agency of Human Services submit a five-year state health care assistance program budget as part of the annual appropriations process.⁴ The bulk of this budget is Medicaid, so it is typically thought of as the Medicaid budget. It comprises about one-quarter of total state health care costs.

According to the most recent estimates—made in July 2008—total health care assistance program spending for fiscal 2010 is projected to be $1.36 billion. This spending level is expected to require $579 million in state funding. However, as Figure 1 shows, with the match rate change and the loss of federal money for the VSH, the estimate of state funds required in fiscal 2010 rises to $594 million, or $15 million more than projected.

The state health care assistance program projections assume that there will be no changes in policy, such as eligibility rules, premium rates, or tax rates. So the amounts shown in Figure 1 are those needed to pay for current services.

This $15 million loss of federal funds adds to the already expected increase in the state’s health program spending of more than 8 percent in fiscal 2010.⁵ As Figure 2 shows, the largest source of revenue for state health care assistance programs is the general fund. Other money comes from dedicated taxes and premiums; these are fixed amounts, with little or no flexibility.

Current revenue estimates indicate that to balance the fiscal 2010 budget overall general fund spending would need to be the same in fiscal 2010 as in fiscal 2009.6 But if the state is going to pay for current health care services at next year’s projected cost with next year’s projected caseloads, the general fund appropriation for health programs will need to be $70 million more than in fiscal 2009. Figure 2 shows the additional revenue requirement in the context of all the revenue sources that support state health programs.

Handwringing over Medicaid is nothing new. At the start of each budget cycle, there are warnings that Vermont will not be able to meet its obligations without making drastic cuts in eligibility and benefits, shortchanging health care providers or raising additional revenue. But each year Vermont has found the money to get through that year.

But as the economy weakens and revenues fall, the state has fewer options for providing one-time budget fixes. There are rumblings about another economic stimulus plan from Washington that could provide a temporary funding increase to states. And even if Vermont gets lucky again, it will just be another one-time fix. If the state is to continue providing essential health care services to Vermonters, the governor and the Legislature need to put state health care programs on solid footing—with funding—and stop hoping each year that somehow things will work out.

ENDNOTES

1 Vermont Department of Banking, Insurance, Securities and Health Care Administration, 2006 Vermont Health Care Expenditure Analysis & 3-Year Forecast

2 Kavet, Rockler and Associates, July 2008 Economic Review and Revenue Forecast Update

3 Joint Fiscal Office

4 33 VSA § 1901a

5 Joint Fiscal Office, consensus five-year projections, July 2008

6 Joint Fiscal Office, General Fund Summary & Outlook, August 2008

7 Certified funds are funds spent by entities other than the State of Vermont on activities that are included in the terms and conditions of the Global Commitment waiver. These activities include:

• • Reducing the rate of uninsured and/or underinsured in Vermont;
• • Increasing the access of quality health care to uninsured, underinsured, and Medicaid beneficiaries;
• • Providing public health approaches to improve the health outcomes and the quality of life for Medicaid-eligible individuals in Vermont; and
• • Encouraging the formation and maintenance of public-private partnerships in health care.
• The majority of these funds are spent in local schools, including health-related services provided to eligible students and part of the costs of the school nurse program. The funds are “certified” because there is no direct state appropriation for these services.

For example, if schools spend $1 million to provide nursing services for the uninsured, underinsured, and Medicaid beneficiaries, this amount is certified to the federal government, which provides matching funds at the standard state match rate (about 60 percent). In this example, Global Commitment allows the state to draw down about $600,000 of federal funds that would be unavailable in the absence of the waiver.

© 2008 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

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2008 Update: Where They Come From, Where They Go

Posted by sarah on October 28, 2008 at 9:27 am

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Jack Hoffman (October 2008)

Families moving to Vermont continue to report higher incomes than people who remain in the state or leave it. The latest data from the Internal Revenue Service show that individual filers and families who relocated to Vermont in 2007 had about 9.3 percent more income per family member than those who left. The new arrivals also had more income per family member—7 percent more —than Vermonters who stayed put last year.

According to the IRS’s report tracking migration patterns from 2006 to 2007, 16,238 people moved out of Vermont last year and 15,073 moved in.¹ The number that left the state was slightly lower than the number that left the previous year. However, the number moving to Vermont dropped about 8 percent.

As in 2006, the people immigrating to Vermont had higher incomes than those who left. The newcomers reported average adjusted gross income per family member of $28,570. For people who left, the comparable figure was $26,141; for non-migrating taxpayers, $26,697.

People moving here from New Jersey were much better heeled than non-migrating taxpayers. A little more than 500 people moved here from that state last year, with an average income per person of $46,111. Almost 1,000 people moved here from Connecticut, and they came with about 50 percent more income than Vermonters who stayed put. Newcomers from Massachusetts earned about 20 percent more.

The Vermont migration figures for 2007 are reported below. Figure 1 compares the total incomes of people moving in and out of the state in 2007. Figures 2 and 3 show, by state, where Vermonters went when they left and where people lived before they moved into Vermont.

Footnotes:

1 As an approximation of the number of people coming and going, the IRS tracks the returns filed and the exemptions (primary filers, secondary filers, and dependent children) reported on each return.

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Beyond Belt-Tightening

Posted by sarah on September 16, 2008 at 12:09 pm

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Jack Hoffman (August 2008)

If the administration and the Legislature stick to the fiscal policy they have followed in recent years, Vermonters will be forced to forgo more than $100 million in government services next year.

The administration is in the early stages of developing the fiscal 2010 budget—covering July 2009 through June 2010—which will be presented to the Legislature in January. Based on the latest estimates and current obligations, there is a gap of at least $102 million between expected revenues and the cost of providing existing services (Figure 1).

If Montpelier continues as it has in the past few years, policy makers will “manage to the money”—that is, cut services to bring spending in line with available revenues, rather than figure out how to raise the money needed to meet obligations for current services.

The public won’t know the details of these decisions until the budget reaches the Legislature at the start of the next session. But one thing is certain: $100 million is not the kind of gap that can be closed with a little “belt-tightening.”

The administration just proposed a package of spending reductions to close a $32 million gap in the current fiscal year budget. If they insist on cutting their way out of the state’s budget problems, they will need to find three times as many cuts for fiscal 2010.

General fund

The most recent projections, released in late July, show that the state is likely to take in less revenue in 2010 than it did last year, fiscal 2008. The revenue forecast was lowered in January, lowered further in April, and lowered even further in July. People who work closely with the state budget predict the estimate will be lowered again in November. For now, though, the official forecast is for $1.19 billion in General Fund revenue for 2010.

The biggest drop is forecast for corporate taxes—from $75 million in fiscal 2008 to $54 million in 2010. Income taxes are expected to drop $40 million this year and then rebound some in 2010. But the forecast of $609 million for next year is still below the amount of personal income taxes collected in 2008 (Figure 2).

Meanwhile, with even a modest increase, General Fund spending would exceed available revenue. For the last four years, total General Fund appropriations have risen an average of 3.7 percent a year. An increase of just 3 percent would leave the General Fund $42 million short. And that assumes all of the cuts that have been made in this year’s budget—putting off computer purchases, restricting out-of-state travel, cutting smoking-cessation programs and the Housing and Conservation Board—can be absorbed again next year.

Even a modest 3 percent increase probably would require additional job cuts in state government and further cuts in services. The current contract for state employees calls for a 3.5 percent salary increase in fiscal 2010¹. The pattern in recent years has been to approve pay increases but not all of the funding to pay for them. That has meant that agency and department heads have been forced to use money from other parts of their budgets to cover the pay raises for their employees. In some cases, positions are left unfilled and work is delayed or shifted onto other workers. In other cases, services are delayed or cut back in order to “save” the money needed for pay raises.

Stretched government staffs will affect Vermonters who don’t work for the state as well as those who do—for instance, in reduced courthouse hours, less in-home help in assisted living programs, delays in services for home-schoolers, and other disruptions.

Medicaid

For the past few years, Vermont has escaped the expected reckoning on Medicaid funding. But 2010 could be the year it comes due. Vermont shares the cost of Medicaid with the federal government. The split is roughly 60-40, with Vermont paying the smaller share. The projected “Medicaid deficit” is the difference between projected spending for Medicaid and the money that policy makers have designated to cover those costs.

In recent years, the Legislature has relied on one-time state surplus funds to cover the Medicaid deficit, and in fiscal 2004 Vermont got a reprieve when the federal government temporarily increased its match rate. In addition, Vermont has cut back on the amount the state pays providers for treating Medicaid recipients.

There won’t be any surplus state funds next year, and Vermont risks losing Medicaid providers if the payments go any lower. Without another windfall from the federal government, which faces a growing deficit of its own, Vermont’s Medicaid deficit is forecast to be $38 million to $48 million in 2010. If the state fails to come up with that money, the federal matching share will be lost, as well. The total reduction to Medicaid would be $94 million to $119 million.

The state faces another risk with Medicaid, too. Vermont and Washington no longer share the actual cost of Medicaid services. They are instead splitting the cost of insurance premiums. Until now, Vermont calculated premiums at the end of the year, when the state knew what the Medicaid costs were; that way, the state always covered costs. But that arrangement is over. The state must now set premiums in advance, and the federal government will pay its share. If people need more health care and the money runs out, the state will be on the hook for 100 percent of the excess costs.

LIHEAP

The Low-Income Home Energy Assistance Program is a federal program, but federal funding is not adequate to serve the needs of Vermonters when heating oil costs $4 a gallon. LIHEAP officials estimate that Vermont needs an additional $20 million to provide the same level of protection for vulnerable Vermonters that it did last winter. Even then, the program would only cover 60 percent of a family’s annual heating cost.

It’s not clear yet where Vermont will get that extra money. Barring a steep and unexpected drop in the price of oil next year, it is safe to assume that Vermont will need to find $20 million to make sure that poor and elderly Vermonters can get through the winter of 2009-2010.

Teachers’ retirement

Vermont has been underfunding the teachers’ retirement system for more than a decade. A plan to restore full funding was developed in 2006, and the state has made the required contribution in recent years, but the Legislature and the administration have relied on surplus funds and other one-time money to do so. There will be no surplus available for 2010, and, given the state of the economy, the retirement fund’s investments can be expected to earn less. That means the state would have to contribute more. We won’t know how much until late fall, but the Joint Fiscal Office estimates a figure at $2 million to $10 million above the amount the state is putting into the retirement fund this year.

So far, both legislative leaders and the administration have rejected any consideration of raising revenue to address Vermont’s budget problems. One argument they make is that higher gasoline and heating oil prices mean that Vermonters are shelling out $650 million more for fossil fuel energy than they were a year ago².  With that extra burden, leaders in Montpelier say, people cannot pay more taxes. The only responsible response to the budget crisis, they insist, is to reduce government spending.

But that response does not take into account the additional cost that will be shifted onto Vermonters as a result of cutbacks in government services. Whether they have to buy new tires and struts after negotiating poorly maintained roads, pay higher premiums and copays for health insurance, or wait longer for their day in court, Vermonters will bear the cost of many of the services that government no longer will deliver. And unlike taxes, which are more likely to be tied to income and ability to pay, costs that result from cuts in government services fall most heavily on those who can least afford them.

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ENDNOTES

1 Joint Fiscal Office, Act 206 of 2007-2008 session of the Vermont General Assembly.

2 Estimate provided by the Regulatory Assistance Project, Montpelier, based on Energy Information Agency data.

© 2008 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

Rising Energy Costs Plague State Government, Too

Posted by sarah on September 16, 2008 at 12:01 pm

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Paul Cillo and Doug Hoffer (August 2008)

Like families and businesses, Vermont’s state government uses energy to heat and light buildings and fuel vehicles and equipment. And each year the cost of energy is taking a bigger bite out of the budget. The state’s energy costs in fiscal 2008, which ended June 30, are estimated at about $28.9 million—$4.2 million (17 percent) higher than in 2007 and $9.2 million (46 percent) higher than in 2003¹. If oil prices stay at their July/August 2008 level, those costs will increase to $33.7 million in fiscal 2009, a $4.8 million (17 percent) increase over 2008².

Of the $25 million the state government spent on energy in fiscal 2007, slightly more than half was related to buildings (Figure 1). The remainder went to transportation, including fuel for state vehicles such as police cruisers and snowplows and mileage paid to state employees driving their personal vehicles for state business.

While transportation expenditures grew, managers kept that growth down by working to limit miles driven in private vehicles—reducing mileage reimbursements 18 percent from 2003 to 2007.

During that same period, energy costs for buildings increased far faster than for transportation—three times as fast. One reason for the increase in buildings energy costs is that the state occupies more space than it used to. The good news is that energy consumption in state buildings has grown only 2 percent (measured in million BTUs, or MMBTUs)³, despite a 12 percent increase in the square footage of space the state uses. So the amount of energy consumed per square foot has fallen about 8 percent since 2004 (Figure 2).

Increasing oil prices are behind much of the recent increases in state energy expenditures. Figure 3 shows the percentage price change for energy sources the state purchases and also change in the mileage reimbursement rate to employees. Prices for petroleum-based fuels are taken from the “rack” prices⁴ published by the Department of Buildings and General Services.

The most recent State Agency Energy Plan (SAEP 2005)5 set goals for reducing consumption. The plan, with fiscal 2004 as its base, called for a 20 percent reduction in energy use in buildings and 10 percent in transportation by 2012—for a cut of 15 percent overall. Achieving these goals requires investment in the energy efficiency of the state’s vehicles and building—money well spent.

State statute requires the Commissioner of Buildings and General Services to report to the Secretary of Administration every other year on the government’s progress in reducing energy consumption. But to monitor that progress, state officials and citizens need to know what the state is spending and where it is spending it. The Department of Buildings and General Services provides the best available information on state government energy consumption and cost—we use those figures in this analysis. But the department has not been given the authority or the resources to collect and maintain state government energy consumption data under an audited system, and that undermines confidence in the accuracy of the information. A serious program to reduce energy consumption demands a rigorous commitment to reliable data-keeping.

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ENDNOTES

1 Usage data are not yet available for fiscal 2008. This estimate is based on the authors’ calculations assuming usage was the same as for fiscal 2007.

2 2009 estimate is based on the authors’ calculations using rack prices (see note 4 below) for July and August 2008.

3 BTU means British thermal unit, the amount of energy required to raise the temperature of one pound of liquid water (approx. one pint) by one degree Fahrenheit.  MMBTU = 1 million BTUs.

4 The rack price is the posted price at which refineries sell fuel to wholesalers from a specified bulk terminal.  The State of Vermont buys its fuels through Vermont retail suppliers, but sets the price each week based on the rack prices for the Albany and Selkirk, NY, and Boston, MA , terminals (as of close of business Thursday and listed Friday in the New York Journal of Commerce), plus the supplier’s markup.

5 Required by 3 V.S.A. §2291.

© 2008 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the foundations.

2009 Budget: Election-Year Caution Postpones Facing Trouble Ahead

Posted by sarah on September 16, 2008 at 11:50 am

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Jack Hoffman (June 2008)

When the Vermont Legislature adjourned in May, it almost balanced the fiscal 2009 General Fund budget. According to the latest projections, the Legislature appropriated about $13 million more than the state is expected to collect in General Fund taxes and other revenues next year. In the scheme of things, the shortfall is small — 1 percent of General Fund spending. And a small surplus at the end of the current year is expected to cover that deficit.

But the deficit is a sign of troubles to come if Vermont continues on its current path. For the past couple of years, the General Fund has produced operating surpluses — that is, the revenue collected in a given year has exceeded the general operating expenses. That cushion is likely to disappear. Next year, revenues are expected to fall short of anticipated expenditures.

Extra money in the General Fund on June 30, the end of fiscal 2008, will mask the transition from surpluses to deficits. But once the 2009 shortfall is covered, the cookie jar will be empty. Moreover, the deficit projected for fiscal 2010 is based on the assumption that spending will continue on its current path — a growth rate of 3 percent — which does not allow for an increased demand for services as a result of a slowing economy.

Spending Priorities in Sync

Signs of the recession were apparent at the start of the session. The revenue forecast was lowered, and legislative leaders warned that the budget proposed by the administration wouldn’t adequately fund all the services that Vermonters will need — especially those struggling in a faltering economy.

Despite partisan rhetoric, the Republican administration and the heavily Democratic Legislature ended the session largely in step on next year’s spending priorities.

On the spending side, the Legislature trimmed a little more than $1.6 million, or 0.04 percent, off a total budget of $4.2 billion that the governor proposed. That figure includes both state and federal funds.

Looking beyond total spending, a line-by-line review of the 2009 Appropriations Bill reveals that the changes made by the Legislature amounted to nibbling around the edges, not shifting where the state spends its money. For nearly 90 percent of the budget line items, the administration got at least 95 percent of what it asked for.

The Legislature did make some changes. The administration, for example, wanted to reduce tax reimbursement payments to Vermont hospitals by $8 million. The Legislature restored the payments.

The administration wanted to reduce funding for the Vermont Housing and Conservation Board by $4.6 million. That would have been a substantial cut in state funding — about 30 percent — and a reduction in overall funding of about 9 percent. The Legislature voted to restore that funding — and more — which will result in a slight increase in appropriations to the Housing and Conservation Board next year.

Still, in the context of a $4 billion budget, the Legislature’s changes were small, rarely more than a few percent up or down from the governor’s recommendation.

New revenues revealed bigger policy differences — and perhaps more surprising ones. The session began in January with grim economic news — a forecast that the state would take in slightly less in fiscal 2009 than in 2008. That’s happened rarely in the last 30 years, and it was a sign of trouble ahead.

The governor seemed to acknowledge the need for additional revenue. He proposed leasing the state lottery, which he said would bring in a one-time payment of $50 million. The Legislature never warmed to the proposal, and, as the national economy worsened during the winter, the $50 million lease price appeared overly optimistic. Once the idea of leasing the lottery died, however, so did serious discussion of raising additional revenue, except through fees, and the Legislature never really pushed the administration on the need for more money.

The governor also had called for a change in the way Vermont taxes capital gains. He made a moral argument against the current policy, which excludes 40 percent of capital gains from taxation, saying it was unfair to wage-earning Vermonters. “Our state is one of only a few that has such an unfair penalty for doing an honest day’s work,” the governor said in January. “This is grossly unfair. We must close this loophole and eliminate this working tax penalty.”

Depending on how tightly the loophole was closed, it could have produced $20 million to $30 million for the state — and some legislators were eager to use that potential revenue, which was clearly needed. But the governor didn’t want to close the loophole to generate more money. His plan called for lowering tax rates for those in the upper income brackets to offset the increase in capital gains taxes. Democratic leaders balked at raising taxes in an election year, too. In the end, nothing was done to eliminate the “working tax penalty.

One place the administration and the Legislature agreed to go for new revenue was to low- and moderate-income Vermonters enrolled in state-run health care programs. The Legislature approved smaller premium increases than the administration had sought and rejected proposed increases in copayments. Nevertheless, families living at 200 to 300 percent of the federal poverty level will see their premiums in the Catamount Health program rise in the range of 22 to 37 percent.

The premium increases could be mitigated for some people if Vermont gets federal approval to change the way it determines income eligibility. Under Catamount Health, premiums are based on income. The proposed change would disregard certain income and allow some Catamount subscribers to move into income brackets with lower premiums than they pay now.

By the end of the 2008 session, the debate over balancing the budget came down to a debate about what to cut. Other options — raising new revenue or using some of the state’s reserve funds — never got serious consideration, at least in public. But the operating deficit projected for 2010 means the next administration and the next Legislature will have to confront these choices again.

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No New Taxes, but…

Posted by sarah on September 16, 2008 at 11:44 am

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Jack Hoffman (June 2008)

Despite a pattern of declining state revenues, the administration and the Legislature managed to avoid raising taxes in an election year — at least taxes that are likely to affect a broad range of voters. Candidates seeking re-election will be free to campaign in the fall by saying they (almost) balanced the fiscal 2009 budget with (hardly any) new taxes.

That doesn’t mean that some people won’t be paying more for government services, though. General Fund revenues are expected to increase nearly $10 million as a result of actions by the Legislature.

The bulk of the new revenue — almost $6 million — will come from tax law changes. One change is a cap on Vermont capital gains exclusion. In most instances, Vermonters can subtract 40 percent of their capital gains when they calculate their state income tax liability. Under certain circumstances, the exclusion can wipe out taxable income altogether. Now taxpayers can exclude capital gains, but the exclusion cannot exceed 40 percent of their taxable income. The Joint Fiscal Office estimates the change will produce about $1.5 million in new revenue next year.

As part of the federal economic stimulus package approved earlier this year, Congress will allow taxpayers to depreciate some assets more quickly. Because Vermont follows many federal tax laws, next year’s revenue estimate was lowered April after Congress approved the so-called “bonus depreciation.” At the end of the session, however, the Legislature voted to block the accelerated depreciation in the calculation of state taxes. The money is being treated as new revenue; it’s really recouping lost revenue.

Some provisions of the Miscellaneous Tax Bill will reduce revenues. These include sales tax holidays and property tax exemptions for skating rinks. Other provisions will redirect revenues. For instance, through “tax increment financing” (TIFs), new property tax revenues generated in a designated economic development area are dedicated to paying back bonds for infrastructure improvements in that area.

A variety of fees are going up as a result of another new law. These include court fees, sheriffs’ fees, registration fees charged by the secretary of state’s office, and hazardous-materials fees. In all, the so-called “fee bill” is expected to generate about $3.9 million in new revenue for the General Fund. Other fee increases will bring in additional money for the Transportation Fund ($345,000) and Special Funds ($1.8 million).

Election year tax phobia compels legislators to limit their own policy options. They deny themselves the opportunity to determine the need for revenue first and then decide the best ways to generate it. That’s not to say that government shouldn’t collect fees for certain services. But the Legislature often turns to fees as an inconspicuous way to raise money. The problem is, they often take a bigger bite out of lower incomes than higher ones — so they’re not always the fairest.

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Measuring Economic Development: What Do Subsidies Buy?

Posted by sarah on September 16, 2008 at 11:35 am

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by Jack Hoffman (June 2008)

The Vermont Legislature is taking another run at figuring out what the state is getting for all of its economic development efforts. Existing laws that would enable evaluation have been ignored for years. So the House and Senate passed another measure this year designed to produce useful performance data on the many grants, tax breaks, job-training programs, low-interest financing, and other benefits the state offers to businesses promising to locate or expand in Vermont.

Some states are starting to look more critically at the subsidies going to business, especially the tax breaks often demanded by big retail chains such as Wal-Mart or Cabela’s. Critics of these subsidies argue that the money would be better spent on general infrastructure improvements that would help everyone, not just a few favored companies.

In big urban centers, where federal, state, and local government support is often provided for redevelopment projects, community activists and local officials are demanding direct benefits for neighborhood residents – jobs and job-training from redevelopment contractors, public transportation facilities, neighborhood groceries, and other improvements.

Since 1995, Vermont has had a law requiring the commissioner of economic development to report to the Legislature each January on all economic development assistance provided to Vermont businesses, including assistance supported directly or indirectly with federal or state funds. The comprehensive reports specified in statute are meant to provide information about who is getting the development assistance and the number and quality of jobs created or retained.

The Legislature has no record of ever receiving such an “incentives benchmark report.”

The Department of Economic Development does submit some performance information about specific programs. It also relies on reports filed by other agencies or state entities to fulfill the reporting requirement. But there is no single comprehensive report, according to a department spokesperson, “due to the complexity and significant unfunded cost of creating what is called for.”

Now the Legislature has passed a new bill, recently signed into law, designed to bring consistency to the way state agencies measure the performance of economic development programs. The law requires the commissioner of finance and management and the secretary of commerce and community development to prepare a “unified economic development budget” each year and submit it to the Legislature as part of the annual budget. Again, the purpose is to allow lawmakers to assess the effectiveness of the state’s efforts to promote job creation. The new law also requires the commissioner of finance and management to present a report to the Legislature on ways to consolidate and coordinate all the other reports now required on economic development assistance.

The commissioner’s report is due in January.

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Economic Stimulus Needs New Money, Fast

Posted by admin on May 2, 2008 at 2:17 am

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Jack Hoffman (May 2008)

Congress and the Bush administration moved with unusual speed earlier this year to put together an economic stimulus package to try to fend off the recession. They agreed to send out more than $168 billion in income tax rebates and business tax breaks this spring. Putting money in the hands of ordinary citizens, who are expected to spend it right away, is meant to create immediate, new demand for goods and services and thus stimulate the economy.

Vermont’s governor announced recently that he wanted to help pull the state out of this economic slow down with a stimulus package of his own. While some elements of the 15-point plan could benefit the state in the long run, most will not affect the immediate problems of Vermont’s faltering economy.

First, the measures won’t come quickly enough. “If the purpose of fiscal stimulus is to reduce the risk and severity of a recession, it would need to take effect quickly,” Peter R. Orszag, the director of the Congressional Budget Office, told the U.S. Senate Finance Committee back in January. “Stimulus delayed is stimulus denied, and could even prove unnecessary and potentially counterproductive if delayed so long that it takes effect after the period of economic weakness has passed.”

Second, unlike the federal rebates, the governor’s plan will inject little new money into the system. The Legislature’s chief economist, Tom Kavet, made that point in an analysis of the administration’s stimulus plan. To produce any real net stimulus, he said, the state would have to add new spending through borrowing, using some of the existing reserve funds, or with cash from the sale of state assets. Most of the plan’s funding will come from additional borrowing for highway maintenance — with an overall impact in the $40 million–to-$60 million range, Kavet concluded. This is far less than the governor’s predicted $214 million in new economic activity over the next five years.

Housing assistance. The plan includes proposals to help homeowners, but it is not clear that they will produce any new demand for housing that would not have occurred without the “stimulus.” The governor suggested using $17 million in teacher and state employee retirement funds to buy bonds from the Vermont Housing Finance Agency, which in turn would lend the money to low- and moderate-income homebuyers. However, this would not increase the agency’s pool of mortgage money. Providing VHFA with an alternative source of funds would not, in itself, lead to new borrowing or housing sales.

The governor also has proposed mortgage counseling and a grace period for homeowners who may be having trouble making mortgage payments. He also wants the state to provide additional moral backing to VHFA bonds, and he proposed tax incentives in so-called “Urban Homestead” zones.

Business Incentives. The plan includes new and redirected tax incentives. He would target the VEGI (Vermont Employment Growth Incentive) program at environmentally friendly businesses. This would not be new money, either. There is a $10 million annual cap on this incentive, and the new program for “green businesses” would fall under that existing cap.

It’s a good idea to support green business. But even if this were new money, it would be unlikely to affect the current recession. Under this program, cash incentives are paid to qualifying businesses only after they have made new investments and reached their new employment targets.

The governor also proposed deeply subsidized loans for businesses through the Vermont Economic Development Authority. Business demand for capital from VEDA has slowed to a trickle. The lower interest rates can help on the supply side and benefit those businesses that decide to invest. But what the economy needs now is help on the demand side.

Highway maintenance. The governor wants to increase state borrowing to speed up maintenance of Vermont’s roads, and that should have some stimulus effect. His proposal is to borrow and extra $10 million a year for the next five years.

The roads do need repair, and the borrowing will provide additional money that would not have been available otherwise. However, the increased spending will be spread over five years. That’s probably not fast enough. Kavet and the administration’s economist, Jeffrey Carr, predicted in mid-April that the current recession would be short and shallow. Their latest forecast shows a turnaround starting in late 2008 or early 2009, although both conceded that the recession could last longer.

The governor also wants to reallocate $50 million from the state’s General Fund to the Transportation Fund gradually over the next five years. That cannot be considered new money. It will be new to the Transportation Fund, but it is money state government would have spent anyway, just on different services.

States don’t have the capacity to provide economic stimulus the way the federal government can. For one thing, Washington can increase the federal deficit (and debt) to provide short-term tax rebates. Most states are constitutionally prohibited from running deficits. To cut taxes, states have to cut spending by the same amount, which ends up reducing services for people who need help the most during an economic slow down.

Vermont is the lone exception: it has no balanced-budget statute. But to do something on the scale of the federal stimulus would be unrealistically expensive, even if there were political support for deficit spending. When Congress was considering the federal tax rebate, economists said the stimulus needed to be about 1 percent of the gross domestic product — or about $150 billion. An equivalent rebate package in Vermont would cost the state about $250 million — almost 20 percent of the General Fund budget.

States can mitigate the effects of recessions, but they can’t really slow them down. The Congressional Budget Office offers guidelines for fiscal stimulus. Other rational measures for states can be found in a report by Nicholas Johnson for the Center on Budget and Policy Priorities. And the March 2008 Public Assets Institute report on the governor’s fiscal 2009 budget also provides suggestions for what Vermont can do to help its economy and its citizens to weather the rough times.

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This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We appreciate their support. The findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the views of our funders.

Some Necessities Cost More, Others Don’t

Posted by rob on May 1, 2008 at 4:53 am

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Paul Cillo and Doug Hoffer (May 2008)

Average Vermont families have good reason to feel that the cost of living is going up. Their buying power increased from the mid-1990s to the mid-2000s. But it didn’t grow as much as many of their biggest-ticket needs, such as health insurance, heating fuel, and housing.

The chart below shows changes in the cost of common household expenses between 1996 and 2006, the most recent decade for which data are available. For comparison, the red bar shows the change in median family income. The cost of items above the red bar grew faster than the typical family’s income; those below it grew slower.

The cost of health insurance, for example, jumped 130 percent, nearly three times the increase in median income. The rise in fuel oil, natural gas, and gasoline also outstripped the increase in buying power.

The change in food costs doesn’t reflect the current spike in prices worldwide. During the period covered by the chart, food became more affordable for the typical family. School taxes for the typical family also increased less than income.

END NOTES

1 The Hanson Index. Based on costs from Adelphia and Comcast.

2 Blue Cross Blue Shield, 4/21/08 communication; Vermont Freedom Plan, $2,500 deductible.

3 U.S. Department of Energy, Energy Information Administration; #2 fuel oil, cents/gallon; data from December 1996 and December 2006.

4 U.S. Department of Energy, Energy Information Administration; residential cost /1,000 cubic feet.

5 Vermont Department of Taxes, property transfer tax.

6 U.S. Department of Energy, Energy Information Administration; Northeast average cost for regular gas (not reformulated); data from December 1996 and December 2006.

7 The Hanson Index. Based on tickets purchased 14 days in advance with a Saturday stayover.

8 Vermont Department of Motor Vehicles

9 Authors’ calculations: average tax on house with less than six acres, data from Property Valuation & Review, equalization studies.

10 U.S. Dept. of Housing & Urban Development, Fair Market Rents; Chittenden County.

11 Vermont tax on median household income (married, filing jointly), Vermont Department of Taxes.

12 Vermont Department of Labor, Quarterly Census of Employment & Wages, unemployment insurance- covered employment.

13 U.S. Census Bureau, Table H-8B; three-year moving average adjusted with CPI-U-RS.

14 Vermont Department of Motor Vehicles

15 Authors’ calculations: average tax on house with less than six acres, data from Property Valuation & Review, equalization studies.

16 U.S. Department of Housing & Urban Development, Fair Market Rents; weighted average for all Vermont counties except Chittenden.

17 U.S. Department of Labor, Bureau of Labor Statistics, CPI-U “food at home” for cities under 50,000; not seasonally adjusted.

18 U.S. Department of Energy, Energy Information Administration; average statewide cost (cents/kWh).

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Deb Brighton also contributed to this report.

This research was funded in part by the Annie E. Casey Foundation and the Public Welfare Foundation. We appreciate their support. The findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the views of our funders.

Vermont’s 2009 Budget: The State Should Step In, Not Step Back

Posted by rob on March 1, 2008 at 4:57 am

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Jack Hoffman and Paul Cillo (March 2008)

Montpelier is in the middle of its annual budget battle. In January, Governor Jim Douglas told Vermonters how he would balance the state budget for fiscal 2009. By late March, the House will unveil its version of a balanced budget. In the meantime, the public has been left to sit by and watch the line-item by line-item skirmishes between the administration and the Legislature. Should Medicaid premiums be raised? Should town highway aid be cut? Should Vermont lease the state lottery?

What’s missing is a frame that would help Vermonters understand what the squabbling is all about. Montpelier understands that the state is facing a difficult time for the next year — and probably longer. But no one has painted the big picture in a way that the public can see the problem and weigh the options for addressing it.

In this report, we attempt to paint the big picture for 2009; describe and analyze some of the budget-balancing strategies being proposed; and discuss how this process could work better in the future. We recommend the state:

• Publish current services budgets to make the state’s fiscal situation clear to Vermonters.

• Include the use of reserves, bonding, and targeted tax increases to respond to this economic slowdown.

• Develop a long-term budget strategy instead of

reactively adjusting spending to available revenue.

The state budget is more than a list of spending priorities for the ensuing year. It’s a critical policy document that shapes where Vermont will be next year, the year after, and five or 10 years from now. The state’s political leaders have a responsibility to recast the budget debate so that average Vermonters — and even lawmakers who are not on the Legislature’s Appropriations Committees — can join the discussion about where the state is headed, how it should treat its citizens, and what kinds of services it should provide.

The 2009 Basics

The governor didn’t mention the word “deficit” when he presented his budget in January, but that’s clearly what his administration and the Legislature are trying to avoid. Their problem is that revenues are projected to drop next year, which means there will be no new money to cover the normal spending increases caused by inflation and population growth.

General Fund taxes are forecast to decline next year compared with this year (Figure 1). The drop is small — about $1 million out of total projected receipts of $1.18 billion — but rare.¹ In the last 30 years, General Fund tax revenue has declined from one year to the next only a handful of times, in most cases after the Legislature cut the tax rate.² Transportation Fund revenues — such as taxes on gasoline and new car purchases — also are projected to be flat. And federal funds, which account for nearly a third of the funds that pay for state services, could be lower next year as well.³

At the same time, costs are going up on fuel and health care the state will have to purchase next year, and state employees are due for pay increases. Making matters worse is the economic crunch. Demand for government services like low income fuel assistance or health care will increase at the same time the funds to pay for those services are shrinking.

There are no official figures on the gap between how much Vermont will take in and how much it will need to meet all of its obligations and maintain existing services at current levels. Vermont does not require the administration to prepare a current services budget in conjunction with the governor’s recommended budget — but it should. A current services budget is a projection of the cost of maintaining the current level of services, with adjustments for inflation, caseload changes, and other factors that are likely to influence costs. When compared with a budget proposed by the governor or the Legislature, a current services budget provides a yardstick to gauge whether the state is meeting its obligations, expanding them, or cutting back.

It’s possible to estimate part of the gap, though, by looking at the governor’s budget proposal. To make expenditures equal projected revenue, the budget calls for cutting and underfunding services, shifting costs onto other payers, deferring expenditures, and raising additional revenue.

It’s evident that the administration saw a gap of at least $59 million that needs to be filled for fiscal 2009 (Figure 2). But that’s not what the public has been hearing. Instead, they have heard about fights over individual budget items. Finding a comprehensive solution to the bigger problem — a potential shortfall of $59 million or more — would be a better approach than tackling each of the small problems in isolation.

Options for Managing the Projected Deficit

The administration and to a lesser extent the Legislature are looking to make do with available revenue — that is, they are “managing to the money.” This approach means that government estimates state revenues first, then cuts back spending when projected revenues are insufficient to cover the projected costs of current services.

But that’s not what people expect from government. When the state is hit by a crisis — a flood or earthquake, for example — citizens rightly expect their government to act. Economic recession, which is the primary driver behind Vermont’s lagging revenues, is an economic crisis that requires government action. In relying heavily on spending cuts in response to a recessionary deficit, both the administration and the Legislature are stepping back at a time when the state should step in.

Here are additional options for dealing with this economic crisis:

Use Rainy Day Funds. Since the mid-1990s, Vermont has maintained rainy day funds for all its major accounts. The official name for these funds is “budget stabilization reserve,” which aptly describes what the money is for. Currently, the state has about $58 million in the General Fund reserve and another $17 million in the human services caseload reserve. The reserves for the Transportation Fund are about $11 million, and for the Education Fund, about $27 million.

This is a good time for the state to use reserves to fill some of the holes in the budget. Any decision to use these funds would require a specific plan to replenish them. But they provide a way to maintain budget stability — that is, continuity of services for Vermonters — when money is short.

Increase Revenues. Despite the instinct states often have to cut spending to balance their budgets, cuts are more harmful to the economy than tax increases, particularly increases on those in higher income brackets.⁹ A temporary tax increase on upper-income Vermonters was a major part of the recovery plan the governor and the Legislature crafted when the state had recessionary budget deficits in the early 1990s. Vermont shouldn’t be afraid to use the same approach in this recession.

There has been some discussion this year about raising revenue, but not on those in the upper income brackets. The governor proposed the partial elimination of a tax break on capital gains, which he estimates would bring in $21 million in new revenue. Legislative alternatives boost this amount by as much as $10 million. But the governor proposed using these funds to pay for tax cuts for those in middle- and upper-income brackets. While eliminating the tax break is good policy, a recession is not the time to lower tax rates on those in upper-income brackets because it reduces the money that could be available to provide state services as demand for them is rising.

The governor called for leasing the state lottery to a private business, which he said could give Vermont a one-time infusion of $50 million. While the influx of money at the outset of the recession might be helpful, in the long run this plan, which has gotten a chilly reception in the Legislature, would depend on increased lottery sales that would come primarily from lower-income Vermonters.

The governor has also proposed raising state revenue by increasing premiums on Medicaid recipients. This wouldn’t increase overall consumer spending that might help stimulate the economy; it just means low income families would pay more for health care instead of paying for some other essential.

Increase Bonded Indebtedness. During the 1990s, when the economy was strong, Vermont used surpluses to pay off some of its debt. That was a good idea. But now that the economy is slipping into recession, increasing state bonding for school improvements, state buildings, or highways would help pay for needed capital improvements and stimulate the economy through job creation.

A Better Process for Rational Budgets

The state budget process should not be an annual squabble over line items or a raid on piggy banks to get through another year. The budget is a concrete expression of the state’s priorities — so a better dialogue with Vermonters is needed to make sure the budget reflects their priorities. Here are two concrete steps that would help make the annual budget process more rational:

Publish a current services budget. The federal government has been using current services budgets for more than 30 years, and about a dozen states have adopted the practice. It’s a way for the public and all lawmakers to see whether government has the means to meet its existing commitments. It also can improve government efficiency by helping to identify services that are either underfunded or overfunded. It is an important document that the public should have.

Manage to a plan, not to the money. The short-term problem with trying to make do with the money available is that it forces government to reduce services just when demand is increasing.

It hasn’t always been this way in Vermont. In the early 1980s and again in the early 1990s, the state ran up big budget deficits instead of making the deep cuts in services that would have been required to bring spending in line with the available revenue. The governor at the time took a counter-cyclical approach to state budgeting. He believed in maintaining slow but steady growth in state spending and wasn’t afraid to raise taxes temporarily when the economy slowed. He also cut spending, but he recognized that the demand for government services increases when times are tough and tax revenues are soft.

There is also a long-term problem with trying to manage to the money and letting the state be at the mercy of the economy: the state cannot plan for the future or determine its own way forward. The poor condition of Vermont’s roads and bridges is a stark example of the pitfalls of managing to the money.

The state can play a vital role in helping the economy, especially by planning, building, and maintaining public structures over the long term. But Vermont can’t play that role if it has to wait each year to see how much money is available.

A better approach — and this is where the public plays its role — would be to envision where Vermont wants to be in the next two, five, and 10 years and lay out a roadmap for getting there. Once the plan is in place, the administration and the Legislature can manage to the plan and adjust revenues and spending to accomplish the goals the state has set for itself.

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Read an op-ed that refers to this analysis

ENDNOTES

1 Economic Review and Revenue Forecast Update, Jan. 16, 2008, p. 24.

2 Joint Fiscal Office, revenue spreadsheet.

3 President Bush’s proposed 2009 budget would cut funds to Vermont, but Congress won’t act until next fall or perhaps even later.

4 Fiscal Year 2009 Budget Recommendations, Fiscal Year 2009 Executive Budget Recommendations Summary, Joint Fiscal Office documents, interviews with legislative and administrative staff.

5 Includes $4.6 million reduction in state funding for fiscal 2009 and $600,000 cut for fiscal 2008.

6 Includes $5.3 million cut in federal and state funds for town bridge projects plus an estimate of the effect of inflation on the cost of highway paving materials.

7 In Vermont statute (33 VSA § 3512) childcare reimbursement rates are based on federal poverty guidelines. The administration is using 10-year-old guidelines. Joint Fiscal Office estimates program costs would increase $6 million if current guidelines were used.

8 Caseload projection for Temporary Assistance for Needy Families (TANF) program for fiscal 2009 is lower than the caseload projection for fiscal 2008 as updated in January 2008.

9 Nicholas Johnson, Budget Cuts or Tax Increases at the State Level: Which is Preferable During an Economic Downturn?, Center on Budget and Policy Priorities, Jan. 8, 2008, available at www.cbpp.org/1-8-08sfp.htm

© 2008 by Public Assets Institute

This research was funded in part by the Annie E. Casey Foundation. We thank them for their support but acknowledge that the findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the opinions of the Foundation.

School-Budget Voters Are Minding Their Own Purse Strings

Posted by rob on February 1, 2008 at 5:21 am

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Deb Brighton and Jack Hoffman (February 2008)

Vermont’s education funding system was created just over a decade ago to correct what the state Supreme Court called “the gross inequities in education opportunities.” Those inequities enabled communities with lots of property wealth to keep tax rates low and per-pupil spending high. Meanwhile, some towns with much less property wealth had the highest tax rates in the state but also the least amount to spend on their students.

That all changed with the passage of Act 60 and Act 68. The funding system is now a statewide system, and Vermont has largely succeeded in eliminating the disparities caused by differences in property wealth, as the Supreme Court ordered. Vermont now has, in the words of Vermont Education Commissioner Richard Cate, “the most equitable [funding] formula in the country.”¹

But has Vermont moved toward equity by promoting irresponsible spending? Does the system encourage some communities to vote higher budgets because they know the bulk of the money will come from taxpayers in other towns? Do the towns that benefit the most from Act 60 — that is, get the best return on their homestead tax dollar — also spend the most? Are lower-income taxpayers driving up spending and shifting the burden onto those who are better off?

These are some of the questions that have hung over Act 60 since its passage in 1997. The Public Assets Institute researched these questions to examine some of the changes that have occurred since the new funding system was adopted and to see if Vermonters were taking advantage of their better-off neighbors.

Despite the seeming advantages to gaming the system, we found no evidence that it is happening. In fact, there are strong disincentives against it.

Here are the major findings of our research and analysis:

• Towns that get more do not spend more. In fiscal 2008, there was a negative correlation between a district’s return from the Education Fund and its per-pupil spending. On average, the more a town received compared with what it paid in, the lower its per-pupil spending.

• The consequences of higher spending fall on the people who approved that spending. When a town chooses to increase per-pupil spending, the tax consequences are, on average, more than 200 times greater on the homestead taxpayers in that town than on property taxpayers in other towns.

• High per-pupil spending was linked to high resident income.² Towns with more high-income residents voted higher school budgets than those with lower-income residents.

Individually, these findings dispel some of the myths that have sprung up around Act 60. Taken together, they paint a consistent picture of what motivates Vermonters when they vote on their local school budgets. How much money comes out of each voter’s pocket appears to be the principal factor in their decision-making, not how much money comes from the other communities through the Education Fund. And individuals’ ability to pay is still a hurdle to equal educational opportunity, as it was in the past.

Even before Act 60, it was evident that taxpayers responded to tax rates. Districts with low rates tended to have high per-pupil spending, and the low-spending districts were the ones with the high rates. Our research suggests that tax rates still matter most, and that taxpayers vote for the rates they feel they can afford. With Act 60 and Act 68, the more a district spends per pupil, the higher the tax rate. That appears to be a deterrent to high spending in towns with less relative income. In communities where incomes are higher — that is, where people can afford to pay more — tax rates tend to be higher.

How the system works

Money in the Education Fund comes from three primary sources: residential or “homestead” taxes, which can be based on personal income or property values; non-residential property taxes; and support from the state’s General Fund. Additional funds come from one-third of the sales tax, the state lottery, and miscellaneous other revenue. In fiscal 2008, 38 percent of the money came from taxes on non-residential property, 24 percent from homestead taxes (income-based and property-based), 23 percent from the General Fund, and the remaining 15 percent from the other revenue sources (Figure 1). Total revenue to the Education Fund was $1.24 billion in fiscal 2008.

The tax rate for non-residential property is fixed in statute, and there is one uniform rate throughout the state. The money going from the General Fund, the sales tax, lottery, and miscellaneous revenues into the Education Fund is determined by formulas set in statute.³

Homestead taxes — that is, the school taxes local residents pay on their primary homes and some or all of the surrounding property — are different. Unlike all of the other Education Fund revenue sources, local voters have control over the homestead tax rates, which can vary from town to town. Homestead tax rates are determined by per-pupil spending, which is based on the budget approved by voters each spring. The more a community spends per pupil, the higher its homestead tax rates.

However, all communities with the same level of spending per pupil have the same homestead tax rates. This is one of the key features of Act 60 and Act 68. It is the mechanism that has helped to reduce the disparities between property-rich and property-poor towns. It also is the mechanism in the system that encourages voters to moderate their spending.

Homestead taxes can be based on income or property value. The homeowner can choose the method that results in a lower tax bill. In 2007, about 65 percent of homestead owners received an income-based adjustment to their school taxes.⁴ Through this mechanism, commonly know as “income sensitivity,” Act 60 and Act 68 have eased the burden of property taxes for Vermonters.

Whichever method is chosen, the rates are the same for residential homeowners in towns with the same level of per-pupil spending. Similarly situated taxpayers will have the same tax rates and tax bills regardless of whether their school district gets back $2 or $10 for every $1 their homestead taxpayers pay into the Education Fund.

In fiscal 2008, for example, any family paying homestead taxes based on $50,000 of household income, living in any town with $10,000 in per-pupil spending, paid $1,163 in school taxes on its home and up to two acres of land.⁵ And any family paying property taxes on a $200,000 homestead, and living in any town with $10,000 in per-pupil education spending, paid $2,249 in school taxes.⁶ Tax rates vary with per-pupil spending, not with the return the community gets from the Education Fund.

The state sets a base rate for both the homestead property tax and the income-based tax. Local voters then can choose to increase per-pupil spending above a base amount that also is determined by the state. Increasing per-pupil spending in a town increases that town’s tax rates.

Towns that get more don’t spend more

We investigated whether the towns that had the highest return on their tax dollar spent the most per pupil — to see if towns were “gaming” the system. You might think — and some people have speculated — that the greater a district’s return, the greater the incentive to spend. This theory follows the rationale that some shoppers adopt at sale time, which is that the more they spend, the more they save. According to our analysis, this isn’t happening with taxpayers (Figure 2).

We looked at the homestead taxes paid by people in each district. This included the taxes paid by people who qualified for an adjustment based on their income, as well as all homestead property taxes. We focused our analysis on the homestead tax because local voters have control over the rate.

As a measure of a community’s return on its tax dollar we compared these homestead taxes paid into the Education Fund to the district’s total education spending to determine the net benefit from the Education Fund.

All but one school district in fiscal 2008 got back more from the Education Fund than the homestead taxes residents paid in. The returns varied from district to district. On average, towns got back $1 for every 31 cents in homestead taxes paid in, for a net gain of 69 cents. The highest return was $1 for every 11 cents paid in. Even the towns of Dorset, Stowe, and Charlotte, where voters’ incomes and property values are high, got back at least 20 percent more than they paid in.

Why taxpayers don’t ‘game’ the system

In order to increase their “take” from the Education Fund, local voters would have to increase the per-pupil spending in their town. But by increasing per-pupil spending, they also increase their own tax bills. Every resident’s homestead tax rate is determined by the district’s per-pupil spending. From town to town, homestead taxpayers with the same level of per-pupil spending have the same equalized tax rates, regardless of whether the town gets a big return or a small return from the Education Fund.

Communities that get back the most from the Education Fund, compared with what their homestead taxpayers pay in, tend to be poorer.⁷ The data show that in fiscal 2008 these communities tended to spend less than towns with higher-income residents even though they were getting a better “return” on their tax dollars. That is consistent with our other finding about the link between spending and family income. If it were true that Act 60 and Act 68 created an incentive to spend more in districts that get more, we would expect to see the highest per-pupil spending in districts that get the biggest return on their tax dollar and the least spending where the return is smallest. The opposite was true.

Tax increases hit hardest at home

Act 60 and the Education Fund created a relationship among school districts that hadn’t existed before. Prior to Act 60, local spending decisions had only local tax consequences. Now Vermont has a dynamic funding system. Everyone pays into same pot, the Education Fund, and everyone draws from it. The actions of one district have an effect on all the others.

How much districts affect one another has been a source of speculation since the passage of Act 60 — and later Act 68. Some people have worried that there is a big ripple effect when spending goes up in districts that get a high return on their homestead tax dollars. The Public Assets Institute decided to examine this effect.

For the analysis, we started with budgets approved for fiscal 2008. Then, one by one, we looked at what would have happened if each district had increased spending by $500 per student. We calculated the tax

effect in all other towns on property valued at $100,000. Our analysis produced two important findings:

• A $500 per-pupil spending increase in one community barely registered in the others.

• The tax effect of the $500 increase on a local homestead taxpayer was more than 200 times that on a taxpayer in another town.

Once again, despite the conventional wisdom suggesting that Act 60 and Act 68 encourage voters in poor towns to take advantage of their richer neighbors, our analysis shows there are strong disincentives built into the funding system that moderate against runaway spending.

Our research shows that if a town increased spending by $500 per pupil, in most cases, the tax increase in other communities would be measured in pennies. When we calculated the average effect, a $500 increase in per-pupil spending in one town would increase taxes by 25 cents in other communities on each $100,000 of property value (Figure 3). That’s a 25-cent increase in the tax bill, not the tax rate.

Meanwhile, homestead taxes in the town that decided to increase spending would go up substantially more. For each $100,000 of homestead value, taxes would increase $56 for local homestead property taxpayers. For those who qualified for an adjustment based on income, their taxes would go up $58 for each $50,000 of household income. For one town to cause a significant tax increase in other communities, voters would have to impose a crushing burden on local homestead taxpayers in their own town.

To the extent that the actions of one town do affect others, the number of students in the district hiking taxes is a bigger factor than whether the town is getting a good return on its homestead tax dollars. A district with 1,000 students, even a wealthy one, has a greater effect than a small school district that is getting a high return from the Education Fund.

There is another mechanism designed to discourage communities from letting the spending get too far out of line. While there is no limit on how much a town can spend, exceeding the state average per-pupil spending accelerates the rise in homestead taxes for local residents. In effect, every $1 of spending above the threshold is counted as $2.

Higher income linked to higher budgets

Act 60 and the refinements that came a few years later with Act 68 have largely succeeded in correcting the inequities in school spending that are caused by disparities in property wealth from town to town. Nevertheless, our analysis found that towns where residents have higher incomes are spending more than towns with lower-income residents.

We ranked school districts according to income⁸ and compared their per-pupil spending. The data showed, on average, that the greater the district’s income, the higher its per-pupil spending.

These findings reinforce the findings depicted in Figure 2. Figure 4 shows the positive correlation between spending and income. Figure 2 shows a negative correlation between spending and the return on homestead tax dollars from the Education Fund. Together they suggest that affordability is an important factor for voters and that people approve tax rates they feel they can afford.

Conclusion

Act 60 has been suspected of driving up education costs by creating incentives for some voters to spend more money. The theory has been that if a community gets back more money from the Education Fund than it pays in homestead taxes, residents will try to increase their return. Our analysis of spending patterns does not support that theory. There was no correlation between high per-pupil spending and getting a higher return from the Education Fund.

Under Act 60, there are tax consequences when voters increase per-pupil spending. Those consequences appear to outweigh any theoretical community benefit to spending more money. There is no incentive for a community to increase its spending in order to shift costs onto those outside the community. In fact, there is a strong reward built into the system to restrain spending — lower taxes.

Finally, Acts 60 and 68 have reduced disparities related to differences in property wealth among towns. This does not mean that all towns or taxpayers — and, consequently, the educational opportunities of all Vermont schoolchildren — are now equal, however. In spite of systemic tax-rate equity, higher-income citizens are still voting higher school budgets, spending more per pupil. Challenges remain in crafting policy that most effectively reduces the inequities facing Vermont’s taxpayers and their children.

Methodology

To calculate the net return from the Education Fund and its relationship to spending, fiscal 2008 data on the net homestead school tax collected from each town were compared with the total amount the town received from the Education Fund. A ratio of the net homestead school tax to the total amount received from the Education Fund was created for each town.

To understand the effect that increasing school spending in one town would have on tax bills in all towns, the net homestead school tax and the amount received from the Education Fund were recalculated for each town with the assumption that the town increased its spending by $500 per pupil. It was assumed that the resulting net cost to the Education Fund would result in an increase in the base tax rates, and this increase was calculated.

To examine whether towns getting higher returns from the Education Fund were spending more per pupil, per-pupil spending was correlated with the return ratio. We found that the towns with a lower return on their tax dollar actually spent more per pupil in fiscal 2008. The Pearson Correlation coefficient was -0.309, and the probability was 0.00% that the relationship could have occurred by chance.

To examine the relationship between income of residents and school spending, we correlated fiscal 2007 spending per pupil with 2006 adjusted gross income per exemption in the town. There is a statistically significant relationship between these measures: the higher the income, the higher the spending. The Pearson Correlation coefficient was 0.341, and the probability was 0.00% that this relationship could have occurred by chance.

END NOTES

1 “School Funding Gap Grows, Report Says,” Burlington Free Press, Jan. 18, 2008.

2 The income measure used is average adjusted gross income per exemption, as reported by the Vermont Department of Taxes in its annual report on personal income tax returns by town for tax year 2006. This measure approximates income per family member. It is one consistent measure of income compiled each year by the Tax Department that provides a means of comparing towns with one another.

3 16 VSA § 4025. Education Fund

4 Vermont Division of Property Valuation and Review, Annual Report 2008, “Property Tax Reduction Payment Summary,” p. 103.

5 Household income, as defined for Act 60 and Act 68, falls between gross income and adjusted gross income. It excludes Social Security and Medicare taxes, but includes certain income that may be deducted on state and federal income tax returns. The income of all occupants of the household must be included.

6 The property values used here are “equalized property values” calculated by the Vermont Division of Property Valuation and Review. Equalized values are adjusted from values listed by the towns and reflect the state’s current estimate of fair-market values.

7 Measured by average adjusted gross income per exemption.

8 Measured by average adjusted gross income per exemption.

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© 2008 by Public Assets Institute

This research was funded by the Annie E. Casey Foundation with support from the Vermont School Boards Association. We appreciate their support. The findings presented in this report are those of the Public Assets Institute and do not necessarily reflect the views of our funders.

Where They Come From; Where They Go

Posted by rob on December 3, 2007 at 5:24 am

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Jack Hoffman (December 2007)

The 1040 forms that people file every year with the Internal Revenue Service provide a lot of information beyond income statistics and tax collections. By tracking Social Security numbers and the addresses from which taxpayers file, the IRS can follow people moving from one state to another. They also can track people moving in or out of the country — at least those who file income tax returns. And the IRS has data on how much income moves as people migrate from one place to another.

According to the latest information published by the IRS, more people moved out of Vermont in 2006 than moved in. However, the new arrivals had more income than those who left — on average about 18¹ percent more per exemption.

The tables below show the movement in and out of Vermont. They include aggregate figures as well as migration to and from each of the other states. The IRS tracks the number of returns filed and the number of exemptions represented by those returns, which is an approximation of the number of people who moved.

It appears that many Vermonters who left didn’t go far away or headed for warmer weather. About a quarter of those who emigrated went to New Hampshire or New York. The next most popular destination was Florida. Much of the movement into Vermont also was from neighboring states. New Hampshire, New York and Massachusetts accounted for about 40 percent of the newcomers in 2006.

What the IRS data don’t show are the age or income brackets of the people coming and going. For a time, the IRS reported the median income of those migrating, which was a better indicator of the income of the average person or family coming to Vermont or moving away.

Knowing the age and income of families would help to answer some important questions about demographic changes affecting Vermont. There has been anecdotal information — and considerable worry — about young Vermonters leaving the state. It would be useful to have hard data to test that assumption. It also would be good to know who the people are who are moving to Vermont. Even more important would be to learn why they are coming to the state. (A new study done by the Federal Reserve Bank of Boston, Is New England Experiencing A “Brain Drain”? offers new information about young professionals in the region.)

Here are the migration figures for Vermont for 2006. Figure 1 shows total figures for movement in and out of the state. Figures 2 and 3 provide a breakdown of where Vermonters went after they left the state and where the newcomers had lived previously.

Footnotes

1 The  original report said that new arrivals to Vermont had, on average, 15 percent  more income per exemption than those who left the state. Their total income  was 15 percent greater than those who left, but the income per exemption was 18 percent greater.

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Vermonters’ Incomes Outpaced School Taxes (1996-2006)

Posted by rob on December 2, 2007 at 5:27 am

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Paul Cillo and Jack Hoffman (December 2007)

School districts’ spending increases are slowing.

Even before the Legislature passed a law last session designed to pressure communities to curb the growth of education spending, Vermonters had started to act on their own. Data from the Vermont Education Department show that school spending growth has been slowing for the past four years. In the 2005 fiscal year,¹ total education spending — which is the key variable that determines towns’ tax rates —  rose by 6.6 percent over the previous year. For the current year, fiscal year 2008, the growth rate has dropped to 4.1 percent (Figure 1).

At the insistence of the governor, the Legislature approved a new process for the adoption of local school budgets. The new rules, which do not take effect until fiscal 2010, will require a two-part vote by local residents in some instances if the proposed budget increase exceeds a certain inflation index.

The law intends to cap school budget increases at a little higher than the inflation rate. (If the law were in effect now, growth would be capped at about 4.3 percent.) Without a preview of the index for the next two years, it is difficult to know how individual school districts will be affected. However, if the recent trend continues, the overall growth rate of school budgets could fall below the proposed cap even before it takes effect.

Despite the focus last session on school budget growth, that isn’t the major factor driving local school tax rates in many towns. Since 1997, per-pupil spending has been used to determine each town’s tax rate. While spending is part of the equation, student enrollment is also a critical factor in determining per-pupil spending. Under Vermont’s current school funding system, a school district that was adding students could have a substantial budget increase and no increase in tax rates. The flip side of this formula, which has been the case in many Vermont communities, is that local residents may see relatively big jumps in the tax rates even though school spending rises only slightly. That is because the school-age population has been shrinking in towns across the state; with fewer children in a school, even if the budget stays the same, per-pupil spending —  and therefore the tax rate —  is driven up.

But even against this wave of declining enrollment, the growth in per-pupil spending has been slowing. For the 2005 fiscal year, per-pupil spending rose by 7.7 percent. This year the rate of increase was 5.8 percent.

School taxes as a percentage of income are dropping.

Vermont ended its reliance on local property taxes to fund education with the passage of Act 60 in 1997. Since then, property has been taxed on a statewide basis, and a majority of Vermont homeowners have had the option of paying all or most of their school taxes based on their household income rather than the value of their homesteads. Critics of Act 60 – and a companion law, Act 68, passed in 2003 – have alleged that the new funding system has led to runaway education spending that Vermonters simply cannot afford.

The available data paint a different picture, however. Figure 2 shows the growth in Vermonters adjusted gross income (AGI) between 1996 and 2006. On the next line, it shows the growth in net school taxes paid by Vermont residents over the same period.

Vermonters’ net school taxes represent the final amount state residents collectively paid in school taxes. Until this year, many Vermonters first paid their property tax bills and then received a refund from the state after calculating their school taxes as a percentage of their income. “Net school taxes” was the amount residents paid after the refund. Beginning in 2007, town tax bills reflected the net school tax amount without the need for a refund.

As Figure 2 shows, since the passage of Act 60, Vermonters’ incomes have grown at a faster rate than their school taxes. Additionally, the percentage of Vermonters’ incomes that they collectively spend on school taxes has dropped from 3.7 percent in fiscal 1996 to 3 percent in fiscal 2006.

1 July 1, 2004 to June 30, 2005

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The Governor’s Budget Release: Earlier is Better

Posted by rob on December 1, 2007 at 5:32 am

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Paul Cillo and Jack Hoffman (December 2007)

Everyone who is part of the state budgeting process needs timely information. The Vermont Legislature can gain precious time for itself — and for the public — by moving up the deadline for the annual release of the governor’s budget.

Each session of the Vermont Legislature begins in January, and soon after lawmakers have gathered in Montpelier, the governor delivers the budget address to a joint assembly of the House and Senate. This address marks the first time legislators and the public get to see how much the governor is proposing to spend and for what purposes.

Approving a budget is one of the Legislature’s most important jobs. Without a budget passed by both the House and Senate, state government cannot operate. Nevertheless, Vermont’s citizen Legislature is expected to do this critical job in a relatively short time.

By statute, the governor is required to present the budget by the third Tuesday of each legislative session. Depending on when New Year’s falls, that date can be as early as the 17th or as late as the 29th.  In 2008, the deadline for the budget address will be Jan. 22, and the governor announced recently that that would be the date of his speech and the release of his plan for spending more than $4 billion in the next fiscal year.

Given the usual pressure for the Legislature to adjourn by early spring, that won’t give legislators or the public enough time to review the governor’s proposal and respond with their own priorities for spending the taxpayers’ money.

End-of-session pressure marginalizes most lawmakers and citizens.

In Vermont, the legislative part of the budget process typically begins in the House. The House Appropriations Committee takes up the governor’s budget as soon as it is delivered. The committee hears public testimony, questions administration officials, and reworks some of the governor’s priorities. The full House then debates and votes on the bill and passes it on to the Senate, where it goes through a similar process. After the Senate adopts its version of the Appropriations Bill, the two chambers have to resolve their differences and come to a compromise. The compromise bill must ultimately be approved by the full House and full Senate. Typically, that occurs in the final hours of the final day of the session.

Rarely is an Appropriations Bill vetoed by the governor. As the House and Senate Appropriations committees are making their adjustments, administration officials closely monitor the changes from the governor’s proposal and work to keep them to a minimum. The bill, which is typically the last to be voted on each session, is in fact a compromise among the House, the Senate, and the governor.

The administration has more than six months to prepare the spending plan. However, that work is done without any direct input from citizens. The budget address is the first time both lawmakers and the public get to see what the governor wants to do. And only then do voters and advocates get to weigh in on the proposal; that process takes place in the Legislature.

A plan to spend more than $4 billion is a lot to digest — even for experienced legislators. But by late April or early May, the pressure begins to build for the Legislature to wrap up its work and adjourn for the year. The governor, regardless of political party, is typically among the first to start calling for the Legislature to go home, often citing the daily or weekly cost of keeping the session going. The pressure to adjourn creates a fast-paced, end-of-session process that leaves most legislators and citizens out of the important decision-making. Beginning the budget process earlier in the session would relieve some of the late-session pressure  and make the process more accessible to citizens.

Recommendation: Move the deadline for the budget address to the second week of the session.

The statute establishing the deadline for the governor’s budget address that took effect in 1988 reads:

32VSA§ 306. Budget report

The governor shall submit to the general assembly, not later than the third Tuesday of every annual session, a budget which shall embody his or her estimates, requests and recom mendations for appropriations or other authorizations for expenditures from the state treasury.

Over the past 20 years, there have been four different governors. While all four governors have operated under the same statutory requirement, the governors prior to 2002 typically submitted their budgets well in advance of the deadline. By doing so, they started the legislative budget process earlier in the session. The sessions on average were shorter.

As Figure 1 shows, from 1988 to 2001, the sitting governors submitted their budgets to the Legislature on average on the sixth calendar day of the session. From 2002 to 2007, the governor’s budget was submitted on the 17th day — 11 days later. Coincidentally, the sessions have lasted longer, on average, in the past six years than in the previous 14. As the chart shows, the average length of the session from 2002 to 2007 was 10 days longer than the average session from 1988 to 2001. Also, the percentage of the session that has elapsed by the time the governor delivers the budget has more than doubled in recent years.

Moving the deadline for the budget address to the second week of the session would give the Legislature and the public crucial additional time. The first few days of the session are taken up in organizing activities, especially at the opening of a new biennial session when newly elected members are getting their bearings. But by the second week, most legislators are eager to get down to business. There is no need for them to wait another week before they see the budget. And, as in the past, the governor can always deliver it sooner.

Recommendation: Release the official revenue forecast sooner.

The official estimate of how much revenue the state expects to collect for the year — the revenue forecast — is revised each Jan. 15 and updated on July 15. This is when the administration and the Legislature meet to agree on this figure, which is used in deciding how much money is available for the budget.

Past administrations have released their budgets in advance of the January revenue forecast (Figure 2).  In those years, lawmakers adjusted spending plans when the revenue estimates were released. In recent years, the January adjustment has been an increase over the previous estimate rather than a decrease. That may explain why the budget address has gotten later: the upward adjustments make it a bit easier for the administration to balance the budget.

If the governor wants this revenue estimate available before releasing the administration’s budget proposal, then the deadline for the official revenue forecast should be moved up, too.

If the revenue revision were done in the first week of January, the budget address deadline could be moved from the third Tuesday of the session to the first Tuesday afte