Deputy Transportation Secretary Sue Minter summed it up best in a New York Times story last week. The Shumlin administration received well-deserved front-page kudos for getting the state’s highways and bridges fixed and functioning in record time.

“The attitude,” said Minter, “was, ‘We’ll do the work and we’ll figure out how we’re paying for it, but we’re not waiting.’”

In other words, the administration was committed to rebuilding the state’s infrastructure after the flood regardless of where the money was coming from. That was the right attitude and it’s not a surprise that it got results.

It’s the opposite, however, of the usual manage-to-the-money approach where the state estimates its annual receipts at current tax rates and then decides what it can and can’t do.

We’re still waiting, for example, for the state to investigate the backlog of reports alleging abuse and neglect of elderly and disabled Vermonters. Organizations representing the victims felt compelled to sue this week to force the state to take action. We’re still tying to figure out how to pay for state policies that we know will reduce poverty—11.7 percent of Vermonters lived in poverty in 2010, up from 9.4 percent in the 2000 Census. And we’re still waiting to have adequate and affordable childcare for Vermont’s working families.

If we had managed to the money with post-Irene repairs, we would still be reading about impassable highways and stranded residents. The state would still be in crisis.

And in fact, the state is in crisis, but not in ways that make headlines. At least 70,000 of us live in poverty, and our middle class is losing ground. But our elected leaders aren’t showing the post-Irene, can-do attitude to tackling these problems.

After Irene, the state had a clear goal of rebuilding roads and bridges and our public officials kept at it until we achieved those results. We need to bring the same approach to the rest of state government and to state budgeting. Instead of allocating a certain sum each year to anti-poverty programs, the Legislature should adopt a budget that will reduce poverty. Instead of arguing that we can’t afford to hire more investigators, our political leaders should be saying we can’t afford to allow elderly or disabled Vermonters to be abused or neglected.

In other words, Montpelier needs to use the new thinking that guided the flood recovery – a commitment to results – to create a state that works for all Vermonters.

While he doesn’t frame it that way, Margolis points out that Gov. Peter Shumlin, in a speech at the University of Vermont last week, urged the school to focus on preparing students for business, without mention of the arts, culture, or philosophy. The governor didn’t use the word “citizen” once in his speech about the “better results” the state should expect from its university.

The governor’s remarks reflect a perspective that runs deep these days among members of both major parties—in the Vermont State House, in this administration, and in the last administration.  It’s a money-first, people-second view that underlies policies that affect Vermonters’ lives every day.  As we pointed out in a report last year and in an op-ed last month, the state budget process now focuses on doing what we can for Vermonters with available revenues, instead of starting with a vision of the kind of state Vermonters want and need and adopting fiscal policies to achieve that vision.

Tax policy has become a mindless mantra of “no new taxes” even in the face of greater human need, the greatest income disparity in 80 years, and a declining middle class in Vermont. Economic development has come to mean more business tax breaks rather than public investment in a society that produces widely shared prosperity. Now the governor wants to bring this thinking to education.

The irony is that Governor Shumlin’s liberal arts education did not have the narrow focus he is encouraging Vermont’s university to adopt. Buxton, where the governor spent his high school years, educates each of its charges “to live a fully conscious, responsible life” — not exactly job training.  And his alma mater, Wesleyan University, boasts “[f]reedom, rigor, intellectual experimentation and the desire to make a positive difference in the world” as the Wesleyan Experience.

These institutions are focused on developing human beings to be productive members of society.  While that might involve a life in business, it might also be in the arts or public service or politics, but always as a critical thinking, participating citizen.

Occupy Wall Street has rightly demonstrated to the world how the current focus on money is leaving people behind.  The balance between money and people is tilted toward money in Vermont as well.  And while philosophers still argue about it, we can be confident that the purpose of life involves a lot more than cash.

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.

– Talking About the Middle Class
– A Double-Dip Recession?
– The Rich Stay Put
– Let’s Level with Vermonters
– Your Tax Dollars at Work

Continue reading August 2011 Update

Level funding: The words suggest two things: no cuts, no increases.  For that reason, politicians love to use them. But what does level funding really mean?

Any one of three different things, depending on the speaker and the context.

1. We’ll maintain services, hold the status quo: In hard economic times like these, maintaining existing levels of service usually requires higher spending. More Vermonters need services, and some costs are difficult to control, like oil and health care. Providing the same services from year to year can require a 5 percent to 7 percent increase in dollars spent.

2. We’ll keep up with inflation: Even though inflation is low these days—2 percent in the Northeast in 2010—prices are rising. Level-funding the budget in real terms—that is, after adjusting for inflation—will result in somewhat higher spending. But there also will be services cuts, thanks again to costs that rise faster than general inflation and also to increasing human need. State officials like to say that they can make up for the difference through greater efficiency. That’s possible once in a while, but not year after year.  Using this definition, level funding means real cuts to state services.

3. We’ll spend the same next year as this year: If the state spends $1.2 billion for General Fund services this year, a budget of $1.2 billion for next year would result in even deeper cuts than with the inflation-adjusted approach. Again, there are some increases that simply can’t be avoided, and covering those increases means taking bites—big ones—from other areas of the budget.

At best, the term “level funding” creates public confusion. At worst, it’s an opportunity for mischief. The citizen thinks: “Phew, at least we won’t see budget cuts this year.” The speaker means: “We’re making aggressive cuts again.” Our advice: Strike “level funding” from the official fiscal lexicon and tell it like it is.

That’s not surprising. Legislatures rarely make big changes to what a governor proposes. The fights that generate the most heat often are over relatively small amounts of money.

But you can see for yourself. Four versions of the fiscal 2012 budget are now available for a side-by-side comparison on Vermont Transparency: the governor’s proposal, the House-passed plan, the Senate plan, and the final compromise between the House and Senate that was passed and sent to the governor on May 6, the last day of the 2011 session.

Visitors to the site can see how much was appropriated by line item for each of the major functions of state government: general government, protection, human services, labor, education, natural resources, commerce and community development, debt service, and transportation. They can view the appropriations from all sources of funding, including federal funds. And they can look at appropriations by individual funding sources, such as the General Fund.

The side-by-side comparisons are available on the Current Session page. For those who want to see how this year’s appropriations compare with prior years, budget data going back to 1994 are available on the State Spending page.

Today, Vermont can avoid deficit spending by using its rainy day fund. Instead it is refusing to, making drastic services cuts instead. “I don’t know what they’re waiting for,” Hoffman told the Times. During this economic downpour, the funds remain full to capacity, with $55 million of reserves in the General Fund alone.

In this issue:
– Tax Flight? Forget About It
– One Budget, Two Big Problems
– Mixed News For Working Vermonters
– No Tax Reform This Year
– A Third Way to Tackle the Federal Deficit

Continue reading April 2011 Update

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.

We also hope the Legislature will follow through on the recommendations of the Blue Ribbon Tax Structure Commission. The commission proposed some sensible changes to the income tax, which should make it easier to understand. However, the rates recommended by the commission need to be adjusted to make sure the income tax, which is our fairest tax, continues to generate at least as much money as it does now.

The Legislature also should fix the sales tax by eliminating the exemption for services. Without this necessary change, revenue from the sales tax won’t grow with the economy because in Vermont, as elsewhere, consumers spend more on services than they do on taxable goods.