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.

It was refreshing that the governor appears to recognize that improving the efficiency of state government will take time and probably additional investment. The governor reduced his expectations of the savings that can be achieved in 2012 through Challenges for Change, the plan to improve government services while reducing the cost. The goal was a worthy one. But first state government needs to restore its capacity to assess performance and measure whether Vermonters are actually getting better services for their hard-earned tax dollars.

We are cautiously optimistic about the governor’s commitment to improving Vermont’s infrastructure, in particular, its broadband network.  We remember that four years ago, we heard a similar promise from the previous administration: high-speed Internet throughout the state by 2010.  We’re still waiting.

We are disappointed, however, that the governor’s budget relies so heavily on spending cuts, including cuts to human services that will hurt the most vulnerable Vermonters, and cuts for education that will only add to the upward pressure on property taxes. What new revenue the governor uses is mostly windfall revenue—an unexpected surplus from 2011, unanticipated federal funds, and additional taxes on health care providers that will enable Vermont to draw down additional federal money. Unfortunately, the governor has ignored the fact that Vermont has additional tax capacity for the next two years, thanks to Congress’s decision to extend the Bush tax cuts. The extension of those tax cuts will save the wealthiest Vermonters $190 million in 2011 and a similar amount in 2012.

The political rhetoric we’ve heard in recent years about Vermont’s tax system has been misleading. This state actually has one of the fairest tax systems in the country. As more Vermonters understand this, we’ll have a better chance of taking a balanced approach to solving our current budget problems. The commission’s report, which was badly needed and long overdue, is a good first step in strengthening our revenue system so it can support the essential public services that all Vermonters deserve.

The official state projection of the fiscal 2012 budget deficit is $112 million, about 9 percent of projected General Fund spending. This assumes that $33 million in new cuts under the Challenges for Change initiative have already been made for 2012 (they haven’t) and that all $38 million in fiscal 2011 Challenges savings will carry forward into fiscal 2012 (they won’t).

But even if we assume the consensus number is correct, the task of filling this budget gap is a killer.

Here’s why.

The recession started in the middle of fiscal 2008. State revenues nosedived over the next two years; they’ve only begun to recover this year. Federal recovery (ARRA) funds combined with state budget cuts plugged more than 90 percent of the hole between what the state needed to spend to maintain state services and what it took in for revenue during fiscal 2009-2011.

The good news is that the gap is much smaller in 2012 than in the previous years, and revenues are recovering.

The bad news: ARRA funding—which filled more than half of the hole over three years—will no longer be available in fiscal 2012.

More important, though, 2012 will be the fourth year of major budget cutting. The administration is preparing a budget that would reduce state appropriations to about 85 percent of what the state needs to do its job.

In general, the easiest and least harmful cuts are made first—and they’ve been made. There is little left to cut without undermining essential state services to Vermonters.

How did we get here? In short, by mixing up our priorities. Policymakers have followed the fiscal principle called “manage to the money.” This approach suggests that the state needs to function on reduced recession-level revenue even as Vermonters have greater need. Little attention is focused on that increased need.

In other words, the focus of state policymakers has been money—raising and spending less of it. In fact, despite the revenue shortfall, the Legislature actually cut taxes this year. While this might sound good to Vermonters who don’t like the thought of paying more, it is undermining education, health care, clean air and water, transportation, communications—the things people need.

“Managing to the money” is putting money ahead of people. And that’s not only bad for people, it’s bad for the economy.

During the last major recession, 20 years ago, the state put people first and then worked out the money part. It raised income taxes on the wealthiest and other taxes as well. It even ran a deficit for a couple of years. Vermont came out of the recession stronger than it went in.

We’ll have a new administration in January and it needs to get its priorities straight. It has to bring new thinking to the job it is taking on: making government work for Vermonters, not just counting beans.

Continue reading September Update

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.

One of the big boosts to states in the federal stimulus package—American Recovery and Reinvestment Act (ARRA)—was an increase in the federal matching rate for Medicaid expenditures. The match rate varies by state. Before ARRA, the split for Vermont in Medicaid spending was about 60-40, with the feds picking up the larger share. Under ARRA, the federal match rate for Vermont rose to about 70 percent.

These higher match rates are scheduled to expire at the end of this calendar year, which falls right in the middle of most states’ fiscal years. Congress is poised to extend the higher match for another six months—both the House and Senate have included the extension in separate bills—but it’s not yet a done deal. Nevertheless, many states, including Vermont, are incorporating the additional funding in their fiscal 2011 budgets. The budget approved by the Vermont House anticipates an extra $62 million from the higher match rate.

The House bill spends these additional federal funds in the fiscal 2011 budget. The House bill appropriated more federal funding and less General Fund money for Medicaid than the governor did. That allowed the House to put $62 million from the General Fund into the “human services caseload reserve.”

Technically, state dollars have been put into the reserve. But both the administration and the Joint Fiscal Office agree that without the additional federal money, the state would not have the $62 million from the General Fund to put into the caseload reserve.

Here’s the potential rub—and the reason the Legislature should get a second opinion from the federal government: ARRA specifically prohibits the states from using enhanced match rate money for reserves or rainy day funds. The primary purpose of the law was economic stimulus. Knowing that the states had Medicaid obligations and limited funds to meet them, Congress provided money so it could be spent promptly. There is a specific section of the law that addresses reserve funds and federal matching funds, which are known by the acronym FMAP (Federal Medical Assistance Percentages). Sec. 5001.(f)(3) reads:

STATE’S APPLICATION TOWARD RAINY DAY FUND.—A State is not eligible for an increase in its FMAP under subsection(b) or (c), or an increase in a cap amount under subsection(d), if any amounts attributable (directly or indirectly) to such increase are deposited or credited into any reserve or rainy day fund of the State.

The fact that Vermont wouldn’t have $62 million from the General Fund to put in the caseload reserve were it not for the additional federal matching money appears to conflict with the intent of the ARRA law, which speaks to “amounts attributable (directly or indirectly) to such increase” in its matching funds. Both the administration and the Joint Fiscal Office say they don’t see a problem. But it might be prudent to get a second opinion from federal officials.

Another potential problem is the deadline for using the federal funds. In the original bill, the funds were to be used by Dec. 31, 2010, which Congress defined as the “recession adjustment period.” The bills pending in Congress now would push that back to June 30, 2011, but the ARRA law says that the additional matching funds are not to be used for “items and services furnished after the end of the recession adjustment period.”

The administration has talked about using the reserves to replace the Vermont State Hospital, which lost its certification in 2003 and is no longer eligible for federal funding. But that won’t happen before June 2011. The Legislature knows the state is facing another budget gap in fiscal 2012, and the money in the reserve fund is one way to close part of that gap.

It may not be a bad thing, though, if federal officials disapprove of Vermont’s plan for using the extra matching funds. It could help legislative leaders out of the jam they’re in with Challenges for Change, the government reform plan that promises better state services for less.

A revolt is brewing among the rank and file against Challenges for Change. As they learn the details of the plan, it’s starting to look like an elaborate fig leaf that will really mean doing less with less. They also don’t like the fact that they’re being given so little time to evaluate a major government reorganization plan.

The extra federal money in fiscal 2011 could allow the Legislature to delay the cuts imposed by Challenges for Change and take the time it needs to thoroughly review the reform plans. Challenges for Change promises savings of about $72 million in fiscal 2012. If they’re real—and nobody would argue against true efficiency savings—that would be a good down payment to closing the anticipated budget gap.

The former officials, Con Hogan, Tom Davis, and Cheryl Mitchell delivered their message at a State House press conference organized by Public Assets Institute on April 7, 2010. The event accompanied the release of our latest report: 2011 Budget: Cutting the Commitment to Vermonters, which contrasts the state’s response to the current recession to the actions taken by the governor and the Legislature during the recession of the early 1990s.

Twenty years ago, the Vermont raised taxes and put more state resources into human services to meet the increased demand from people struggling in the recession. Today, the Legislature is proposing to put additional federal funds into human services, which was also done in the early 1990s, but it has been cutting state funding.

Con Hogan and Cheryl Mitchell both led the Agency of Human Services in the 1990s. Tom Davis served in the administration of Gov. Tom Salmon and headed the agency in the mid-1970s. They all described a commitment to improving the lives of Vermonters that they see lacking in the current administration and among legislative leaders.

Video clips from the press conference can be seen at vtdigger, the online news service.

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.

He was talking about the options and issues of a sales tax on services in the state.

Citing data provided by the Public Assets Institute, Mazerov pointed out that taxable sales as a percentage of Vermont’s economy have been declining for the past 30 years.  This is largely because Vermont’s sales growth has been in the service sector, and the state taxes goods, but few services.  Only 13 states of the 46 with a sales tax in place tax fewer services than Vermont.

Lagging growth of taxable sales is one of the longstanding problems that have worsened the effects of the current recession in Vermont.   The legislature is working to close a $154 million budget gap for the fiscal 2011 budget, and the Joint Fiscal Office estimates the fiscal 2012 gap at over $250 million.