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

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.