Vermont’s economy weakened but stable; new challenges loom

Tom Kavet, right, says while Vermont's credit rating is still triple-A rated or double A+, the national downgrade makes the overall economy more fragile. VTD/Josh Larkin

Vermont is in good shape financially for the time being. The state has socked away $60 million in the stabilization reserve fund and $30 million in the human services caseload reserve. We have $10 million set aside for federal cuts to the Low Income Heating Assistance Program. Revenues are back up 11 percent ahead of last year’s tax receipts. And our credit rating is the second highest in the country.

Gov. Peter Shumlin and the leadership in the House and Senate have worked hard to create a hedge against a possible debt-ceiling and market-volatility tsunami, but it remains to be seen whether Vermont can stand the torrents of federal budget cuts and potential revenue downgrades as a result of market insecurity.

Like most states around the country, Vermont is in a weakened position. Over the last four years, more than 660 positions have been cut from state government, businesses have been muddling through, credit is hard to obtain, the housing market is soft and jobs are hard to find. Poverty and hunger are on the rise. Productivity is at an all-time high, and yet workers aren’t seeing more money in their pockets. Retail stores, newspapers and restaurants are having a tough time hanging in there as consumer confidence has softened.

The nation could face a doubl-dip recession as a result of the debt-ceiling crisis, the deficit, the European sovereign debt and market volatility.

So what does all this mean for Vermont’s economy? In a press conference last week, Shumlin acknowledged the economic strains the state faces but said the administration is working towards a level-funded budget for next year.

“We’re going to try very hard to present a level-funded budget because we have to,” Shumlin said. “The good news is that means we won’t be making cuts, but the bad news is we aren’t able to restore some of the services that we wish we could as quickly as some might want.”

Tom Kavet, the economist for the Legislature, says while Vermont’s credit rating is still triple-A rated or double A+, the national downgrade makes the overall economy more fragile.

Revenues were down slightly in July, but that’s to be expected in what is a traditionally slow month.

Jeb Spaulding says the state is seeing a slow but steady recovery. ”What’s going on out there is a topic of discussion and conjecture,” Spaulding said. “Both political parties were using it (the debt-ceiling debate) as a means to rev up the base. All that stuff hurts confidence of consumers and businesses.”

“We don’t really know how much of an impact the retrenchment of the federal government could have,” Spaulding said. “It’s certainly put pressure on state budgets and state contractors that rely on federal contracts. Vermont does have fed employees, but not like Virginia and Maryland where they have a bigger problem.

“It’s not the downgrade itself that presents the biggest change for us,” Spaulding said. “First, we didn’t need a rating agency to tell us to get our act together. The question is, are they going to get our act together, and if they do, what is going to be the impact on states?”

Secretary of Administration Jeb Spaulding. VTD/Josh Larkin

Spaulding said cuts to Low Income Heating Assistance Program, community service block grants and water improvements could have a big impact on the budget. “There’s no way we could pick up up all of that,” Spaulding said.

What we try to do is position ourselves to buffer against the most detrimental cuts, Spaulding said.

One of the first changes the administration will face as part of the Budget Adjustment Act is an interest payment on the state’s Unemployment Fund borrowing. The feds had talked about forgiving the state’s interest. This year the state will need to come up with $2.5 million toward interest.

Kavet describes the Standard and Poor’s downgrade as “a lot to do about nothing.”

“People in the market who are trying to beat the market on a daily basis may be burned, but for people who are long-term investors, it didn’t matter,” Kavet said. “I don’t think debt rating by Standard and Poor’s is that pivotal.”

Still, Kavet says he and Jeffrey Carr, the economist for the Shumlin administration, are not rushing to move ahead with a downgrade in revenues, but “they have heightened attention to that possibility.”

Federal cuts to education, entitlement and human services programs pose the greatest risk to Vermonters and state government.

“We’ll be watching closely; if there were near-term cuts, there would be a lot of adjustments, and it would be counterproductive long term,” Kavet said. “There are going to be cuts, and they probably cover a lot of different areas.”

The broadband projects now under way based on stimulus funding are very important economic development projects, Kavet said.

“That critical investment wouldn’t have happened without the stimulus money,” Kavet said.

People pooh-poohed the stimulus, but it was critical to the economy, he said. “We would be in much worse shape now — it would be 1933.”

Cutting back on spending now could throw the economy into a double dip. Kavet pointed to President Herbert Hoover who presided over the Great Depression as an example.