Economist says state revenues on target after Irene; Budget gap widens to $80 million

Tom Kavet, right, and Jeffrey Carr. VTD/Josh Larkin

Last of the Tobacco Fund, $6M, used to help balance projected budget; $10 million for autism mandate may be eliminated in fiscal year 2013

So far, so good. That was the message from Tom Kavet, the state Legislature’s economist, on Tuesday in testimony to the House Ways and Means Committee.

Kavet said in spite of the impact of Tropical Storm Irene on hundreds of businesses and homeowners, and the economic uncertainty that is churning national and global markets, Vermont’s tax revenues have continued to plug steadily along and have hit the projected targets in all areas so far – meals and rooms, sales and use, personal income, corporate and property transfer taxes.

The direct impacts of Irene are still unknown, but at this juncture, Kavet said, with 40 percent of tax receipts in for the first 24 days of October, it appears that the storm has not affected state revenues yet. Withholding has been “solid and strong,” the economist said.

“There are no red flags at the moment,” Kavet said. “Right now it doesn’t look like a giant negative.”

Much of the deleterious impact of Irene on the state’s economy has been offset, he said, by some unexpected revenue growth. While many small businesses were wiped out (the state has no definitive figures on just how many yet), the construction industry has seen a resurgence as property owners clean up debris and rebuild. Workers and displaced homeowners have stayed in hotel rooms, pushing up meals and rooms tax receipts up.

Kavet said about 33 percent of towns saw an impact on their grand lists. About $110 million worth of property was affected. At this point, he doesn’t know how much values have dropped as a result of damage from Irene. He expects some values to go up as property owners replace old building stock with new construction.

Though the scope of affected Irene property is sizable, he said it’s small compared with the $900 million in grand list property values that are exempted under the state’s Tax Increment Financing program. The program, he said, was designed to attract investment in blighted urban areas. The bulk of Vermont’s exempted property is in Burlington, Winooski and Milton – towns in Chittenden County that are actually booming.

The larger context

It’s too early to tell whether Vermont’s economy will continue to show signs of slow growth. At this juncture, Kavet says the U.S. is facing a 40 percent change of a double-dip recession. The risk was 25 percent earlier this year.

“We are in a much more vulnerable situation at the close of the first half of the fiscal year,” Kavet told lawmakers.

Vermont has avoided problems that have plagued other states, namely high unemployment rates, mass foreclosures and the worst of the housing value drop. “That’s helped quite a bit” in Vermont, Kavet said. In addition, he said, the state’s mix of businesses has been more resilient in the downturn. Tourism, for example, has remained strong because people who live in the region tend to vacation nearby when gas prices are high and disposal incomes are squeezed.

External factors, including the Greek debt crisis contagion in Europe, could infect the U.S. and give Vermont a sluggish cold, Kavet said. “It’s not like we’re separate and apart,” Kavet said. “We’re at the mercy of national and international trends.”

One of those trends includes ongoing declines in real estate values in 2011 and 2012. At the same time, Vermont’s student enrollments will continue to drop through 2019, and demand for education services, which are funded through property tax revenues, will be very weak, Kavet said.

Cutbacks in federal programs are a likely outcome in a second downturn in four years, he said. “On the federal level, we have to come into balance over the long term.”

One bright spot? Tobacco tax revenues are up above targets by $1.5 million. Kavet said the increase in the cigarette tax, in spite of the Shumlin administration’s dire predictions last year, has not dampened consumer demand.

The state budget

Steve Klein, executive director of the Joint Fiscal Office, explained to lawmakers that the state faces yet another gap year. The JFO and administration consensus forecast for fiscal year 2013, which was issued last week, showed expenditures outstripping revenues by about $75 million. As new information about the Education Fund and teacher pensions became available on Tuesday, that number bumped up to $80 million.

The budget adjustment total for fiscal year 2012 is roughly $20 million.
Klein said the gap number does not include federal budget cuts, reductions to the Low-Income Heating Assistance Program and estimates for Irene impacts.

Over the last four years, the state has seen much higher projected annual gaps between revenues and expenditures. Last year the total was $170 million, Klein said.

“The problem is, we’ve been dealing with these for lots of years, and we’re running out of easy solutions,” he said.

This year Irene is the big unknown. State officials don’t know if Congress will authorize the secretary of the Agency of Transportation to waive a $100 million cap on the federal highway emergency fund. If the cap isn’t lifted, the state could face up to $500 million in long-term transportation repairs to highways damaged by the storm. Under the best-case scenario, the state would be on the hook for $80 million, which it could pay for through about $83 million in additional revenue bonding capacity through the Transportation Infrastructure Bond program.

Klein said the state has $7 million to cover federal cuts. The $30 million cushion in the Agency of Human Services caseload reserve fund, which was originally set aside to offset federal cuts, has been used to defray unanticipated Irene costs.

Budget-writers assumed the $6 million left in the Tobacco Funds would be used to shore up the budget. Klein said the autism mandate, a provision that requires insurers to provide therapeutic treatment for young children with the developmental disability, could cost the state $10 million. He said the administration may ask for a delay in the effective date for the mandate.

The biggest cost-drivers in the budget include upward pressures in Medicaid costs – about $16 million – and a loss of 1.7 percent in funding for the federal Medicaid match – about $19.6 million.

The set-aside of $19.2 million for employee salaries, benefits and pensions includes money for negotiations with state employees and increases in health care and retirement benefits for teachers. Klein said the total figure is likely too low. Teacher retirement costs, alone, will increase $9.1 million, and health care for retires is expected to go up by $3.6 million.

The General Fund transfer to the Education Fund is listed as $6 million.
Pre-trial detention of prisoners will cost the state an additional $2.5 million.