As the state heads into the economic uncertainty associated with a potential fiscal cliff in Washington, D.C., in January, Stephen Klein, the chief fiscal officer of the Joint Fiscal Office, which works on the state’s budget, said the state had already built in potential federal budget cuts of $14 million.
“In the overall sense, there’s a tremendous amount of caution,” about the state’s finances, said Klein. “While revenues are only 0.55 percent off target, the income tax trend does give us pause, and it’s something we need to watch.”
Even as Finance Commissioner Jim Reardon speaks to public agencies and the general public about their budget needs, said Klein, “there are a lot of pressures in the current budget as it’s funded.”
Reardon spoke to some of those budget pressures in Thursday’s Statehouse fiscal meeting, mentioning likely upward revisions for the state’s corrections and mental health budgets.
After the hearing, Reardon said: “We’re continuing to see spending pressures in human services, primarily related to caseload.” In the hearing he outlined preliminary budget worries from the Department of Children and Families, as well as one-time costs for the state’s loss in a 2011 federal lawsuit about pharmaceutical marketing.
Citing a slight revenue shortfall through lower income tax receipts, public and governmental input into budget building, and uncertainty at the federal level, Klein said, “All three of those create a need to be really cautious in the next few months as we build the budget and develop expectations.”
“This is not like the years where we had fairly dramatic budget gaps and deficits,” he continued. “But it’s certainly a year where we’re concerned.” He said the state is still on track for a $50 million to $70 million budget gap in the General Fund.
In a press release Tuesday, Administration Secretary Jeb Spaulding announced a revenue shortfall of about $2.49 million for the General Fund in October, about 2.37 percent below forecast for the month. Spaulding also noted underperforming personal income tax revenue for the past three months.
General Fund revenues were 0.55 percent short of the year to date projections, going off the latest July forecast.
Economist Tom Kavet, the Legislature’s economist, said the apparent shortfall was due to a technical error with monthly estimates, which are less reliable than yearly projections.
“We’re not attributing the shortfall in personal income tax to primarily economic effects right now,” said Kavet, who explained the shortfall partly to a technology overhaul at the tax department, and a lack of historical data for reliable monthly estimates.
“We’re infinitesimally behind; half of one percent off, it’s almost perfect,” said Kavet. He said it’d take a revenue shortfall of over $10 million from personal income tax monies before serious concern would be warranted.
As for the impending fiscal cliff in January, where several federal tax increases and spending cuts are set to converge abruptly on Jan. 1, Kavet warned that Vermont would not escape a likely slide back into a national recession, with immediate tax increases meaning less disposable income for Vermonters.
But he said that most analysts believed it would be unlikely that the fiscal cliff would actually happen. Kavet called the scenario of an actual fiscal cliff an entirely unnecessary political blunder.
Nonetheless, said Commissioner Reardon, there are some measures the administration could take to prepare for January. “We can track what we think the federal funding reductions may be, and we can decide whether we want to fund some of those with state dollars, or not fund them,” he said.
Reardon said the state had already done an analysis of what sequestration budget cuts, or broad budget cuts across several departments, including heavy defense spending cuts, could mean for Vermont. He added that the analysis would be continually updated over coming weeks.
“But there is a lot of unpredictability, too,” said Reardon. “I don’t know what they might do about taxes, and what that might mean to Vermont. And if action or inaction in Washington results in a downturn in the economy, that’s nothing Vermont can control. … There are some things simply that are out of our control.”
Klein pointed to the administration and Legislature setting aside some reserve funding, for instance to cover the Low Income Home Energy Assistance Program, as one preparation for a fiscal cliff. But he said that monitoring the situation closely is arguably the best that state government can do at this point.
“I think it’s really a question of monitoring right now,” he said. “I don’t think there’s much we can do, because there’s so much uncertainty in Washington.”