Vermont’s unemployment rates remain low, the real estate market is finally bouncing back and income tax revenues are slowly climbing back up as the state crawls out of the Great Recession.
But in spite of those gains, state revenues continue to lag behind state spending.
The so-called “alligator smile,” a graph that shows the gap between the state’s revenues and expenditures, is back. The smile widened in 2009 and has never completely been wiped away. Year after year, lawmakers have narrowly closed the gap with one-time funds. This year, however, state officials warn that that may not be possible because federal funding is beginning to wane.
Federal funding accounts for 35 percent of the state’s total spending of $5.2 billion.
Steve Klein, the director of the Joint Fiscal Office (the nonpartisan arm of the Legislature that crunches numbers for lawmakers), gave the House Institutions and Corrections Committee a 15-minute glimpse into the alligator’s mouth.
The view down the gullet isn’t pretty. Click here for Klein’s slideshow presentation.
Klein explained to lawmakers that revenues (the bottom jaw of the mouth) are climbing slowly, but are not projected to keep pace with current spending level trends, based on a 3.5 percent annual average increase, for the foreseeable future.
Last year, lawmakers and the Shumlin administration came up with $55 million in one-time monies to cover the discrepancy. In fiscal year 2015, there are more pressures, fewer options at the outset and a gap figure that is now hovering at $70 million.
The rainy day reserve of $12 million, Klein said, must be used in budget adjustment to cover excess spending for the fiscal year 2014 budget.
At that point, Rep. Cynthia Browning, D-Arlington, interrupted Klein. “I thought that was a real reserve for an emergency, not the budget adjustment,” Browning said.
“That is an issue, when you use that fund it is an issue,” Klein replied. “You could reduce spending and leave the reserve and that’s a choice you have to make.”
Making that choice — of cutting or not — was the subtext of Klein’s speech. But lawmakers have direct jurisdiction over only one quadrant of the budget, the General Fund, which in fiscal year 2014 (the current year from July 1-June 30) was $1.83 billion, including tax expenditures, i.e. tax exemptions.
About 36 percent of the General Fund goes toward K-12 education and Medicaid. Another 26 percent of the fund is for tax breaks or exemptions for sales, property and income taxes. That leaves roughly $700 million for the rest of the state’s operations. Of that amount, the state’s prison system eats up $130 million. The remainder? Roughly $570 million.
Still seems like a lot of money, unless considered in the context of the bills now coming due in the General Fund column. Here is a sampling of the pressures that are driving a wedge between revenues and spending:
- The state’s share of the federal Medicaid match is expected to increase by $16 million. The state’s unemployment rates remain low and so the feds have increased the state’s percentage match for the Medicaid program.
- The feds reduced funding for the Low Income Heating Assistance Program (which got a boost at the beginning of the recession) last year, and the state made up the difference. Shumlin announced in an Emergency Board meeting on Thursday that his administration and the Legislature would commit to a total of $8.1 million (up $2 million from last year). The federal government will contribute $17 million, state officials say.
- Technology is costing the state $10 million more than expected.
- If the Middlesex secure facility for psychiatric patients stays open after the new Vermont Psychiatric Care Hospital stays open, that could cost the state an additional $4 million to $13 million.
- Additional exchange funding from the state could run as much as $8 million.
- Debt service is going up $4 million.
These numbers do not include the built-in $55 million gap left over from fiscal year 2014, or federal reductions.
In anticipation of another tight budget year, the Shumlin administration has again asked department commissioners and agency secretaries this fall to level-fund their budgets. Level funding, given the increases for employee pay, energy and other operational costs, is in effect a cut.
In a letter to state officials, Jeb Spaulding, the secretary of the Agency of Administration, wrote: “Federal reductions — under sequestration and otherwise — are likely to become the ‘new normal’ for the foreseeable future, putting pressure on state programs that rely on federal participation and creating demand for state resources in policy areas that had previously been outside of our responsibility.”
Spaulding says growth in entitlement and “formula-driven spending” in human services and education are driving most of the growth in state expenditures.
The state must reduce its reliance on one-time funding this year, he says.
Jim Reardon, the commissioner of the Department of Finance and Management, says he doesn’t see federal sequestration cuts going away.
“We haven’t begun to feel the full pinch of sequestration yet because some programs carried forward additional funds,” Reardon said in an interview.
“Our ability to go in and backfill for lost federal funds is not real,” he said.
Here’s a look at other pressures that will be carried forward from the current year’s General Fund budget:
- Teachers retirement obligations. Health care costs are eating into the retirement fund. At this juncture, teachers retirement is only 60.5 percent funded. Over the last decade health care costs, for which there is no reserve, have jumped from $6.6 million in 2003 to $22.5 million in 2013. The state’s contribution to the fund in fiscal year 2013 was $68.3 million. Actuaries recommended a $71.8 million contribution from the state in 2014; of that $26.5 million will go toward health care costs for retirees.
- In fiscal year 2014, pay for Vermont State Police went up 18 percent or $25 million, but reduces the impact on the Transportation Fund.
- Fee for space for state employees, a total of $28.3 million, increased 7.3 percent in 2014.
- Current use went up 6.5 percent in 2014 and will cost the General Fund $13 million.
CORRECTION: We incorrectly reported that current use would go up an additional $13 million; we also incorrectly reported that an increase in trooper pay would impact the General Fund.