The state’s economists say Vermont revenues will fall $31 million short of projections in fiscal year 2015.
The revenue downgrade represents a 1.8 percentage point drop in anticipated state revenue. Overall growth in fiscal year 2015 will be 3 percent instead of the 4.8 percent gain projected in January.
The revised estimate followed a nearly $9 million budget gap in fiscal year 2014. Revenues came in close to target, but from a different mix of sources than expected. Personal income taxes, along with sales and use revenues, were down; receipts from the Department of Financial Regulation, which collects on insurance, banking and securities transactions, came in a bit high.
Ultimately the fiscal year ending June 30 was closed with a zero balance with help from the Rainy Day Fund and an unexpected windfall from the estate tax. The estate tax revenue was so high, in fact, there was enough left over to build the Rainy Day Fund back up, ending at $5 million.
Looking back on FY14, state economists lowered their expectations for the future.
Gov. Peter Shumlin emphasized in a briefing with the media Thursday morning that the reduction in predicted receipts in FY15 is a “minor adjustment” to the $1.4 billion General Fund.
Shumlin said he would reduce state spending by $31 million in response to the downgrade. The governor has asked state agencies to reduce their budgets by 4 percent.
There will be no layoffs as a result of the rescissions, Shumlin said. The administration will not touch the state’s retirement or debt reduction obligations. The Education Fund reserve will be reduced.
“We’re going to make this small adjustment to the $1.4 billion General Fund budget by insisting that we not raise broad-based taxes — income taxes, sales taxes or rooms and meals taxes,” Shumlin said. “In other words, we are not going to ask working Vermonters to make this relatively small adjustment by raising tax revenues. Vermonters’ taxes are high enough. We will not shift any of this to hardworking property taxpayers who already find that property taxes are high enough.”
Shumlin said the good news is that “it’s July, not January.” “It gives us almost the entire fiscal year to make this adjustment.”
The governor met with lawmakers later Thursday, and asked the Joint Fiscal Committee to agree to rescissions in the fiscal year 2015 budget.
The governor and Jeb Spaulding, the secretary of the Agency of Administration, said the decline in state tax receipts is caused by national economic trends. Spaulding said the biggest blow was a significant drop in personal income tax collections in the month of April, which is typically the state’s biggest month for tax receipts.
Collections were down by nearly $20 million. If the state hadn’t collected $20 million from an estate tax windfall, lawmakers and the Shumlin administration would have faced the prospect of backfilling a very large hole in the budget at the end of the legislative session.
Tax changes in 2012 had an unanticipated impact on personal income tax receipts nationwide, Spaulding said.
“It was clear back in April that economists across the country had underestimated the effect of the tax strategy changes that taxpayers employed at the end of calendar 2012 that led to by far and away the largest ever April revenue collections in 2013 by far and away much higher than anticipated,” Spaulding said. “They knew that would play out as a wild card in 2014. It turned out that across the country Congress underestimated the impact on 2014. What economists are largely saying now is what we’re looking at is a recalibration of what the take should be from personal income taxes.”
The governor touted the state’s bond triple A bond rating and low unemployment as evidence that Vermont’s fiscal situation is very positive. The state has $65 million in budget stabilization funds and $5 million in Rainy Day Funds that Spaulding said would not be tapped.
“One of the reasons we have one of the best bond ratings in the country is because we balance budgets the old-fashioned way, by making real cuts,” Spaulding said.
The governor emphasized that the state’s revenues are growing, just not at the level anticipated. In a national context, Shumlin said the state’s slow economic growth is not out of kilter.
During the Great Recession, the state saw a drops of 7 percent in fiscal year 2009 and 12 percent in fiscal year 2010 in tax receipts. Since then, the state’s economy has grown, but has not kept pace with state spending. The Vermont Legislature and the Shumlin administration have been dogged by ongoing budget gaps of roughly $50 million to $70 million per year.
Still, in fiscal year 2013, tax receipts were up by $90 million; in 2014, by $46 million; and in 2015 by $35 million.
“We continue to recover, but this has been a slow crawl back from the worst recession in American history and Vermont’s not immune to that,” Shumlin said. “It’s great, 3 percent revenue growth. We’d rather have 4.8 percent but with 3 percent, we’re still going to have the biggest revenue year in Vermont’s history.”
looking back on FY14
Officials and lawmakers saw problems with the 2014 budget even before the fiscal year ended.
Personal income tax receipts fell short by about $20 million in April, normally a month of high collections. Coincidentally, that was the same month estate tax revenues delivered a record high amount.
The timing afforded just enough time for state officials to still get what they wanted by changing state statutes before the fiscal year ended. Priorities included matching funds to secure a federal grant to help health care professionals repay education loans, and Shumlin’s signature Enterprise Fund, $500,000 in loan loss reserves for the Vermont Economic Development Authority, and $4.5 million in possible cash payments to lure businesses to stay in or move to Vermont.
Money for the Enterprise Fund originally was expected to come from surplus, but when a shortfall became more likely, a plan was hatched to redirect estate tax windfalls. Instead of going to the Higher Education Trust Fund, the money first would flow to the medical loan repayment grant, then to shore up the Rainy Day Fund, which at the time was around $8.5 million.
But in the same stroke, lawmakers agreed to appropriate $5 million from the Rainy Day Fund to create the Enterprise Fund, leaving $3.57 million in the reserve.
To close the fiscal year in balance, the Rainy Day Fund was depleted. Extra estate tax revenues then built it back up to $5 million.
The estate tax windfall also plugged the remaining $5.39 million gap in the General Fund budget, to avoid dipping into a different reserve fund that’s held with tighter purse strings.
In the end, $250,000 of estate taxes remained for the Higher Education Trust Fund.
This article was updated at 4:56 p.m. Thursday.