Overall growth in health care costs have been 8 to 10 percent a year for the last 14 years, and that increase has created a structural problem for Vermont state budgeting.
That was the message Paul Cillo, a former lawmaker and tax and budget analyst, brought to the House Ways and Means Committee at a recent hearing on Vermont’s economic future.
Cillo says General Fund obligations for health care are now about 15 percent a year. Medical costs now represent 17 percent of the state’s gross product. Meanwhile, he said, the state’s revenues are growing at a slower rate.
In a graph showing the state’s parallel revenue and spending trends, in which the state’s expenditures outstrip revenues by $200 million per year in the foreseeable future, Cillo pointed to a green dash line. “(This) shows what spending would be like if we didn’t have to pay for health care cost increases in the budget,” he explained. “So what you see if you take health care spending out of the budget, you end up with something that looks like a cycle, a temporary problem.”
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“Because health care is eating up so much of the budget, and it has to be funded … it creates shortfalls in the system,” Cillo said.
Cillo, executive director of a non-partisan financial research group, Public Assets Institute, told lawmakers that declining sales and fuel taxes are also causing structural budget problems. Revenues from the 6 percent sales tax, he said, have been declining for 30 years. The gas tax is based on a gallonage rate, and over time, as Vermonters drive less and buy more efficient vehicles, the amount raised declines.
“As the price goes up, the percentage collected goes down,” Cillo said. He argued that a percentage tax would be more stable.
“Revenues are growing slower than the economy is and that’s as bad, or worse, than a spending trend that’s growing faster than the economy,” Cillo said.
Cillo suggested that the committee order a study of long-term revenue trends, an analysis of the needs of the state and a study of the structural impact of health care on the rest of the budget.
“This budget won’t balance on a sustainable basis without structural reforms,” he said.
In the short term, he urged lawmakers to take a “balanced approach” to the budget, to raise tax revenues instead of cutting more services.
Cillo also recommended that the committee take a new approach to creating the budget because he says the state’s “excessive focus” on “managing to the money,” or basing spending on how much money the state has generated in revenues from quarter to quarter, has generated short-term thinking around services for Vermonters.
“The evidence of that is, we have spent a lot of time estimating revenues during this recession … and we spend very little time actually” assessing what we need to spend money on, Cillo said. “Managing to the money views Vermonters as taxpayers primarily. As taxpayers, we don’t want taxes to go up, and we’ll avoid that at any cost and try to get the budget to balance with the money we have. The problem is, Vermonters are more than taxpayers, they’re also users of services, and they depend on the government to provide those services.”
Cillo pointed to the Crown Point bridge closure as an example of an instance where 3,400 people depended on a government service – bridge maintenance – in order to get to work every day.
Cillo said the state should consider using a “current services” budgeting method. Under this approach, the state would calculate how much it cost to provide existing services for Vermonters in the previous year and use that as a baseline for creating the next year’s budget.
“We’re not pretending that in order to balance the budget, we’re not cutting the budget,” Cillo said.
