Though other states around the country have posted much higher tax receipt losses (last year the projected budget gap in Maine, for example, was $1 billion), Vermont has also experienced significant economic fallout over the last three years of the Great Recession.
When residents’ incomes drop, income tax collections fall proportionally. State spending meanwhile was on an upward trajectory, outstripping tax receipts by about $150 million on average each year for the last four years.
Until this year. Gov. Peter Shumlin and Democratic leaders in the Legislature bent the growth curve when they agreed to spend about $75 million less in General Fund dollars (state money derived from income taxes) on government services. The actual spending level in fiscal year 2012 will be 5.7 percent less than the total amount the state spent in fiscal year 2011 (including federal stimulus funds).
This significant reduction in expenditures comes at the end of a long slog through swampy economic times that could continue into fiscal year 2013. For one thing, the budget gap stubbornly keeps popping up, no matter how hard state officials try to quash it. Next year’s projected gap is $70 million. Add to that the prospect of federal program cuts, and it’s likely that the gap will yawn wider than predicted.
A short history
Since 2008, the state has slashed agency budgets, eliminated 10 percent of the state workforce, asked state workers to accept $1.3 million in retirement concessions and a 3 percent pay reduction, asked teachers to contribute an additional $15.3 million a year toward their retirement fund, and cut $14 million from the nonprofit designated agencies that provide mental health services and programs for the developmentally disabled.
For a while the federal government softened the blow. The funding for the American Reinvestment and Recovery Act was used to shore up state programs. But this year the federal money dried up, with the exception of $40.5 million in carryover funds for transportation infrastructure.
Last fall, the fiscal year 2012 budget gap grew from about $150 million to $176 million by January.
The state had four basic options as the recession deepened: cut budgets, raise revenue, rely on one-time monies and/or dip into the stabilization fund (also known, incorrectly, as the rainy day fund).
While Gov. Jim Douglas, a Republican, was in office, the state focused on budget reductions. In 2009, Douglas and Democratic lawmakers lowered income tax rates slightly and tussled over an increase in the capital gains and estate taxes. The governor won. Last year, the Dems (House Speaker Shap Smith and then-Senate President Pro Tempore Peter Shumlin) relented under pressure from Douglas and repealed the taxes.
More of the same
The governor’s office changed parties in January, and the recession continued to cling. The more things changed politically, this year, however, the more they seem to stay the same. Gov. Peter Shumlin, a Democrat, promised during his campaign not to raise income, sales or property taxes, and, determined to keep a steady hand on the fiscal tiller, the new governor kept that pledge.
The Democratic leadership team helped Shumlin stay the course; they decided at the outset of the session not to raise “broad-based” taxes and not to tap the stabilization fund. Instead they found other solutions to the budget gap, much to the surprise of Richard Heaps, a conservative economic analyst with Northern Economic Consulting, Inc., based in Westford.
“For the most part the deficit was closed by not relying on taxes,” Heaps said in an interview. “Taxes were a small percentage of the solution. If you would have asked this question in January, I would have said we would have relied on taxes more than we did.”
Instead of increasing income or sales taxes, lawmakers tapped another source of revenue – hospitals, insurance companies, nursing homes and home health agencies.
Heaps says though it was counterintuitive to tax providers at the same time the Shumlin administration professed a commitment to cutting health care costs, it was time to find some new revenues.
“The answer is, you go to where the money is, and there’s lots of money in the medical sector, and that’s why that was tapped,” Heaps said. There’s no question that the cost will be passed on, he said, but “we won’t see it.”
By the numbers
Lawmakers made up the $176 million difference through $87 million in more cuts, $60 million in one-time funding sources and the $24 million in taxes on medical providers.
The cuts included:
- A $23 million reduction in the General Fund transfer to the Education Fund;
- A $4 million transfer to the Transportation Fund (rest areas are now part of the Transportation budget, not the General Fund budget);
- A $38.68 million cut to Agency of Human Resources programs;
- $3.32 million in Department of Corrections savings;
- $4.1 million forgiven in interest payments to the federal government for unemployment insurance;
- $1.7 million “other”
- A $12 million reduction in state labor costs, including $2 million from private contracts, $1.3 million in additional retirement contributions from workers, $5 million through employee attrition and accompanying hiring freeze, $2 million through a voluntary flex time program, and health care savings.
A missed opportunity
This is the only the third time in the last 30 years that the state has had a year over year reduction in spending, according to Paul Cillo, president and executive director of the liberal Public Assets Institute, a nonprofit that specializes in fiscal analysis of state government.
“It’s a milestone that they’re doing this at this point,” Cillo said. “There hasn’t been much noise about the cuts — it’s been pretty quiet.”
The $87 million in cuts, Cillo said, will have major long-term impacts on Vermont.
“It’s been a hard story to tell in the midst of fiscal difficulty, but we’re going to be living with the impacts for years,” Cillo said.
Cillo said people will suffer as a result of what he called “major cuts” to state services, including care for mentally ill, developmentally disabled and physically disabled Vermonters. As the system of support for relatives who care for disabled and mentally ill Vermonters erodes, more people will end up on the street or in jail, Cillo warned.
“People go home thinking the budget is balanced, they feel good about that but the problems will happen in the future,” Cillo said.
The $23 million reduction in the General Fund transfer to the Education Fund will be permanent. Cillo said that reduction will mean significant cuts for schools or higher property taxes or both. A penny on the statewide property tax rate is worth about $10 million; the $23 million would have to be made up for in a two penny increase in the tax rate unless schools reduce their spending by that amount.
The health care reform legislation, however, has set the state on “a course to solve a problem that’s been intractable for years.”
Cillo said the shift to a single-payer system has “huge budget implications.”
“Health care cost increases have been gobbling up all the capacity of the budget,” Cillo said. “(As a result), effectively we were cutting budgets before the recession started.”
A breakdown of the Agency of Human Services cuts
The Department of Vermont Health Access, which manages the state’s Medicaid programs, will see the largest of the AHS cuts, with a reduction of $16.8 million.
- $5 million to the Catamount Health program through a 9 percent reduction in reimbursements for providers, limiting administrative expenses to 6% of overall premium and a state savings “differential” adjustment of 11% based on the carriers’ lowest premium; CORRECTED
- $5.9 million in reduced pass through Medicaid money to hospitals;
- $2.3 million in changes to the Medicaid program, including limits on over-the-counter medications, radiology authorization and utilization decreases.
Long-Term Care for disabled or elderly Vermonters
- $1 million in cuts to respite care and support services (budget-writers say these services which are part of the Choices for Care program will be likely reinstated because the program, which prevents Vermonters from going to nursing homes for care, is already saving the state $10 million this year)
Vermont Department of Health
- $2 million in reductions to the tobacco cessation program, immunizations and substance abuse counselors in schools (the funding for counselors was cut in half)
Department of Mental Health
- $3.3 million in funding from the federal government in reimbursements for Medicaid and Medicare should the Vermont State Hospital be recertified (the hospital lost its federal designation in 2003)
- $700,000 in reductions to mental health agencies
Department of Children and Family services
- $3.9 million in funding changes
- Department of Aging and Independent Living
- $3.3 million in cuts to caseload, attendant services and a $200,000 reduction in funding for the Area Agencies on Aging
Department of Corrections
- $6.4 million in savings through a reduction in out-of-state prison costs, transitional housing savings, an increase in the number of federally housed inmates in Vermont prisons, a reduction in the number of Vermonters convicted of misdemeanor crimes who are incarcerated.
Editor’s note: The last two passages of this story were added at 6 a.m. May 13, 2011.
