Editor’s note: This commentary is by Tom Pelham, formerly finance commissioner in the Dean administration, tax commissioner in the Douglas administration, a state representative elected as an independent and who served on the Appropriations Committee, and now a co-founder of Campaign for Vermont.
Quite often, small events reveal the larger story. Two recent events at the Statehouse point to the structural weakness of state government’s fiscal footing – self-inflicted weakness created and allowed to fester over recent years.
First, Treasurer Beth Pearce recently announced a fix for the major financial hole in the Teachers’ Retirement Fund. This fund has been in decline over recent years due in part to unfavorable investment returns as well as the fact that health care benefits for retired teachers are paid directly out of the fund without dedicated off-setting revenues to cover their cost. In years past, the Legislature enhanced these benefits for retirees without establishing a revenue source to fund them. For the coming fiscal year, the estimated cost of retiree health care benefits is $28.6 million.
As of June 30, 2013, the Teachers’ Retirement Fund had only 60.5 percent of the funds necessary to support projected teacher retirement benefits. This is a big problem. Vermont has a AA+ bond rating but such underfunding of the Teachers’ Retirement Fund threatens that rating. The treasurer surely understands this and has been clear to all who would listen that a remedy is essential. Yet, she gathered together the NEA and other Statehouse insiders to produce a plan that at best kicks the can down the road.
Bottom line is the governor’s proposal will further weaken the Rainy Day Fund, increase risk for those subject to federal cutbacks and further cost shift Education Fund spending onto local property tax payers.
The treasurer proposes to create a Retired Teachers Health and Medical Benefits Fund and “lend” it $28 million from the state’s cash reserves for 10 years. However, these cash reserves are the very same reserves designated as part of the state’s fiscal safety net called the General Fund Stabilization Reserve and “Rainy Day Fund.” At the end of fiscal 2015, House budget writers project these reserves to have $77.3 million. Thus, should Vermont hit another recessionary rough patch, as is certain to happen, the reserves necessary to weather the storm will be significantly diminished by the treasurer’s proposal, putting the ability to fund necessary state services at higher risk.
Further, the treasurer proposes a $1,072 annual assessment per newly hired teachers. Over the 10 year period the assessment is projected to raise $27.8 million from Vermont’s school districts. Bottom line, this is an unfunded shift of responsibility from the state to local school districts and property tax payers of an obligation created by the state Legislature and currently the statutory responsibility of the state.
Secondly, Gov. Peter Shumlin, later joined by Sen. Kevin Mullin, announces an end-of-legislative session, last-minute “$4.5 million cash incentive program to retain and attract business” a.k.a. IBM. To pay for this new program, the governor would use hoped-for FY 2014 revenues that exceed forecasts. Given that it’s late in the tax processing season, it’s quite likely the governor has the inside knowledge that some excess will occur, though due to taxes on capital gains from a vibrant stock market rather than wage and salary growth from a vibrant Vermont economy.
However, to get this “excess” revenue, the governor and Sen. Mullin must push to the front of the line and elbow away three others currently at the front according to the House-passed budget. These are the Rainy Day Fund, a reserve to counteract federal cutbacks, and the Education Fund. Bottom line is the governor’s proposal will further weaken the Rainy Day Fund, increase risk for those subject to federal cutbacks and further cost shift Education Fund spending onto local property tax payers. You might remember that it was the governor who called for an 8 percent reserve in the Rainy Day Fund vs. the current 5 percent as well as scolded school boards for high property taxes.
Cleary, what the above two proposals reveal is a state government with its back against the fiscal wall and no ability to rearrange priorities to fund the more essential over the less essential. It’s telling that two top tier leaders, the governor and the treasurer, must offer high risk proposals to fix problems or undertake new initiatives because the state’s fiscal resources are already stretched to their limits and overly reliant on multiple millions of one-time revenues.
This is not a recent development. In the broader context, the state has been on an unsustainable track since 2009. From 2009 to 2011, such excessive spending was supported by one-time federal “stimulus” funds which were not available starting in fiscal 2012. Yet, as the table below indicates, our state leaders, given the recent House-passed budget, look to continue spending well beyond the growth rate of the Vermont economy.
Our state economists tell us that since 1974 a recession has hit the Vermont economy on average every seven years. The last recession started seven years ago. Unfortunately, the light of sustainable spending shined by Govs. Snelling, Dean and Douglas has been dimmed under the golden dome for too many years. It is inevitably that the economy will stumble again, sooner rather than later, and when it does, taxpayers as well as the most vulnerable will suffer the harsh consequences of the fiscal shortsightedness of current Statehouse leadership.
