Editor’s note: Budget Watch is an occasional political analysis.
The word “structural” has entered the lexicon in the pre-legislative rhetoric about the state’s $100 million budget gap.
Gov. Peter Shumlin is fond of using the word, as are his fellow Democrats in the Legislature, perhaps because it’s a way of soft-pedaling the restructuring of state government, lest they sound too much like Republicans.
Right-sizing state government is another euphemism Shumlin is using to sum up what will certainly be a painful budget-cutting exercise in the Legislature this session.
Budget-writers and legislative leaders are talking about making significant long-term changes to the way the state spends money in order to permanently close a $100 million gap in revenues and state expenditures in fiscal year 2016. The state has seen a $30 million to $75 million gap every year since 2010, and has filled the hole with one-time funds.
The reason? State spending is outstripping revenues. Expenditures have been increasing by 5 percent a year on average, while revenues have been increasing by about 3 percent since Gov. Peter Shumlin took office in 2010. Last year’s total budget for all funds was $5.6 billion; the fiscal year 2010 budget was $4.6 billion.
This year is worse than usual, however, lawmakers and administration officials say. The gap is actually growing on a monthly basis because income tax receipts from wages are not keeping up with projections. This state of affairs began in April when income tax revenues were down by nearly $20 million. The only reason the state ended the year with a balanced budget was because of a $20 million estate tax windfall that otherwise would have gone to the Higher Education Trust Fund. In July, the state economists downgraded revenues by roughly $30 million.
Since then, the law of diminishing returns has continued to kick in. As of November, state revenues are down another $18.5 million, according to Jeb Spaulding, outgoing secretary of the Agency of Administration.
Since July, Spaulding has recommended $48.3 million in cuts this fiscal year — on top of next year’s $100 million hole.
It’s becoming more likely now that there will be a second downgrade in projections for state revenues again in January as the U.S. economy slows.
Shumlin insists that an increase in broad-based taxes, i.e. income and sales, is not an option. The Shumlin administration hopes to cut its way out of the hole.
Cutting $100 million is tantamount to cutting 25 percent of state government, according to Steve Klein, the executive director of the Joint Fiscal Office. That’s because $988 million of the current $1.4 billion General Fund budget is untouchable. The state must pay debt service, contracted employee compensation, the General Fund transfer to the Education Fund and retirement obligations, for example. The rest of state government amounts to $432 million.
“It’s a serious problem,” Klein says. “Cutting $100 million is not an easy thing to do.”
So expect to see some drastic changes to the budget next month. The elimination of a whole department, for example. Or the reconfiguration of the state workers contract. Or a reduction in Medicaid spending. It’s possible the governor and the Legislature will consider a combination of all three.
Jim Reardon, commissioner of the Department of Finance and Management and the state’s chief budget-writer, saw the crisis coming. “I’ve told people 2016 was where the rubber hit the road,” Reardon said. “I’ve told people that for a long time and I’m absolutely right.”
Reardon says he will be presenting a balanced budget to lawmakers next month. His goal: To right-size the budget within available revenues.
Human services, which accounts for 40 percent of the budget, will come under the knife, but he says he’s looking at everything outside of the Agency of Human Services, too. “I’m not taking anything off the table,” he says.
“I try to craft careful proposals,” Reardon said. “It’s not just all about numbers, it’s also about policies and services and programs. I don’t just put on a visor and balance the books.”
Sen. Kevin Mullin, R-Rutland, wants to look at the possibility of cutting a whole program. “What that is yet, I don’t know,” Mullin says.
“Rather than nickel and dime it, I think we should find something to eliminate and see if we could live without it,” Mullin says. “I don’t think anyone can afford to pay more in taxes. The carbon tax proposal is dead, and any other tax proposal is dead.”
Medicaid funding and the Pay Act are at the top of Sen. Jane Kitchel’s list of must-cut areas of the budget. Both areas of spending have been driving up annual budget increases, and it’s time, she says, to look at the source the upward pressures on these large areas of spending.
The federal match rate for the $1 billion Medicaid budget has dropped, which means the state has to pick up more of the costs associated with subsidized health care.
One of the biggest areas of state spending is staff. Last year the Pay Act, the state contract with employees, resulted in a 4.5 percent hike in spending on state workers. Many employees get step increases in addition to cost of living increases.
“I think maybe this environment forces an examination of what are those base spending areas in state government,” Kitchel says.
Total compensation for state employees, from federal and state funds, in fiscal year 2014 totaled $729 million, and represented 12.9 percent of the state’s total expenditures of $5.66 billion that year, according to Sue Zeller, the chief performance officer for the Agency of Administration and former deputy commissioner of the Department of Finance and Management.
Rep. Mitzi Johnson, D-Grand Isle, vice chair of the House Appropriations Committee, agrees that the budget-writing committees will need to look at state employee contracts, even though in her opinion state workers are already spread too thin because demand for government services have increased.
“Me mentioning it isn’t any kind of slam on state employees, it’s just an acknowledgment that it’s a place a very large amount of money is spent, and so we really need to look at it,” Johnson said.
The long-term solution, in her view, is implementing results based assessments that would use data and other metrics to help the Legislature evaluate the effectiveness of state programs.
RBA, as it’s called, could take time, however. And the state doesn’t have the luxury of waiting.
House Speaker Shap Smith says the RBAs are a “no-brainer,” but could “take a while.”
“It should be an expectation of government that we are spending money in areas where we get the best results and we insist that that’s happening, but I agree with Kevin Mullin and Jane Kitchel that there may be things we no longer do,” Smith said.
Update: Information about total state staff compensation was added to this story on Dec. 10.
