This commentary is by Tom Pelham of Berlin, who was finance commissioner in the Dean administration and tax commissioner in the Douglas administration and served on the Vermont House Appropriations Committee as an independent.
In June, legislators will gather to make the final decision regarding Gov. Scott’s likely veto of the Legislature’s 2024 state budget.
It’s rare that Vermont voters statewide have the opportunity at a single point in time to provide guidance to those they’ve elected. Yet, Vermont’s fiscal history over the past 20 years as well as the recent wisdom of Vermont’s economists indicate we may be at a critical fork in the road, with debilitating consequences should the governor’s veto not be sustained.
Within the state budget there are two major funds, the General Fund and the Transportation Fund. These funds are supported mostly by revenue coming directly out of Vermonters’ pockets, including state taxes on personal income, corporations, the sales tax, meals and rooms, gasoline, diesel fuel, motor vehicle purchase and use and motor vehicle fees, among others.
In 1986, the then-governor and Legislature authorized $480.3 million in expenditures from these two funds. Four years later, they had grown these expenditures to $715.8 million. Thus, from 1986 to 1990, general and transportation fund expenditures increased at the annual rate of 10.5%, a rate far exceeding the 4.1% underlying growth of Vermont’s economy.
Then came the 1990-91 recession and Vermont’s economy and state budget hit the recessionary wall.
In a VPR story, economist Art Woolf described the fallout.
“How bad was it?” he asks rhetorically. “Vermont’s unemployment rate stood at a record low level of 3% in the summer of 1988. By the spring of 1991, it had risen to 7.7%, and it stayed above 7% for a full year. Vermont lost 15,000 jobs between 1989 and 1991, a job loss of more than 6 percent — the worst job loss in Vermont since the Great Depression and four times the national rate.
“Declining state revenues led to a huge budget deficit, which took Governors Snelling and Dean four years to pay off. State government spending remained virtually unchanged for several years, and sales and income taxes were raised to help retire the deficit.”
Further, Vermont’s bond rating was cut, and did not recover until 1998, while general and transportation fund expenditures were limited to a growth rate of just 2.24% from FY 1991 to FY 1995, including negative growth in 1993 at -2.16%.
It’s not hard to make the case that Vermont’s Legislature is about to repeat the above history.
Last January, legislative leaders and the governor were briefed by the current state economist regarding current fiscal risks. They were advised:
- The pandemic has resulted in a clash of opposing macro forces.
– On one side has been a set of “foot on the accelerator” expansionary federal fiscal and monetary policies that has provided the state with more than $10 billion in federal financial aid.
– On the other side is the recent implementation of a set of restrictive federal monetary policies.
- The shift in monetary policy has come about as the U.S. economy experiences a run-up in inflation — unlike any that the economy has experienced in the last 40 years.
- As such, the chief questions going forward as part of this consensus forecast update is understanding when the dynamics of this policy clash may change, and potentially even be reversed, and what that transition away from those expansionary policies and back to the economy’s underlying fundamentals might look like.
- What does seem clear at this point is that there will be a time in the not-too distant future when this epic and unprecedented amount of federal fiscal pandemic assistance, which has been so instrumental to supporting the economy and state revenues, will eventually run its course. They cannot be relied upon to continue to undergird state revenues much more beyond the near-term time horizon.
- Therefore, the state’s economic and revenue outlook continues to be highly uncertain and volatile.
The facts on the ground today and the observations of the state economist are much in line with the realities of the 1990-91 fiscal crisis. Like that fiscal crisis, the annual rate of general and transportation fund spending over the past four years has been 9.49%, growing from $1.84 billion in FY 2018 to $2.64 billion in FY 2022.
Further, the Legislature’s proposed FY 2024 general and transportation budget at $2.71 billion is a 12.1% increase over the current FY 2023 budget of $2.42 billion.
These growth rates do not align with the underlying Vermont economy, leaving Vermonters exposed and vulnerable to economic trauma of the likes profiled by Art Woolf above. Vermonters can do themselves a favor and ask their state House representatives to sustain Gov. Scott’s veto and come back with a more modest and affordable budget proposal.