State of the State: Vermont
Governor Scott promises to limit spending increases, prevent tax increases, balance the budget, pursue budgetary and education reforms and fund pension obligations.
Governor Phil Scott’s first State of the State address promised to limit spending increases, prevent tax increases, balance the budget, pursue budgetary and education reforms and fund pension obligations. With Vermont’s economic outlook continuing to languish at 49th (according to the American Legislative Exchange Council report Rich States, Poor States), legislators may be ready to take the governor’s charge to heart: “We must act now, and begin our ascent.”
People vote with their feet regarding the pursuit of opportunity. In the Green Mountain State, these votes have been towards the exit, with annual net domestic migration being negative for more than a decade. Gov. Scott noted “from 2010 to 2016, we lost an average of 2,300 workers per year from the workforce…With fewer workers, we have less revenue and the state becomes less and less affordable.”
Acknowledging the hard choices required to achieve fiscal balance this year, the governor also pointed out this represents an “opportunity to rethink how we approach our budget.” As a start, he advocated for base spending in the upcoming fiscal year to actually be “below base spending for the current one.” But his Government Modernization and Efficiency Team and PIVOT program promise to focus on outcomes and “Results Based Accountability” throughout the budgeting process. A similar process is explained in the ALEC State Budget Reform Toolkit; this reorientation away from traditional “baseline budgeting” is essential to delivering higher quality essential services alongside a lighter tax burden.
One the most glaring problems facing Vermont is the level of unfunded government pension liabilities. The ALEC report Unaccountable and Unaffordable 2016 estimates the funded ratio at just 30.4 percent, using a risk-free rate of return of 2.344 percent (the average of the 10 and 20 year U.S. Treasury bond yields from March 2015 to March 2016). Applying this risk-free rate to the assets on hand, unfunded pension liabilities now exceed $13,900 per capita in Vermont.
Commendably, the governor proposed to “fund our pension obligations at their full recommended annual levels” and to “set aside reserve accounts.” But the recommended funding levels in Vermont are based off an unrealistic assumed rate of return of 7.9 percent for teachers pensions and 7.95 percent for other state employees. These are some of the highest assumed rates of returns in the nation. The annual contribution assuming a more reasonable (and likely) rate of return would be far higher. Refusal by the state to fully acknowledge the potential extent of these unfunded liabilities could result in drastic pension cuts, spending shifts, or tax hikes to remedy capital shortfalls in the future.
One of the impediments to affordability in Vermont is the unfortunate fact that the state has the 3rd highest property tax burden in the nation. A large proportion of this revenue flows to public schools. Despite a long-term enrollment decline in public schools spanning two decades, the governor pointed out “costs have continued to rise faster than our ability to pay.” According to the U.S. Census Bureau, Vermont has the 3rd highest per pupil administration costs in the nation. “We can no longer afford to allow so much of the nearly $19,000 we spend for each K- through-12 student to be diverted away from the child and toward empty spaces and overhead costs,” declared the governor. “To start us on this new path, I’m proposing a realignment of priorities and spending that allows us to unify the system from early care to higher education and trades training,” he continued.
To begin resolving the problem, Governor Scott called for school districts to freeze their funding for the upcoming year at current levels. He also proposed teachers pay 20 percent of their health insurance premiums (the same rate as other state employees) instead of 15 percent. “We can no longer ask property tax payers to pay more every year for education without offering better efficiency and better outcomes,” explained the governor. This lackluster performance is clearly evidenced in ALEC publication Report Card on American Education. Vermont ranks 40th in education policy, largely related to lack of allowance for charter schools (which cost less and outperform traditional public schools).
The governor promised “modest tax relief to help working families and create jobs” but regretted budgetary constraints preventing his ability to “go further with broad-based income tax cuts for Vermonters.” According to Rich States, Poor States, the top marginal personal and corporate income tax rates are 8th and 12th highest nationally, respectively. The onerous tax burden is a leading factor behind Vermont’s consistent status as nearly dead last in economic outlook as it deters entrepreneurs, businesses and workers from pursuing opportunities within the state.
“Please don’t instinctively lock up with resistance to change,” Governor Scott implored legislators. Indeed, reforms on budget priorities, public pensions, taxation levels and education funding are all sorely needed. Although solutions to each of these issues present political challenges, the reality seems to be sinking in as people and jobs continue to exit the state. Fortunately, the new governor appears to possess the vision and stamina to lead the way back to prosperity.