Pelham: Apologize, and then move on

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Pelham: Apologize, and then move on

Mon, 02/16/2015 - 3:25pm -- tim

by Tom Pelham It’s a mathematical and fiscal fact. In 2010, state spending from the general fund was $1.087 billion. Given the annual budget adjustment just passed by the House, state general fund spending for fiscal 2015 will be $1.406 billion. That equates to an annual spending growth rate of 5.3 percent. If, however, since 2010 state general fund spending had increased at a 3 percent rate, spending would be $1.26 billion or $146 million less than the House passed budget adjustment.

So there’s the rub. At 5.3 percent Vermonters face a $130 million deficit but at 3 percent a small surplus was the likely outcome. Further, a 3 percent spending growth rate is quite reasonable. It’s a growth rate that exceeds these underlying annual growth rates: population (7/10ths of one percent), employment (negative 2/10ths of percent), inflation (1.7 percent), grand list value (negative 3/10ths of 1 percent), median household income (6/10ths of 1 percent), wages (1.8 percent), and gross state product (2.8 percent).

So, taxpayers have a legitimate basis to ask, “What were you thinking Governor Shumlin, Speaker Smith, Pro Temp Leader Campbell, former House Appropriations Chair Martha Heath, and Senate Appropriations Chair Jane Kitchell when you crafted these high growth budgets over the past five years? These leaders have made a grievous mistake and at minimum owe Vermonters an apology.

Many of us predicted this ugly outcome. It wasn’t complicated to see. Growing the state budget at 5.3 percent when underlying economic indicators are growing at less than 3 percent is asking for trouble. And now we have trouble.

Governor Shumlin’s proposed 2016 budget tries to fix this problem in one year with higher taxes and irrational budget cuts. Maybe he’s hoping the problem will washed over before the next election. House and Senate budget writers are in a dither as to what to do, with state union members, program advocates, higher education leaders and even fellow legislators clamoring for painless solutions protecting their special interests.

Unfortunately, this problem is too big to fix in one year. At $130 million, it’s near ten percent of all general fund spending and about the scale of the fiscal problem inherited by Governor’s Snelling and Dean. The work-out of that problem took near 5 years, from 1991 to 1996, inclusive of sunsetting the temporary tax increases enacted during the Snelling Administration.

My advice to House Appropriations Chair Mitzi Johnson and Senator Jane Kitchell is to reject the Governor’s recommended budget as unreasonable. A one year silver bullet resolution to a fiscal problem this big does not exist. Their focus should be a more graceful, thoughtful and less painful, but still very painful, work-out strategy over the next three to four years.  It might look something like this.

First, assume general fund revenue growth of 3 percent per year. This assumption might be a bit risky but recent indications are that economic growth is starting to gain some speed. Of this 3 percent growth, commit half to spending growth and the other half to deficit reduction. This should generate over $60 million in deficit reduction by fiscal 2018 assuming another recession doesn’t come along.

Secondly, challenge agencies and departments to achieve each year 1.5 percent in program efficiencies or program revenues which the agency or department can keep to off-set spending cuts that otherwise would occur. At the Agency of Human Services, implementation of an integrated eligibility and benefits software system to replace the ancient 1980’s ACCESS system is certain to leverage sizable efficiencies as will the new FAST integrated tax system at the Tax Department. Further, the Affordable Care Act allows premiums for health care benefits to be charged for those above 150 percent of poverty. Agency budget crafters might probe this as a potential revenue stream to be further leveraged. Also, the VSEA labor contract expires at the end of fiscal 2016. Rather than cram savings down the throats of state employees in 2016, use the coming labor negotiation cycle to achieve efficiencies and savings in 2017 and beyond. Overall, at 1.5 percent, over $20 million annually is targeted to off-set budget cuts by agencies and departments.

Thirdly, some cuts must be made in the vicinity of $30 million. Prioritize these and phase them in over the three year period. This may require some short term borrowing in 2016 to allow these cuts a softer landing, depending upon how much free cash flow is left in the state treasury. Unfortunately, Treasurer Pearce has already diminished the state’s free cash flow by $35 million with loans for energy efficiency projects and teachers’ retired health care benefits.

Budget leaders should stop wasting time looking for a one year fix to the current problem. Such a fix inherently requires unnecessary tax increases as well as unnecessary budget cuts. A three to four year work-out strategy should be their focus that includes mandating state government become more efficient.

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.