McClaughry: Hard spending choices for 2018

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McClaughry: Hard spending choices for 2018

Tue, 12/20/2016 - 3:55am -- tim

by John McClaughry Two weeks from now new Governor Phil Scott will give his inaugural address to the legislature, and a week or so later they’ll receive his budget proposal for FY2018, which begins in July. Governor Scott campaigned on the attractive idea that “state budget spending will not grow faster than the economy or your wages.” Exactly what that means remains unclear. Is it General Fund spending, or that plus Transportation and Education Fund spending? Does it also include Federal funds? And whose wages?

Keeping that promise requires overcoming the “Hungry Alligator”. This is the open-jawed gap between expected revenues and promised spending, as viewed on a multiyear graph. The Joint Fiscal Committee estimates that gap to be $55-$75 million for the General Fund. But as former Finance and Management Commissioner Tom Pelham has repeatedly pointed out, much, though not all, of that shortfall is based on requested increases from the previous year’s spending levels, that can be modified or rejected.

Some budget categories simply can’t be cut: interest on the state debt ($71 million); the ironclad transfer of $303 million to the Education Fund to hold down property taxes; and the annual required contributions to keep the liabilities of the state employees and teachers retirement plans from falling even further behind. The former is 70.9% funded; the latter 55.3%; the two plans’ total unfunded liability is now $4.6 billion.

Another imperative is new money to combat the runoff pollution that afflicts the north end of Lake Champlain. Vermont is under an agreement with the EPA to come through with $67  million from somewhere.

The tendency of the legislature’s liberal majority, of course, is to raise more revenue to meet the inexhaustible supply of desirable things to do with taxpayer dollars. Raising income tax rates or the sales tax rate won’t fit with the Governor’s idea of “affordability”. He was boosted into office largely because of his firm promise to veto a carbon tax and any extension of the sales tax to services. No new revenues there.

The past three legislatures have raised taxes on a wide range of things, from soda to health insurance claims to home heating oil, but finally balked on Gov. Shumlin’s proposed payroll tax increases to fund more health care experiments. They’ve pretty much squeezed out all that can be had from new revenue sources or higher tax rates.

Governor Scott has promised a “pro growth pro jobs” economic policy that would increase revenues, plus serious efforts to “make government work better.” Both are difficult, and both will take more time than the 2018 budget process can wait for. About the only immediate choice is to find ways to reduce or postpone spending.

A number of states – Texas, Michigan, Arkansas, Washington  – have improved state finances and economies by a thoroughgoing performance review, managed by a dedicated and fearless commission not under the thumb of politicians. In fact, Vermont Democrats proposed just such an effort in 2004, but their candidate didn’t win the governor’s race, and the liberal Democratic majorities in House and Senate had little interest in any such confining process.  They would do well to put their proposal back on the agenda.

But ever if everyone gets on board with that idea – far from likely - that can’t happen between now and June.  That will leave the budget writers with the painful task of shaving here, stretching out there, providing less, and trying to kick the fiscal can down the road. The trouble is, that after six years of galloping government, that can is now a lot bigger than the feet hoping to kick it.

In March 2015 the House Appropriations chair Mitzi Johnson put some sensible language into the 2016 bill. It called for

  • bending the rate of spending growth to bring the expenditure pressures in line with revenue growth to end the cycle of annual budget gaps;
  • moving toward budgeting based on using less than 100 percent of forecasted revenue to build a reserve which can help offset the variability of revenues that comes with a progressive tax system and the risk of reliance on federal funds; and
  • exploring a two-year budgeting cycle where the interim year will be such as to allow time to be spent focusing on program performance, results-based analysis, and evidenced-based program evaluation.

            This is sound thinking. As the next Speaker, Johnson will have a great opportunity to take the lead in making this happen, although it will not come without pain.

            Phil Scott has shown over the years that he can work with Democrats. This is one area in which they all really need to cooperate, beginning on Day One.

John McClaughry is vice president of the Ethan Allen Institute (ethanallen.org).