by Timothy McQuiston Vermont Business Magazine There is the demographic problem, both with a minuscule population growth and finding the right workers for jobs that are going vacant; there is New York state and its no-tax pledge for new companies for 10 years; there is the painfully slow emergence from the Great Recession, now nearly five years gone (June 2009); there is a budget shortfall; there is the closing of the Vermont Yankee nuclear power plant and its uncertain decommissioning; there is at least one tax hike coming, though perhaps a few relatively small ones; and there is the weather, which anyone can complain about. So why are the state economists so upbeat?
Jeff Carr and Tom Kavet. VBM photo.
Jeff Carr, representing the Shumlin Administration, and Tom Kavet, representing the Legislature told the Emergency Board in mid-January that economic indicators were pointing up. The economists report to the E-Board at least twice a year on tax revenue estimates, but much of the discussion is about the economy in general. (The E-Board is comprised of the four money committee chairs in the Legislature and the governor).
‘Not bad,’ Carr said at the opening about the economy. ‘Not bad,’ Kavet echoed.
Carr views the economic forecast with ‘an upside risk,’ meaning that if the economists are wrong, it will be for the better.
Kavet went on to say, ‘Things are starting to align in a way that they might be much better down the road.’
While there is not much change right now as far as the numbers are concerned, he said, ‘This is a hopeful forecast now with not much change, but hopefully when we meet in July we’ll have much better things to talk about. We’ll see. Economic fundamentals have changed in a way that could support much faster growth.’
Kavet and Carr ticked off a number of positive economic elements: Positive action, finally, in Washington on the federal budget; non-building construction (commercial building, schools, government buildings, etc) which spiked last year; lower energy costs; and lower debt burden both for individuals and business.
The new Vermont unemployment rate of 4.2 percent for December (released at the end of January), down two-tenths from November, shows a continuing trend: all indicators were down -- jobs, total unemployed and total labor force. So the unemployment rate was not the result of increased employment, but significantly fewer unemployed. But the economists believe that could change soon.
One positive indicator was the increase in private (not farm, non-profit or government) business employment, which has slowly but steadily added jobs over the last year. Also, prominent on the horizon are labor market indicators, which Carr and Kavet agree could mean an expansion of Vermont’s labor force.
An alternative forecast from the Vermont Economy Newsletter annual conference from early January was much less enthusiastic. UVM Professor Art Woolf, who with partner Dick Heaps has put on the conference for 23 years, has long argued that demographic forces will continue to hold back the Vermont economy from vigorous growth.
Woolf suggests that while the Vermont economy will continue to perform pretty well, and the state will see a continued increase in household income and a low unemployment rate, that it will be very difficult to add jobs if the labor force continues to shrink. Vermont also has near zero population growth.
He also notes that aging ‘baby boomers’ are not being replaced in the labor force by younger workers. Woolf predicted that statistical revisions in 2014 will reveal a continued lag in the labor force, rather than the slow gains data are showing now.
Carr acknowledged that possibility. Even Woolf and Heaps considered that if Vermont has good jobs, that could draw workers from out-of-state, in a kind of ‘build it and they will come’ scenario.
But what Carr and Kavet instead focused on in the E-Board meeting the week after the economic conference were other factors pointing to labor market growth. Those include a much-reduced debt burden in both households and corporations. Kavet explained that less debt means businesses have more capital to invest in the future ‘ by hiring, for example. Interest rates, inflation and electricity costs also are very low, he added. And a ‘fiscal drag’ from federal sequestration and struggles has, for the time being, ended.
They said some uptick in manufacturing is already evidence that the labor environment is ripening for growth. What’s missing, Carr said, is confidence ‘ among both consumers and businesses.
Moody’s Analytics shows a recent rise in business confidence, but Carr noted that it’s traditionally a hard metric to capture. Strong stock market performance is a good sign though, he said.
On the housing and construction front ‘ arguably the industry whose collapse caused the recession the state is now struggling to emerge from ‘ they said there is also cause for hope.
That recent spike in non-residential construction consists of wide-ranging and variably sized projects, not just isolated big projects, Carr said. Aside from the construction jobs this provides, it also is likely that businesses will be hiring new people to work at their expanded facilities, he said.
Single-family housing starts are also up, and a slow increase in property values is taking hold, as indicated by Shumlin’s proposed FY15 budget. If all property transfer tax revenue that’s statutorily earmarked for the Vermont Housing & Conservation Board actually went to the agency, its budget would increase by about 30 percent, Administration Secretary Jeb Spaulding said Wednesday.
The total value of taxable property in the state is still depressed from the recent recession, however. And those low values are partly to blame for rising property tax rates. Because tax rates are based on property values over time, the real estate market’s rosy outlook will take a while to trickle down to good news for the state’s Education Fund, Carr and Kavet said.
One more volatile area is the Transportation Fund and related fuel taxes. In 2013, the Legislature pinned gas and diesel taxes closer to their actual prices. Now the cost per gallon is headed down, analysts agree. The price drop may mean that the state will pull in less money from fuel sales than previously thought.
Kavet noted the Internet sales tax has not been strong. Carr also pointed out that certain products exempted from the sales taxes, such as food and clothing, constitute some of the highest aggregate sales.
Budget
Governor Shumlin mostly wants to use so-called one time funds and a new tax to fill most of an estimated $71 million budget shortfall. That shortfall could also be lessened by even better revenue results. But for now, the economists are not formally projecting FY 2015 will see a bump. In fact, in this revenue report they have a very slight ($500,000), which could change considerably if their collective sense of the economy turns positive.
The one-time funds had been supplied to a great extent by federal stimulus funds. Those have run out, but there are still some out there in diminishing, but not insignificant amounts. The Shumlin Administration suggests there is about $30 million available: $13 through an Affordable Care Act match; $8.3 million from the settlement announced late last year with RJ Reynolds; $5 million from Vermont Yankee, pending approval; $3 million in tobacco settlement money; and $800,000 in federal emergency funds.
The tax hike, which has been suggested and rejected by the Legislature before, would be on health insurance claims. The 0.8 percent tax would raise $14 million.
The governor, of course, only proposes a budget. It’s up to the Legislature to come up with and pass the Big Bill before sending it to the governor for his signature.
The Administration also said it has found another $27 million in savings and other federal funds to plug the gap. While Vermont is alone in not having a balanced budget requirement, it has been faithful in doing so for two decades, even while most other states have not.
Vermont is expected to balance its budget again for FY 2015.
The FY 2014 budget adjustment act bill has already passed the House, along party lines with Republicans mostly voting against the $12.6 million hike in spending for the rest of this year (the fiscal year ends June 30).
The Budget Adjustment Act, H655, includes increased spending on winter road maintenance, methadone treatment, an increase in prison costs and a spike in emergency housing expenditures.
The House also put $9.5 million in a rainy day fund.
In a statement House Speaker Shap Smith said the bill ‘makes important adjustments to the 2013 budget with the health and wellbeing of Vermonters in mind.’
‘In the wake of Entergy’s decision to close Vermont Yankee, it invests $500,000 for economic development in Windham County,’ Smith said in a statement. ‘For Vermonters working to recover from opiate addiction, it invests in methadone treatment and adds to existing funds for Vermont’s eleven Recovery Centers. In the wake of a harsh winter, it invests additional monies in winter and spring road maintenance, and sets spendable reserves at $9.5 M to help with future shortfalls.’
Among other points in his budget address, Shumlin said he's dedicated to increasing Transportation spending $33 million to its highest levels in the state's history, which if it comes to fruition would be the second consecutive year it would set a record.
The governor emphasized his commitment to fiscal frugality without gutting services but always with a vision toward economic growth.
‘Accounting for replacement of one-time funds in this year’s budget, my spending proposal for Fiscal Year 15 will rise by 3.56 percent,’ Shumlin said. ‘Every spending proposal I have pursued as governor has been designed to promote economic development and prosperity for all Vermonters. This budget is no different. It keeps our promise to invest in our infrastructure and in our people, and it relies on a unified, coordinated strategy, targeting every sector of our economy and every one of our communities.’
Hilary Niles of vtdigger.org contributed to this report.