The following piece authored by former Vermont Finance Commissioner Tom Pelham asks six vital questions about this year’s budget process. In a kind of Socratic manner, the answers emerge from the questions themselves.Pelham talks about the increase, not decrease, in the state budget even through the Great Recession; about the budget gap; about income tax rates paid by top 1.73 percent of Vermont wage earners; about local TIFs reducing revenues going to the statewide Education Fund; and what role the somewhat mysterious ‘Rainy Day’ fund played in the actual rainy day of August 28, 2011. Budget Preparationsby Tom Pelham Vermont’s blogs and news media are filled with stories about the state budget. It’s sure to be an engaging, if not entertaining, few months that follow the Governor’s budget address. Fiscal 2013 is likely a pivotal year, equivalent to the late ‘80’s, when a few wrong turns traumatized the state budget well into the 1990’s. To sharpen our collective knowledge base, if not our wits and possibly spears, I crafted the following six leading questions for consideration. The purpose here is not to determine right answers, but to lead those who so chose a few paces into the forest of the state budget by providing context, information and links to key sources of information. The links embedded below will help inform the conversation as we move forward and seek to bridge divides on fiscal matters and keep Vermont on a fiscally responsible path. Warm-up – Question 1: Context: As Vermont struggled to regain its financial footing following the fiscal adventures of the late 1980’s (extra points if you name the then Governor and Chief of Staff) and the resulting $65 million general fund deficit, Governor Richard Snelling embarked on a path of temporary tax increases and substantial budget cuts to stem the flow of red ink. Governor Snelling, unfortunately, died in the first year of his new administration and Lt. Governor Howard Dean took charge, with the promise to stay the fiscal course crafted by Snelling. Dean’s first budget for fiscal 1992 was a 2.1% increase, his second a 2.15% cut (as in less money, not a slower rate of growth), and his third a 2.07% increase. Essentially, Dean’s 1994 budget was about the same level as his 1992 budget and not much higher than Snelling’s 1991 budget. During these same years, Dean also set about the hard-nosed task of insuring that the ‘sun set’ provisions associated with Snelling’s temporary tax increases were honored, which, by 1996 they were. Question: Was Howard Dean’s choice to follow the Snelling path the best choice for Vermont? Follow the Money: Question 2: Context: I know a cut when I see one, having cut a few budgets myself along the way. The impression I get from the newspapers and TV news and some blogs and from listening to advocates and watching the hand ringing of legislators is that the state budget has been cut repeatedly during this recession. But then I click the link below and find the Total Budget has increased by $585.6 million since 2008, or 3.4% annually http://www.leg.state.vt.us/jfo/appropriations/fy_2012/FY08_-_FY12_Total_…(link is external) and I click here at page 21: Section B.345-Total Human Services and find that the AHS budget servinghttp://www.leg.state.vt.us/jfo/appropriations/fy_2012/FY09_-_FY12_Gov__T…(link is external) our most vulnerable has increased by $235.4 million over the past three years, or 4.3% annually. Further, since fiscal 2000, the AHS budget has increased at the rate of 7.15% per year. How these spending increases become cuts in the eyes of the media, especially in the context of minimal population growth and a declining population of young folks is a wonder! Question: Given flat population growth and a declining child count, by how much does a budget have to increase to be considered an increase? Looking Forward ‘ Question 3: Context: The Budget Gap projection is a relatively new way to provide context to the budget process. It is developed by a free ranging (by accounting standards) agreement of budget staffers working for the legislature and the Governor. Here is its most recent profile. http://www.leg.state.vt.us/jfo/appropriations/fy_2013/FY13_Gap_Oct_Conse…(link is external) The Budget Gap focuses only on the general fund which accounts for about 40% of all state non-federal spending. At the top of the first numeric column is the amount $1,235.9 million, which is the general fund budget approved by the legislature for the current fiscal year, fiscal 2012. You can also find this same amount here under the column FY12 CofC (Committee of Conference). This table includes a profile of all spending across state government during this current recession. http://www.leg.state.vt.us/jfo/appropriations/fy_2012/FY08_-_FY12_Total_…(link is external) Note that the FY 12 general fund amount of $1.2359 billion is a 7.3% increase over the FY 11 amount of $1.152 billion. The 7.3% increase was supported in part by new taxes passed in prior legislative sessions as well as one-time revenues. From the Budget Gap projection, we can see the ‘gap’ between the current fiscal 2012 amount and the projected 2013 amount of $1,361.5 million is $125.6 million, amounting to a 10.2% increase. However, the ‘official’ general fund revenue estimate for fiscal 2013 is only $1267.2 million. The ‘official’ estimate can be found here, on page 16: http://www.leg.state.vt.us/jfo/state_forecasts/2011-07%20July%20Forecast…(link is external) Question: In view of the fiscal year 7.3% general fund increase, should the Governor recommend and the legislature agree to raise taxes to fund fiscal year 2013 at $1,361.5 million for a 10.2% increase over fiscal 2012. Ringing the Dinner Bell ‘ Question 4: Context: At the link below you’ll find an excel spread sheet profiling income tax filers and receipts for calendar 2009, the most recent data available. Click on ‘Income Statistics- State’ and then hit the ‘excel’ button and click on the ‘Statdol’ tab and you’ll be ready to gorge, as some say, on OPM, better known as ‘other people’s money’ or give definition to your principled view of a ‘fair share’. http://www.state.vt.us/tax/statisticsincome.shtml(link is external) The important columns to focus on are AGI Income Class, Returns, and Net Vermont Tax. From these you can calculate ‘effective’ tax rates for each income group. You’ll note that only half the phrase ‘millionaires and billionaires’ applies to Vermont, as the cumulative income of all our 292 highest income earners amounts to less than one billion. Also note that of the 353,858 filers, those over $200,000 AGI comprise 6,094 or 1.73% of the total. I draw a line at $200,000 as these are the folks the President has in his sights for the repeal of the Bush tax cuts. The Bush tax cuts for everybody else will remain in place. In 2009, this group paid 5.8% or $156.6 million of their AGI to the state of Vermont which comprised 31% of all state income taxes. IRS data, found here, http://www.taxfoundation.org/news/show/250.html#table8(link is external) indicates these filers also pay 24% of their AGI in federal income taxes. These taxpayers also pay sales, meals and rooms, property and all the other taxes levied by local, state and federal government. It’s also of note that about 33% of these filers are 65 or over. Question: Should Vermonters pay more income taxes to both the state and federal government? If so, which income groups among us should pay more and how much more should they pay? TIF Me Once, then TIF Me Twice, then TIF Me Once Again ‘ Question 5 Context: A Tax Increment Finance (TIF) District is an area designated by both the municipality and state to encourage redevelopment. Property taxes on the value of the land in place at the time of state designation of a TIF district continue to be paid to the municipality and education fund as usual. However, property taxes attributable to new grand list growth after the date of designation over the next 20 years can stay with the municipality to support infrastructure costs within the TIF District. The City of Burlington has been TIF’d twice, plus a bit more. The first TIF, called the ‘Waterfront TIF’, was approved in 1996 and included the Burlington Square Mall up to Church St. You can read about this TIF here: http://www.cedoburlington.org/waterfront/moran_plant/BRC%20Documents/6-1…(link is external) In 1996, the listed value of the land in the TIF district was $42.2 million. Today, the listed value is around $140 million for an increase of almost $100 million, or 8.3% annually, over the past 15 years. In 2009, the state legislature granted Burlington the right to finance additional debt with taxes from this TIF district for an additional 20 years. I call the legislatures action ‘TIF me twice’. In June of this year, the state approved and designated another ‘downtown TIF’ district for Burlington that essential surrounds and expands the ‘waterfront TIF’. Here’s a map showing both TIF districts: http://www.dhca.state.vt.us/TIF/Burlington/documents/Proposed%20and%20Ex…(link is external)The grand list value of property within this TIF district at the time of designation was $170.8 million. Current state law allows that 75% of the taxes attributable to grand list growth be retained by the City of Burlington. Combined, the ‘waterfront’ and ‘downtown’ TIF comprise around 10% of Burlington’s taxable grand list. Burlington planners estimate that the new ‘downtown’ TIF alone will divert $35.4 million from the education fund over the next 20 years on top of the millions diverted due to the ‘waterfront’ TIF. http://www.dhca.state.vt.us/TIF/Burlington/documents/ProjtotalTIFrev.pdf(link is external) Further, education property taxes across Vermont are destined to rise. Because of the recession, property values are declining (see recent analysis here): http://www.leg.state.vt.us/jfo/reports/Legislative%20Briefings/2011_11_1…(link is external)and the legislature’s efforts to constrain education spending have been weak, with little effect resulting. Also, during the last legislative session, the Governor recommended and the legislature agreed to reduce permanently by $23.2 million the transfer required by law from the general fund to the education fund. You can see this here on Line 4 (b): http://www.leg.state.vt.us/jfo/education/EF_Outlook_-_Final_May_2011.pdf(link is external) Question: Are Burlington’s TIF districts a ‘raid’ on the Education Fund or a reasonable diversion of funds to support Burlington’s development projects? Tropical Storm Irene was a ‘Rainy Day’ ‘ Question 6 Throughout this recession, some have advocated spending Vermont’s ‘Rainy Day’ fund to support on-going state programs. Among these advocates were Senator’s Ashe, Racine and Pollina. The opposing view included Senator’s Bartlett, Brock and Snelling. Governor Douglas also opposed dipping into the ‘Rainy Day’ fund. You can read about one instance of this kerfuffle here: http://vtdigger.org/2010/04/28/senate-passes-budget-kills-rainy-day-amen…(link is external) Vermont’s Rainy Day fund is technically not a fund, but a reserved balance in the general fund in an amount greater than the general fund budget passed by the legislature. Think of it as the balance in your checking account that you’ve promised yourself not to spend, but save for a ‘rainy day’. Vermont’s ‘Rainy Day’ fund equals 5 percent of the prior year’s budget. This reserve also allows the State to avoid borrowing money to pay current bills as the state borrows cash from the ‘Rainy Day’ reserve to pay bills and repays the reserve when tax revenues are high, say during the April income tax season. Then came Tropical Storm Irene, washing roads and bridges and downtowns and homes downstream, with the latter two a.k.a. as the property tax grand list. For some communities, covering even the short term costs of clean-up were an impossible task, so the State reached out a helping hand. Because of the ‘rainy day’ reserve, the State could make advanced payment to communities on state grants (say Town Highway Grants) owed the community and allow for the delayed payment by communities on money owed the State (say property taxes to the Education Fund). This maneuver provides communities hit hard by Irene a bit of help in covering the immediate costs of clean-up left by Irene. Absent the ‘Rainy Day’ fund, it’s likely these near term bills could not be paid without either the state or municipalities taking out loans. Question: With 20/20 hindsight, whose position was more responsible, the Ashe, Racine and Pollina team or the Bartlett, Brock and Snelling team? Tom Pelham served as Commissioner of Housing in the Snelling Administration, Commissioner of Finance and Management under Governor Howard Dean in the 1990s, and from 2003 to 2009 served as Tax Commissioner for Governor Jim Douglas.
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