The 2021 legislature faces major challenges on Fiscal Worries, Revenue Shortfalls, Retirement Fund Deterioration, and Electric Grid Challenges, but the governor surely won‘t launch a much needed Performance Review.
The exhausting national election is now over, other than counting misplaced ballots and resolving lawsuits. Now is a good time for Vermonters to let partisan animosities subside, and take a serious look at what the governor and the next legislature are likely to face. Here’s a concise list.
Fiscal Worries: In September a Republican governor and Democratic legislature commendably produced a balanced budget for FY21, with no tax increases. This achievement was made possible by the windfall of $1.25 billion from the CARES pandemic relief act, and an unexpected $21 million in personal income tax revenues from boom year 2019. Remarkably, the lawmakers did this without depleting the Budget Stabilization and Rainy Day Reserve Funds (totaling $112 million).
But with the election year pressure on Congress to spend now in the past, and the national debt growing by a trillion dollars a year, there’s no assurance that the 2021 Congress and President will issue more debt to pay for a CARES Act reprise. Nor can anyone confidently predict the fiscal implications of various pandemic scenarios.
The Scott Administration projects a $180 million General Fund deficit for FY 2022.The $23 million needed to keep three state colleges in business can’t be delivered year after year. Some solution has to be found that makes the system self-supporting or drastically transformed, over stubborn resistance from faculties, staff and legislators committed to preserving the (unstable) status quo.
Revenue Shortfalls: Other than rooms and meals, tax collections have been surprisingly strong over the past six months. However, there is no likely new source of new tax revenue to close this anticipated budget gap. Politicians like former Speaker Shap Smith have lusted after a sales tax on services, but Democrats, in the majority, have historically resisted raising sales tax rates. Their current “progressive” idea – a surtax on incomes of more than $500,000 – won’t come close to covering a $180 million shortfall, and would likely send current and prospective top bracket taxpayers fleeing to less punishing places.
Broadly taxing fossil fuels, the most yearned for Green enthusiasm of the past decade, has never made it to a vote in the House, despite a virtue-signaling supermajority ready to vote for almost anything that promises, however preposterously, to defeat “climate change”.
The pending carbon tax proposal, the Transportation and Climate Initiative (TCI), would put a tax of 5 to 17 cents per gallon on motor fuel, rising annually, but the backers are insistent about spending the revenues on additional subsidies for solar panels, electric cars and room heaters, and home insulation. Those revenues would not be available to cover existing fiscal shortfalls.
Retirement Fund Deterioration: A year ago the state employees’ and teachers retirement funds, and their associated post-employment benefits, had an astounding unfunded liability of $4.5 billion. When the new figures come out on November 10, that liability is likely to increase to more than $5 billion. Making things worse, the unachieved 7.5% annual yield from the funds will soon be reduced to 7.0%, but in this pandemic year, the funds will be lucky to earn half that.
Even tightening up benefits and adopting a realistic yield rate will not be enough to sustain confidence in our retirement fund management. Without credible progress on reform, the interest costs on state borrowing will start creeping up, and our bond ratings will start creeping down.
This problem has been recognized for three decades. In 1996 Treasurer Jim Douglas reported that with an infusion of $60 million the teachers fund could be converted to a defined contribution plan, a amount now ludicrously inadequate. I wrote back then, “The $60 million shortfall - perhaps much more - is part of the price of a legislature and Governor chronically unable to pay for a liberal welfare state with the revenue that beleaguered Vermont taxpayers can produce. That is the tough nut that will have to be cracked somehow.” Twenty four years have gone by and that tough nut remains uncracked.
Electric Grid Challenges: The “decarbonizing” rush to replace fossil fuels with electricity, whether with heat pumps in homes and businesses, or electric vehicles on the highways, promises to put a serious burden on the state’s already shaky power grid. Vermont’s Meredith Angwin, in her new book Shorting the Grid, patiently explains why reliance on diffuse and intermittent renewable power generation and just-in-time fuel deliveries to downcountry natural gas plants is a recipe for rolling brownouts by 2025.
Finally, the chances for a long-overdue government performance review remain, alas, zero. Every administration sets out to carve out waste and improve services (Scott’s version is PIVOT). All have achieved some small successes. But the big question – just what can we realistically expect our state government to do, and how much can our taxpayers be made to pay for it? – won’t be asked.
John McClaughry is vice president of the Ethan Allen Institute.