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McClaughry: Fiscal Challenges Ahead

Chief fiscal officer Steve Klein has concluded that the 2015 legislature will face an expected general fund shortfall of from $90 to 120 million dollars for Fiscal Year 2016.

Making the fiscal situation worse is a reduction in Federal Medicaid cost sharing, higher pay and fringe benefits under the Pay Act passed in May, and the pressing need for increasing contributions to pay for retired teacher health costs. Jim Reardon, commissioner of the Department of Finance and Management, said in August that he’s running out of one-time pots to raid.

Vermont has profited immensely from a four year flood of funding from Washington including $170 million to create the problem plagued Vermont Health Connect, $45 million for the Green Mountain Care Board to figure out what health care “payment reform” means, and $37 million grant to subsidize universal pre-kindergarten. That flood of dollars is now likely to slow down significantly.

Add to this that the state employees and teachers’ retirement funds are seriously underfunded. The total unfunded liability for these funds is now over $3.2 billion. A total of $118 million will have to be appropriated next year just to meet annual contribution requirements.
Of particular concern is the retired teachers’ health benefit, which is funded simply by sucking money out of the teachers’ pension fund. Treasurer Beth Pearce persuaded the legislature to make a small dent in this problem last spring. Solving this problem is likely far beyond the capacity of a legislature eager to keep the spending coming for a wide range of popular programs.

Also troubling is that the governor and legislature increased the homestead and non-residential property tax base rates in 2013 and 2014, and will have to do it again in 2015. If they don’t, the Education Fund will come up $42 million short. The increasingly likely – though long avoided – response may be state-imposed school district budget caps.

And finally: Looming over the legislature is the grim prospect of voting $2 billion dollars in new taxes – income, sales, payroll, assets, perhaps others – to underwrite Gov. Shumlin’s single payer health care plan for 2017. Whether the governor can keep his liberal majority from fleeing panic stricken out of the state house before a vote on a $2 billion tax increase may be the key question of 2015.

For the good of our state, let’s hope the new legislature faces these challenges with candor and determination.

John McClaughry is founder and vice president of the Ethan Allen Institute, a Vermont policy research and education organization.
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