Gov. Peter Shumlin and lawmakers crafting the 2016 fiscal year budget will have to dig a little deeper after state economists provided a downgrade to the general fund revenue forecast Tuesday, despite positive signs in the economy related to lower oil prices.
The Emergency Board, comprised of the governor and the chairs of the Legislature’s money committees, were told Tuesday that revenues are projected to be $18 million lower than previously expected in the 2016 fiscal year budget. The state was already facing a $94 million projected gap, which Shumlin’s proposed budget would close through a combination of cuts and tax increases.
Economists Jeffrey Carr and Tom Kavet, who provide revenue forecasts to the state twice a year, also downgraded revenues for the current fiscal year by $10 million. The Shumlin administration and lawmakers, anticipating that, are working to lower the current budget in the annual budget adjustment process by $17 million. That follows about $31 million in rescissions that took place in August.
The downgrade is projected despite an expected uptick in spending by Vermont residents as oil process drop.
“We’re looking at the economy finally starting to pick up like we haven’t seen in some time. A big part of that is the drop in oil prices,” Kavet told the board. “That’s something that’s very substantial to Vermont and other New England states.”
"We're looking at the economy finally starting to pick up like we haven't seen in some time. A big part of that is the drop in oil prices." - Tom Kavet, Economist
Vermonters spend more than $2 billion annually on petroleum-based energy, mostly in transportation and home heating. With the price of oil around $60 per barrel, and projected to drop to around $40 per barrel this year before rising to $70 to $80 per barrel, Vermonters are projected to save about $600 million in 2015, according to Kavet.
“That’s a phenomenal stimulus to the economy and it really hasn’t been felt in full at all,” he said. “The projections right now are coming down not up.”
“To get an additional $2,500 (per family) in spending money … is bigger than any raise that anybody’s gotten for a long, long, time,” Kavet added.
Lower energy costs acts like a tax cut in the economy, without the corresponding decreases in government spending that actual taxes cause.
It also changes the psychology of residents and alters their spending habits, Carr said.
“The critical thing is it will help with psychology. Part of the reason that we really haven’t broken out of our funk is that people have been looking for some reason, there has got to be some catalyst,” Carr said. “I think that there still is kind of a residual hangover in households. Some of us now know what our parents and grandparents went through when we went through the Great Recession that they went through during the Great Depression. It changes you. It fundamentally alters the way that you approach things. You weren’t quite so aggressive in your spending.”
Oil prices in previous forecasts were projected at $103 per barrel. The current forecast projects prices at $63 per barrel, but prices will likely drop lower. As a result, the two economists boosted expected consumption taxes based on expected spending in their latest forecast.
Still, despite the relief in energy prices, unstable corporate income taxes and uncertainty surrounding some high-earning taxpayers has led to the near-term downgrade, according to the economists. Additionally, businesses are expected to hire, but profits will drop as they train and bring new hires up to speed, they said. That will likely lead to larger state refunds for businesses.
The state’s revenue growth should see improvements down the road.
“There is some good news. It’s a little farther out on the horizon than we might like,” Kavet said. “There’s some very good things happening right now.”
"There is some good news. It's a little farther out on the horizon than we might like." - Tom Kavet
Shumlin said Tuesday that his administration anticipated a further downgrade in the current budget and moved to make cuts ahead of the annual budget adjustment in each January. He said a downgrade to the 2016 fiscal year budget was also expected, but the administration did not plan further efforts to patch it without knowing how much it would be.
“We didn’t know what to expect,” the governor said. “Obviously, we don’t guess. We have to actually build a budget based on the facts and we now have to work together with the Legislature to balance the budget, which is what I’ve done every term that I’ve been governor.”
He said he is “heartened” that the downgrade isn’t larger, and noted that the economists said there could even be revenue growth later in the year.
“I just heard a pretty upbeat report in terms of their hopes for their future, so we’re going to manage to the money but this is not an insurmountable challenge,” Shumlin said. “My job as governor is to roll with the punches and deal with the numbers as they come in. My job is to balance the budget and be fiscally responsible when we do it and we’re going to continue to do that.”
Tuesday’s updated revenue forecast projected no changes to the transportation fund for the remained of the 2015 fiscal year, and a 1 percent increase in revenue, amounting to $2.7 million, for the 2016 fiscal year.
The education fund, meanwhile, is projected to see a revenue increase of $1.6 million, or about 0.9 percent, for the remainder of the 2015 fiscal year. In fiscal year 2016, the education fund is expected to see a 1.5 percent growth in revenue, which would amount to $2.8 million.
