Tom Pelham: What’s next for fiscal 2025?

This commentary is by Tom Pelham of Berlin. He was finance commissioner in the Dean administration and tax commissioner in the Douglas administration and served on the Vermont House Appropriations Committee as an Independent.

July 1 has come and gone, and with it the end of Vermont’s 2024 fiscal year on June 30th and the start of fiscal 2025 on July 1. Now is a good time to consider important fiscal trends within the budget that might bite taxpayers going forward.

Below is a profile of major fiscal trends in the state budget, using data from the Legislature’s Joint Fiscal Committee . The column totals for these four funding sources amount to 93% of total state spending.

The above data reveals overall annual spending growth of 7.5%, with General, Education and Federal Funds exceeding the overall annual growth rate. A further point of reference is the Emergency Board Economists’ Consensus Revenue Report. The latest such report was issued January 18, 2024, with the next release due this July. It will include additional revenues raised by the Legislature this past session. The current report projects Education Fund growth for 2025 and 2026 at 1.7% and 2.6% respectively, General Fund growth at -0.8% and 3.7% respectively and Transportation Fund growth at 5.4% and 1.5% respectively.

Clearly, the above spread between high spending rates and estimated low revenue increases is worrisome. But Vermonters have been in this situation before, and we will hopefully learn from our past.

From fiscal year 1986 to fiscal 1989, state General and Transportation Fund spending grew at combined rates of 5.9%, 13.5%, 10.9% and 13.3%. Then came the 1990-1991 recession, and Vermont’s economy and state budget hit the recessionary wall.

In a VPR commentary from 2008 , economist Art Woolf described the fallout.

“Vermont’s unemployment rate stood at a record low level of 3% in the summer of 1988. By the spring of 1991, it had risen to 7.7%, and it stayed above 7% for a full year. Vermont lost 15,000 jobs between 1989 and 1991, a job loss of more than six percent — the worst job loss in Vermont since the Great Depression and four times the national rate.”

“Declining state revenues led to a huge budget deficit, which took Governors Snelling and Dean four years to pay off. State government spending remained virtually unchanged for several years, and sales and income taxes were raised to help retire the deficit.”

Further, Vermont’s Bond Rating was cut, not recovering until 1998, while General and Transportation Fund expenditures were limited to a growth rate of just 2.24% from FY 1991 to FY 1995, including negative growth in 1993 at -2.16%.

It’s not hard to make the case that Vermont’s Legislature is about to repeat the above history. Maybe the trigger will be a recession; or maybe the loss of former Sen. Patrick Leahy as chair of the U.S. Senate Appropriations Committee will reduce Vermont’s access to federal funds; or maybe Vermont’s shortening ski season will undermine state revenues; or maybe the national election will bring to the White House forces unfriendly to liberal Vermont. Whatever the cause, should there come even a mild recession, Vermont’s fiscal profile appears vulnerable.

One lesson from the recovery of the 1991 recession is the importance of having legislators willing to put conservative fiscal reforms into place despite opposition from their political party. Republican Gov. Snelling was able to work with Democratic House Speaker Ralph Wright to pass a package of temporary tax increases to help mitigate the recession’s impact. Similarly, Gov. Howard Dean was able to work with Republican Walter Freed and a handful of “Blue Dog” Democrats led by Representative Charles Flaherty to pass state budgets with modest increases during the 1990’s. When it comes to fiscal common sense, it’s important to have as legislators Vermonters who can embrace such and not be handcuffed by the dogma of their political party affiliation.

Read the story on VTDigger here: Tom Pelham: What’s next for fiscal 2025? .