Pay attention because today’s post is going to provide exclusive answers to one of the great unresolved questions bedeviling the people of this fair state: Why Is Vermont’s State Government Facing a Budget Shortfall?

Ready for the answer? Brace yourself for shock. Make sure you’re seated and have not just partaken of a large meal (though recent imbibement of a cocktail or two might not hurt).

OK, here it is: Because Vermont is Part of the United States of America.

Almost all of which is in deep recession, even if it has been declared officially over. The unemployed and under-employed don’t pay much in the way of taxes. The newly foreclosed don’t buy much. The businesses who used to sell to them aren’t expanding.

Not here in Vermont. But hardly anywhere else, either. Most state economies are in worse shape, and most of their governments are facing worse budget shortfalls.

This does not mean Vermont has no budget problem. It does seem to mean that though state policy-makers may have made some mistakes in the past that rendered the state more vulnerable to the ravages of recession, they didn’t make any more – and possible not as many – as their counterparts elsewhere.

In a report titled, Beyond California: States in Fiscal Peril, The Pew Center on the States counts nine other states facing deep budget crises in addition that big one on the left coast.

Vermont is not among them. In fact, Vermont was rated among the fiscally less troubled states.

Even more pessimistically, a report from the Kaiser Family Foundation finds that only two states – Montana and North Dakota – are not “facing budget shortfalls.”

From the statistics alone, it was impossible to determine the source of the good fortune of these two states, though it’s reasonable to suspect that it has some connection with the coal, oil, and natural gas underneath them. Under the circumstances, all the rest of us help pay their taxes every time we start our cars or turn on a light. If only maple syrup were a necessity instead of a mere delight, Vermont’s budget might be easily balanced.

(Objection One: Isn’t there a lot of oil under California? Yes, but California is so huge, its economy so diverse, that the petroleum revenue adds up to a paltry percentage).

(Objection Two: Isn’t it sad to deride a delight, which in a sane world would be treasured more than a “mere” necessity? Yes).

Both the Pew and the Kaiser studies show why Vermont is not as hard-pressed as some other states. The root cause of the problem in all states is the Recession, which stemmed from what the Pew study called “the bursting of the housing bubble.” That’s why, the study noted, three of the nine states in almost as much trouble as California are its neighbors – Arizona, Nevada, and Oregon – into which some of the California housing boom (and unsustainable lending practices) spilled.

For several reasons, the bubble in Vermont never expanded as recklessly as it did in some states, so the “burst” was less damaging. Vermont’s foreclosure rate is the lowest in the country.

Why? Well, tighter regulations may be one factor; mortgage prepayment penalties are illegal here, for instance. But the figures indicate that the state’s economy generally sat on a relatively strong foundation. The report by the Kaiser Family Foundation shows that since the Recession began, Vermont’s unemployment rate has gone up less than the nation’s as a whole (1.6 percentage points compared to 3.6).

It even seems possible, reluctant though we may all be to find anything good to say about political office-holders, that Vermont’s leaders were more responsible – or at least less irresponsible – than their counterparts elsewhere.

“Virtually every state had to make tough decisions this year about where to cut and how to raise additional revenues,” the Pew report said. “But in some states, lawmakers punted the responsibility,” refusing to cut spending or raise taxes. Vermont did both. It may not have been pretty to watch or pleasing to any political faction, but as a result the state has a smaller budget shortfall than most others.

The Pew report gives Vermont a “score” of 13 (lower is better), tied with Virginia, and better than all but nine other states. The Kaiser Family Foundation report also finds that only ten states have less serious budget problems than Vermont.

(Most, though, not all, ten are the same in the two studies, which were taken at different times and used somewhat different criteria. Their basic conclusions, though, seem consistent).

Still, Vermont has a rather substantial looming budget deficit which is likely to dominate the Legislative session beginning next month. The exact size of the extent to which likely revenues for Fiscal Year 2011 (starting next July 1) will fall short of projected expenses is unclear, but should add up to roughly $100 million.

That’s a lot of money, and the early indications are that the Legislature is going to “find” it by cutting spending. Both legislative leaders, Senate President Peter Shumlin of Putney and House Speaker Shap Smith of Morristown, have come out against any new or higher taxes. Considering that they’re both Democrats, the party less resistant to raising taxes, it’s unlikely that taxes will go up.

Unlikely but not certain. There is at least one dissenter, State Sen. Doug Racine of Richmond (check the December 7 post here), who favors a temporary tax increase to avoid deep cuts in social programs. And wait until the advocates of those social programs get television news footage showing the impoverished, disabled children whose lives would be further impoverished by some of the cuts that would no doubt be proposed.

People don’t want to pay taxes. Neither do they want to abandon needy children. That Vermont may have to abandon fewer of them than most other states is not likely to make the decision much easier.

(Note: This is obviously the first of several examinations of the state’s budget situation; Wednesday’s post will be on a different topic, but we’ll return to this one next Monday

What happened to Friday? As indicated earlier, on the assumption that almost no one will be reading this kind of stuff on Christmas and New Years Days, there will be no new postings the next two Fridays.)

Note One: If you missed Wednesday’s post because you checked in early and it wasn’t there, scroll down to read it. The system disobeyed orders. It will have to be dealt with, but that can’t happen for another week or so.

Note Two: Because a few have graciously inquired, herewith policy: The News Guy does NOT want donations from public officials or candidates, those he may have to excoriate. But thanks for the thought.

Sound the Alarm! The statewide school property tax rate is going up. It’s unprecedented. Worse, the rate isn’t going up by a penny or two. No, by 2013, so projects the Tax Commissioner, sounding the alarm in a letter to the Legislature, the increase may total 22.2 cents.

In the property tax world, that could add up to a lot of money.

So the alarm has been sounded.

And sounded. So persistently that the average Joe/Jane minding his/her business might be forgiven for thinking that the world as we know it is doomed, or at least that their property taxes will drive them to either: (a) the poor house; or (b) another state.

Joe. Jane. Calm down.

Your taxes are not necessarily going up.

First of all, these projections are just that – projections, especially that 22.2 cents estimate, which is for Fiscal Year 2013, before which a great deal can change. Like all projections, these are based on certain assumptions. The assumptions in this case seem reasonable, but (details below) at least one of them might be a bit pessimistic.

None of which is to say that your taxes are likely to go down, or even not likely to go up, as they usually do. It’s to say that the going down and the coming up don’t depend only on the rate. Or in the words of Deb Brighton, one of the policy analysts who helped Commissioner Richard Westman work out the proposed new rates, “You might end up having exactly the same tax bill,” even with higher rates.

It’s also to say that (surprise!) there is a certain amount of politics behind the tax rate rhetoric. Right now, it’s from Republicans, but do not think that Democrats don’t sometimes indulge. They did last year when they assailed then-Tax Commissioner Tom Pelham for not reducing the rate as quickly as they thought he should.

So he reduced it.

And all your property taxes went down?

Uhhh, no. Mostly they went up because the value of your property went up more than the rate went down.

Next year your actual tax payments may stay the same or decline, even as the rate goes up, because property values are going down in Vermont as they are elsewhere.

In fact, they are declining faster in most other states, which helps explain why, though Vermont’s fiscal predicament is real enough, it is less severe than in about 45 of the other states. (Check in Monday for details and elaboration).

Now, this property tax business is complicated, so complicated that were one a cynic, one might suppose the powers that be made it complicated so that the average person would have a tough time understanding it.

No such cynicism will be expressed here. But just to clear up one complication, here’s how your property value can go down (for purposes of the statewide school property tax) even if your property is not reassessed: Every year the state adjusts the grand list based on the actual prices of recent home sales in your town. If those prices go down, so does your tax bill unless the rate is raised. Hence Westman’s decision to raise it (subject, of course, to Legislative approval).

Another complication: The property tax is not the only source of revenue for the Education Fund, which pays for the schools. That Fund also gets money from other sources, especially from the General Fund, into which go most income, sales, and other taxes, out of which most operations of state government are financed.

According to Mark Perrault of the Legislature’s Joint Fiscal Office , for Fiscal Year 2008 the Legislature determined that the General Fund would transfer $280.2 million to the Education Fund that year, increasing it annually to adjust for inflation.

That’s what happened for the next year, when $291.8 million was transferred. But for this year (FY 2010), the Recession had hit. The General Fund didn’t have enough money. So the lawmakers cut $18.4 from the transfer for this year, and the same for FY 2011. The Ed Fund, then, is slated get only $240.8 million from the General Fund, less than it got two years ago.

For these two years (2010 and 2011) the burden on the property tax was eased because the Legislature funneled $38.6 million of federal stimulus money directly to the towns, Perrault said. But unless more federal money comes next year, he said, “the problem comes in FY 2012.”

True, depending, again, on assumptions. One of them is that the Feds won’t cough up more money in 2011. Another is that the Legislature won’t fatten the General Fund by raising taxes. Yet another is that total school spending will continue to go up by two percent a year.

Those first two assumptions seem on the mark. The last is a bit more questionable. Deb Brighton said she and her colleagues learned that the most recent increase was “something like 1.96 percent,” and “we had to make some assumptions, so we just agreed to assume a two percent increase to make some sense of it.”

That does make sense, but there is some reason to suspect that school costs will go up more slowly over the next few years. With the number of pupils still falling, schools all over the state are reducing staff. There were slightly fewer teachers in FY 2008 than the year before (the last statistics available), and the decline might well continue.

In his letter to the Legislature, Westman made much of the school spending matter, noting the “uninterrupted growth” of school spending, mostly “personnel costs” despite falling enrollment. Here he echoed the steady refrain of Gov. Jim Douglas and his associates who regularly call for lower school spending.

It may have been mere coincidence that just days after Westman submitted his letter, Neale Lunderville, Douglas’s Administrative Secretary, noted the three percent pay cut negotiated by the state employees union and not-very-subtly suggested that teachers consider following that example.

Or it may have been, as Darren Allen of the Vermont National Education Association said, “an orchestrated effort into bullying teachers into taking a pay cut.”

Allen, needless to say, is hardly a disinterested observer. But if it wasn’t an orchestrated effort, it was a pretty good imitation.

Either way, it might be a bood idea. It would save money for the taxpayers, most of whom earn less than most teachers. On its face, it would be sensible budget policy.

But perhaps very bad fiscal policy. In a recession as serious as this one, economic policy should aim at getting people to spend more, which they cannot do if they earn less. Prices have fallen, but by about one percent according to official government figures. So if they ratify the contract with the pay cut, some 7,000 or so state workers will suffer “real” pay cuts of two percent.

That’s Vermont’s own anti-stimulus package.

And there are more teachers than state workers. All this salary reduction might be good for the state budget and the property taxpayers, but awful for Vermont’s economy.

OK, for the last time for a year if not forever, let’s get this fund-raising stuff out of the way.

The response to last month’s plea for donations has been encouraging. The News Guy will live for another year.

The clever ploy, of course, would be to state the opposite, that only you, by your contribution, can stave off the death of this site. But while effective marketing may call for…well, shall we say a touch of artfulness, good journalism – the goal here — requires transparency.

Which you have. Whether or not you contribute, the News Guy will live.

But he still needs a little more revenue. Hence this admittedly annoying reminder. The experience of the last few weeks is that reminders work; each new appeal for funds inspires more donations. Perhaps this explains why public radio station fund drives are so obnoxious. It works. Alas, the News Guy finds it impossible to be nearly as obnoxious as a public radio station. But he’s trying.

So once more: If you think this site brings Vermonters news and analysis they otherwise would not get, and contributes to the state’s public discussion, click on “donate” (Under “pages” in the upper right quarter of the page) and send as little (or, even better, as much) as you choose.

All right. Enough of that.

Now let’s peek into two items of the week’s news, starting with State Sen. Hinda Miller’s proposal to reverse this year’s repeal of the state’s capital gains tax preference.

In this case, a peek is all that’s required because, with the eternal caveat that one can never conclusively predict where proposed legislation will go, one can with some confidence predict that this one ain’t goin’ nowhere.

Still, there was something interesting about the evidence Sen. Miller, a Burlington Democrat, provided as she announced her proposal: there wasn’t much, if any.

Do not misunderstand. This is an observation, not a condemnation. There is nothing unusual in proposing legislation without providing much evidence for it. Better (or worse?) yet, one need not have evidence to be correct.

Miller said that doing away with the preference may have been “fair” because it mostly effected the wealthy, but it was not “smart” because it would discourage investments, which the state needs.

“If we don’t repeal these capital-gains tax increases then we are going to dissipate any consideration people might have to risk their own money in the future of Vermont businesses,” Miller told the Burlington Free Press.

 

Could be. Then again, the news has been full of late of people who have decided to risk somebody’s money, probably including their own, in Vermont businesses (a new Yogurt plant in Brattleboro; a new company planning to produce hydro power from old flood control dams; three stores moving to Shelburne Road Plaza). Obviously, the tax structure isn’t discouraging everybody.

Not to mention that Gov. Jim Douglas, that advocate of low taxes and investment incentives, once proposed ending that capital gains preference himself. True, Douglas would have, sort of, given the money back to the same people who “lost” it by reducing income tax rates on the wealthiest taxpayers. But the impact on investment would presumably have been identical to the impact from this year’s repeal.

In fairness to Sen. Miller, she might have some facts to back up her contention, but she was out of town yesterday and did not respond to phone and email messages.

But now comes word of an actual economic study arguing that under the present circumstances (high unemployment; effective zero short-term interest rates), cutting capital gains taxes would be exactly the wrong thing to do.

In a paper written for the New York Federal Reserve Bank, economist Gauti Eggertsson concluded that reducing capital gains taxes “deepens a recession” because it “gives people the incentive to save instead of spend, when precisely the opposite is needed.”

The other item worth a peek is yesterday’s unanimous decision by the Legislative Committee on Administrative Review (LCAR) to reject a proposed rule allowing all-terrain vehicles on state land.

Again, only a peek is needed because there’s no reason to think many Vermonters care much. This is a niche issue. Oh, there’s measurable public opinion on it; a rather substantial majority of the public seems to oppose allowing the ATVs on state land. But only the hardcore environmentalists are passionate opponents, just as only the ATV riders are passionate advocates.

This political perspective is appropriate because the Agency of Natural Resource’s case for changing the rule was entirely political. The scientific evidence – every iota of it – supports keeping the ATVs off public land (and perhaps imposing more restrictions elsewhere). That’s why the actual scientists in the agency opposed changing the rule.

Again, this is observation, not condemnation. In a democracy, political decisions are entirely proper. Top ANR officials might have reasonably concluded that the degradation of the natural resource caused by ATVs, while certain, would be minor, outweighed by the enhanced convenience bestowed on the ATV riders.

(And perhaps enhanced economic activity, though whether allowing ATVs on state land would attract more out-of-state riders to Vermont is conjecture, and would have to be considered against the possibility that the policy would deter some out-of-state visitors who prefer quiet hikes on state land).

Then there’s the management consideration. ANR Secretary Jonathan Wood, neither an ATV rider nor, by reliable report, a great fan of the ATV lobby, has pointed out that some ATVers are riding on state land anyway, legal or no, and that providing some legal access might reduce the trespassing.

Besides, the ATV riders are one of the constituencies to which Gov. Jim Douglas…well, after some reflection, let’s say, one which he likes to please.

Before the reflection, the impulse was to say a constituency to which Douglas panders. But that has an unnecessarily derogatory connotation. Pandering is unavoidable in a democracy, and all office-holders engage in it (See under: Vermont Yankee, Democratic candidates for governor, and). The favored constituency does not think of itself as being pandered to, only as having its needs recognized and its sensibilities honored.

That’s why the Douglas Administration might try to push ahead with the rule change anyway. Honoring the sensibilities of a loyal constituency, even a small one, can be politically appealing.