- Tim Newcomb
Hours after legislators voted to close the Vermont Statehouse last month in the face of the coronavirus outbreak, Rep. Kitty Toll (D-Danville) and fellow members of the House Appropriations Committee toiled into the evening to complete next year's state budget.
"We were well over 80, 85 percent done," said Toll, who chairs the committee, "until things started to crumble around us."
Nearly four weeks later, that budget has become an artifact of history — rendered irrelevant by the pandemic's ravaging effects on Vermont's economy and the state's finances. "We're going to be starting from the beginning," Toll said, with resignation in her voice.
Not anytime soon.
Well before Toll and her colleagues reconsider next year's budget, they'll have to plug a massive hole in this year's. According to the latest projections by the legislature's Joint Fiscal Office, the crisis has already cost the state $389 million in tax receipts — about 44 percent of what it was expecting to collect by June 30. And because the state is three-quarters of the way through its current fiscal year, much of that money has already been spent.
The central problem lawmakers face is the uncertainty around how long the public health crisis will last — and, therefore, how long the government will have to enforce social-distancing protocols. Those, while necessary, according to state Finance Commissioner Adam Greshin, are "taking a hatchet to our economy."
House Speaker Mitzi Johnson (D-South Hero) has spent 18 years in the legislature and served on the Appropriations Committee during the last two economic and natural disasters the state faced: the 2008 financial crisis and Tropical Storm Irene in 2011. In her view, neither compares. "This is unlike anything that we've experienced before, just because of the number and magnitude of unknowns," she said.
One unknown is how much it will cost the state to fight the coronavirus outbreak.
According to Greshin, who serves as Gov. Phil Scott's chief budget writer, the administration is doing everything it can to protect Vermonters — and that's an expensive proposition. In recent weeks, Greshin said, the state has spent more than $20 million on ventilators, personal protective equipment for health care providers, emergency housing, medical surge centers and other pressing needs.
That doesn't even begin to account for costs that are harder to quantify at this stage, such as remote learning at shuttered schools and overtime for public health and safety workers.
"Because the number is so damn variable, anything I say today will be wrong tomorrow," Greshin said.
The administration is making a "colossal effort" to track every cost for potential reimbursement by the federal government, Greshin said, but all parties seem to agree that bookkeeping shouldn't get in the way of fighting the outbreak.
"My attitude has been: Save lives first, worry about the finances after," said Senate President Pro Tempore Tim Ashe (D/P-Chittenden). "Which is to say, we don't want people not getting access to materials that are needed to keep people safe or alive because of a worry that we're going to overshoot a line item or something."
Uncle Sam's Plan
The federal government is likely to pick up the tab for many of these expenses.
The first of three aid packages approved by Congress is already funding the state's Health Operations Center, which coordinates Vermont's epidemiological response. The third — and by far the largest — is projected to direct nearly $2 billion to Vermont, U.S. Sen. Patrick Leahy (D-Vt.) announced two weeks ago when it cleared the Senate.
Of that, the state is expecting to receive a $1.25 billion check later this month from the federal Coronavirus Relief Fund. Leahy's office has outlined another $65 million worth of funding in the bill for Vermont, including $20 million for public transit, $10 million for airports and $5 million for public health preparedness. The rest of the $2 billion will come in the form of direct aid to hospitals and schools, as well as expanded unemployment benefits to Vermonters, according to Leahy's office.
While the $1.25 billion payment amounts to a whopping three-quarters of the state's annual General Fund budget, it comes with strings attached: The money can be used only to pay expenses created by the coronavirus pandemic between March and December of this year, and it cannot be used for expenses already included in state and local budgets.
Steve Klein, the legislature's chief fiscal officer, is worried that those restrictions could prevent the state from using the federal aid for what it needs most: replacing the revenue it's already lost. Perversely, he said, "We may have more money than we know what to do with if they tighten [the restrictions] up."
Leahy's office appears acutely aware of the problem. In an interview with Seven Days, members of his Senate Appropriations Committee staff said they were urging the Department of the Treasury to provide flexibility for the funding and a broad interpretation of coronavirus-related expenses.
Kicking the Can
Not all of Vermont's lost tax revenue is gone for good.
When the federal government bumped Tax Day from April 15 to July 15, the state had to follow suit, which caused a major problem on paper. That's because many personal and corporate income tax payments will be collected next fiscal year, not this one. "So we have this whole last quarter without any revenues coming in," said Sen. Ann Cummings (D-Washington), who chairs the Senate Finance Committee.
The good news is that most of that money should eventually show up, assuming taxpayers can pay what they owe come summer. And because those income tax collections reflect the robust economic activity that took place in 2019, they shouldn't be affected by the current economic downturn. So while the state's General Fund revenue is projected to be short $202 million this fiscal year, $140 million of it is expected to arrive by July. The other $62 million may be lost for good, due to shortfalls in other taxes that feed into the General Fund, such as those on rooms and meals.
The Scott administration recently gave retailers, restaurants, hotels and other businesses a two-month reprieve on the sales and use taxes and the rooms and meals taxes they remit each month. "The idea was to give these guys a break," Greshin explained.
But because those revenue sources reflect current recent economic activity — much of which has ground to a halt — it's unlikely to amount to a lot when it finally arrives. Furthermore, many establishments that owe the state money might not be able to pay up when it's finally due.
"I think that it's an open question as to whether we'll be able to actually collect all that money," senior fiscal analyst Mark Perrault told legislators last week.
That could prove especially problematic for the state's Education Fund, which is partially funded by sales and use taxes.
"The only thing people are buying right now are groceries, and groceries aren't subject to the sales tax," said Rep. Janet Ancel (D-Calais), who chairs the House Ways and Means Committee. "So we are looking at really a pretty severe drop in sales tax revenue — and we don't know how long it will last."
"Basically, the Education Fund is insolvent at this point," Perrault said last week.
And just because schools are closed for the rest of the year doesn't mean they're spending less money. "If anything, this new world will cost them the same or more," Ancel said.
Meanwhile, most school districts have already signed off on budgets for the next fiscal year, and those have added another $73 million worth of spending. "They were passed in another financial world," Cummings said.
Lawmakers are also worried that many Vermonters won't be able to pay their property tax bills when they come due, which could further exacerbate school funding shortfalls. And while many residential property taxpayers get a break each year based on their earnings, next year's payments are calculated using last year's income levels — so those who have lost their jobs due to the pandemic won't get relief anytime soon.
Adjusting the Adjustment
In ordinary times, the legislature sends the governor a budget in May and then adjourns for the year. When lawmakers return the next January — halfway through the fiscal year — they pass a "budget adjustment act" that accounts for any changes in revenue or spending needs.
These being no ordinary times, the Scott administration and legislative leaders are now preparing for a second budget adjustment act that would address the problems caused by the pandemic. It could come up for a vote later this month or early next month, they say, and would only address the current fiscal year.
According to Greshin, the revised budget could be balanced by cutting spending, making use of the new federal funding and tapping the state's four reserve funds, which currently hold $228 million. "I'm proud to say that Vermont is in much better shape than most other states," Greshin said. "We do have full reserves. We do have the ability to plug holes."
Ashe, the Senate president, said he believes now is an appropriate time to draw them down, but he argues that it's not without cost. "If you use all the reserves, then they're gone," he said. "And you have to replenish them."
One Step at a Time
Sen. Jane Kitchel (D-Caledonia), who chairs the Senate Appropriations Committee, normally spends the month of April ironing out the next year's budget. For the time being, her committee isn't even meeting.
"I could spend a lot of time raising questions only to be told, 'I don't know that yet,'" she said. "We need to exercise patience to get the answers we need to make decisions."
Given how challenging it is to anticipate what next week will bring, nobody in state government appears eager to begin work on next year's budget. "Until we're all the way through the surge and well back down the back side of it, we won't understand the impact on the state budget or household budgets," said Johnson, the House speaker.
For that reason, lawmakers are now expecting to pass a short-term budget that would cover only the first few months of the fiscal year that begins July 1. Rather than adjourn for the biennium, they would return over the summer or fall to complete the rest of the budget.
For now, according to Cummings, "There's just too much up in the air."
Pensions Will Be Paid
The good news, according to Treasurer Beth Pearce, is that the state has enough money — at least for now — to pay its bills.
Throughout the year, the state's cash position ebbs and flows as revenue comes in and payments are made. The next big outlay is scheduled for April 30, when the state is set to distribute $130 million to school districts. "We will be paying that on time and without disruption," Pearce said.
To provide an additional backstop, Pearce is calling on the legislature to extend the period during which she can borrow from restricted state funds to make payments. "It's like borrowing from yourself," she said. "It's cheaper than going out for a line of credit."
Pearce also oversees pension funds for state workers, teachers and municipal employees. Those were worth $4.6 billion at the end of the February — before the stock market tanked. The treasurer said she hasn't yet received an end-of-March update.
"They're gonna take some hits, and there's gonna be some volatility in the markets continuing," she said. "But we're long-term investors. We see things in a 30-year horizon. We have more than enough money, I want to assure retirees, to pay retirement bills."
Though Toll and her colleagues on the House Appropriations Committee are no longer working into the night at the Statehouse, they're continuing to meet — now using Zoom's videoconferencing platform.
"There's a learning curve," she said. "My kids hear us talking and say, 'You're such boomers!'"
The committee is also doing a lot of waiting — for clarity from the state economists and for marching orders from legislative leadership. "We're on hold at this point," she said.
According to Johnson, they may stay on hold for some time.
"Stay tuned," she said. "It's going to be a long process and not an easy one."
Disclosure: Tim Ashe is the domestic partner of Seven Days publisher and coeditor Paula Routly. Find our conflict-of-interest policy at sevendaysvt.com/disclosure.