Over the next few months, Gov. Scott and his agency secretaries and commissioners will prepare the budget that the administration will submit to the Legislature when it returns to Montpelier next January. They will face challenges on both the revenue and spending sides of the budget.
The first challenge is whether to modify the revenue projections that consulting economists Tom Kavet and Jeffrey Carr presented to the governor and legislative leadership only a month ago. On July 29, Carr and Kavet estimated that state revenues would increase by $56 million over the next two years. They also said “it is difficult to include a forecast of a recession over the next 24 months.”
Since July 29, signs of a slowing United States and global economy have increased. Largely in response to the trade war instigated by President Trump, manufacturing output has shrunk around the world. Business leaders are holding back from making capital investments due to the uncertainty surrounding the trade war. Surveys of consumer confidence also show increased concern about the economic future. While economic forecasters are divided over whether the U.S. will experience an actual recession in 2020, few economists see growth at much higher than 2 percent annually.
Vermont is not immune from national and international economic trends, and slow or no economic growth would mean this summer’s revenue projections would not materialize. The income tax would be affected if high-net-worth taxpayers report lower capital gains due to declining stock prices. The sales tax would be affected if consumers cut back on purchases, especially of big-ticket items whose prices may increase because of Trump tariffs.
Meanwhile, the Scott administration is facing increasing pressures on the spending side of the budget. The current year’s state budget includes an increase in Medicaid appropriations of only 0.9 percent, less than overall inflation, much less health care inflation. Medicaid reimbursement rates are far below the actual cost of care incurred by providers. Providers make up the difference by charging higher prices to commercial insurers such as Blue Cross Blue Shield and MVP.
The Green Mountain Care Board recently approved an average rate increase of 12.4 percent for BCBS, the state’s largest insurer, for 2020. One of the principal drivers of this rate increase is the Medicaid cost-shift. The Green Mountain Care Board estimates that the Medicaid cost-shift for 2019 will be $217 million.
Even if every additional dollar of state revenue that Kavet and Carr project for the next two years were devoted to Medicaid, only one-quarter of the Medicaid cost-shift gap would be closed. If actual revenues come in lower than those projections, funds that could be allocated to Medicaid to hold down private insurance rate increases would not materialize.
Another area of concern on the spending side of the state budget is school construction aid. The state once covered 30 percent of the cost of school renovation and construction projects. That program was suspended in 2007. School boards and superintendents want the administration and the Legislature to reinstate it.
Many Vermont school buildings were constructed during the 1950s and 1960s, a time of rapid enrollment growth associated with the baby boom. These buildings are now 50 to 60 years old. They are not only showing their age, but in many instances are inefficient in terms of energy consumption and not suited to contemporary styles of teaching and learning.
In the absence of state construction aid funds, school districts must rely on the willingness of voters to approve bond issues and property tax increases to cover the full cost of renovation and construction. These tax increases are too much for the voters in some districts — the Mount Abraham Unified School District being a good local example. But unless the economy grows considerably faster than even under Kavet and Carr’s optimistic projection, the state would not have the revenue needed to help property taxpayers with school construction costs.
Eric L. Davis is professor emeritus of political science at Middlebury College.