The Problem with a Special Session Stand Off

Yesterday, on June 14, the Governor vetoed the “special session” budget bill (H.13) that was passed by the legislature. The Governor’s action confirms that we are stuck in a stand off over how to use one-time money that is available. The Administration has asked the legislature to use one-time money to buy down average homestead property tax rates. By contrast, the legislature has now passed two budgets that would fund government with proposals to use portions of the one-time money to pay down long term obligations, retiring debts incurred by previous generations of lawmakers.

The gubernatorial veto development is problematic for a number of reasons. If the Governor and legislature fail to reach agreement on a budget by July 1, many functions and services provided by state government would stop functioning. Our credit rating (in government, we measure creditworthiness by our bond rating) could suffer a downgrade, which would be harmful to the entities that rely on the state’s financial health to access low interest financing — these entities service student loans for higher education (VSAC), finance municipal infrastructure (VMBB), spur economic development (VEDA), and build out affordable housing stock (VHFA).

So, you might ask, what is all this talk about one-time money use to buy down property tax rates?

Late in the “normal” 2018 session, the Governor advocated that lawmakers prevent the average homestead property tax rate from increasing beyond FY18 levels. To do so, he called for a series of cost containment measures to be achieved by shifting education decision making from the local level to the state. The proposal came after 93% of local school budgets had been approved by voters, with all but several winning voter approval.

While the Governor’s framing suggested that his plan would shield Vermonters from experiencing property tax increases in FY19, the opposite is true for a majority of Vermont homeowners. In fact, more than half (127) of Vermont’s communities would experience a rate increase. And this average measure does not account for the many factors that go into determining an individual’s property tax bill. Relevant factors include, but are not limited to: 1. municipal tax rates; 2. an individual’s property and its relationship to their communities’ property values and statewide property values; 3. local student enrollment trends; 4. whether or not a school district has maintained adequate reserves; 5. the scheduled phaseout of Act 46 incentives, and more. In each of these examples local circumstances would impact an individual’s property tax bill.

For instance, let’s imagine that the average statewide homestead tax rate was adopted as recommended by the Administration and one of the above circumstances occurred in a Vermonter’s community:

  1. If the municipal tax rate increased due to increased municipal spending, the homestead tax payer would pay more in property taxes.
  2. If the town’s property values fell while property values increased in other parts of the state, the homestead tax payer would pay more in property taxes.
  3. If the number of students educated in the local school dropped from FY18 to FY19, but spending did not, per pupil spending would increase and the homestead tax payer would pay more in property taxes.
  4. If the school district emptied its reserves in FY18 and needed to replenish them in FY19 for future needs, the homestead tax payer would pay more in property taxes.
  5. If the school district received Act 46 merger incentives in FY18, and they stepped down by 2 cents in FY19 as they are phased out, the homestead tax payer would pay more in property taxes.

It’s important to note that approximately 70% of Vermont homeowners pay their property taxes based on income. Were we to apply the same logic of the Administration’s plan—namely that the average statewide rate for the largest percentage of payers is the most important measure to determine acceptable property tax growth—then the House and Senate education finance bill (H.911) that advaced in the “normal” 2018 session was a sound policy position, as it reduced the average tax rate on household income to 2.53%, down from 2.55% in FY18 and 2.70% in FY17. Again, the proposed 2.53% rate would be applied to 70% of Vermont payers who pay less because of income sensitivity. Of course, as explained above, a number of local factors would determine how much these payers actually pay for property taxes.

The Administration has stated that the 2.6 cent increase on the average homestead property tax rate authorized by H.911 was too great of an increase. Likewise, they appear to be suggesting that the proposed increase in the nonresidential property tax rate is too great, increasing from $1.535 in FY17 and 18 to $1.590 in FY19. Interestingly, of the 5.5 cent nonresidential increase proposed under H.911, roughly half of the uptick is attributable to the fact that the Administration insisted on keeping the rate artificially flat using one-time monies when setting FY18 rates. The other half of the increase comes from locally authorized spending in the Education Fund.

It is both too simple and too sloppy to suggest that the average statewide property tax is the best measure to shield Vermont property tax payers from future increases. The metric does not account for the many local variances present in Vermont’s education system. Nor does it account for how artificially holding down rates can lead to future year cost pressures, as seen in the nonresidential rate. Herein lies the disagreement and stand off.

The Governor wants to make the case that one-time money should be used in the Education Fund to hold rates steady. He has not, however, presented a complete plan for how we would cut spending in future years to ensure we wouldn’t cause a spike in property tax rates. More recently, the legislature has advocated for a multi-faceted approach to apply the one-time money, buying down property tax rates, saving some of the money for future needs, and applying some to pay down long term obligations in our pension funds. Depending on where you stand, both plans have pros and cons.

Ultimately, a continued stand off is bad for Vermonters. There is no upside — Political victories are temporary and empty if they mean we jeopardize our state’s national reputation for fiscal stewardship. We cannot risk a protracted budget debate and shutdown. Every move Vermont makes is under the microscope of the country’s three major bond rating agencies, Moody’s, Fitch, and Standard and Poor’s. A downgrade in our credit rating would have lasting implications. It would damage our reputation and Wall Street’s perception of Vermont as a premier, trustworthy, and competent triple-A rated state.

Wall Street is one thing — Closer to home, on Vermont’s main streets this type of brinksmanship is damaging trust in government. Our Institutions are strained nationally. We have an obligation to work together so we don’t fuel skepticism and frustration in the Green Mountain State — I believe our neighbors deserve better. I wasn’t elected to be politically entrenched or politically calculating. I was elected to get things done. In that spirit, all parties need to get back to the negotiating table to forge an agreement. Failure to do so is not an option. It’s time to reach consensus.