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Lower tax receipts mean $89M Education Fund shortfall

That is the outstanding question for not just Vermont, but for every state.
— Rep. Diane Lanpher

MONTPELIER — With the Vermont Education Fund’s revenue sources hit hard by the COVID-19 pandemic, a legislative office last week projected that the fund will have an $88.7 million revenue shortfall.
“State revenues are expected to fall dramatically,” leading to a shortfall for the fiscal year that ends this June — Fiscal Year 2020, according to an April 9 draft issue brief prepared by the Vermont Legislature Joint Fiscal Office (JFO). 
Legislators are scrambling to cover the shortfall, the size of which was not expected, according to Rep. Robin Scheu. The Middlebury Democrat is a member of the House Ways and Means Committee that will do much of the heavy lifting during the financial crisis that is accompanying the response to the public health crisis. 
“It doubled overnight. That’s one of the things that surprised us,” Scheu said. “First of all, we have to get through Fiscal Year 2020. And that’s the first part people need to understand, is that the nearly $89 million shortfall is for Fiscal Year 20. And that is because of lost revenue and revenue that is being delayed for months, until July for some revenue.”
Lawmakers are not optimistic about the outlook for FY 2021, which begins July 1. Voters in March approved $73 million in new school spending statewide above the FY 2020 level. And another 18 school budgets — including for Essex, South Burlington, and the Slate Valley Unified School District, which includes Orwell — have yet to be either approved or voted upon.
“If we use reserves and a lot of other things to cover for this year, FY21 for the education funding is likely to be worse, because we won’t have any reserves,” Scheu said. “In fact, we’ll be operating in a deficit position in this fiscal year very possibly. It’s too difficult to project what FY21 is going to look like at this point, except worse than FY20.”

PROBLEM DETAILS
The Vermont Education Fund gets two-thirds of money through property taxes, which at this point is an uncertain source since many residents are struggling to make escrow payments. Other funding sources for the Education Fund include proceeds from 100% of the Sales and Use Tax and the Vermont Lottery, 33% of the Vehicle Purchase and Use Tax, and 25% of the Meals/Rooms and Alcohol Tax.
The JFO issue brief stated that prior to the pandemic, the Education Fund “was in good fiscal condition with a full $36.4 million stabilization reserve and an estimated $12.9 million surplus.”
Last week, however, the JFO issue brief projected the fund “to close FY2020 with a $39.5 million deficit. Moreover, if $53.5 million in deferred consumption taxes are not fully remitted to the state at the end of June, this fund deficit could grow even larger.”
Those delayed taxes to which the JFO refers are Sales and Rooms/Meals tax payments that the Vermont Tax Department allowed businesses to defer making for the past two months until at least May, lawmakers said.
Rep. Peter Conlon, D-Cornwall, a House Education Committee and Addison Central School Board member, said lawmakers share the JFO concern that business might not be able to come up with those funds. 
“Do they even have that money?” Conlon said. “Can they possibly make those payments? Who knows?”
Scheu also noted towns have also yet to send to the state $132 million of school property taxes because of installment payment dates scheduled for late in the fiscal year. 
Vermont officials are also uncertain about the larger revenue picture because of the postponement of the federal and state income tax filing date from April 15 to July 15. 
Meanwhile, Legislators said the state is obligated to fund school spending approved for this school year and next. They note voters have spoken, teachers’ contracts are in place, and the dates have passed to send out reduction-in-force notices required before teachers can be laid off. 
“That’s what they (voters) passed,” said Rep. Diane Lanpher, D-Vergennes, the clerk of the House Appropriations Committee. “That’s what has to be provided. So we’re working from those numbers.”
Lanpher described the Ed Fund issue as the most immediately pressing financial question facing lawmakers.
“The Ed Fund is the most worrisome,” Lanpher said.

SOLUTIONS
Scheu said the members of the Ways and Means Committee met with Vermont Treasurer Beth Pearce on Friday to brainstorm ways to fill the funding gap. 
There are three major internal options, Scheu said: borrowing from reserves in other major state funds, establishing lines of credit, and short-term borrowing from a municipal bond bank.
All will probably be used, she said. 
“We won’t do just one thing,” Scheu said. “Treasurer Pearce’s first choice is inter-fund borrowing because it’s easier, more efficient, and there’s no additional cost to the taxpayer.”
Then there is federal help. Vermont is due about $1.25 billion from the federal C.A.R.E.S Act later this month, and Congress is working on another COVID-19 relief bill.
Scheu is not optimistic the first infusion of federal cash will be useful because as the bill is written the money cannot simply replace lost revenue. 
“They have assigned where all that money goes in that $1.2 billion. So there isn’t any flexibility. And none of that money is for revenue replacement. That’s what we need,” Scheu said. 
The second bill could be more helpful, however, she said.
“We need flexible money. We don’t need it to be prescribed to us, because we know where we need the money,” Scheu said.
Conlon and Lanpher still hope that restrictions will be relaxed on the first bill. 
“We’re hoping they loosen the strings so that it can be used for revenue replacement,” Conlon said. 
Lanpher said Vermont is not the only state in this situation, and pressure from other states could lead to a change of course at the federal level. 
“That is the outstanding question for not just Vermont, but for every state,” Lanpher said.
The C.A.R.E.S. bill is providing about $31 million directly to Vermont schools. For example, Addison Northwest School District is expecting to receive about $155,000 to pay for delivering meals during April break, helping to supply Chromebooks to students for distance learning, and extra cleaning at schools, according to ANWSD Superintendent Sheila Soule.
Scheu said that funding might offset some costs that otherwise would have added to the deficit. 
All the lawmakers saw a long road ahead working on the budget. Lanpher expected Legislative or committee sessions throughout the summer to deal with financial questions: “We’re pretty much not leaving, I would say.”
Scheu said Vermont’s finances have been well managed, and that would help the state weather the storm. 
“The fact that the state has over the years built up these reserves is what makes it possible for us today to do this. Our state is in much better shape than many of the other states,” she said. 
But Conlon said ultimately the problem would probably be too large for Vermont, or any other state, to handle on its own. 
“For right now it’s still a waiting game while we learn more about what the level of federal support is going to be,” Conlon said. “Beyond that the Legislature and state government as a whole is still focused on getting through 2020 and is deeply concerned about 2021.”

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