Analysis: The Many Ways Of Closing A $112 Million Budget Gap

Feb 20, 2015

VPR’s Statehouse Reporter Peter Hirschfeld joined Vermont Edition to talk about some of the ideas and proposals facing the Legislature to help close the $112 million budget gap.

On state workers having to re-negotiate their contracts

This week, state employees held a rally at the Statehouse to protest a plan by Gov. Peter Shumlin's administration to re-negotiate their existing contracts, in order to make at least $5 million in savings for the coming year. The savings could come in the form of higher health care payment for state employees, or a reduction of their proposed salary increases.

Hirschfeld reports that state workers don’t feel the budget gap is their problem to solve, and that they think they shouldn’t have to open up a contract they already bargained in good faith.

So how will this be settled? “The Vermont State Employees Association is having a very tough time finding any support for its cause in Montpelier right now,” Hirschfeld says. He explains that House Speaker Shap Smith and Senate President John Campbell both say that reductions in government payroll are a necessary component to solving the $112 million shortfall in the general fund budget. “And if the VSEA is going to win this fight, then it’s going to have to find some pretty hard-hitting lawmakers to take up its cause, and fast,” says Hirschfeld.

On Gov. Shumlin’s proposed payroll tax

Gov. Shumlin recently proposed a 0.7 percent payroll tax on all businesses in the state, which would raise roughly $90 million annually and be matched by $100 million of federal money. The plan is to take $140 million of that money and put it towards raising the Medicaid reimbursement rate, which would reduce the cost-shift that takes place when government underfunds the cost of Medicaid services.

“Views are still evolving. But the plan is definitely in trouble. The concept of a payroll tax is an incendiary one and most business groups absolutely hate it.” - Peter Hirschfeld, VPR statehouse reporter

How are lawmakers responding to the proposal in the Statehouse? “Views are still evolving,” Hirschfeld says. “But the plan is definitely in trouble. The concept of a payroll tax is an incendiary one and most business groups absolutely hate it.”

Hirschfeld explains that although the hit to the average business wouldn’t be enormous under this plan — maybe a few hundred dollars annually for small companies — a lot of people view it as a dangerous precedent. “They view the payroll tax as a place administrations are going to continue to go to every time they have a need for revenue,” he says.

The governor says the new payroll tax will create a 5 percent reduction in private health care premiums next year. After facing some skepticism with that figure, Shumlin proposed to put a revision into the bill that if there isn’t a 5 percent reduction, the payroll tax will go away.

“This idea from the governor is more about political salesmanship than it is about the creation of sound policy,” Hirschfeld says. “I don’t think lawmakers are going to get bogged down trying to come up with some kind of twisted methodology … They are going to evaluate the proposal on its merits, and then either move forward or not. But it underscores the basic tension at play here.”

Shumlin says the economic harm to businesses from the payroll tax will be offset entirely by the economic benefits of the lower health insurance premiums. But Hirschfeld says the skepticism remains: “The bottom line is many legislators remain unconvinced that that will be the outcome.”

Is the Medicaid cost-shift a serious issue for legislators?

“They absolutely want to do something about this cost-shift and they’ve wanted to for a long time. The issue has always been the money."

“They absolutely want to do something about this cost-shift and they’ve wanted to for a long time,” Hirschfeld says. “The issue has always been the money. The state last year was going to spend $10 million to boost Medicaid rates … That would mean paying providers 3 percent more this year to treat Medicaid patients than the prior year. But, when revenues came under target, the first place that they went to was the increased Medicaid rates.” He explains that the Legislature has always voiced commitment to improve Medicaid, but has yet to come through with the revenue needed to accomplish it.

Hirschfeld says that the next step for lawmakers is to decide if they are ready to commit to the issue entirely. “There is a threshold question that lawmakers need to ask: ‘Do we want to address the cost-shift or not? If we do want to address it, then by how much?’ That’s the question they need to find the answer to, and soon,” Hirschfeld says.

“There is a threshold question that lawmakers need to ask: ‘Do we want to address the cost-shift or not? If we do want to address it, then by how much?’ That’s the question they need to find the answer to, and soon."

Once they know the answer to that, they can figure out how they’ll pay for it, Hirschfeld says. There are several proposed ways to raise the revenue: “There’s the proposed tax on soda and sugar-sweetened beverages, there are some people who want to increase taxes only on businesses that don’t provide health insurance to their employees … The thing they need to decide first is, ‘Do we want to find the money,’ then they get to answer the question, ‘Where do we get it?’"