Three weeks to shutdown: Catch up on VT's budget standoff

April McCullum | Burlington Free Press

MONTPELIER - Gov. Phil Scott had hoped the Vermont Legislature's special session would be quick work. Three days in Montpelier, tops, to pass a new budget and tax bill, he suggested in a letter to lawmakers.

In reality the special session will be three weeks old Wednesday, with no end in sight.

Fewer than three weeks remain until the end of the fiscal year and the possibility of a government shutdown.

The House and Senate have been working in fits and starts, minimizing their time in the Statehouse to keep expenses down. They passed a bill last week that would keep the government running, if Scott allows it to become law. Lawmakers have also worked on a number of lower-profile bills.

But no deal has materialized that would resolve the core issue — a rise in education property tax rates — that prompted Scott to veto the budget and tax bills in the first place. Scott has not budged on his no-taxes pledge, and Democratic leaders have found the governor's proposals unpalatable or unworkable.

Here's what to watch in the ongoing dispute.

On Gov. Scott's desk: A budget and tax bill that would keep government running

The House and Senate have passed a bill that would address three fiscal challenges:

The first is that Vermont needs a budget on July 1 to keep state government running. There is no contingency plan for a state government shutdown, and all sides agree that a shutdown would be the worst possible outcome.

to keep state government running. There is no contingency plan for a state government shutdown, and all sides agree that a shutdown would be the worst possible outcome. The second challenge is that Vermont needs a homestead property tax rate on July 1 in order to collect taxes from homeowners. There is no fallback plan, and without a homestead tax rate Vermont's education fund would be hundreds of millions of dollars short.

in order to collect taxes from homeowners. There is no fallback plan, and without a homestead tax rate Vermont's education fund would be hundreds of millions of dollars short. The third challenge is that Vermont leaders want to change Vermont's income tax laws and expand the Social Security tax exemption. These changes died when Scott vetoed the tax bill in May, but they have broad support.

H. 13, which reached the governor's desk Friday, includes a spending plan to keep state government running, a default homestead tax rate, and the income tax changes.

"We passed a good budget that removes the points of controversy so we can fight on those a different day without risking a government shutdown, which the governor hopefully joins us in wanting to avoid at all costs," said Senate President Pro Tempore Tim Ashe, D/P-Chittenden.

More: Vermont Legislature moves to avoid a government shutdown — but not resolve the standoff

Scott has signaled that he may veto the bill. The Scott administration and some Republican lawmakers have complained that H. 13 is insufficient because it does nothing to change the non-residential property tax rate. The non-residential rate — which applies to commercial and industrial property, second homes and rental housing — defaults to $1.59 in any given year if the Legislature takes no action. This year, that default rate would represent an increase of 5.5 cents.

"By being silent on this, we are voting for a tax increase on non-residential property taxes," said Sen. Randy Brock, R-Franklin.

The Senate rejected an attempt by Brock to keep the non-residential tax rate flat, and they passed the bill despite the governor's disapproval.

"We can't legislate by veto threats," Ashe said. "Otherwise, the governor could walk in on day one, put a piece of paper on the table and say, 'Anything that deviates from this will be vetoed.' And then the legislative function of the Legislature would be removed entirely."

The governor has until Thursday to announce whether he will veto H. 13, sign it, or allow it to become law without his signature. In the event of a veto, lawmakers will need to consider a veto override or another attempt to keep government running.

Still unresolved: The underlying dispute over tax rates

Even if H. 13 succeeds, the Legislature and Scott will still need to negotiate over what Ashe described as "points of controversy." These include:

Should Vermont keep education property tax rates level using a one-time influx of $34.5 million from the general fund? If so, should that transfer be paid back in the future?

Alternatively, should the state allow property taxes to rise to fund local school budgets?

Should the state put the millions of dollars of extra money toward reducing teacher retirement obligations?

Will any of Scott's education policy ideas become a reality, such as the imposition of school employee health care terms? Lawmakers have been uncomfortable with some of the ideas, and even less comfortable with the prospect of banking on future savings from untested initiatives.

Increasingly urgent: The possibility of a government shutdown

If Vermont lacks a budget on July 1, state government would risk shutting down. The state Constitution requires all spending to be approved by the Legislature, and there are no exceptions for law enforcement or other essential services.

A shutdown could also harm the state's credit rating, according to State Treasurer Beth Pearce.

The Vermont State Employees Union is seeking clarification from the state about which employees would be considered "essential" in the event of a shutdown. They also want a promise that all state employees will be paid when funding is restored.

"We remember the chaos and indecision about services and personnel after Hurricane Irene slammed us, and there’s no way anyone wants a repeat of that, which is why we are looking for concrete answers about a shutdown weeks in advance," said Dave Bellini, president of VSEA.

"VSEA remains hopeful a budget deal will be reached," Bellini continued in a statement, "and Vermont can continue to claim to be one of the few states to never suffer a government shutdown."

Contact April McCullum at 802-660-1863 or amccullum@freepressmedia.com. Follow her on Twitter at @April_McCullum.