Gov. Scott pitches plan to fix school funding gap

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MONTPELIER — The Scott administration proposed a plan Tuesday to plug a $58 million hole in the education fund with one-time money.

The sources of the funding include $19 million from a tobacco settlement,

$20 million from state surplus revenues, $7 million in reserves and $12 million from other sources.

The money will be paid back over time, mainly by asking schools to reduce the size of educational staff over the next five years, according to Susanne Young, the secretary of the Agency of Administration.

If the lawmakers and the Scott administration don't fill the funding gap — which was created by the use of one-time money last year — taxpayers will be on the hook for a 5-cent to 7-cent increase in property taxes this coming fiscal year.

Gov. Phil Scott is sticking to his no new taxes campaign pledge and adamantly opposes a property tax increase. His administration says that a short-term funding solution this year, combined with longer term commitments to cost-containment measures, will keep taxes stable for years. Reducing school spending and putting a lid on the property tax rate is central to that promise, Young says.

"Our student-to-staff ratio is the lowest in the country and our per-pupil spending is one of the highest," Young said. "We have a perennial challenge with deficits, with a declining student population, we are very enthusiastic about the fact we have drawn on bipartisan ideas."

Lawmakers immediately opposed the plan. The legislative session is set to end May 12, but Senate leader Tim Ashe is skeptical about how the Legislature and the Scott administration will resolve their differences. Scott has threatened vetos over any increases in taxes or fees; Ashe has said he will not schedule a veto session.

"We'll work with the administration in the coming days, but I already see the storm clouds moving in," Ashe said.

The one-time funding proposal not only reins in rates at 2017 levels for the coming fiscal year; it is also part of a plan that keeps rates level over a five-year period by reducing school teaching and paraprofessional staff statewide by about 1,000 jobs over five years, through retirements and other job vacancies. There are about 18,000 educational workers in the state.

The savings over the five-year period would be about $262 million, according to estimates from the Department of Finance and Management.

Jeff Fannon, the executive director of the Vermont NEA, which represents teachers, says the plan would eliminate thousands of jobs across the state and "will do nothing for kids and it won't better the education system."

"If a second grade teacher retires you still need a second grade teacher, so attrition works in the aggregate but not at the local level," Fannon said. "Local school boards figure out who to hire and who to replace and they do that well and manage well under current restraints under which they operate including declining enrollment."

Scott says the reductions in force through attrition are necessary because of the 25 percent decline in student enrollments over the past 20 years. There are currently 76,000 students in Vermont, down from a high of 104,000. The Agency of Education estimates that number will drop to 69,000 students over the next five years.

"Stepping back as to why we have to act, and it is important for all of us to come to consensus and act now, Vermont has great schools and great teachers and delivers a great education, but demographic challenges contribute to a K-12 educational system that is inefficient, outdated and unaffordable," Young said. "It is actually denying opportunity to kids if we do nothing."

Young and Heather Bouchey, the interim secretary of the Agency of Education, say they will form a task force that will help schools adapt to fewer personnel and restructure programs.

"I think we are not talking about immediately cutting current jobs," Bouchey said. "We are talking about a plan that will naturally occur in the system."

The governor has said that the average statewide staff-to-student ratio at the current ratio of 1 to 4.25 is too low. In his proposal, the administration estimates that the state could save $262 million over five years, starting in fiscal year 2020, if the ratio is ratcheted up to 1 to 5.75.

House and Senate reaction

Both Senate President Pro Tem Tim Ashe and Speaker of the House Mitzi Johnson have said the use of one-time funding to plug the education fund hole this year will only exacerbate the state's school spending woes, as it would essentially create the same problem next year by artificially buying down taxes this year.

But the two leaders also signaled that they would be willing to negotiate with the governor — both on the $58 million gap and the staff-to-student ratio issue. Still, Ashe put the onus on Scott to come to the table.

"I believe if the governor is willing to compromise, there is plenty of room to get out of here without a veto session," Ashe said. "The problem is, we have a nonnegotiable position too we are not going to willy-nilly slash staff at schools."

The one-time money earmarked by the Scott administration has already been tapped by the General Assembly. The Senate had already earmarked the $24 million in anticipated surplus for programs in the budget. The House spent the tobacco money on addiction treatment and paying down teacher pension obligations to "make up for underfunding in the 1990s."

Ashe says there might be a need for some one-time money to reach a deal, but that $58 million in one-time money would be "unprecedented."

"I think the Senate for sure will have to think long and hard before it uses $58 million of one-time money to artificially buy down rates for one year, knowing for what the other uses of those dollars could be." Ashe said.

The Senate leader described it as a tradeoff between "instant gratification versus fiscal conservatism." Ashe said the governor was using level funding for property taxes as a wedge issue for the upcoming election instead of ensuring that longterm retirement debt is kept in check.

"This would really scoop from almost every reserve we have for the purpose of delivering that tax pledge from the governor," Ashe said. "Vermonters want long-term sustainability and being able to provide long-term fiscal prudence and to show Wall Street that we deserve the outstanding credit ratings we have by keeping our reserves filled and paying our bills."

Johnson said Vermont should be saving some of its reserves rather than spending it all during a period of economic growth.

"At some point, we'll start seeing a downturn, and when I was on appropriations committee on first years, I remember really wishing that we had some sort of spendable reserve rather than just cutting willy nilly," Johnson said. "I want to make sure that we are preparing ourselves for something that eventually is going to be a rainy day."

The House speaker said reducing reserves could also have an adverse impact on the state's bond ratings, which means the money it borrows, at both the state and municipal level, will cost more.

Ashe and Johnson have also objected to mandated staff-to-student ratios. They insist that the ratios are already changing as school districts merge under Act 46 and local communities grapple with increasingly small school populations. Young didn't disagree with this assessment of the eventual impact of Act 46, but said that the mergers have been slow to bear fiscal fruit.

Lawmakers have seen this movie before. Like last year, education financing will be the issue that bogs down the end-of-session debate in the Legislature.

Longtime legislator Rep. Kurt Wright, R-Burlington, described it as the "pressure point" for adjournment

"I'm guessing the governor will veto either the House or the Senate versions of the bill [H.911] over the income surcharge or the 5 cent tax increase," Wright said. "So the question is, is there some compromise in between the House, Senate and governor's proposals that can get support from the administration and the Legislature?"

Spending plan details

The budget currently under consideration by the Senate has an estimated $24 million in surplus at the close of FY18. Almost all of that would go to education funding.

The total tobacco settlement brought a total of $34 million into state coffers, but $14 million was already earmarked for opioid addiction treatment programs.

The Senate's proposed budget included a number of programs to support children and vulnerable adults using that settlement funding.

The full spending plan is as follows:

- $19 million from $34 million received in tobacco settlement funds

- $20 million in FY18 General Fund surplus revenues (8.6 million as suggested in Senate windfall language for FY18 Education Fund Budget Stabilization Reserve)

- $7 million from the General Fund Balance Reserve

- $4 million in direct application from special funds

- $2 million in direct application from the Department of Financial Regulation non-smoothing

- $2 million reversion from Pay Act and reclassications appropriations

- $2 million in expected Education Fund carryforwards

- $2 million in savings from changes to out method of calculating property tax adjustments, as proposed in H.911

Over time, the plan is expected to reap tens of millions of dollars in savings from K-12 public schools that would be used for investments in higher education and early education programs, both of which have been starved for funding.

The Scott administration says the proposal accounts for 3.25 percent annually increases on average in the education fund, primarily from growth in the grand list.

The governor's office has adopted several proposals the Legislature has been considering this session. The governor's office is booking savings from a less expensive and more predictable statewide teacher health care plan ($62 million over five years), district block grants for special education ($86 million over five years), and a lower threshold for tax refunds for house site values ($400,000 as opposed to the current level, $500,000).

New ideas for long-term savings include property tax adjustments for new homesteads ($11 million) and a lower excess spending threshold for per pupil spending ($35 million).

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