 Good morning, everybody. It's Thursday, September 3rd. And this is a joint meeting with House Ways, Means and House Appropriations Committee. And I asked our fiscal staff a week or two ago if they would help put together a block of time to look at state responses in a recession and particularly a recession like the one or an economic downturn like the one that we're in now. I don't know if it's technically a recession at this point, but it's certainly challenging. And Joyce Manchester in particular and Graham just did a phenomenal job of putting together a panel that I think will be very interesting and I hope instructor for all of us. We're very happy to have House Appropriations join us. We collaborate as much as we can on fiscal issues so it's really good for us all to be listening to the same thing. I'm going to introduce. I need to check with social I think Dan White is not here yet so let me introduce the two that I'll introduce all three panel members and then when Dan joins us so just join us and I won't stop and do another introduction. She is with us and she is the sole price fellow and director of the state local finance initiative at the urban urban Brookings tax policy center. She's an expert on state and local public finance and economics of education, which is exactly what we're focused on her work examines issues of state and local public finance and focuses on state budget and tax issues. And we're very grateful that you're with us and happy to be able to spend some time with you. Dan White is going to be joining us. I hope shortly and he is the director of governmental consulting and fiscal policy research with Moody's analytics. Moody's economic research with an emphasis on fiscal policy and municipal market impacts and his most recent research has focused on public policy responses to the great recession and ways to better prepare for changes in the business cycle. There's much more to their bios I'm not going to read it all so I don't want to use all our time doing that but they will be posted on our website for people who want to refer to them. I want to be introduced a little more formally than I normally do. Tom combat who is our legislative economists to use the president of combat rockler and associates and economic and public policy consultancy offering professional services and areas of economics public policy analysis demographics, regional economic modeling and information systems and we have the benefit of Tom's expertise on a regular basis and and depend on him and have for many years been helping us through these challenging questions so thank you all for being here and I think what I'd like to do is to open it up for Kim Rubin to start us off and the format will be the presenters will make a presentation. And I think it'd be great to hold questions and tell everybody has had a chance to present. And then we'll have time for questions. We have about two hours scheduled for this which is a luxury for legislative time. So I hope that I hope that we use the time wisely and I'm again appreciative of getting this information at a time when we really need it. One last thing I wanted to say is that what the situation, the economic situation that we're in is not a September 2020 situation. It's a situation that's going to last for a period of time. And so although we, we need, we need this discussion is really helpful right now it's certainly also something that will carry over next session for those of us who are returning. So, again, thank you for coming. Thank you. And thank you for having me and I hope the weather is good there. It's a little steamy in Washington right now but you know that is goes without saying and social you're gonna do the slides. Yes, I will bring them up now. So, I'm happy to join you. I wish the circumstances were a little bit better than they are right now. But basically what I'm hoping to do is talk to you about and do I. And so do I forward or do you sort of I will forward for you. You can cue me if I get behind. Great. And so basically what I'm going to do is I'm going to talk a little bit about where we were before COVID-19. What states have done lessons from the Great Recession and places to respond going forward. If anything is unclear, you can stop me or else we can come back to it at the end. We can go on to the next slide. So, what are some takeaways. It's important to note that states were in good shape before COVID-19. When we were talking to, you know, governors and legislators in the states as late as, you know, February places were sort of assuming that they were going to have more money than the year before and possibly be over forecast. Fiscal problems came on strong. They were deep and widespread and most places, but the severity varies. So it depended on the state's economy, which Vermont was hurt because you're so relying on tourism, the tax system and the viral load. So I think it's a professional instance and I think what was done in March was incredibly helpful. It probably is not nearly enough, but at least at the time it was timely and helpful at the start of this. I'll get back to this in the end. I think for states having some combination of tax increases and budget cuts and some budget movement where you sort of move some things around and think about sort of whether you can do some of this with one time cuts versus the need for cross the board cuts is important. Federal aid and rainy day funds can help temper the response. So in that way, the fact that Vermont has such a big hat started this with a big rainy day fund balance helps federal aid is incredibly helpful. And there were substantial budget actions in fiscal year 2020 on the order of, you know, somewhere about 5% in many states. We're expecting things to be even bigger in 2021 and 2022 more like 10 to 15%. And the biggest issue that I keep stressing when I talk to people at the state level and in Washington is the level of uncertainty right now is huge and it's a persistent problem. So the fact that it isn't clear what federal action is going to be it's not clear what the viral load will be and what's going to happen with the economy. And there's some more knowledge than there was when when I was giving a similar talk to this in May or June, in that you at least have your income tax revenues. But there still is a fair amount of uncertainty going forward so sort of going forward with caution and knowing that it's going to be an ongoing problem over more than just the current budget year is going to be really important to keep into account. Next slide. I think it's right so you can just go to the next one. So this is just reiterating what I said state revenues were on track for the 10th consecutive year of growth. No states were making budget cuts in fiscal year 29 all budgets were in on time in fiscal year 29. The Indian rainy day fund was 7.3% according to Nazbo for 2019 they were forecasting 7.8% in 2020 Vermont was 14%. So you started this recession or this downturn in much better shape and this was in much better shape than what states were facing in in fiscal year 20 2007 when they started what seemed like big budgets for pluses at 4.6%. One thing that's worth pointing out is some of what was done by Vermont in the reform to TCJA already helped protect some of your low and middle income families so the fact that Vermont went from being a taxable income state to a TGI and you introduced a change getting rid of exemptions and moving to a credit for charity help protect some of your most vulnerable families and we'll get back to this later. Next slide please. I'm showing that basically states were expecting 3% increases two to 3% for the next couple of years and budget forecast this is also going to be important because as I talk about things there's going to be a difference between what cuts need to be compared to forecast expenses the year before and in some ways for some states making the cuts that needed to be made in the past fiscal year and going into it was less hard because there was some slack in terms of there was expected to be growth in and so I think often places just cut back what was going to be increased spending and expansion of programs and so that seems like an easier thing than actually cutting existing levels of services. Next slide, you can actually go to. So something that is clear to most of you probably is, this is not a typical recession, the fact that we saw increases in unemployment claims that came fast and furious. The duration of as a whole initial claims were greater than the duration of what we saw in the Great Recession by week 12, Vermont's a little bit better off in that you're at the level of claims that we saw during the Great Recession. And at like week 75 but the level of unemployment insurance claims and the steep level of changes was strong. And it means that what you're dealing with is very different than what we've seen before. Next slide please. This is just, you know, Vermont is doing slightly better than the US as a whole and the other New England states in terms of what its unemployment rate is. But we're dealing with things that are much higher than it was before and if you go to the next one. I want to note right so in that prior slide, everything looked really flat because what we're seeing is very high right now, but this just is sort of highlighting that even at the peak of the Great Recession unemployment levels were way below where they are right now, even when they've come down from sort of what the peak was earlier this spring. Next slide please. We also saw sharp declines in most spending, which means that if you think about the fact that for states, most of their money is coming from income taxes and sales taxes so about 75% of state revenues come from those two sources. The fact that we saw declines in spending in most areas, food sales did not decline in the spring in part because people were buying things that doesn't necessarily help Vermont sales tax revenues just because you don't really tax food. Next slide. This is just sort of highlighting that we saw a collapse in revenue forecasts and this is data that my colleague Lucy Dottion collects from state revenue forecasters. So this is going to be different and they're going to be larger numbers that Dan is going to present when he talks. These are basically levels of changes in revenue forecasts that states are reporting to us for 2020 and 2021. And we have numbers for about 27 states. And if we extrapolate it would be about $200 billion in shortfalls from where they state revenue folks thought that revenues were going to be. And if we go to the next one. And this varies a lot by states and this was worse for states that are dependent on tourism and energy. Vermont is there at about a 12% decline in what your revenue forecasts are. Something that's worth saying is we actually saw declines in most economic activity across states in the spring some of that has come back and there have been changes in sort of what the unemployment levels and the economic activity has been by industry. But the levels of declines actually went way beyond tourism and energy, which is different than some of the other recessions we've seen. Next slide please. And so those are revenue forecast this is just highlighting the fact that part of what we saw and some of the differences we saw in the declines in revenue levels we were expecting are not as great when we look at it from a year to year change. And so, while we saw that 12% decline forecasted. If we look at it, compared to last year's revenues for Vermont we're seeing about a 4% decline in state revenues. And these are major state taxes as reported to Lucy. Next slide. I'm something to point out before we start talking about how you balance their budget, it's important to think about the fact that, unlike your typical recession because this is largely coming from a public health emergency. It's also going to be increasing spending needs that are going into effect, because ultimately we have to deal with the issues with the economy and with the public health issue so there that means there's going to be needs for increased spending on sort of public health testing PPE hospitals are going to need more revenue and these are places that typically you might imagine revenue being cut. I'm saying some of my colleagues at Urban are estimating that non-elderly Medicaid enrollment is going to increase between 8 and 26 million people during the COVID-19 recession which is going to increase demands for states. Part of this is enrollment rules weren't allowed to change if you were going to get access to the increased match from the federal government. And so that means that there's going to be increased demand for revenues to pay for health care at a time where that's also a large part of state budgets. The other thing and Medicaid so health care and education, they get a large percent of what states spend money on. And so the fact that, you know, for education, there could be some cost savings, especially if places are moving to distance learning, but there also can be increased demands if places are returning in person. That means you need smaller class sizes and you need increased spending on, you know, both having more people in the schools but also having more equipment there at the same time is a chance that pandemic levels or viral loads are going to go up and states are going to have to return or school districts are going to have to move to a distance learning thing. There's also going to meet need to make sure students have access to what they need to do something that looks like distance learning. Next slide please. What are you doing? I think it's important to note that, you know, 46 states began fiscal year 2021 on July 1. 43 states enacted budgets. New Jersey got a lot of attention because it basically said its fiscal year was going to start three months later. Other states like Vermont basically passed budgets for the first quarter or they passed other states past temporary budgets where they were basically going to fund things for a month or three months and then reassess depending on what their revenues look like and what federal aid might be forthcoming. I think there's a lot of sense to me because if you think about what was going on in June, there was an incredible amount of uncertainty about what revenues were going to look like from income taxes due in 2020 so 2019 income tax levels. And so partly what we see now is if we look at the July numbers of what's coming in, while revenues are lower than prior year and from forecasts. There have probably been increases in the level of income tax revenues in a number of states than what they were expecting come spring. So the drop in the level of revenues from 29 income taxes was a little lower than places. It wasn't as bad as places were expecting which I think made it a little easier to think about what you're doing next. Next slide. The other thing that I think it's worth pointing out, there was that two to three trillion dollars of federal assistance that was passed. So a lot of that was focused on unemployment and support for businesses, but there was money for a public health funds expansion of Medicaid funds. And the CARES Act actually shifted money to state and local governments, although most of that money was supposed to be related to COVID-19 expenses. And it's not clear how that was going to be defined so how much of this is for the public health, and how much of it can actually be used to address the fact that there are revenue issues. There's money for schools. Some of this was incredibly late in being shifted and sent out to school districts. And so places are seeing some of that money. And I think states, including Vermont are trying to be strategic and how they're using that money to help shore up the spending that needs to be done to ensure that you're responding to COVID, but then also some of that money, especially for schools, can be used to help provide services and think about how you're going to return or sort of pay for equipment or things that need to be done for distance learning. There was hope that there would be new congressional action. The, you know, state and local governments didn't get much help in the last federal assistance. And there's nothing that seems to be happening until maybe the end of the month. And so at the end of the month, but the other thing to note is where the parties are most far apart is what aid to states is going to look like, how much money is going to be there. And how tied to sort of certain actions that's going to be, but it's clearly going to be less than the amount that was in the Heroes Act and it may even be less than what was being discussed this summer by the Senate in terms of money for states. And so there should be some money. The other thing that's worth bringing up that if we next slide, I think. Not, not yet. Sorry. So the other thing I want to say is, if we think about the emergency, the presidential, right, the presidential actions. The states are just now really accessing that $300 increase in bonus unemployment insurance money. And that's supposed to be funded with money from FEMA. The problem is there isn't that much money in there so 42 states have now gotten authorization or applied to access that money, but FEMA is estimating that it's only going to pay for three months, three weeks of expanded unemployment benefits. And so it's not really clear how we're going to pay for this additional money from the federal government to help provide federal assistance or to shore up unemployment. Next slide. So what states are doing. They've spent down some rainy day funds. They know that there's worse coming tax actions have been limited thus far some states decoupled from the cares act where basically under the cares act one of the things that happened is the federal government changed net operating losses and allows businesses to carry that back, which would lower prior years revenue but also affect corporate revenues for this year. Again, Vermont going from taxable income means that it's a little bit more protected California went beyond just sort of decoupling from what was under the cares act to suspending some of the net operating losses. And so doing things that can help protect revenues is helpful. Colorado curtailed some of the corporate tax expenditures they're thinking about whether there are more things they could do on the tax expenditure side. Now, there have been some widespread 2020 budget cuts these have largely been temporary shifts, where some of this is sort of recognizing that some of the spending that was supposed to happen in terms of having conferences or opening state parks wasn't happening just because of COVID. There were also for low furloughs and some layoffs that we'll get to in a little while, or even larger cuts expected for 2021, especially a federal aid isn't for forthcoming so a lot of what we saw in state budgets is either passage of optimistic budgets, or spending that recognition that they're going to be need to be more cuts. If there isn't federal aid, just because the level of uncertainty is high and that they're expecting to have 100% declines in the level of budgets for the next year from state revenues and so if there isn't money from the federal government that's going to largely translate into spending cuts in a way that we didn't necessarily see in the last recession immediately. Next slide. So this is just sort of highlighting what we've seen so state and local government employment often drops during recessions. Never as stark as we've seen right now. And so the fact that this spring. Next slide, we can go to the next one. This spring we saw a state and local government employment down by 1.5 million it's up to 1.2 million now so 300,000 people were actually brought back from temporary layoffs, but that's a 6.2% decline in federal and state and local government since February. This level of decline is much stronger and it's across most parts of state and local government employment. So it includes education and non education and state and local. Next slide. So what did we learn from the great recession so a lot of this isn't going to be new to you. There are possible reactions to deficits so states have balanced budget rules which means that in theory the level of revenues and expenditures need to balance the fact that revenues are down spending needs are high makes this really tough. The level of government that's most able to respond to this is the federal government so having federal aid helps a lot and is least damaging to economic activity. Overall, the next thing states often do is they spend down rainy day funds. They'll shift into first spending so this is where we see money coming into the general fund from say doing things like deferring infrastructure or maintenance, or trying to make money between budgets we saw some of this as there was more revenue from the first part of last year. And so we did see a number of states not do some of the infrastructure projects or expansions that they were hoping to do in last year and into this year. So that's often some of this is across different agencies. We can also see, you know, often states will balance their budget by cutting local aid. This can be really harmful and local city revenues and city budgets they're estimating even larger government changes in their bottom line than states are. And part of this is they have less flexibility so as the money gets or the cuts get pushed down. It becomes harder for them to figure out what they're doing. And then we also see state increased taxes or fees and do different things so you know the two points I would take away from this is higher levels of government often have more level of flexibility in a way that might be less harmful to local economies than lower levels of government this means that any actions the feds can take can spare states but also action states can do to try and be targeted and not push it down to cities or counties can be helpful. Next slide. So we've done some work where we looked at sort of what states did in terms of unexpected shortfalls in prior recessions. Something that was interesting is we saw states make within a year about they covered about 60% of unexpected shortfalls in the prior recessions before the Great Recession about half of that coming from tax increases and half of that coming from budget cuts. In the Great Recession we actually saw only a 40% increase in tax and a lot of that was coming from budget cuts rather than tax increases. It's varied a lot depending on the party makeup of the state so states that were dominated by Republicans who controlled the governor and both houses of the legislature were much less likely to raise taxes. They were either mixed or had Democratic control, but part of this is interesting is that we saw that decline in how much needed to be responded to you is largely related to both federal aid, the fact that we saw the f map match and money being pushed out to help protect education. During the Great Recession, and also the fact that states did start with some rainy day funds so they had some money there. So the immediate reaction was slower. The recovery was long and weak. So part of this is in part because states that the federal aid ended up probably shutting off sooner than it should have. This meant that states didn't actually return levels of spending to prior levels pre-recession until very recently. So only in the aftermath of TCJA and the wafer decision, did we actually see revenues go up and spending levels and investments go back to some of what we had seen before 2007. Often recovery was slow. Education and healthcare because they make up so much of state spending are going to need to be affected. Like this isn't going to be enough to just cut around the edges. And so that's going to be real cuts and things that need to be done strategically. We often see reduced local aid. That's going to be somewhat problematic depending on what local aid gets cut. Part of what we just saw in Georgia is they ended up, you know what I'll talk about that later. In the next slide. We also saw cuts and we're not done yet. Sorry. Can we go back one slide? Please. Thank you. The other thing we saw in state and local aid is we saw some opportunities for reform. Some of what we saw in sort of changes to the DMV and some government agencies ended up introducing some automation. And that basically led to some increases in efficiencies and people are happier doing more of their DMV interactions online rather than in person. So some of this could lead to some sort of reform that can be helpful. There were, you know, big reforms and pension programs and especially in sort of what retirees needed to pay into healthcare for retiree healthcare. On the revenue side, it was interesting. We saw a bifurcation. We saw some states, largely blue states, introduce things like millionaires taxes. Other states, red states, if we think about Kansas, tried cutting state income taxes and relying more on sales taxes that didn't necessarily work and led to big spending cuts, often in places. And there was little evidence that some of the increase in progressive taxation or millionaires taxes affected the growth following the great recession. And so there is some room to think about increasing income taxes. The other thing we saw in the last recession is we saw increases in tobacco taxes we saw increases in fees and charges. Not necessarily at the state level, but at the local level we also saw increases in tourism taxes. We saw some of this at the state level, but hotel taxes or fees on airline tickets or car rental taxes. And so some of those aren't going to be available just because those activities haven't come back. Next slide. So where are we now? So options for reform. If we look at where Vermont is now, it's important to note tax increases are hard. They're especially hard during your recession, where the idea that you're going to increase taxes on people as they're struggling isn't politically an easy thing to do. I just said revenue sources for a lot of the tourism taxes that were increased in the prior recession aren't going to be available, even if you increase them you're not going to get revenues from them because that activity isn't necessarily coming back. So some room for Vermont. One of the things that we have, we have some of my colleagues are doing a report on sales tax bases, Vermont's sales back tax base is one of the most narrow of the country and so there's room for trying to expand both sales to some services, but then also to some more durable goods. You text fewer durable goods than some of the other states. And so there might be room there to get more revenues in by expanding some of those bases. So Vermont is also less reliant on income as a share of your revenues than other states. This recovery is also case shape where people like me who can largely work at home have kept their salaries and we're working. A lot of people who are higher up or doing certain jobs. If your money come in they're actually saving more. And so there might be some room to either introduce an additional top rate or broaden what the brackets look like. But it's also important to note that Vermont has a higher. You know if you compare your income tax rates to something like Massachusetts you're already higher than there so there's some room from maneuvering. You're already discussing legislation to text marijuana we see other states that are also doing this. It's not going to reflect a lot of money on average states are raising about a half a percent of their general revenues from marijuana taxes. There's some room to increase cigarette taxes, you're higher than the national average but lower than most of your neighbors. Alcohol taxes are in the middle of national rates but higher than New York and Massachusetts. If we go to the spending side. Oh, did I just lose you. Sorry. Sorry about that. Am I gone. Sorry. The year you're fine. My phone rang and I should have had it and do not disturb so we go to the next slide. I'm almost done. If we go to the spending side. You know spending cuts can take many forms you can delay we can see things we've seen states introduce things like furloughs where basically you're not paying people for not working say, you know, two days a month, what 12 days a year, which can cut some spending cuts. So we've seen states move where they like reduced wage increases. There's going to be some need to spend more money, especially on the public health side, we've seen states like Georgia that may across there basically had their agencies come up with spending cuts, and some of them are actually moving in through the county public health agencies and they're also cutting money that allows seniors to live at home and not go into nursing homes. If we think about what that means in terms of the public health issues and who's dying and who's getting sick. That feels like changes in the wrong direction. I understand that you can make targeted thoughtful cuts rather than cross the board cuts which might be harder politically, but will actually be easier to do we've also seen seen states cut back on infrastructure and try and move money into the general fund, which could actually be useful. The other thing is if you think about across the board cuts, especially in something like education, if you think that state money for education, often goes to low income students. That means that the school districts that could maybe least handle getting state aid cuts are going to be the ones that are most affected so you just want to be somewhat careful about this and then the other thing that's important to do is thinking about cuts to one department can affect other costs so we've seen some cuts to judicial judicial systems in states like Nevada and Georgia. But what that can mean is if like, we're delaying court cases, you can actually see increases in prison or jail populations. And so if we think about where cove it is, those aren't necessarily the cuts you want to make. But this is just my cautionary tale, and then I'm done, and we can go to questions and we can go into more details is one of the things that's really important why and why it's really disturbing from us as we're sitting here in Washington that we're not seeing more federal aid. What state and local governments do is they actually contribute to GDP grow. So typically, state and local government spending is a makes up about a point 3% of GDP grow. So percentage points. And so to the level that states are going to cut back and we're going to see those cuts and jobs. That's going to actually act as a drag and make whatever the fiscal outcomes last even longer so it is sort of short sided tend to lead to having those cuts and I'll end there. Thank you. Great. Thank you very much. I, I'm sort of trying to figure out how best to proceed through the rest of the morning. I'm going to start with Surtian see if Dan White is with us at this point. Yes, he's on the call now. It's great. Okay. So, I think what I'm going to do is maybe 10 minutes or so of questions here if committee members have them and want to jump in. Kim, I don't know how long you're able to be with us if we. My plan is to stay for the whole thing. That's wonderful. Okay. So let me take a couple of questions now and then we'll move to Dan White and I'm going to be sure that we have a chance to hear from everybody and get the questions on the table so Robin, you go ahead. Thank you. And thanks for this presentation. This is a great morning. I had two questions. And then on slide 13, you had, you showed the revenue decline and everybody was declining as well as the country, but Maine was increasing by 2%. And it just stood out and I'm wondering if they're doing anything special or different that we could work from. Sorry. They had a tax increase last year. Oh, okay. Okay. There are some states like we see Nebraska is doing better than we're expecting that didn't have something like that, but I think it made it was basically that there's their taxes increased. As the governor changed, they actually undid some of what was. Yes, I remember that well. Okay, and my other question was on slide 22 you had possible reactions to the deficit and you listed a number of different things. I'm not sure if you had any sense of a priority for those or the impacts of choosing one over another, or maybe we're going to hear that from somebody else. So I think in general, I would always start with like if I could get the federal government to send money to states that would be first and then use the rainy day funds. I would also do stuff that you know I don't know if Dan is going to disagree with me I know the folks that you hate it when I say this. I would move money around, like, you know, if it was me and I was you, I would maybe defer some money into pension programs. And sort of recognize that if you're thinking about your long term obligations there might be room to move things into the general fund so you can make smaller budget cuts than others. On the tax side, I would start looking we're doing some work with Colorado right now where we're looking at sort of ways to expand their sales tax, even how narrow Vermont sales tax basis I would think about increasing that, and also think about something like, you know, I think it's hard to talk about raising your top marginal tax rate on your income tax, but recognizing that the people who are sort of going after pay that aren't necessarily struggling as much, because they're all working remotely, and they're not leaving something else which is, you know, a little like beggar thy neighbor but it's something I feel like I should bring up and your revenue department should think about is there. Because people are working remotely. There are questions about where people should be paying their state income taxes. So to the extent that there are New Yorkers who are actually working in Vermont now and not in New York. There is some question about whether, like, who's who should be getting that money. So in places where money is sort of dependent on where you're showing up right this this is something that we're seeing if people live in New Hampshire but work in Massachusetts. Or you know if they live in New Hampshire, and they work in Vermont you might see it on the other side if they're not physically in Vermont. I was going to say, okay, we're those hours and those days, we were in New Hampshire so we don't actually owe you that income tax so there are ways of sort of changing your income tax rates but then also thinking about whether the specifics of what's going on with the pandemic means that there are going to be differences in how money comes in is also going to be important. Thank you. I don't I assume that you're aware that our 100% of our sales tax goes into the Education Fund to Berkeley 12. I'm intrigued by the comment I know that we have a narrow sales tax space but I was not aware that we tax fewer durable goods than other states. Tell me what kind of durable goods we're talking about. Yes, I am going to open my other computer because I actually have the list. Because I was looking about that so part of that are things like watches and like jewelry or cars or new cars. I didn't go through and look at what you don't tax that other people do tax, but it was interesting to me. In that of the base that we do, and I, I looked this up just because it looks so low to me. It's about 29% versus what's going on. Okay, so for durable goods in general, the US on average places tech 89% of them for us Vermont tax is 65% for non durable goods. And this is largely food so part of this you're not going to necessarily want to tax. The US average is 42% you're taxing 30% and while services aren't generally taxed on us, the base is about 18% versus 9% in Vermont. So, you know, going through and I could send you the list of what is taxed and what is great. Actually, I think that would be really helpful because that's the kind of thing that our committee will will dive into. And, but just to be clear that cars are taxed under purchase and use tax so they're exempt under the sales tax but there's no tax. So that may change the picture a bit. And it could be so and that's work that we're currently doing so it isn't finalized yet. Yeah, we can also talk to them about it. It was just sort of striking and looking at the graphs that they sent me that Vermont seemed to be low there. It caught my attention. So, thank you. So we'll get more information as you work on the work you're doing. I'm going to do one more question and then I'm going to switch to Dan White so Emily go ahead. Thanks. I really appreciate this. It's been wonderful. Thank you. I'm thinking about sort of the fiscal drag that you pointed out and Vermont has the unique possible opportunity that we don't have a balanced budget and statute. And so curious if you see any opportunities there whether that is borrowing or, you know, borrowing year to year or shifting things that other states might not be able to take advantage of. I would do some of that. I wouldn't do a lot of it in that, like, to the level that you can actually postpone some investment or push some off. The only problem there is the fact that there isn't going to be over a year. Like, if I really thought that there was going to be a vaccine in November and, you know, we could go back to normal. You have the advantage that New England feels like it's the region that's doing fast right now. And so the level that economic activity can return is helpful. I definitely take advantage of doing some shifting or doing some borrowing. You might be able to access some of the, you know, the barring availability from the fed to do some of this too, although I feel like that money needs to be paid back in a very relatively short window one of the other things that's being done in DC is even if Congress doesn't act if there are ways like we've already made the barring rules or rates more attractive than they were when they were originally passed. And, but if there are ways of sort of accessing money but to the extent that, you know, especially in real spending areas and especially in things that end up shifting some of the problem down to local governments or your schools, I would think about postponing some and maybe running a deficit just being very aware right the advantages you're coming into this in relatively good shape in a way that, you know, I would necessarily suggest this to Illinois just because of their history but to the extent that you can do some borrowing I would think about it or moving money between general fund and other funds. Thank you. Kitty, I see you have your hand up. Go ahead, and then we'll switch to Dan White. Thank you, Janet. I just wanted to get Kim's opinion on if looking at, you know, be doing a budget kind of midterm and not, you know, and based on very uncertain data and you know just our entire fiscal landscape is very uncertain. We save ideas such as borrowing or shifting costs into other areas for expanding sales tax for when, you know, to build capacity and save these strategies at a time where at this point we're not having to make any cuts in services and programs, we're not having to use our rainy day funds to do that because we're able to use a significant amount of federal dollars is Vermont fared extremely well we were one of the top two states. And if we're able to balance a budget and not cut programs and services and also get CRF out to our communities and our businesses, would you save those capacities and strategies for January when we see a very tough budget probably coming, or would you start using now to enhance programs that we haven't considered or you know we've always considered them I'm just curious when what the timing should be. So I would actually start looking at what it means like doing the investigation into sort of what you could do to sort of expand your sales tax base certainly. I would think about looking at earlier so I feel like doing the research is good and having options on the table. Now much uncertainty. It's hard to know like the fact that a lot of the New England states and some states actually past these temporary budgets and push this off I thought was a really good solution in terms of, at least seeing what your income tax revenues were going to be from the 2019 income tax payments because they all came in in June and July, and there was more money there than people thought. The activities that I feel like are actually going to strengthen your tax structure overall, I would start thinking about a maybe pass now. And I wouldn't necessarily spend that money right away. But there is an advantage to having money in hand just because the level of uncertainty is so high. The fact that you don't have to cut it's not as dire as some of the other places. But I just feel like in some ways, setting yourself up for what might be happening in the next few years, especially if you know revenue dries up from the federal government. There's so much uncertainty on the federal side. I feel like trying to get your house in order is useful. And then see what happens. A lot of this might look really different depending on who wins in November and what Congress looks like and what we think might be coming out of Washington. But I do feel like some of the lessons from the Great Recession was also, I feel like they were good at the beginning, and then those programs ended a little too soon and then we saw cuts in education that were after the Great Recession was over. We saw a lot of the cuts that soon local governments made were actually after the Great Recession ended. And so sort of giving yourself some buffer because this is going to go on for a few years and Dan can also talk about this based on his forecasts. I would try and do the things that feel like they are good tax policy anyway to set yourself up and have more of revenues in hand because I just feel like the uncertainty is so high right now. Thank you. So I, we could probably talk with you for at least another hour, but I want to move on to Dan White. I'm glad you can stay with us Kim. And I did a brief introduction Dan a few before you joined the call, but to remind people that you're the director of governmental consulting and fiscal policy research with Moody's analytics and we're glad to have you with us and interested in what you have to tell us. I'm happy to be here. Thank you so much for having me. I'm going to move my screen over a little bit. So are you going to be able to share my slides there you go. Yes. Perfect source is making it easy on that I have to do any work now. Okay. Thank you so much for having me. I've spoken to a couple committees in Vermont I don't think I've had the pleasure of speaking to this one yet so I appreciate the invite. Very briefly about some of the calculations that we have done in projections that we've done at Moody's about kind of what the potential fiscal fallout could be from the economic disruptions caused by COVID. And then I'm going to talk a little bit about some of the advice that we're giving some of our clients around the country in terms of how they can be best putting their budgets together going into this year. I don't know that we've ever had a more difficult time to put together a budget than we are right now and so obviously want to give you guys as much support as we can possibly give you. So, if you could slip to the first slide really quickly or sorry go back one source really quickly before I start just because this is on the make sure this is on the record. I want to make sure that everyone understands that I work for Moody's analytics, which is an entirely separate company from Moody's investor service so we're both owned by Moody's Corporation but never the tween shall meet right so they're the ratings agency. They are the ones who, you know, come in and do all the ratings and everything. We're the good guys they would like the dark side and the light side of the force we're the light side of the force we're here to help we're here to help you get through your budgeting process. So please don't let anything I say today be misconstrued as having any bearing on past current or future ratings actions. All right. Apologies if that sounds like it was written by a lawyer but it was keeps me out of trouble. Okay, first things first so when we've talked to a lot of our clients around the country. You know we really struggled for quite a while to come up with a good analogy for what putting together budget is like right now. But the one that we kind of settled on was it's everybody keeps telling us it's kind of like nailing jello to a wall. And it's kind of like nailing jello wall in that every time you think you have got it figured out and you think you've got a plan going forward. Things change things more for a little bit the virus doesn't do what we expected it to do. And so we create this kind of universe where there's always kind of a constant change going on around the assumptions that we need to work with and anytime you're putting a budget together if you can't rely on a solid set of assumptions that can be a very dangerous place to to operate so One of the things that you can do to waste time during this pandemic is you can go on Google and you can Google all kinds of silly stuff like how do you nail jello to a wall and you would be surprised. And what kind of pictures like this one that will come up and step by step instructions of how scientists have actually done experiments to nail jello to a wall. So if you've got 15 minutes to spare someday, go on and Google how to nail jello to a wall you'd be amazed what comes up. One of the things that was interesting when I was wasting that time looking up how to nail jello wall was that a lot of the prescriptions that are advised by the scientists to do that coincide with a lot of the strategies that the best states who are out there doing their budgets are using to try and get around some of the uncertainty that we're seeing. Okay, so the first thing that we talked about I'm going to talk about three kind of subjects here today. And the first thing that it's important to do if you're trying to nail jello little wall or put together a budget during a pandemic is to use more than one nail. Now what I mean by that is to plan for more than one economic scenario. So the folks out there who came into this in the best shape and had a lot of contingencies already in place for such a downturn as this, with the states that have been budgets off of more than one budget scenario either through stress testing which is something I'll talk about in a minute, or simply as a as an informational piece kind of in the background to say, you know, if we have a recession. This is how much potential revenue we could lose what are our plans ahead of time to deal with that kind of a downturn right. This is just a jfk that said it's much easier to to fix the roof when it's sunny outside then when it's raining so most of the states who are in really good shape, including Vermont have been doing some kind of alternative scenario testing in the background to make sure that we're ready for a normal recession. This is not a normal recession. Right. So even all of that planning and all of that time that we put into preparing for this still is not quite enough to get us through what we would expect simply off of contingency plans and reserves alone. So, what we are doing as we put it together our 21 budgets and 22 budgets and a lot of states is many of these states are building off of several different scenarios so that they have plans in place to say, if this happens this is what we're going to do, if this happens this is what we're going to do, because it can make things a lot easier in the heat of the moment to, to try to get things out the door. And by being as decisive as possible and creating as much certainty around the state budget in particular, as you can do. That's going to create a lot more economic growth for you down the line it's going to save you a lot of headaches not only in terms of the private sector being able to rely on what they think or know that the state government is going to do. In terms of your local governments or your school districts your cities your counties. They're going to have a bit more certainty when they put together their budgets if they know that there are contingencies that are put in place at the state level, and kind of what the worst case scenario could be right. That prevents some of the fiscal drag that I heard that I heard previous present presenter talking about and something that we'll talk about and pretty good detail here. The next question obviously so if we're going to use more than one scenario. The question is what kind of scenario should we be using and when we do our stress test normally we use our baseline which in a normal year doesn't assume a downturn. And then we use what we call our RS three or our severe scenario which really is just a moderate recession or what we would turn the normal recession if there is such a thing. The states have been building their reserve funds around and their contingencies around. But again, neither of those kind of quote unquote normal scenarios really take into account the fact that we would have a pandemic so what we have done we do this every year we do a stress exercise and Vermont usually does it actually relatively well given your reserve policies. We do these every year every fall but given what's going on with code and we've actually done this exercise two or three times now in the process of updating it actually this week for another presentation but the scenarios that we are using assume basically and then much worse kind of scenario in terms of what we expect to happen. So, under our baseline scenario right now at Moody's analytics we are predicting you could go back real quick. Sources don't ruin the punchline sources come on now. So under under our baseline assumptions what we are it's basically to give you some background on what the context of that world looks like and under our baseline scenario we assume at least from a pandemic perspective so much from an epidemiological that the worst more or less is behind us so we've kind of had our second peak nationally in terms of the number of infections and etc. And so what that means is that we're going to slowly start to see business restrictions. If a minimum stay where they are, if not get most slightly better in most states so even if we were to have some kind of an increase in infections as we get into the cold weather months with I think is totally expected. People are going to have to be in close proximity again and people are going to be getting sick for other reasons and people aren't going to know if they've got COVID or they've got whatever so they're going to be staying home anyway. Given that kind of weakness coming up the good news is that for the most part most private industries have figured out ways to operate in a world that is a pandemic right so we don't have to send everybody home. We don't have everybody using a shelter in place orders anymore. We've come up with ways that we can really get around some of the economic disruption that comes from those kind of business restrictions. Now it's not to say that you know business will be operating at full speed but what it means is they they're likely not to get any worse from a business restriction perspective than they are right now in the majority of states that are out there. Under that kind of a scenario. It's still a pretty scary economic scenario so by the end of this year Q4 2020 the jobless rate will be about nine and a half percent still and GDP will be down about 7% lower than what it was at the end of 2019 so to give you some some context and perspective. When we had the great recession we saw GDP fall by about 4% in one year so we're looking at roughly twice the economic disruption of the great recession. Okay. Under that kind of a scenario you know we basically move flat until we start to see a vaccine come into place and not only a vaccine discovered and put in place but really rolled out and manageable and practical from a perspective where almost everybody can get a vaccine in the United States is able to get that vaccine. We don't anticipate that that will happen until probably at least next summer in terms of a widespread rollout. So there's upside risk there if we can do it ahead of that, but that's kind of our baseline assumption under those assumptions the job market doesn't really fully recovered nationwide until you got into 2023 so to kind of second Kim's assertion that this is something that's going to be around for a while even if the worst is over. We're going to be thinking about this for quite some time. Now that's our baseline scenario so the numbers that I present to you in the baseline that's sort of the world that we live in now under another scenario and this is the kind of worst case or maybe not worst case but pretty darn close to worst case scenario that most states are building off of is what we call our S3 scenario now apologies for the jargon we actually produced nine off the shelf scenarios every month with different assumptions built in. The two that we are using and that most of our state and local government clients are using when they're putting together their budgets. Under our severe stress scenario. It's it's really it's it's bad I don't know how else to put it there I'm running out of synonyms for the word bad or unprecedented or, you know, how crazy crucial it is for this. So under this kind of a scenario we assume that we go into the winter time and we have kind of a second round of infections or again people are sick for other reasons and they're assuming it's covered. We have a much stronger kind of clamp down in terms of business restrictions, more governors are closing down states and reducing the amount of business activity that can physically happen. This also assumes that we do have very little if any fiscal stimulus from the federal government so our baseline assumes that we have about one and a half trillion dollars in federal stimulus before the election so that's state and local government aid. So that's enhanced UI that's stimulus checks to individuals. The S3 scenario assumes we don't have that. And so what we end up having is a double dip recession, beginning in the fourth quarter of this year, and that results in much more, a much more decline in overall GDP over the course of the year and also a much longer and more sluggish recovery afterwards so, and that kind of a scenario the jobless rate is about 11 and a half percent by the end of the year. And GDP is about 10% lower year over year in that. But again the most I think telling a sign there is that under that kind of a scenario, the job market doesn't fully recover until early 2026 under that kind of a scenario so you're looking at roughly seven years peak to trough in terms of the labor market for context after the great recession it took about five years for us to regain all of the jobs that we had lost during and after the recession. Okay. If I cheered you all up yet. No. Well let's talk about the numbers just in case I haven't thoroughly bummed you out enough. It'll talk about some of the numbers and what that means if we take those economic assumptions we translate them through to state budget so under our baseline outlook. We would assume that states combined so all 50 states combined would lose about $230 billion in revenue over a three year period. Now if you're familiar with our stress testing exercises that we've done in the past you'll know that the way that we do our stress testing is we take our revenue models, and we compare them to inflation so, because every state has different assumptions to their budget we basically assume what would a state need to have to just keep its budget flat zero, zero growth in their budget from a real perspective. What is the shortfall compared to just keeping that flat. The second thing we do is we also test Medicaid and the reason being that Medicaid is a mandatory program so an increase in Medicaid spending or need is the same as having a reduction in tax revenue because given balance budget requirements if Medicaid goes up you have to have money from elsewhere in the budget to backfill that Medicaid spending so an increase in mandatory spending can be almost if not more harmful than an actual reduction in tax revenue. So we combine those two together to give us what we call a fiscal shock. Now, most of the time when you see our stress test reports we measure that fiscal shock over a two year period, and we express it as a share of whatever the general fund budget is. We can't do that in this particular instance because, even though, you know, each of the last six or seven recessions has really confined itself to about two fiscal years in terms of its impact. This recession is going to impact much more than two fiscal years and so we can't confine it to just two fiscal years. So, spreading these out to fiscal 2022 which is the year that most states should be starting to work on now, and once they get their fiscal 2021 budgets done. We get a combined shortfall of just over $300 billion over that three year period. Okay. So for context, general fund budgets nationwide are about 900 billion so you're looking at about 30% decline over three years. Now the majority of the pain is going to be concentrated, given the baseline economic forecast in the current fiscal year so the fiscal year that we are going through right now fiscal 2021. The, the carryover effects to other fiscal years are less but there's going to be obviously lasting effects from all of the changes that have to be made to this year's budget in order to get us through from a fiscal perspective right. Just for your informational purposes only when we kind of use a rule of thumb to include local governments in this as well. We get to a shortfall of around $500 billion nationally. Right. So that's why when we talk to folks in Washington DC and we talked to people who are working on the current stimulus bill. I think you're going to find a pretty good consensus around a $500 billion number in terms of the total amount of aid that eventually gets to state to local governments I know the House bill included over a trillion dollars. The Senate bill included zero and we think that kind of is setting things up for a political compromise to be somewhere around $500 billion. However, this Congress has surprised us before and so I wouldn't put it past them to surprise us again but that's kind of our baseline working assumption in our baseline forecast. On a state by state perspective what this means and sort of you could show that next slide is that there's going to be a significant level of fiscal drag that happens to the economy over the next several years. If we don't get any additional aid from Congress so what this map shows you is basically that three year fiscal shock as a percentage of the state's gross state product. Then now it's the shock, not including anything that would be netted out from rainy day reserve funds not netted out from any additional aid that might be coming from Congress this is just the raw fiscal shock that would happen if we didn't do anything else from a policy perspective. Now what you can see is that Vermont is not, you know, among the worst in the country, but it certainly is among one of the higher fiscal shocks as a percentage of its gross state product. Now that can be misleading presented this way so I want to make sure to give some context here. So the actual the level of fiscal shock as a share of your budget. Vermont is, you know, almost right on the national average so that in terms of the amount of stress that you're going to see in tax revenues, or increase Medicaid spending it's right on the national average given kind of the tax structure in Vermont the way you set your budget up. It's about an average level of fiscal stress. It is ahead of the curve in terms of the amount of money that it has put away in a rainy day reserve fund so you're actually better off than the US in that particular instance. The reason that you are orange in this particular graph though is that state government makes up an exceptionally large share of Vermont's gross state product relative to the US. I'm just looking at the numbers this morning. Total state local government output makes about 10% of overall GDP in Vermont, nationwide it's about 8% and the differences at the state level so state GDP makes up about 4.5% of total GDP in Vermont, the national average is about 2%. So the level of state spending in Vermont is much higher relative to the economy than it is in a lot of other states so any changes that are made to the budget. Either from a tax perspective or from a spending cut perspective are going to have outsize impacts on your economy relative to what happens maybe in some other states. So that makes sense. Okay. Now, that's the baseline outlook. That wasn't scary enough for you I've got one more that's even scarier I won't show the state by state on this because basically everybody goes red on that particular map. But if we look at the the next slide which shows the kind of the order of magnitude from the severe outlook versus the baseline. So if you remember on the baseline. It was about $312 billion was the overall fiscal shock that we expected to see from states over the next three years in the severe scenario that number goes up to almost $500 billion. So if you include local governments you're about $750 billion under that kind of a double depth recession scenario. Now again, a lot has to go wrong for us to get to that double bit recession scenario. But we can't forget how much has gone wrong so far in 2020 2020 is really good at going wrong. So our baseline assumption is for that moderate level of stress. There is a possibility that we have this, you know, much more severe level of stress as well. So quickly, China to cap things off. I want to go through those three kind of pieces of advice that we're giving other policymakers throughout the country as they're dealing with their coven style budget planning. And then I'd be happy to answer any questions you guys might have so the very first thing to do when we're planning for this coven budget for 2021 and 2022 is to use more than one nail I cannot encourage you strongly enough to be looking at your own economic scenario, when you're trying to plan for all the contingencies that are possibly going to happen. The more that you can get that sorted out now, the better off you're going to be in the future in terms of you know when when that, when that call comes from the revenue department they say guess what we've got $50 billion less than we thought we would. There's already a plan in place to go through you don't have to spend you know an entire special session arguing about what should be done or what could be done. Here's an example of this and I they know I pick on them all the time but the state of Texas is a client of ours, and they have one of the largest rainy day funds in the country because of all the oil money that they've been storing up throughout the years. In 2008, when we had the great recession. Basically, they didn't use their reserve funds even though they had this huge reserve fund they didn't use it. They didn't use it for almost two years until 2010 one of the reasons they didn't use it was they spent probably a year and a half to two years arguing in the legislature about whether or not it was raining hard enough to use that rainy day fund right. They didn't plan ahead for you know they didn't have any rules of thumb for this is when we use the rainy day fund this is when we use a tax increases will use a spending cut. Because of that by the time they actually ended up using their rainy day fund, they might as well not have used it in the first place. So I would strongly encourage you to use these several different economic scenarios now to set up those conversations that are going to happen. If not this year certainly next year. The second thing I want to encourage you to do is when you have economists like myself or like one of your staff economists come to you and talk about these different scenarios. I want to make sure that you're asking them important questions about what key assumptions are driving each scenario now that's going to change based on what your tax structure is. Kim I think gave you some really important things to think about in terms of where people are working in terms of your sales tax base. All are things that you can look at specific economic indicators and make sure that you're understanding how they're behaving in those scenarios so for sales taxes we always want to look at durable goods purchases we want to look at disposable personal income we want to look at construction employment and the amount of investment that's going into the economy all of those big strong indicators for sales taxes. And then the last thing that I want to make sure you all are understanding or make sure you're asking these questions of the folks who are going to be coming and giving this stuff to you is to make sure that you're considering the whole picture so don't just rely on the pieces alone, make sure that you're concentrating on the spending side of the ledger as well because they're going to be spending effects are already are spending effects that surround COVID. You know, TANF Medicaid all of those social benefits spending they're all going to go up very significantly, and that's going to be a consideration that you're going to have to take into account. There are also going to be a number of other COVID specific spending items that you're going to have to make sure you paying attention to and if you spend all your time concentrating on how much revenue is going to be lost. You could lose the full picture and end up with a very unpleasant surprise when we get to the end of the fiscal year and we're looking at tax revenues coming in. Okay, so with that, Madam Chair and members of the committee I'd be happy to ask answer any questions you might have around those scenarios or any of the questions more generally around kind of putting together a budget during COVID. Does anyone on the committee or really on either committee have a question for Dan. Give people a minute to use our hands. I think I bummed him out too much. You did, you actually did I was sort of thinking we should have started with you and then we could have been cheered up as we went along here but Bob has a question, Bob you go ahead. And I realized this is an important question and I'm only asking it because nobody else is asking anything and I thought somebody out. So, one of the slides that showed 200 and actually a $500 billion. Damage to the economy. Additionally, and there was a picture of the United States there with color, all color coded as to who's where in their economy. Do you remember that one. I do. The one with the map. Yes. Yeah, yeah. Now that one showed more than half of the states, I don't know about the population, but more than half of the states were in the upper tier, and the other half of the lesson, a little bit less than half the states were in the lower tier, the red and the more orange I believe. So, when things, my point is when things start to, there we go. When things start to change. And we start to catch our breasts on this a little bit. Is that an indicator that the red states, the damage is not done at equally throughout the US, and are the red and orange states going to recover quicker, or am I just imagining that. Representative, that's a good question. So this is, as I mentioned earlier, this could be a bit misleading and that this is as a share of growth state product. So this is not only indicative of the fact that there are going to be larger fiscal shocks in those particular states, but also that state spending makes up a much larger share of overall GDP, and those particular states. So Vermont, for example, I think this is more indicative of the fact that state spending makes up a much larger share of the overall economy in Vermont, then you're having a much larger downturn of fiscal shock as a result of COVID. For example, in New York, for example, they see are seeing a much larger fiscal shock than the average state. And that's not just because they're, you know, they were the epicenter of the COVID outbreak for a very long time. They also have one of the most volatile tax structures out there they have a very progressive personal income tax in New York and that means that they see big swings from one to the other so in that particular instance they will see revenues come back very strongly when they do come back, but they're also seeing some of the largest revenue declines out there right now. In other states, Louisiana, for example, is the same way they're a very strong exposure to COVID, but they rely tremendously on energy and natural resources and energy prices have fallen off dramatically since the beginning of COVID and that's causing them, again, a big impact on their state in terms of the fiscal drag from the budget. Thank you. Question. And it's, it's the phrase use more than one nail which I've written down on my sheet here about five times. Because I'm trying to understand what it means when when I first read that I thought you were talking about use more than one nail you have in mind more than one strategy. Not just tax increases, not just budget cuts, not just deficit spending and so on. But when you've talked about it each time you said use more than one scenario and more than one stress test and I just want to understand what it is that you mean, what are the nails that you're talking about. Yeah, so represented by nails I mean use more than one scenario use more than one budget outlook when you're doing this so if you make all of your plans around one set of assumptions and one, one view of the world. And as COVID is want to do all of that changes in two months, you all have to go back to the drawing board and redo all of that plan again. So I would strongly suggest that you use contingencies to come up with several different plans, or at least two different plans so that when bad things happen as they are want to do because it's 2020 and that's the way things work in 2020. You don't have to go back and totally revamp the entire plan. Now, there is a strong. There's a strong case to be made for the other interpretation as well which I hadn't thought about much which is you can see most of the time I spend with revenue forecasters most kind of folks. But yeah in terms of solving the problem using multiple nails is very important as well because, especially if you're relying only on reserves or only on the federal government that can lead to a very, a very anxious surprise down the road if if you're not careful. So you're not telling us not to do that you're just focused on a different set of nails and to use the analogy represent yeah I think I think it actually applies well to both. Yep. Okay, thank you. I'm going to do two more questions here and then I'm going to switch to Tom, Peter and Mary. Thank you representative and so thank you Dan for coming in. Dan, when you mentioned one of the very first things that you mentioned was multiple contingencies. It's an entire military gone through a lot of military planning processes and the the strategic planning process that we use is exhausting. And that's, that's not giving it it's due, but extraordinarily thorough. It does bring in multiple factors and essentially you end up with a set of multiple set of plans that you can use to either directly address a issue at hand or amend to address the issue at hand and then when you, when you talked about Texas, not having any done any contingency planning and thus arguing away their opportunity to mute the the recession. It really drove it home and why on the right track. Is that what you're talking about. Madam chair representative absolutely yeah and because whenever I talked about earlier to is the, the, the amount of certainty that you can give the private sector and the local governments who kind of are contingent upon the state government the more certainty you can give them, the more they can plan and the more they can invest in the better off the economy is going to be if there's uncertainty around that even if you come up with a really good plan to get through the baseline that we talked about. If you have to revisit that all in six months and change it again, that's going to create a lot more economic turmoil and a lot more distrust in the process and it can create even more additional kind of fiscal drag on the the pace of growth in the recovery. Thank you. Thank you. I don't want to us to go away with a misapprehension about the discussion of the map on with a different color coding in terms of the stress in the future. So I have a question and and if you could clarify what that's telling us. My question is, I'm wondering if part of the reason we're so reliant or show up as being so reliant on state spending is because we don't have a county government structure the way other other states do and if that's therefore shows up as more spending at the state level rather than it being spread out. So that's my question. And I might my takeaway in part from that map was that our economy like Alaska, Texas and Louisiana is maybe more dependent on one sector of revenue in our case being tourism there's been the energy economies and that that's part of our vulnerability is the last lack of diversity in revenue streams. Can you can you kind of respond to what I said. Sure. Yeah, madam chair and representative. I think you're right on both counts. So I think the first part is, yes, because of the way that they the local government and the state relationship is in Vermont. It does lend itself for more states spending more spending to show up as state spending as opposed to local spending. However, even when you combine the two together so you've got state and local combine the the the level of GDP that government makes up in Vermont is still much higher than the national average of state local combined in Vermont is over 10% of the overall GDP nationally it's about 8%. So even if we control for that there is still the government makes a much plays a much larger role in the economy in Vermont than it does in some other states. And that's not necessarily a good thing or a bad thing that's just it's a it's a thing it's a characteristic so what I think it's more important to talk about is the fact that that kind of amplifies any changes that Vermont has to make from a state budget perspective, especially if it's a last minute kind of change after the fact so if we have to do a mid year change because we're finding the things are coming in worse than we thought. That's going to be amplified throughout the rest of the economy because state and local spending is so important to the overall budget in in in Vermont so the fiscal the potential for fiscal drag there's much larger than maybe in another state where government makes up a much smaller piece of overall GDP. To your second point, I think is that's also a great reason why you do show up as orange there in addition to the government making up a much larger portion of overall GDP. You are very reliant on tourism not only for economic activity but also for tax revenues. And that generally makes you a little bit more volatile in terms of the overall tax structure now you balance that pretty well by relying a bit more on sales taxes for certain parts of your budget then on very progressive personal income like say in New York or New Jersey. If you were to have a tax structure that was, you know, like New York or California New Jersey, that volatility would be much greater going into and out of a business cycle than, than your current tax structure would suggest. Thank you. Thank you. I think we're slightly more cheered at the moment. So, that's good. I'm glad I can keep a smile on your face while I'm bumming you out. So, Tom Kovet is our third presenter, and I'm going to give him a few minutes or some time to present and then if we have time at the end. Dan I don't know if you're able to stick around or not. I know that Kim is so we'll do some questions at the end if we have time. So, I'll do my best I have another presentation at 1030 so I'll stick around. Yeah, great. Thank you. That's that's when we're scheduled to be done so we'll be right around then. Tom Kovet. Thanks Janet. Sure. Hi, my turn to bum you all out I guess. I prepared some very brief written responses to the four questions you pose to everyone, and then to the four specific questions that were directed to me. So, those are just brief responses and I, I think it's probably best to leave as much time for Q&A as possible because I think that's where some of the more relevant conversation and exchange occurs during all of this and some of this you would have heard before. Preface my remarks and and the analysis we do on the revenue side with the fact that we use Moody analytics as as core part of our input in doing revenue analysis and have for a very long time worked with Mark Zandy who's the chief economist at Moody's long before he was at Moody's it started a company called regional data associates and then turned into economy.com and was purchased by Moody's in 2005 and we've worked closely with them and developing, not just Vermont models but other models and our core macro economic models and some of the scenarios that we may run from time to time are derived from that and so would be largely consistent with what Dan has generated. So, let me just go through these questions briefly and you know quick responses a couple of points. I concur with pretty much everything that's been presented so far today. This is a preferable to raise state taxes or cut spending or some combination to during a recession. And, ideally, none of the above. Ideally, there will be sufficient rainy day funds that are banked during times of economic expansion, so that there could be level reduction of state operations during a downturn. Any of the alternatives will represent some economic drag and negative to the economy, whether during the recession, which is the worst possible time, or, or later if are impacts from borrowing and things like that. So, we'll talk about some of the pros and cons of spending and taxation and and borrowing in the event that there are rainy day funds not large enough, but that is the best and optimal way to budget on a long term basis is to bank reserves that are sufficient to go clear through. And that that would be true of any private sector business to Second question, what are some reasonable ways to raise state taxes with minimal damage to the economy. If we're looking at the tax increase side of things. Temporary tax increases are better than permanent tax increases so on page four there's a chart that I have that just has kind of a long term look at at effective tax rates by various income groups, and you'll see that during the recession in 1990, 91, that the Snelling administration raised taxes, particularly on high income individuals, and it was a temporary tax increase, and at the end of three years it expired, and a lot of the downside impacts from raising taxes generally can be accomplished with temporary changes. So, you know that's just showing for those earning 100,000 above. You know that bump in the effective tax rate it actually wasn't only my income taxpayers but that was that was where most of that surcharge was done. The other thing in the last four administrations, there's been something of a mantra about not raising broad based taxes so as to maintain tax capacity in the event of a recession. That that is the case. Now, there, there, since the Snelling administration, that tax capacity has never been used, but that is probably the, if you're having to raise taxes and that's not, not necessarily the first thing to do. But if you do, that is the probably the area that you would be most focused on higher income, higher net worth tax payers being sensitive to equity efficiency and then any specific recessionary conditions. We can get into more detail on that later. So the third question was, what are some reasonable ways to cut state spending with minimal damage to the economy. The most effective spending cuts are done in areas that that their efficiencies that can be achieved that really don't affect the services provided. And I know that in advance, you know, state agencies will say we don't have any room for those sorts of things that we try to do that on an ongoing basis in the private sector there's constant pressure to improve efficiency, whenever you can because there's there's a media profitability impacts that accrue to the owners of the of the entity in in the public sector quite often efficiencies don't happen unless they have to. So the, you know, that that's the first area to look at is is where can there be spending cuts without really affecting the delivery of services. The next tier would be either deferred, or, or tax cuts with minimal hardship to society and business. And I would include tax expenditures here that's something that should should be looked at in the same breath as any spending cuts and we have a lot of tax expenditures. There's a report that's generated each year. And that should also be scrutinized. The fourth question was how is this recession different from previous recessions. I think you've seen a lot of charts to that effect from both Kim and Dan. I've got a few as, as well. I, let's just look for example, that chart on page seven and eight, just to give you a visual on the difference. One of page seven is Vermont unemployment employment insurance claims, and it goes from January 1987 through late 2019, and you'll see it peaks at about 1550. And interestingly, you can see, you know, that blip where a tropical storm Irene came into play and I'll mention that that later, but the chart on the next slide is the exact same concept data concept, with a few months added. That 1500 all time record high is just totally dwarfed by what we've experienced. So, you know, that and many other metrics point to the extraordinary nature and and both the extent of the economic dislocation and the speed with which it happened. And they're, they're really unprecedented. The thing that's most important is, is that this downturn was not precipitated by economic imbalances, but by an intentional temporary shutdown of certain sectors of the US economy, in order to avoid economic health outcomes, and that is really different. Because of it, though, it's not going to be ended by traditional economic forces. It's the epidemiological course of the pandemic that's going to set the, the, the music to this, and there are huge attendant economic consequences, of course. The uncertainty that Dan mentioned is, you know, concomitant with that. And I think our responses will be shaped by that kind of uncertainty. The defining characteristic of this downturn in this period is the unprecedented federal government fiscal and monetary response, both speed and magnitude of the of the both fiscal and monetary measures is completely unprecedented, and has has been an element in making revenue forecasts, difficult because there's nothing like it that's occurred before. We'll talk a little bit about this recession compared to the last one. And, and there was a lot of fiscal support then to but nowhere near as much as we're getting now and and also concentrated and relatively short period of time. So the implications of these different, the next question is what the implication of those differences for state budget policy. So, the, you know, the unique causes of this contraction and its linkage to the pandemic creates this uncertainty, and also the political nature of any future fiscal support and and monetary support. Create a lot of uncertainty there to not so much on the monetary side, the steadiness of the Federal Reserve, and its separation from central a central political control over it is a steadying influence right now. But as to whether we get additional fiscal support when it might come, even, you know, who's going to be running the government in four or five months. There's just tremendous uncertainty right now on all of those fronts. So that creates an environment of heightened uncertainty, the jello on the wall that Dan mentioned. And, you know, he talked about the need for simulation analysis. That's not something that Vermont has done. Virtually all of our private sector clients run simulations, especially when they're times like this with a lot of uncertainty. And that's something we can do, but we haven't done that we've talked about forecast risks. Sometimes we roughly quantifying but we don't run explicit scenarios, and, and we could that might be something you want to do. I think one thing though that's just as important that goes along with that in terms of looking at how to plan and and forecast around uncertainty is to increase the frequency of the revenue and spending outlooks. We typically do it every six months. But in the last few months we've been doing it on a rolling basis, almost every month. But again, most, most organizations and entities that are the size of the state government of Vermont would be doing quarterly analysis on a regular basis, and especially in a time of heightened uncertainty. I think revisiting the forecasts frequently it's a way to make mid course adjustments and that's that's going to be really important. The next question was how did Vermont perform in the in the Great Recession. I, it, it, you know, was severe all over the, all over the nation. I think it stemmed from real estate imbalances and and financial sector. Overreach and so it's spread through the economy in a different way it was a, it was a much slower event than than we've seen with it with the pandemic. I think Vermont was a little bit later. The, the drop was not quite as severe, but one of the reasons was that in 2011 Tropical Storm Irene hit, and there was widespread data station but there was also enormous federal support for relief efforts and spending private insurance spending as well. And this made a noticeable impact at a time that many states were experiencing some of the worst of that downturn and Vermont was getting a whole lot of federal support. So we moved the needle in terms of, you know, that, how that recession looked, and I, I, it also skewed comparisons. As the state was coming out of the downturn, there was, you know, some people were saying, Oh, we're doing way worse relative to that low point because there was much of a low point but that just shows the importance of the federal government and increasingly in recessions in general, it's, it's becoming more the norm that the federal government steps in, in big ways to assist the states, and I think the policy implications to that that I think are important, because I don't think we plan on ways to use federal money in optimal ways, and this, and in this particular case, we, this was presented with very strict terms on how and when it would be spent. And that required a rush of decision making to figure out, Well, how do we get this money out, we want to get as much of it as we can and not lose it. But there wasn't the thought or planning that could have gone into optimal ways to invest that money for both short term relief and longer term benefit from the state. I think we're still struggling with that, but we've, we've never had the problem, if you will, of trying to spend a billion dollars in, you know, six or eight months. And then the problem of spending, we're still, we still have 200 million that we haven't spent. And it's rush rush rush has to get out. But it may be that we would want to anticipate in terms of long term budgetary planning, we would want to even anticipate the possibility that there be federal money and I think with this, if there is a next tranche, it would, it would do as well to think about things that might be done in priorities and areas that have been missed in prior spending, such that we'd be more ready to utilize that that money in the in the most effective way. Hopefully it's more unrestricted, that gives a lot more flexibility, but, but that's been a critical element in the whole thing. So, next question seven what policies were helpful or harmful in responding to the last recession. So the most helpful policies then as now, where the enormous federal fiscal monetary measures without which I think almost everybody agrees there would have been a prolonged downturn that would have qualified as impression. Had it had it not been for that federal response, the state reserves at about 5% were completely inadequate to offset the decline we had about a 12% two year decline in revenues across the major funds and I know it's difficult when you're looking at comparative state numbers like Kim and Dan were presenting where, you know, the details about where we lodge funds and how how we move monies between funds and when things like, you know, medical related revenues to the general fund and, and the way we treat property taxes and deal with that makes for state to state comparison times sometimes a little bit messy but we're looking at something more like a 11% decline in the last forecast we did across all three major funds, excluding the property tax component of the Education Fund, and the fiscal 20 change in those funds was slightly positive it was not negative. So that was about 1% positive across all those funds, once the July income tax revenues were in and all the rest doesn't radically change the story but we were in relatively good shape. But the long and short of it in the last recession is that, just like Texas, our rainy day funds never got used. There was always a concern that it would be raining even harder tomorrow, therefore, let's not do anything. And so the benefit of having even 5% reserves which weren't adequate, but we didn't get any offset from that. It was a federal money that the era money and particularly that allowed us to avoid much more severe spending cuts. Even so we had about an 8% reduction in state government employment between January of 2008 and September of 2009. And there were a lot of other reductions, including a temporary reduction in pay for all state employees, and all of those things acted as a drag on the economic recovery or harmful. It was also a tax increase it won't show up as a tax but the transportation infrastructure bonding program really worked exactly like a tax. The bonding revenue wasn't called a tax but for all intents and purposes is backed by the full faith and credit of the state and it was to fund transportation related investments and the transportation fund revenues in prior years had been moved to the general fund. So there were tax increases but they weren't huge, some of them weren't apparent, cigarette taxes increased, some other fees and things like that, but generally speaking, major tax increases avoided. One thing I'll push back on a little bit with in terms of moving around money in so called creative ways. The pension problems that we face now are the direct result of that kind of budgetary gamesmanship in 1995 and 1996 with the pension funds. So the underfunding the pension funds then was to deal with revenue shortfall without raising taxes and without doing taking measures that would have been more uncomfortable, and I was papered over in a way that led to huge problems that that exists now. And so I'd be very careful in terms of any kind of moves that that, you know, that may have longer term consequences that could be very substantial. Lastly, last question, what are some characteristics of a market effect budget policy in our state demographic characteristics effects. All sorts of things in the economy, including budget policy, we have an older relevant relatively highly educated population, it's small as very slow growth rates are economic profile effects budget policy. We have a relatively large tourism manufacturing education and health care service sectors are geography, being relatively small geographic state with long borders with other political jurisdictions. You know there's mention made about raising the cigarette tax. I, and that most other states had rates that were higher, but our most poorest border and longest borders with New Hampshire. And every time we've raised the cigarette tax we've we've ended up with more revenue, but we do lose sales to New Hampshire because of their their low tax rates. And that's something we have to keep in mind when we're raising taxes that that have some avoidance capacity. Also I'd say you know the share of state government has been mentioned where, both in terms of employment and output, it is a characteristic of a small state to because you have a certain administrative structure. You need, whether the state has 600,000 people, or 6 million people, you still have an unemployment insurance system, you still have administrations that have to, you know, perform these same functions, and it's just less efficient on a smaller base of people so that's part of the reason for that. Our national natural resource characteristics of colder climate that can be a plus or a minus, you know, coming into something like global warming that may turn out to be a plus. Generally speaking, it's considered a minus being near the Canadian border. We're not centrally located in terms of warehousing and activity like that. But our export import business is substantial. There are major highway arteries, things like that. Our tax structure is an important part of the options that we have. It's relatively progressive and like every place amidst a backdrop of increasing economic inequality. That's raised our effects of tax rates because they're progressive, but the volatility is enormous and increasing. A mention was made of California and New York, but we're not far behind in terms of volatility metrics and also being small, single events can have a huge impact in a way they can't in California. You know, one taxpayer can move the needle in Vermont and, you know, one largest state or one, you know, corporate sale. And so those, you know, that volatility is an important characteristic. A couple other things. The relatively civil and pragmatic political tradition in Vermont, I know, being in the middle of it, you all know firsthand, you know, politics involves a lot of fighting. I think that in Vermont, the capacity to speak to both sides and to reach compromise is a real plus in an environment where that's harder and harder. We don't see that happening as easily in Washington as it once may have. This is the persistently positive economic amenity values that we have in Vermont. There's a lot of the Vermont economy that when you model it doesn't make sense without recognition of these amenity values. So, you know, why do some workers accept a lower page pay in Vermont when they could earn more in another state? Particularly in occupations like medical professionals and lawyers and yes, even economists. Why do they accept pay that's lower in Vermont than these other places? They're being compensated in other ways. And quality of life metrics matter in terms of the economy, they matter in terms of tourism also. And there are economic effects that stem from that as well. So with that, I'll just turn it over to Q&A, but that's some of the broad brush responses I'd have to those questions or post. Yeah, so thank you, Tom, and all three of you. It's just about 1030 and I know from Kitty that her committee has scheduled testimony then. Is that right? In your meeting, we're going to take a 15 minute break and we just need to work on the budget. So, yeah, right. So I just thinking about time. I don't know if any, we've got maybe one minute if anyone on appropriations has a question they'd like to ask. I might see if we can go another 10 minutes or so for ways means questions but then we're going to have to stop because we've done a lot of hurt a lot. We're not going to be able to process it all. But we need to be able to move on. So Kitty, do you have anything that you want to ask about before you all? I don't have a question. I would like to know if we can have, will this presentation, the PowerPoints be downloaded so that we can refer to some pieces of these and I think they're going to be extremely helpful strategies, pieces of them for January. And so if we could have the presentations downloaded for our access, I think that would be very helpful. And I would like to thank the three presenters coming in. January is going to be a bear. I think we're hatching through for this year. There's available revenues because we had a great, a great July 15 revenue, you know, taxes that came in were wonderful. And I shouldn't say wonderful much higher than we anticipated. And our challenges are going to be in the future as you all have stated. Yeah. And I just thank you kitty and I just have a note from Dan White and a reminder that he has a 1030 cost so I think we're going to lose Dan we're going to lose the Appropriations Committee. I, I, if there's a burning question from somebody from ways means we'll tackle that for just a minute or so and then I think we're going to say thank you and adjourn and yes the presentations will be available for sure. There's just a ton of really good information in there. Yep. Does somebody think I have anybody asking a question. So I think I have George who tried to do a question a long time ago so let me let me do George and then we'll be done. So my question is actually for Kim Rubin, who talked about the durable goods and things that we don't tax. But you didn't mention at all sales tax on services. And how we might compare to other states with that and I wonder if you could address that. You're low. Everybody, part of what we did and part of the reason for doing the study we're doing is highlighting the fact that you know, services make up much of consumption now it's over 60% in Vermont. And that's relatively few so Colorado where we're working. We're basically going through so I've been on a couple of tax revision commissions one in New York, one in DC and one in California. And I think in general the idea of going through and looking at the specific services and deciding what you could tax and maybe get some money from, and especially what our services that used to be taxed if they were is a way to go. And so sort of going down a list that the Federation of tax administrators puts together and I can send that to you. And looking at the specific ones and thinking, is this something if we expanded it to taxes who would pay what would it do to economic conditions. So what will pay or would they go across the border. So when we did this in DC. One of the things we were very cognizant about is the fact that we're pretty close to Virginia and Maryland so just making sure that what we were taxing was similar to what they were taxing, or if it was something that people could move away and get somewhere else became an issue. I think we could get a fair amount of hate mail because we did instituted Jim tax or yoga tax. And I had a lot of angry friends but I think in general thinking about why something is or is not taxed and in DC it seemed weird that we were in taxing health clubs, but we would tax things like if you bought a basketball or a tennis racket seemed a little wrong. I want to carry us in that context about software as a service being taxed we've had a lot of discussion about that and for a month it's something our committee has been sort of on the ready to do but we haven't actually done it and I'm wondering how what your thoughts are about that. And I think that's right I think the easiest ones to try and have taxed are things that are services that replaced we bought so partly we're having this conversation in Colorado and like things like taxing downloads or movies that people are streaming rather than renting. But you know the question that keeps coming up is if you were going to pay sales tax on it. If you had rented it a blockbuster why aren't you paying sales tax on it. If you're renting it from Amazon. And so I think that there was some room there I think also taxing other events. I feel like that industry is now mature enough that I would expand it I would tax the things that people are spending money on and recognizing that our sales tax base largely reflects what people were buying, you know, last century is a problem. Yeah. Thank you. Quickly. Anything else anybody wants to ask. See any hands so I think what I'm going to do is thank our presenters. Also again thank Joyce and Graham for the work and they did putting this together it was, it was really terrific and I'm going to use these presentations as we go along and Tom we get the benefit of doing questions with you at a later time as well so I know there's a lot of meat and what you presented that I think we need probably to learn more about so. Thanks all committee I'll see you all tomorrow at nine. Thank you. Thank you for inviting this it was great.