State facing $150 million budget gap; Gov. Douglas calls for school tax changes …
Stratton property owners sue state and town of Stratton over property tax appeals …
“Invisible” ancient roads deadline arrives; some towns want extension …

Gov. Jim Douglas gave the Legislature his ideas of how to balance the budget in a State of the State address Jan. 7 and in a budget address Jan. 19. Legislators did not reject his ideas out of hand, but are unlikely to go along with all of them.

In the State of the State address, Douglas told legislators that Vermont was “threatened by massive budget shortfalls, unfunded liabilities, and a broken system of education funding.”

The main reason for the budget shortfall is a weak economy, he said. “In just over a year, more than 10,000 jobs have been lost, and last year median family income fell nearly $2,000 from the year before,” Douglas said.

Douglas encouraged the Legislature to create a tax climate that will foster economic growth. “The single most consequential action we can take to encourage a healthy economy is to address the crushing weight of Vermont’s tax burden,” he said.

Specifically, he asked the Legislature to lower the state property tax rate and roll back, over time, the capital gains and estate tax increases approved by the Legislature last year over his veto.

“Those changes have swelled the ranks of Vermonters who are looking at other states – like New Hampshire or Florida – for their new, permanent residences,” said Douglas, a Republican who is not running for reelection.

With state revenues having fallen significantly, the Legislature will probably resist cutting taxes. But legislative leaders have so far indicated they do not want to raise any new taxes this year.

Senate President Peter Shumlin, who was instrumental in raising the state capital gains tax last year, said he would be “extremely reluctant” to choke off the economic recovery with any talk of new taxes now. “We have a responsibility to solve Vermont’s budget problem with new ideas, not taxes,” he said. Shumlin is one of five Democrats running for governor in 2010.

However, another gubernatorial hopeful, Sen. Doug Racine (D-Chittenden), is calling for tax increases as part of the budget solution. Racine has said he favors temporary increases in the income tax on higher-income Vermonters.

Backers of such a tax may be emboldened by a Jan. 26 public referendum in Oregon that raised taxes on income earned above $250,000 for couples, $125,000 for singles. The tax hike, which passed 54% to 46% and was pushed by public-employee unions, applies to 2009, 2010, and 2011 income. The top tax rate in Oregon is now 11%.

Rather than rely on tax hikes, Douglas wants to balance the budget by making state government more efficient, cutting some human services programs, and making changes to the state’s education finance system.

The efficiencies would come from a plan, endorsed by legislative leaders, to save $38 million next year by rethinking the way state government operates. The plan was developed cooperatively by the Douglas administration and legislators, working with a consulting group.

In the area of human services, Douglas noted that one-third of Vermonters now receive services from the state. Recent sharp growth in demand for human services threatens the stability of the budget, he said.

“Service providers will be asked to provide efficiencies,” he said. “Some beneficiaries will have to accept reductions in order to preserve benefits for the most vulnerable.”

House Speaker Shap Smith said it is likely he’ll support cuts in some programs in order to balance next year’s budget. Smith says it’s not possible to close a $150 million budget gap without reducing some services.

Advocates for Vermont’s human services programs are well organized and will challenge attempts by the Legislature to make cuts in human services at a time when many Vermonters are in economic distress.

Regarding school finance, Douglas called for a variety of fixes, some he had proposed before and others that are new. The proposals include finding ways to increase the student-teacher ratio, reducing income-sensitivity benefits for households that earn between $60,000 and $90,000, gradually shifting funding of teacher’s retirement to the Education Fund, and reducing the number of school districts in Vermont.

In his State of the State address, nearly 40% of which was devoted to school finance, Douglas stated: “The ever-growing burden of property taxes threatens the financial security of Vermonters and the potential of our employers. Getting a handle on this cost is essential to our economic future.”

He went on: “In the last decade, total net education property taxes have nearly doubled from just over $450 million to $900 million today. And that $900 million accounts for only two-thirds of what Vermonters actually pay to support education. Almost half of income taxes, a third of sales taxes and a third of the purchase and use tax go to pay the total bill.”

Critics of Douglas’ education proposals say some of them will in fact drive up property taxes. Indeed, in past recessions Vermont governors and legislators have often helped balance the state’s General Fund by cutting school funding. Last year, for example, property taxes were $26.1 million higher than they would have been without underfunding and other cost shifts made by the Legislature, according to an analysis by the Vermont League of Cities and Towns.

Even with the education cost shift, Vermont’s Legislature had a tough time balancing the General Fund last year; it took tax increases, budget cuts, a big slug of federal stimulus money, and a successful override vote after Gov. Jim Douglas vetoed the budget. Balancing the budget for fiscal year 2011 looks to be even harder, and fiscal year 2012 no better, as federal stimulus funds phase out.

The $150 million budget gap facing the state for fiscal year 2011 includes a $90 million General Fund shortfall (due to declining revenues and $75 million less in federal stimulus dollars), $10 to $20 million in increased costs for human services, $20 to $30 million in increased Medicaid costs, and about $29 million in additional funding for the state’s pension systems (including teachers).

Fortunately, state revenues have stabilized and economic forecasters say Vermont will be one of the first states in the Northeast to come out of the recession (although the national recession has probably ended, the Northeast states are still in recession, according to some economists).

The reaction from Democratic leaders in the Legislature to Douglas’ budget proposal, especially his proposed school finance changes, was mixed at best (Democrats have majorities in both the House and Senate).

The leader of the majority Democrats in the state Senate, Windsor Sen. John Campbell, complained that Douglas was being the antithesis of a leader. “The Legislature has repeatedly said, ‘No,’ to increasing property taxes on middle-income Vermonters,” he said. “We’ve repeatedly said, ‘No,’ to the state of Vermont usurping local control. And what he has said here, in essence, does exactly that.”

House Speaker Shap Smith (D-Morrisville) sounded more conciliatory. He said Douglas’ proposals would be considered by the appropriate committees, and indicated he agreed with the Governor’s idea that Vermont’s very low student- teacher ratio of 11:1 should be raised somewhat, to around 13:1.

Douglas noted that state workers have agreed to take a 3% wage reduction and keep wages frozen for two years. “To date, we have not seen similar agreements between teachers and school boards,” he said. “If teachers’ contracts mirrored the recent state employee contract, there would be no need to raise property tax rates in 2011.”

Among Douglas’ specific suggestions: reducing the student-teacher ratio by filling only one position for every two teacher retirements, requiring teachers to pay a minimum 20% share for their health insurance costs, and reducing the number of school districts and supervisory unions.

Douglas also suggested changing an Act 60 rule that allows schools to receive reimbursement from the state for students who don’t exist. “When a school reports its per-pupil count each year, that number can only decrease by 3.5% from the previous year – regardless of how steep the actual decline,” Douglas said. “I propose increasing the cap to 10% this year, then gradually phasing it out over three years.”

Finally, Douglas complained that the income-sensitivity portion of Act 60 shields 70% of Vermonters “from the full brunt of education spending” and is too expensive for the state, with costs for income sensitivity expected to jump 18% next year. He proposed scaling back income sensitivity and curbing income-sensitivity payments on homesteads valued greater than $400,000.

The state teachers’ union dislikes many of these proposals. For example, with regard to increasing the percentage of health insurance paid for by teachers, Martha Allen, president of the teachers’ union, said: “That is something that the state should not step into. That’s a collective bargaining agreement that is made between the teachers and the local school boards.”

Joel Cook, executive director of the teachers’ union, complained that the governor’s speech contained many old, unproductive ideas. He said the number of teachers has increased in Vermont despite a drop in student population because of the demands of special education and other classroom services.

The teachers’ union is also upset about plans to reduce retirement benefits for teachers and state employees who are more than five years from retirement. Without changes, the pension system could fall short by a billion dollars over the next decade and might not survive, according to State Treasurer Jeb Spaulding, a Democrat.

Spaulding headed a commission that has recommended increasing employee and teacher contributions to the pension plan from 3.4% of pay to 5.47%, pushing the normal retirement age from 62 to 65, and increasing the health premium co-pay. Experts hired by the Vermont State Employees Association say the changes are unnecessary and perhaps illegal.

As the state prepares to deal with its daunting fiscal challenges, there are some bright spots. For one thing, Vermont is better off financially than many other states.

Vermont also has about $60 million in “rainy day” funds that could end up being used to help balance the FY2011 or FY2012 budgets, though Douglas and legislative leaders have said they do not want to tap those funds at this point.

And there has been talk that the federal government might send additional stimulus money to the states. Douglas said his budget does not count on additional federal assistance, and argued the state must recognize that federal recovery funds “will not flow forever, nor should they.”

But in early December, Senate President Shumlin said he thought that “there will be more federal money coming.” If there is no additional federal funding, “we are going have a problem that I don’t quite know how to solve,” he said.

The lawsuit, filed in Washington Superior Court last October, says the state had no authority to recalculate the Stratton school tax rate, and the town had no right to lower the appraisals of properties whose owners had not appealed. The town is planning to conduct a reappraisal this year.

Attorney Hans Huessy, of the Rutland law firm Kenlan, Schweibert, Facey & Goss, told VPOR he was expecting the state or town to file a motion to dismiss the case and noted there is little prior law in this area, making the lawsuit an “uphill battle.” Huessy represented the same property owners in their Stratton tax appeals last spring.

At that time, over 330 property tax appeals were filed in Stratton by owners arguing their properties were assessed at more than 100% of fair market value, which is not allowed under Vermont law.
The Stratton listers agreed that values had dropped, but decided the fairest thing to do was to drop the assessments of all condos, homes and land in town rather than just those property owners who had appealed.

As a result, new assessment notices were mailed out, reducing condo assessments anywhere from 6% to 25%, though a few stayed level. All land and single-family home assessments were dropped 14%.

At that point, the state Tax Department concluded that since 95% of property assessments had changed the town had conducted a reappraisal, requiring a 17% adjustment in the town’s common level of assessment (CLA), which is used in calculating the school tax rate in each town.

If no adjustment had been made to the town’s CLA, the town of Stratton’s tax rates would have been lower and it would have ended up sending between $2 million and $2.5 million less to the state’s Education Fund this year than it did last year, according to Kent Young, chair of the Stratton Board of Listers.

Stratton resisted changing the CLA, but the state calculated a new CLA and tax rate, which was the one ultimately used by Stratton officials.

According to Huessy, his clients and the state would have been happy if the town had simply reduced the assessment of only those parcels owned by property owners who had appealed, rather than most of the properties in town. The taxes of those who had appealed would have been lower if that had happened.

The property owners Huessy is representing include some individual property owners as well as aggrieved unit owners in these condominium associations: Rising Bear Lodge, Hearthstone Lodge, The Watch, Snowbridge, Treetop, Long Trail House, Founders Lodge, and Village Square.

The complaint filed by Huessy states that the state’s action in recalculating the town’s action as a reappraisal “was extralegal and not permitted” under state statutes.

If the court concludes that the state properly certified the town’s actions as a reappraisal, the complaint asks that the court determine that Stratton acted illegally in conducting its reappraisal, that the across-the-board changes be reversed, and the state be ordered to recalculate the school tax rate for Stratton.

If relief is obtained, it appears it would only affect 2009-2010 taxes. The Stratton listers are planning to conduct a “statistical update reappraisal” of all properties this year, according to Young. Stratton conducted a full reappraisal in 2007, near the peak of the market.

According to Young, Stratton had a decent number of sales last fall, although he said sales have slowed down recently. Young said current assessments are fairly accurate, but some condos “will need to be adjusted down a bit more” in the 2010 reappraisal. All Stratton property owners should receive new assessment letters this spring.

As of January 20, 76 towns had submitted their highway mileage certificates and only 16 had any changes, some of which involved ancient roads. Croft said he expected to see more towns submitting ancient roads closer to the deadline.

Highway mileage certificates must be filed in the town office by February 10, then forwarded to the state by February 20, he said.

The town of Barnard is expected to submit 37 ancient roads, which will probably be among the highest number in the state, Croft said. Barnard has already been involved in several ancient road diputes with landowners.

Two towns – Norwich and Hartland – have complained to the state that they did not have enough time to do their work, and it appears there may be an effort in the Legislature to extend the deadline once again.

Under the ancient road law passed in 2006, “invisible” ancient roads were supposed to be added to town highway maps in 2009, but the deadline was later extended by the Legislature to 2010. Invisible ancient roads are those roads for which there is no clearly visible physical evidence on the ground.

The law says new roads are to be added by July 1, but the functional deadline is actually Feb. 10, the annual deadline for updating town highway maps. Norwich and Hartland claim they did not understand this until last fall. Croft said other town may be in the same situation.

Some road advocates, such as Calais surveyor Paul Hannon, have also been publicly complaining that property owners are controlling the ancient road review process in some towns while the public is unaware of what is at stake and is not coming forward to argue for preserving the roads.

Currently, Vermont towns appear to fall into four types when it comes to ancient roads: those that are adding roads and will make the deadline, those that are behind and will not make it, those who researched the issue but decided not to add roads, and those who want nothing to do with adding new roads.

Among the towns in the latter group are 12 who have pursued a “mass discontinuance” procedure in the ancient road law allowing them to get rid of any claims they may have to the old roads.

According to Croft, the towns that have gone through with a mass discontinuance or are almost done are: Benson, Tinmouth, Shoreham, Swanton, Maidstone, Orwell, Newfane, Wallingford, Sunder-land, Monkton, Baltimore and Brookline.

Shelburne is another town that is considering the procedure, according to news reports.

Ancient roads are old, mostly unused roads that were authorized in the past, do not appear on town highway maps, may or may not have been built, and were never legally discontinued.

Invisible roads can still be revived after the 2010 deadline, but towns will have to go through a more rigorous process and may have to pay landowners if they then revive the roads.

Towns have until 2015 to add “visible” ancient roads and other class 4 roads not on their maps. Invisible ancient roads – and perhaps visible roads, though there is debate about that – that have not been added to maps by 2015 will disappear.

When they are revived, ancient roads have often been a surprise to landowners, since the 40-year title searches done when people buy property generally do not go back far enough to discover the roads. Road disputes have led to a raft of lawsuits.

One recent case, Austin et al v. Town of Middlesex, was recently decided by the Vermont Supreme Court in the landowner’s favor. The Court found that the town could not show it went through proper procedures in 1883 when the road was created.

Middlesex Representative Tony Klein recently introduced a bill in the House, H.469, that would reverse the Court’s decision in the case and provide that – for roads created prior to 1850 – a lack of a reference to the fact that the road was laid out by the selectmen “shall not constitute conclusive evidence that a highway is not public.”

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