The economist contracted by the Legislature for consultation and analysis has sent a scathing report back to the Joint Fiscal Office in regards to a bill before the Senate Finance Committee called “Vermont Recovery and Reinvestment Act of 2009 (S.137).” Tom Kavet is an economist from Williamstown. As part of his introduction, he says, “Virtually none of the proposed programs that reduce revenues or increase spending represent any net economic stimulus benefit to the State.” He questions essentially all of the measures as benefitting near-term economic stimulus. He suggests that maximizing federal stimulus funds is by far the best opportunity for the state to recover from the current recession. He also makes a case that a fully funded “rainy day fund (a reserve fund used to make up for lost tax revenues in bad times and replenished during good times)” would be logical public policy, rather than cutting taxes in good times and raising taxes in bad times, but which would require a significant change in political will. The current balance of this fund is $60 million.He goes on to say that the state lacks a comprehensive economic development plan. And even mentions that the popular “sales tax holiday” from last summer and touted as a stimulus measure, “probably actually resulted in a small net economic loss.” He also says that cutting state programs or laying off state workers also would result in a net loss to the economy over the next two years. Below is his overview to the report (click here for the full report).To: Steve Klein, Legislative Joint Fiscal OfficeFrom: Tom KavetKavet, Rockler & Associates, LLCWilliamstown, VermontWebsite: www.kavetrockler.com(link is external)CC: Senate Finance CommitteeDate: April 8, 2009Re: Requested Review of Proposed Vermont Recovery and Reinvestment Act of 2009, S.137OVERVIEWPer your request, I have summarized perspectives on the: 1) Costs, 2) Near-Term Economic Stimulus Effects and 3) Policy Considerations, associated with the 121 relevant sections proposed in S.137, the Vermont Recovery and Reinvestment Act of 2009.While the bleak economic conditions that were originally cited as the rationale for this legislation are real and present, the efficacy of many of the 121 measures contained withinthem to address these conditions can only be described as minor, and in some cases, misguided. Many of the measures are revised versions of programs that have either had little or no beneficial impact as previously enacted or proposed measures that have been rejected in prior legislative sessions.Many of the measures represent substantial State expenditures of revenues – whether as tax expenditures that reduce revenues, loan loss guarantees that may reduce revenues, or direct expenditures – at a time of severe revenue stress. Virtually none of the proposed programs that reduce revenues or increase spending represent any net economic stimulus benefit to the State. This is because they must be funded with offsetting tax increases or spending cuts (see page 2 insert for more a more detailed discussion). Few of the proposed measures provide clear goals stating expected public benefits for these public expenditures, and fewer still provide transparent public oversight to insure that these benefits are achieved. Most importantly, the larger policy framework and supporting analysis within which these measures fit, is absent. As noted in comparable pending House legislation, Vermont lacks a shared statewide vision of its economic future ¦[and] lacks a single, holistic, integrated state plan for economic development. (See H.313)Without a coherent plan and credible planning entity, such measures accumulate, overlap and add to administrative (and user) chaos with those already passed, many of which are unused, unevaluated and of uncertain benefit. Without a strategic plan, the efficiency of public expenditures is diluted and policy priorities remain vague. Economic development becomes a catch-all for anything any other state is doing and anything that might help. While the political impetus to do something is understandable at times like this, it is important to understand the limitations of state economic policy options that can truly impact the broader economy. For example, the beneficial economic impact of almost all of the non- ARRA measures proposed in the subject legislation would be exceeded by the expenditure of the State Rainy Day Fund (about $60 million) and would be dwarfed by the negative economic impact of laying off substantial numbers of state workers and cutting expenditures for essential state services.The most impactful portions of the proposed legislation are those related to maximizing the receipt and expenditure of federal economic stimulus dollars. There is no other single public policy action the State can take with greater beneficial impact on the State s economy over the next two years than measures to aggressively attract and utilize the massive ARRA funds now becoming available (see chart, next page). Proposals in this legislation that maximize and rely on this funding have powerful beneficial economic and fiscal impacts because, for the most part, they do not require any additional State taxation or offsetting spending cutbacks to finance. With nearly $1.5 billion in potential state investment, these policy areas should receive the highest legislative priority.Administrative concerns associated with these proposals should also be given fair weight. All too often, programs are rushed into existence without careful planning regarding compliance, operation and public oversight. The VEPC EATI program, for example, was developed with the best of intentions, but without careful consideration as to how the program would be policed and managed, and resulted in the loss of millions of dollars in taxpayer money due to program loopholes and abuse. All of the large programmatic proposals should be thoroughly vetted by the Tax Department, Joint Fiscal Office and other administrative agencies to determine administrative costs and concerns regarding program operation before passage, and all should have some form of public oversight and follow-up to insure that the expected benefits are received.The below assessments for individual sections of this bill should be considered preliminary, since new information is being made available daily and statutory revisions are being constantly introduced. This memo is based on statutory language as of March 27, 2009. Updated analyses will be made available to various committees upon request as these proposals move through the legislative process.