Lawmakers, Local Officials Debate Return of LOT Pilot Surplus and Funding for Flood Buyouts

Members of the House Committee on Ways & Means heard Tuesday that a growing surplus in the pilot special fund — fed by local option tax (LOT) receipts and rising consumption tax revenue — has prompted calls from municipal officials to return excess dollars to the towns that generated them.

Samantha Sheehan, an advocacy team member with the Vermont League of Cities and Towns, told the committee the league “strongly supports H.164,” a bill described in testimony as seeking to modernize the LOT formula and return the pilot surplus to municipalities. She said the league’s members want an equitable return to the towns that helped create the surplus and object to proposals that would appropriate the money to programs for which many contributing towns would not be eligible.

“The surplus in the pilot special fund has been contributed to by two primary factors,” Sheehan said: more communities adopting local option taxes, and a sharp rise in consumption tax receipts since 2019. She told the committee the current surplus is approximately $10.3 million, compared with roughly $3.3 million the prior year. She and other witnesses urged a simple, fair method to return excess funds to municipalities.

Ted Barnett of the Joint Fiscal Office provided technical background on how pilot payments are calculated and why the special fund balance grew. “The pilot special fund receives 30% of local option tax revenue, minus a $5.98 return fee,” Barnett said, summarizing the statutory allocation and administrative fee. He explained that pilot payments are computed from three variables in statute: the insurance replacement value of state‑owned buildings, the municipal common level of appraisal (CLA), and the municipal tax rate.

Barnett reviewed how changes in property values and CLAs can cause a town’s pilot payment to fall even if the insurance value of state buildings is unchanged. He also noted that the post‑pandemic surge in consumption spending — and the increase in the number of municipalities that have adopted LOTs since 2017 — pushed LOT revenues above earlier forecasts and produced the current surplus.

Witnesses discussed several options to address the surplus. VLCT recommended returning the surplus to municipalities that had a LOT in place during the period when the surplus began to accrue, and also supported a separate $1 million appropriation in the governor’s recommended budget to make municipalities whole for grand‑list losses from buyouts of flood‑prone properties. That appropriation, Sheehan said, could cover reduced grand‑list revenues for up to five years for affected towns, according to conversations with the Department of Taxes.

Barnett offered preliminary JFO estimates for the flood‑related program. He said Vermont Emergency Management had 227 properties on applications for acquisition (FEMA‑style buyouts) and that an initial JFO fiscal look suggested an annual pilot payment shortfall from those properties on the order of roughly $550,000, noting that the number could be higher or lower depending on final approvals and participation. He cautioned that JFO’s calculations are the office’s baseline for committee decision‑making.

Committee members asked about mechanics and policy tradeoffs, including whether reducing the pilot special fund’s 30% allocation would better align revenues and expenses. Barnett said modeling suggested a 25% allocation of LOT receipts would approximate fiscal year 2024 expenses but warned that changing the percentage or the statutory formula would be a policy decision requiring careful analysis. Members also raised administrative burdens: VLCT witnesses described LOT administration as complicated for small municipalities and asked for simple, implementable approaches.

No committee action or vote occurred during the hearing. Witnesses and staff agreed to follow up with more detailed calculations and to reconcile differing cost estimates before the committee makes any statutory or appropriation decisions.

For now, the principal points recorded in testimony were: municipal officials want surplus pilot funds returned to the towns that generated them; VLCT supports H.164 and a $1 million governor’s appropriation to address buyout‑related grand‑list losses; and JFO will continue to provide the committee with technical forecasts and reconciled estimates for any appropriation or statutory change.