Ways & Means hears report: Vermont reserves strong, stress-testing practices limited

The Ways and Means Committee on Friday, Jan. 31 heard a presentation on a state reserve study and a stress-testing report that found Vermont’s statutory reserve practices are broadly strong but recommended building more formal stress-testing processes and closer monitoring of the newly created childcare contribution special fund.

The report was presented by Steve Wislawski, managing director with Public Resources Advisory Group, and introduced by Ashlyn Dohatt, director of policy in the State Treasurer’s Office. Wislawski told the committee, “Vermont does a very good job with this,” and described the state’s practices as “generally aligned with those of the highest … states with the highest credit ratings.”

Why it matters: Committee members flagged heightened uncertainty after a temporary pause in federal funding flows and asked how the state’s reserves and forecasting practices could protect core services if revenue disruptions recur. Wislawski and the working group that prepared the report recommended that Vermont consider routine multiyear stress testing to evaluate combined revenue and expenditure volatility over a three- to five-year horizon.

Key findings presented

- Statutory reserves and cash balances: The working group documented seven statutory reserves across the general, transportation and education funds, including 5% budget stabilization reserves in each major fund. Wislawski said the state’s cash balances are “ample,” noting that cash was “recently at about $1,600,000,000,” largely because of post-pandemic federal funding that is expected to be drawn down over coming years.

- Childcare contribution special fund: The report treated the childcare contribution special fund as warranting its own reserve because it is new and sizable; the fund received an $8,000,000 initial transfer. The working group recommended maintaining that initial amount as a reserve until the state collects more months of revenue and expenditure data to set a long-term target.

- Stress testing: The presenters said stress testing — scenario analysis that jointly models revenue and expenditure shocks — is less uniformly practiced across states than reserve-setting. Utah was cited as a model for routinely completed stress tests that analyze both sides of the budget. Wislawski said stress testing in Vermont would likely require additional staff time and outside support, including coordination with the administration and legislative economists.

Questions and context

Committee members asked about structural pressures including health care costs and demographic factors. Ways and Means member Rebecca Holcomb asked whether rising health-care expenses and federal funding instability should change how the state assesses reserves or its credit rating risk. Wislawski said many states face similar pressures and that rating agencies consider both fiscal management and structural trends when assigning ratings.

Recommendations and next steps

The report’s recommendations include continuing current reserve practices, considering codifying procedures for accessing and replenishing reserves, and evaluating a routine multiyear stress-testing program supported by additional staff or external contractors. Wislawski emphasized that stress testing is “deemed to be good financial practice” but would require resources to implement rigorously.

The committee chair closed the discussion by asking members to read the full report and supporting materials in advance of a joint session with the Education Committee at 1:30 p.m., when consultants from the Agency of Education will be available to answer questions about related documents.