Treasurer's office recommends holding $8 million as reserve for new childcare fund; staff urge formal stress testing

Members of the House Appropriations Committee heard from the treasurer's office and outside financial advisers on Tuesday that Vermont's budget reserves are generally strong and that the committee should keep an $8 million transfer to the new Childcare Contributions Special Fund as a reserve while the program's revenues and expenses stabilize.

The recommendation came during testimony from Ashlyn Doyon, director of policy in the treasurer's office; Jeremiah Breer, chief financial officer in the treasurer's office; and Steve Wrozloski, managing director at Public Resources Advisory Group, at the committee's Jan. 21, 2025, meeting. The presenters summarized a joint report requested in last year's BAA and discussed the state's reserve practices, current cash balances and the use of stress testing to inform reserve sizing.

Why it matters: The Childcare Contributions Special Fund is financed by a 0.44% payroll tax that began collecting on July 1, and the program and revenue stream are new. Presenters said there is insufficient historical data to estimate revenue and expenditure volatility for that fund; retaining the $8 million transfer as a reserve would provide a buffer while the state gathers experience and decides whether to adopt a statutory reserve level for that fund.

Jeremiah Breer described reserves as "fundamentally a restriction on an appropriation" and emphasized that reserves are a budgeting practice rather than segregated cash. He said the working group recommended that "the $8,000,000 in the fund be retained as a reserve, at least for a couple years, until we have some data, and we have a little bit more certainty on how those pieces flow." Breer also outlined the main existing reserves: a general fund budget stabilization reserve set at 5% of prior-year general fund appropriations, a separate human services caseload reserve, a general fund rainy-day reserve (also 5%), and similar 5% reserves in the transportation and education funds. He noted the 27/53 payroll reserve that covers years with an extra payroll or extra Medicaid payment.

Wrozloski told the panel that Vermont's reserve practices and current reserve levels score well with credit-rating standards and that the state currently holds large cash balances. He said the state's liquid cash balances are roughly $1,600,000,000 and described the cash as "very robust and very safe liquid investments." On stress testing, he said few states do formal, consistent annual stress tests; some perform ad hoc or multi-year tests. He recommended doing stress testing periodically (for example, every three years) or piloting a stress test to inform whether a regular program is warranted, while noting it would require staff resources and some cost.

A committee member asked whether the $8 million transfer came from the payroll tax receipts or from the general fund; Breer said he believed it was transferred from the general fund and acknowledged he was not an expert on that particular transfer. A committee speaker confirmed the payroll tax collections began July 1.

The presenters said the working group included the treasurer's office, the Joint Fiscal Office, the Department of Finance and Management and PRAG. They characterized Vermont's broader fiscal management practices as proactive, citing past responses to revenue shocks such as the 2008-2009 downturn, when the state used rescissions and more frequent revenue forecasting to align spending to lower revenue.

No formal motion or vote on the recommendation was recorded during the meeting. Presenters asked to return for further discussion if the committee wanted more time to review cost estimates for implementing more formal stress-testing procedures.

Looking ahead, the treasurer's office and advisers recommended keeping the $8 million as a reserve until observed revenue and expenditure patterns for the Childcare Contributions Special Fund warrant a change, and to consider piloting or scheduling periodic stress tests to refine reserve-sizing methodology.