The central challenge is not that state revenues are collapsing. Instead, the state’s fixed costs are growing faster than its baseline revenue.
Vermont’s state government is preparing for what lawmakers are calling the “most difficult” budget process in recent memory. After several years of budgets bolstered by historic levels of federal pandemic aid, that money has run out.
Now, the state faces a “fiscal reckoning” as it confronts rising internal costs and the threat of “sweeping federal funding cuts”.
This situation is forcing a fundamental debate in Montpelier: Is Vermont’s primary problem an “affordability crisis” that requires spending restraint, or is it an “inadequate revenue” problem that requires new taxes to protect essential services?
This article explains the core conflict, the competing solutions, and what is at stake for Vermonters in the upcoming Fiscal Year 2027 (FY27) budget.
A Call for Public Input
As this process begins, the public is being invited to participate. On November 6, 2025, the Department of Finance & Management (DFM) announced a Public Budget Forum to receive comments on the development of the FY27 state budget.
This is being done in accordance with state law (32 V.S.A. § 306(d)), which requires public participation in developing goals and prioritizing spending and revenue.
According to the DFM, residents are invited to share their thoughts, comments, or suggestions. The public can participate via an online survey, a brief budget presentation, and a public comment page on the department’s website.
The Core Problem: A Structural Gap
The central challenge is not that state revenues are collapsing. Instead, the state’s fixed costs are growing faster than its baseline revenue.
The official July 2025 Consensus Revenue Forecast, which sets the financial “ground truth” for the budget, projects modest revenue growth for FY27, such as a 2.8% increase in personal income tax collections.
However, these gains are not enough to cover the state’s non-negotiable, built-in expenses. These “fixed costs” include:
- State employee salary and benefit agreements.
- A 5% increase in health benefit costs for state workers.
- Required payments for state pensions.
- New, “sweeping” cuts to federal funds that support programs like Medicaid and nutritional assistance.
This creates a “structural deficit”—a gap where baseline projected revenue is not enough to pay for the baseline, already-promised cost of government.
This is a stark reversal from the prior year. The FY26 budget, which passed in mid-2025, included a large 8.4% General Fund increase. That budget used the last of the federal aid and a temporary economic surge to make major “ongoing investments” in childcare, housing, and healthcare.
Now, just one year later, the state must figure out how to pay for those expanded services without the one-time money that created them.
The Governor’s Plan: A 3% “Hard Cap”
Governor Phil Scott’s administration has defined the problem as an “affordability crisis” and has stated its budget strategy is to “play defense” against new spending and taxes, a position echoed by the Vermont Chamber of Commerce.
To enforce this, the Department of Finance and Management (DFM) issued strict instructions to all state agencies for building their FY27 budget requests:
- A 3% General Fund Cap: Agencies cannot request a General Fund budget that is more than 3% higher than their FY26 appropriation.
- The “Hidden Cut”: This 3% cap is not a 3% raise for programs. Agencies must absorb all their fixed-cost increases—like the 5% rise in health benefit costs—within that 3% total. For an agency’s fixed costs to be covered, programmatic spending must be cut to keep the total budget under the 3% cap.
- The “No Backfill” Rule: Agencies were explicitly warned not to assume that any new federal funding cuts will be “backfilled” with state dollars.
This administrative process forces agencies to identify which programs they would cut to meet the 3% cap. It is designed to force the “wants vs. needs” reckoning the Governor has called for.
Two Competing Solutions Emerge
The Governor’s budget, when released, will be the opening move in a session defined by two opposing philosophies.
- The “Restraint” Position: This position, championed by Governor Scott and the Vermont Chamber of Commerce, argues that the state faces an “affordability crisis” and “escalating fiscal pressures.” The solution, in this view, is fiscal restraint, protecting businesses from “disproportionate tax burdens,” and limiting government spending to core “needs”.
- The “New Revenue” Position: This position, advanced by organizations like Vermont Businesses for Social Responsibility (VBSR) and the Public Assets Institute, argues that “budgetary constraints” are a policy choice. They maintain that “additional revenue will need to be raised” to protect the state’s values and essential services. This coalition advocates for “graduated revenue strategies” (like higher taxes on corporations or high-income earners) to avoid cuts to programs, such as by building a revenue system through an equity lens.
What’s at Stake: The “Scale Back”
House Appropriations leaders have warned that committees will be asked “to review existing programs to see if there are any that can be scaled back or may no longer be the priority they once were.”
The programs most directly in the line of fire are the ones expanded in the FY26 budget, including:
- Childcare: A 5% rate increase for childcare providers and financial assistance programs. Advocacy groups are already preparing to defend against cuts.
- Healthcare: Rate increases for critical providers like Federally Qualified Health Centers (FQHCs) and nursing homes. These are especially vulnerable to the combination of the 3% cap and federal Medicaid cuts.
- Housing: Programs funded in FY26 like the Manufactured Home Improvement and Repair Program (MHIR) and the Housing Opportunity Grant Program (HOP).
On top of this, school districts are facing a “double whammy” of their own expiring federal funds and inflationary pressures, all while implementing the state’s massive H.480 education finance reforms.
The Background Factors: Pensions and Debt
Two long-term issues will influence the entire debate:
- Pensions: Vermont’s pension system, a crisis just a few years ago, is now on a stable path to be fully funded by 2038. This good news depends on one thing: the state must “continue to fund ADECs+” (its full, actuarially-required pension payment). In a tight budget year, there will be immense political pressure to divert this massive payment to save social programs, a move the State Treasurer’s office warns against.
- Debt: This is a source of strength. Vermont has high-grade bond ratings (Aa1/AA+) and a low debt load. The state’s Capital Debt Affordability Advisory Committee has recommended the state can prudently take on $100 million in new debt for the biennium. Because the operational General Fund is so constrained by the 3% cap, this $100 million in borrowing capacity (via the Capital Bill) is the primary tool the Governor and Legislature can use to fund new priorities, especially for “one-time” investments in housing and climate infrastructure.
What Happens Next?
1. The Governor’s Budget (January 2026): Governor Scott will formally present his FY2027 Recommended Budget to the Legislature in mid-January 2026. This document will be the first official look at which programs his administration proposes to “scale back” to meet the 3% cap.
2. The Legislative Response: The House and Senate will spend the next four months building their own budget. They will hear testimony from state agencies, advocacy groups, healthcare providers, and local officials.
3. The Central Conflict: The 2026 legislative session will be defined by one question: Will the Legislature pass a budget that fits within the Governor’s “restraint” model, or will it pass a budget that raises “graduated revenue” to preserve services?
4. The Veto Showdown: Given the Governor’s consistent opposition to broad-based tax increases, any legislative effort to pass a significant new revenue package will almost certainly face a gubernatorial veto. This sets the stage for a high-stakes conflict that must be resolved before the new fiscal year begins on July 1, 2026.
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