MONTPELIER – Legislators completed their work for the year just after midnight Thursday, having avoided a threatened veto of the state budget by reaching an eleventh-hour compromise with Gov. James Douglas. The Senate adjourned at 11:42 p.m.; the House at 12:05 a.m.

It was a grueling close to a legislative session, which began with a more than $150 million hole in the state budget and deep differences between Douglas and the Democrats who control the Legislature. The agreement meant Douglas’ final legislative session as governor closed with a balanced budget, estate and capital gains tax cuts and a functional working relationship with legislative leaders. It was a stark contrast to last year’s first ever veto of a state budget, which was followed by lawmakers putting their spending plan into place despite his objection. “The urgency of our efforts is heightened by the knowledge that many of our friends and neighbors are working longer hours for lower wages and that others are out of work altogether,” Douglas told lawmakers before they adjourned. Douglas and legislative leaders thanked lawmakers for their work on matters including shoring up the ailing unemployment insurance trust fund, restructuring the court system, passing a $9 million jobs package, and passing the bill banning text messaging while driving.

“While other states are cutting programs and raising taxes in response to the fiscal crisis, Vermont, I am proud to say, is moving in a different direction,” said the governor, who came to the Statehouse as a House member in 1973. That was a reference by Douglas to the agreed-to partial rollback of estate and capital gains taxes legislators put in place last year. The tax changes made last year by legislators were used to pay for a reduction in income tax rates and money used to fund the state budget. On Wednesday, legislators and Douglas, who had been at an impasse late the night before, agreed to reduce capital gains taxes for those investing directly in Vermont businesses by $3 million.

They also agreed to push back estate taxes next year and follow an expected new federal estate tax system when it is completed. Those tax breaks, to a relatively small number of Vermonters, were less than Douglas had wanted, but more than legislative leaders had wanted to give up. However, after hearing from business owners and others about the beneficial effect on economic development and job growth of rolling back the taxes, legislators agreed. “It allows us to grow jobs, to put Vermonters back to work,” Senate President Pro Tem Peter Shumlin said. The agreement and the budget which will become law because it was reached, moves the state — suffering from declining state revenue brought on by a national economic slump – closer to firm ground, Speaker of the House Shap Smith said. “I am pleased we were able to reach agreement with the governor so we can move forward with what I believe is a good budget bill that balances the needs of Vermonters with our fiscal constraints,” Smith said. In addition to passing the tax bill lawmakers accepted a $4.7 billion budget and the controversial Challenges for Change measure which balances the budget by saving $38 million through government restructuring and efficiency.

But that doesn’t mean that all in the Legislature were happy with the measures worked out between legislative leaders and the governor. “The governor and the leaders in the Legislature talk a lot about how difficult it has been to reach deals on the budget, taxes and Challenges for Change,” said Rep. David Zuckerman, P-Burlington. “I’m worried about the state’s vulnerable who will realize that they are not better off after this passes.” Sen. Mark MacDonald, D-Orange, said the Legislature by placing caps on the values of houses under the income sensitivity program which allows homeowners to pay their property taxes based on their income, was raising taxes on middle-income residents and lowering them for the wealthy through the changes in estate and capital gains taxes.

Others objected to the way in which the tax and budget bill drafts were completed only shortly before they were voted on. “I have no idea what is in this budget. I have no idea what is in Challenges of Change,” said Paul Poirier, I-Barre City. Lawmakers earlier this year rejected one of the Challenges for Change proposal that would have mandated about $23 million in statewide education cuts. The Legislature additionally rebuffed administration suggestions to impose minimum teacher-to-student ratios. But lawmakers say their so-called “voluntary merger” legislation, given final approval late Wednesday night, will, over time, tamp down on school spending without interfering with local control.

A competing bill that would have forced district consolidation never made it through the Senate Committee on Education. “We think is a very important move forward that really empowers local boards to make decisions,” said Rep. Johannah Leddy Donovan, chairwoman of the House Committee on Education. The merger bill offers the 280 school districts in Vermont financial incentives to meld together. By combining more schools into fewer districts, supporters of the legislation say, schools will reap administrative efficiencies. The ability to share teachers and combine programs, according to Donovan, will also ease the impact of future staff reductions. The bill offers four years of reduced tax rates to districts that move forward with merger plans. In order to qualify, the prospective unified district must present a business plan with estimated cost savings, though the financial incentives are not contingent on actual budget reductions.

The Challenges for Change bill consumed most of the House’s day Wednesday and lawmakers eventually approved the proposal – concurring with changes made to it in the Senate – in a vote of 95-41. But first many members raked the bill over the coals, complaining that process was violated, promises broken and too many compromises made. “I vote no for a process that ignores full responsibility,” Donahue said. “I vote no for pretending that we are restructuring services when in fact we will be cutting services.” Rep. Brian Savage, R-Swanton, said the bill “appears to have too many questions and too few answers.” Rep. Jim Masland, D-Thetford Center, defended the proposal, saying it does have “some warts,” but also is a “reflection of our best abilities.” “This bill is not about change, it is about cuts that we didn’t have the courage to make,” said Rep. Patty O’Donnell, R-Vernon. There were also the kind of mistakes often made by weary lawmakers pushing on to adjournment. The wrong version of a bill dealing with state employees retirement was passed, which meant the lawmakers had to go back and redo some of their work from earlier in the evening.

The final bill of the legislative biennium dealt with the disposal of “bodily remains”, which provoked laughs from legislators happy to have completed their work for the year. Staff writers Peter Hirschfeld and Daniel Barlow contributed to this report.