Campaign for Vermont: Poison pills aside, bills addressing workforce, housing, and economic development advance

This is the Campaign for Vermont April 18 legislative update.

There was lots of action this week as the legislature heads into its final month of the session. The ethics bill passed the House unanimously this week and is now headed back to the Senate where we expect final approval before being sent to the Governor.

In a surprise turn of events, the House is now considering the pursuit of defined contribution plans for new hires. This has the potential to address the remaining $2.3B in unfunded liability that will remain in our public pension funds if S.286 passes (the bill currently only addresses about $2B of the $4.3B overall liability).

Workforce, housing, and economic development bills are all progressing towards final passage but there are concerns around “poison pills” added by environmental advocates that could draw a gubernatorial veto. All three of these bills are critical to addressing Vermont’s short and long-term economic challenges.

Fiscal Responsibility

S. 286 – Public Pensions and Other Postemployment Benefits

There has been a great deal of conversation about how to begin implementing S.286 and employee (primarily teachers) contributions. Michelle Baker from the Vermont Association of School Business Officials testified before the House Government Operations Committee last week that her organization, on behalf of administrators, is concerned about the amount of work now required of school business managers. They were not contacted while the task force was working on its plan. Many requirements have to be manually entered for each teacher and some deductions cannot be automated. The resources capacity to do the work is not there and is very challenging. She does not believe the benefit and contribution transitions are feasible by the July 1 implementation date in the bill.

Auditors pointed to at least six payroll systems that are in play. Some districts have up to 72 different types of payroll deductions. Changing each payroll system over to support the new requirements would cost around $7,500 for each school district.

Chairwoman Copeland-Hanzas was frustrated that they are just publically bringing this up now, with only three weeks left in the session. She asked the school business managers to “tell us what you need for support to get it done.” The Agency of Education has been involved, as have superintendents but no one has found a solution since they started working on this in February.

David Coates and John Pelletier testified on S.286 this week also, saying that the bill does not include systemic solutions and will not permanently fix problem. A defined contribution (DC) plan option would allow new hires to join a plan that will limit the state’s liability. They believe assumptions around rates of return in the existing defined-benefit plans are unrealistic and that the state should be more realistic in their assumptions. The actuarial assumptions for the Vermont’s pension system use a 7% rate of return and discount rate through 2038. No one is using this high a rate of return. By assuming a high rate of return it allows the annual required contributions to be lower which means less financial impact in the current fiscal year but it puts the long-term viability of the plans in jeopardy.

Employee turnover is increasing, both within state government and globally. DC plans are portable, they reduce volatility, are not subject to the same restrictions, and increase return rates in most circumstances.

Coates and Pelletier referred to an Op-Ed from last week, which Campaign for Vermont published.

There are also issues with inflation assumptions. The projections currently being used is and annual inflation rate of 2.3%. We already know that assumption makes no sense. The CPI for this year was 4.6% which current retirees see their pension benefits adjusted for. This means that the actual increase in payouts was nearly twice what projections estimated for this year. This assumption being wrong in just one single year resulted in an increase to the unfunded pension liability of $58M. Just one year!

Underestimating Cost of Living Adjustments (COLA) for retirees will result in new losses to the pension plans and will increase the unfunded pension liability.

According to Coates and Pelletier, to reach a meaningful, long-term solution, and to reduce the volatility of the annual state/employer contribution, the following should be part of the legislation:

More frequent reviews and adjustments of assumptions and rigorous stress testing.
The state should create alternative plans for new hires.
There needs to be a risk-sharing policy to avoid the state (and taxpayers) taking on all the market risk.
They concluded saying that given the scale of the challenge, providing benefits structured more in line with other Vermonters for new employees does not seem unreasonable, nor does asking the state workers’ and teachers’ unions to share a more equitable portion of the burden in solving this critical issue that continues to threaten the financial well-being of our state.

Campaign for Vermont agrees with the recommendations above. We also found in a report from last fall that public employee wages are competitive with the private sector which means exorbitant benefit plans may not be necessary to attract and retain workers.

The preliminary actuarial analysis commissioned for the Pension Task Force expects the current bill will reduce the state’s actuarially determined employer contribution (ADEC) by approximately $8.7M annually and the Vermont State Employees Retirement System (VSERS) unfunded liability by approximately $58M (notice this was totally offset by this year’s miss on COLA increases).

Proposed modifications to the Vermont State Teachers Retirement System (VSTRS) would reduce the state’s ADEC by approximately $4.8M annually and the unfunded liability by approximately $34.9M.

The House Government Operations Committee voted the bill out on Wednesday and it was referred to the House Ways and Means Committee who we expect will take up the bill this coming week. However, Gov Ops has already scheduled testimony on defined contribution plans for this coming week so we may see a floor amendment offered. Some members of the Committee were disappointed that it was not being included in the bill now. There was lots of concern that this bill doesn’t actually solve the problem, however the vote was unanimous regardless.

H. 510 – Vermont Child Tax Credit and the Vermont SSI Exclusion

The Senate Finance Committee took more testimony this week on H.510, the child tax credit bill. The Governor laid out a range of proposals he would be interest in; including an earned income tax credit (EITC) of 45% of the federal program. He would also be open to adding a student loan interest deduction. In total, the tax relief package would be about $36M.

The Senate’s proposed version comes out around $35.6M and includes a 45% EITC and a $25.6M child tax credit. Parents of children six and under would receive a $885 tax credit if their taxable income is $50K or less. For families over this threshold, the credit phase out $80 for every $10K in income. Families with taxable income over $160,625 would receive no credit. This program would impact 38,600 tax fliers.

There is also a counter-proposal to expand the federal Child and Dependent Care Credit (CDCC) by filling the gap between actual expenses and what the federal program provides (up to $4K per child). The estimated cost for this program would be $5.35M.

Housing

S. 234 – Changes to Act 250

The House Natural Resources Committee spent the week reviewing S.234 in preparation for passage. The Committee struck a requirement that Priority Housing Projects (PHPs) be located within a Neighborhood Development District (NDA). Also struck was an exemption for permit amendments for projects within NDA’s but they offset this with an expanded exemption for PHP’s located within Downtown Development Areas.

One of the significant changes this bill allows for is qualifying mixed-use construction projects as PHP’s. However, the square footage must be 40% residential and 20% of the housing units are required to be “affordable.” The same concerns that surfaced in the Senate around units only being required to be maintained as “affordable” for 15 years resurfaced here. Several Committee members would prefer that those units remain “affordable” in perpetuity. They ended up addressing this later on through S.226.

They agreed to add language that encourages environmental impacts and forest fragmentation to be “avoided, minimized, or mitigated” during the Agency of Natural Resources review of the permit applications. This addressed one of the Governor’s concerns in his veto threat from a couple weeks ago. It seems like there is an inclination towards merging language from S.226 and H.926 into S.234 as the vehicle for passage. This might make a veto harder to swallow if veto-worth provisions like the road rule and forest fragmentation are bundled with some of the Housing provisions the administration wants.

Chairwoman Sheldon was adamant about preventing subdivisions above 1500 feet in elevation, in addition to the road rule. There was little feedback from the rest of the Committee on this point.

As was the case last week, the Committee made several remarks about the Natural Resources Board (NRB) being dysfunctional. To this end, they were specifically not tasked with any reporting requirements in the bill. Instead, the bill requires the Department of Housing and Community Development to administer a report on the various designation programs, agricultural business language, and NRB staffing levels. It would also review the incentives established in existing statute for both regulatory and non-regulatory benefits. Some members want “consistency between local plans and state plans” for zoning included in the reporting requirements. It was pointed out that Regional Planning Commissions can withhold approval of the Town Plan if they do not align with state goals.

The Committee came back to markup the bill on Thursday with Jeff Wennberg (Former Commissioner of DEC) voicing support for the bill, particularly the sections that remove duplicate permitting for PHPs around wastewater (only the municipal permit would be required). He believes this streamlines the application process without any meaningful reduction in environmental outcomes for the state. There was also concern that the Department of Environmental Conservation was overloaded and that removing these permits from their workflow would allow for more productive endeavors.

They came back around to adding some language from S.226 into the bill, such as the Accessory Dwelling Units (ADU) sections. The Senate wanted to tamp down on some excessive municipal requirements that discouraged the creation of ADUs, which you can think of as housing units like in-law apartments. Many of these have been used for permanent rental housing during the pandemic. The Committee seems like they will support this provision.

The discussion forest products restrictions on operations also resurfaced. A concept similar to manure spreading was surfaced where operators would be required to proceed according to the weather. DEC would issue the permits regulate. The alternative would be periodic reporting on activities from the forest products operators (or do nothing).

S. 226 – Expanding Access to Safe and Affordable Housing

There was a lengthy discussion on Thursday regarding the many parts of the S.226 which may be of interest to the House Ways and Means Committee. Chairwoman Ancel pointed out that the affordable housing tax credits are not in the bill anymore, however, $3M in manufactured housing grants is still there. This equates to 150 grants at $20k apiece.

The bill enhances an existing tax credit program for Designated Downtowns and Village Centers to bring buildings more than 30 years old up to compliance with modern housing codes.

It also provides funding for smaller flood mitigation projects with up to $75k in matching funds. There are other tax credit monies in the bill that operate more like a grant with a programmatic sunset.

The House General Committee also worked on S.226 this week, taking testimony from over a dozen people. The Committee is pretty split on certain aspects of the bill. Some would rather proceed with a strike-all targeting “unfair housing practices” while others think the bill misses the goal of creating new housing stock completely. After some debate, the Committee voted 6-2-3 in favor of adding language discouraging discrimination that was borrowed from S.329. Much of the dissent came from the delicate balance this bill strikes between environmental advocates and housing advocates. There was worry that adding a provision that could open up litigation for landlords and developers might upset that balance.

The Committee did a walk-through of the bill on Friday with legislative counsel. There were several areas that they plan to make changes, but one of the most immediate was that to qualify as an affordable unit under the definitions in the bill the unit would have to be held under market rate for 99 years. They also confirmed support for $15M in funding over two years for a missing middle pilot program run by the Vermont Housing Finance Agency.

The bill also now includes a registration requirement for residential contractors. The Committee increased the insurance coverages contractors would be required to carry to $1M per incident and $2M aggregate. However, some issues surfaced around mediation for small projects (less than $10K). If there were a dispute between a homeowner and a contractor, the state cannot help with complaints that aren’t ‘consumer’ in nature. If the contractor complains about the client there will be no resolution.

Some members of the Committee were in favor of including language from H.273 around discrimination protections while others opposed including anything at all because the language does not paint clear path forward. Chairman Stevens stated that they have no time for further testimony so they will have to proceed without it and hope to offer an amendment on the Floor. There was tension among members about how to move forward. It seems they will give it one more week to see if they can vet the proposal.

There was a proposal from the Administration to include $5M to assist municipalities with upgrading stormwater systems to accommodate more housing in urban areas. However, the funding has not been appropriated in the budget, they would essentially be appropriating pre-existing funds within the Department of Housing and Community Development (taking them from somewhere else). The Committee voted 4-3 against including the proposal in the bill but revisit next week if they are able to take additional testimony.

The Committee voted the bill out 7-2-2.

Economic Development

H. 159 – Community and Economic Development and Workforce Revitalization

While the Senate still holds onto H.159, the House Commerce Committee began taking testimony on the bill again this week. Cassie Polhemus (CEO, Vermont Economic Development Authority) shared with the Committee that the reason for the new VEDA grant program is to assist businesses that “are suffering or have economic harm as a result of Covid-19 so they can be on sound economic footing moving forward.” The qualification parameters that now include “50% or more decrease in Net Operating Income from 2021” constrains the funds meant to assist damaged businesses. Removing these criteria will help a lot to address businesses that still are eligible under the remaining criteria for the program. The Committee seems interested in this proposal.

There was some concern about the caps in the bill and how many businesses would hit them. The maximum grant size is $500k or six months of operating expenses, whichever is lower. No one seemed to have an answer on how many businesses would hit these. There was interest in evaluating multiplier effect of these loans, particularly for larger businesses. There was a question about the businesses’ ability to keep employees and to employ more in the future. VEDA may be asked to come back with reporting to this effect.

Betsy Bishop (President, Vermont Chamber of Commerce) agrees with Polhemus that Vermont businesses will benefit greatly from the raised caps and simplifications to eligibility are welcomed. Small businesses have the need, the impact will be welcomed. She was very complimentary about VEDA’s recent systemic changes and admitted to having been skeptical early on about the CRF being a loan system. VEDA’s outstanding work around the forgiveness aspects of the loan program has built trust within the business community.

She also pointed to the diversity and inclusion, climate goals, and other efforts as things we need to market as “good things we are doing” as a state to attract people to move here. We need to attract people here, but we also need to retain them to fully capitalize on our efforts. She mentioned some of the work that is being done with H.703. To that end, two years ago the Futures Project found that every student who wanted an internship had one, but only 26% of Vermont jobs need a 4 year degree. This means there is a lot of room for upskilling outside of traditional college.

Also discussed were disincentives around returning to work because of lack of childcare. Bishop acknowledged this, but also pointed to the “inertia in our lives” that will prevent some of these changes. Some workers have become used to staying home.

Austin Davis (Government Affairs Manager, Lake Champlain Regional Chamber of Commerce) agreed with her on nearly every point. He was grateful for the overall package (S.226, H.703, etc.). He has lots of respect and confidence in VEDA to administer the flexibility within this bill. This bill, along with workforce and housing issues dealt with in other bills, are “priming the pump” for economic growth in Vermont.

Vermont Businesses for Social Responsibility (VBSR) and Main Street Alliance also supported the VEDA program and were excited to see the minimum wage provisions in the bill. However, they asked the Committee to consider creating a replacement for the federal FCCRA program that covered health care and payroll costs related to Covid-19 absenteeism.

The Senate voted in favor of H.159 on Friday, but an amendment is expected to be offered prior to final passage on Tuesday.

Communications Union Districts (Regional Broadband Authorities)

The House Energy and Technology Committee checked in on the status of their Communication Union Districts (CUDs) that they created two years ago to see how the work they are doing is progressing. They also wanted to be aware of any problems that CUDs were facing. Seven CUDs have received pre-construction grants to build their networks and many more are in progress.

The CUD association has been helping buy bulk fiber cable – it has been difficult to get materials due to supply chain issues. Labor challenges are also a problem that needs to be addressed. At least 250 more technicians are needed and the association has been working with Vermont Tech to train new workers.

Financing is also a major issue and inflation is causing CUDs to consider charging higher rates for service. However, with continued support from the legislature this could be mitigated. They are asking for an additional $93M in ARPA monies to pre-buy materials for the fiber network. It was noted that even with ARPA funds, we will only get to about 50% universal service and that we will need more (state) funds to complete the fiber buildout. If CUDs can’t get grants, the costs are going to be paid by subscribers (which will impact affordability and accessibility).

Good Government

S. 171 Adoption of a State Code of Ethics

The bill creating a universal code of ethics for public officials, S.171, came up for a vote on the House Floor Tuesday. It was emphasized by presenters of the bill that 33 other states have a code of ethics and that this builds off the work they did in 2017 creating an Ethics Commission.

Representative Donahue asked for a clarification around conflicts of interest for physicians and whether the Government Operations Committee had taken testimony around that issue. The Committee hadn’t, but experts assured them that the bill is consistent with what other states do and no issues have been reported around this. Representative Till reminded the body that the issue raised a few years ago was around restrictions against drug manufacturers, drug salesmen, device manufacturers, etc. It was a very narrowly defined around who was giving the gifts to a physician and should not impact the state’s code of ethics.

The motion to advance the bill to third reading was unanimous. Third reading occurred on Wednesday and the House again voted unanimously to send the bill back to the Senate with approval.

Education

S. 248 – Governance of the Vermont State Colleges and the University of Vermont

The Senate Education Committee again revisited S.248 this week, which would put union representatives on the UVM and the Vermont State Colleges Board of Trustees. As a compromise was struck where the colleges agreed to doing a report to improve written communication between trustees and staff. Vermont Tech does not have a staff council and the Committee wanted them to report back in January to share what that could look like. The purpose would be to see how leadership, faculty, and staff can work with each other. The Committee wants more frequent feedback on this issue and a closer look at what other institutions are doing.

S. 287 – Adjusting the School Funding Formula

Legislative council reviewed S.287 section-by-section for the House Ways and Means Committee on Tuesday. Secretary French cast the bill as a response to a specific legal question around equity in the funding system. He views the solutions being proposed as necessary but narrow technical improvements, not structural changes. He believes structural changes will be necessary soon to address cost containment. Initiatives such as special education funding, pre-k, PCB remediation, facility improvement, universal school meals, and the delivery of integrated social services (such as mental health) will put new demands on education funding.

The Secretary has been monitoring and participating in the deliberations around this policy throughout its development. There are pros and cons to the various models that have been proposed, but as he considers the context of the education system today, relative to the pandemic and other factors, he has concerns. The financial context for school districts has never been more uncertain and education workforce issues are becoming more acute. He is concerned about school district’s capacity to implement changes in the funding system and to explain those changes to local taxpayers. The best solution now would be the simplest one from an implementation standpoint.

French supports the creation of school district quality standards in the bill. Quality assurance regulation and improved data reporting on these metrics is necessary for implementing this policy and for addressing long-standing quality and equity issues in Vermont’s education system. However, these structures should be enacted prior to any evaluation of the goals in this bill. No meaningful evaluation could be performed without these other structures being in place.

The NEA believes the change is good and that the weights should be reviewed from time to time with cost adjustments that are in the bill. They believe the cost adjustment model helps everyone. This is the right time to make these changes since we are talking about a 2024 implementation deadline. When people look at equalized student counts they are difficult to understand, if we can streamline and make them more understandable it would be much better (the question is how to do that). They also raised concerns about the Education Fund Advisory Committee missing in the Ways and Means version of the bill – it should be put back in. They believe it is very important to have this oversight.

Chairwoman Ancel was concerned about this advisory committee because the legislature set up a system years ago to review the weights and it didn’t work. She is skeptical about ‘automated reviews,’ but does agree that the committee should be in the bill.

The House Education Committee sent a letter to Ways and Means on Wednesday that recommended the categorical aid program that was debated in the Senate. Currently Vermont’s education funding formula uses weights to equalize education spending and determine local tax rates that control for differences in educational costs outside of district control. Instead of using weighting factors that adjust the tax rate directly, the equalization grants would be used to offset increased costs. While these would also impact tax rates indirectly, they have the benefit of being more transparent and understandable in their impact on local school budgets. It also potentially allows for more accountability because a dollar value can be placed on state aid.

Ways and Means is expected to review the language this week and potentially include it in the bill. If the language is included, this is likely to turn into a conference committee struggle.

Health Care

S. 285 – Health Care Reform Initiatives

Kevin Mullin and Robin Lunge, members of the Green Mountain Care Board (GMCB), testified to the House Health Care Committee on Tuesday. In their overview, they stated that Covid-19 relief funds had been instrumental in keeping hospitals afloat during the pandemic, but as those subsidies wind down underlying inefficiencies in the system will continue to challenge hospitals’ abilities to deliver quality affordable care.

They summarized that, absent reform, Vermont hospitals’ financial health will continue to decline and commercial insurance prices will likely continue to outpace economic growth, making health care less affordable, eroding quality of care over time, and threatening Vermonters’ continued access to care in their communities. There is significant reimbursement disparities across hospitals in the extent to which their reimbursements cover the costs of delivering a particular service. They concluded that accelerating the delivery system transformation is the only solution to address both hospital financial sustainability as well as ensuring Vermonters’ access to high quality, affordable care.

Mullin and Lunge recommended an accelerated shift to value-based payment and delivery, which includes predictable Hospital Global Payments as well as designing and developing a Federal agreement that would include Medicare within this payment system. They also recommend incorporating quality into the hospital budget review process. They would like one-time FY23 funding to accomplish the implementation of such a system. Depending on the resulting global payment design and what is learned through community engagement, additional resources that may be required to implement the desired payment model and to support delivery system transformation work that extends beyond the hospitals.

Image courtesy of Public domain
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