Campaign for Vermont: Town Meeting week going to be interesting

Editor’s note: The following is the Campaign for Vermont Feb. 27 legislative update.

Going into town meeting break there is still much up in the air in the legislative session. The Senate Natural Resources Committee moved an imperfect Act 250 bill that would narrowly address housing, but also include the road rule provision that will likely draw a veto threat from the Governor. We will likely see that bill combined with efforts ongoing in the Senate Economic Development Committee but the overall picture of what the housing incentive package will look like is murky and it seems likely the Senate will fail to address the “missing middle” for owner occupied workforce housing stock that Governor Scott called for in his budget address.

The Pension “fix” was voted out of the Senate Government Operations Committee on Friday. The bill largely follows the Pension Task Force recommendations which only addresses roughly half of the pension liability the state currently faces.

Ethics legislation also ran into stiff opposition from attorneys and judicial employees this week as they refused a compromise that would hold them to the same definition of conflict of interest as other public employees but they could follow their rules for resolving those conflicts. Instead they requested that their rules of professional conduct would override the state code of ethics.

Finally, there was a jump in the projected education spending increase this week as more school budgets came back. It’s still unclear what the actual tax rates will be as there is so much volatility in appraisal values and offsetting state and federal funds.

Fiscal Responsibility

The House Appropriations Committee reviewed the Governors FY2023 pension proposal on Wednesday. Moving to a prefunding for post-employment benefits (OPEB’s) would reduce $1.7B on the state’s balance sheet. The primary driver of this is moving retired teacher health care benefits from pay-as-you-go to prefunded.

Both state employees and teachers would see reduced cost of living adjustments (COLA) to their retirement benefit payouts and increased employee contributions. The state will pay $75M in pre-funding for state employee pensions and $125M for teachers to reduce future liability. In addition to this, the state would contribute additional funds on top of the actuarial determined employer contribution (ADEC), which is being termed the ADEC+ payment. These payments would continue for several years. In FY2023 this amounts to an extra $22M in state payments.

Because the regular required contribution is also increasing for FY2023 there is a gap of $10M that the legislature will need to find a funding source for.

The Senate Government Operations Committee reviewed their public pension bill on Tuesday. The legislation would largely follow the pension task force recommendations with $163M in pre-funding of pension and other post-employment benefits (OPEB) along with contribution and cost of living increase adjusts to reduce liability.

The Committee came back on Friday to vote the draft bill out. The Senate Appropriations Committee is expected to make some additional adjustments to rates and pre-funding amounts after returning from the Town Meeting break.

The same Committee also took testimony on Tuesday regarding divesting our pension funds from fossil fuels (S.251). Advocates shared that 1500 institutions have made some sort of commitment to move away from fossil fuels, some of which have invested in green technologies instead. One thing pointed out is that there is an energy transition coming and if oil and gas companies can’t make the jump to renewables they will be risky long-term investments.

The Committee questioned the role of the state here given their fiduciary responsibility. Evidence suggests that fossil fuel companies make money more reliably at this point that renewable technology. The timing of the bill is very aggressive in how the transition was dictated. The Committee would be more comfortable with the New York model which sets a 40 year target with a phased approach to transition fossil fuel companies out of the investment portfolio based on performance (both expected and real). S.251 would require divestment of the largest portfolio companies by 2025. There was some concern that fossil fuel companies may face an array of lawsuits related to climate change (in a similar way to the tobacco industry) that would devalue their stocks.

Beth Pearce (State Treasurer) and her office have looked into these proposals and she does not this is something Vermont should do at this point. A consultant they hired did make steps to address climate change, backing more carbon reduction investments, for example. The Vermont Pension Investment Committee (VPIC) does have an Environmental and Social Governance Sub-Committee which she chairs. Divestment does not reduce fossil fuel emissions, but rather abdicates our voice in effecting positive change.

Any discussion of divestment should be preceded by an independent study on the impacts on VPIC and the pension funds. Anything less is an abrogation of the fiduciary responsibilities of both the VPIC and the Legislature. To date, they have engaged with other pension fund managers to have an outsized influence on stockholder decisions of fossil fuel companies. VPIC has invested $2.1B in a low carbon index fund created specifically for Vermont

Chairwoman White asked the sponsors of the bill to work with VPIC and the Treasurer to come up with an acceptable process that moves Vermont in the direction of divesting without abdicating our fiduciary responsibilities.

It is important to note that this conversation is happening with a backdrop of an existing pension deficit that has only been partially addressed to this point. This was not mentioned during Committee discussion.

The Senate Institutions Committee reviewed the pension’s impact on capital bond ratings with Beth Pearce (State Treasurer) on Wednesday. Pearce stated that she presented the idea of using pay-go years ago and was told by the Legislature that they were not ready although they thought it was a good idea at the time. She is back presenting the idea now that there are some additional funds available to make the transition easier.

She highlighted that there is a difference between funding (grants) and financing (bonds) and how each should be used. Bonding and other financing mechanisms are often mistaken for revenue, they are not.

Financing makes sense when:

  • Costs are saved through accelerated construction. For example, if inflation or preventative maintenance savings exceed the interest paid on the funds.
  • A quantifiable economic benefit exceeds the cost of borrowing funds.
  • A future identifiable and available revenue source exists to pay for the financing.
  • Intergenerational equity
  • Or, if pay-go funding options are not available.

Pay-go funding options can save the taxpayer money when:

  • They reduce interest costs associated with financing.
  • Bond interest payments impose a financial liability for the state.
    • Even when the interest environment is favorable, bonding over a 20 years period is expensive.
    • Debt interest costs are at least $400k for each $1M of government debt at current rates.
  • Financing involves leveraging a revenue future stream for current programmatic use.
    • Bonding will result in there being fewer funds available for other future uses.

The Treasurer is recommending that we start to accumulate cash reserves for future capital needs that could be funded with pay-go instead of bonding or other financing capacity (i.e. a rainy day fund). Interest could be accrued in the fund, which would make today’s spending more valuable instead of less valuable (turning interest in our favor instead of working against the state). Bottom line – earn interest instead of pay interest.

The proposal would use a mix of capital funds, one-time appropriations, and future debt service payments to create a fund with over $26M in reserves that could be used for this purpose. It would be important to avoid using this fund for operational costs and instead focus on capital expenditures that normally would go through a bonding process.

The Committee was non-committal about taking up this proposal, but they thanked Pearce and will invite her back if they decide to move forward.

Housing

We are now including S.234 under the Housing section of our report because recent versions of the bill narrowly focus on housing policy. We will also now refer to the bill as making modifications to Act 250 instead of reforming or modernizing it.

The Senate Natural Resources Committee reconvened on S.234 this week, dealing with modifications to Act 250. The most recent round of changes included language asking for the Joint Fiscal Office to perform a quantitative study of the ARPA funded Priority Housing Projects (PHPs) exempted from Act 250. There was some concern that ARPA funding and existing housing programs did not mesh well.

Senator McCormack wants to have both connecting habitat and aesthetics listed criteria for avoiding forest block fragmentation. Despite that “many critics sneer about aesthetics as though it is superficial, they are important,” according to him. He is not yet convinced that housing projects need exemption from Act 250 and questioned what we can now consider affordable given the outrageous prices of recent home sales.

Jennifer Hollar (Policy Director, VHCB) outlined the affordable housing options that existing already, addressing both mixed-income and homelessness needs and demographics. They are exploring expanded options which may allow for increased eligibility within the 60%-120% of median income range – hopefully to include some home ownership opportunities. The Administration is seeking to put $10M into the “missing middle” starter homes in FY2023. She also noted that almost every federally funded project goes through some sort of environmental review (perhaps not Act 250, but still relevant).

There was some discussion about whether subsidies and eligibility should be based on home values or income level because metrics are so volatile right now and can change more quickly than policy makers can respond to.

Maura Collins (Executive Director, VHFA) commentated that few projects have only ARPA funding, with HUD funds, tax credits, and state funds there may be 5-7 relevant sources. Natural market forces do not drive the development of homes at or under $400k without incentives. This is what is creating the “missing middle” for starter and middle-income homes.

Chairman Bray noted that Committee is “disabused of the notion that Act 250 costs” are significant and can help lower housing costs at this point. The Committee seemed to struggle to understand the regulatory framework for housing and where the challenges are, and how policy-makers can help. There was no consensus from the Committee on how to move forward.

The Committee reviewed a new draft later in the week. One of the major changes was the requirement to qualify for the “fast track” permitting process would be PHPs that are ARPA funded and have at least 80% of units that are considered affordable for at least 30 years. The previous threshold was 20% affordable units. Some members of the Committee were uncomfortable with this drastic of a policy change, particularly for policy changes that aren’t the jurisdiction of the Committee. However, they decided to keep it in to give them something to negotiate over with either the House or the Administration.

Senator Westman raised concerns that the missing middle homebuyers were not addressed in the bill. Chairman Bray indicated that the Senate Economic Development Committee would take that issue up (which begs the question of why this Committee touched housing policy at all). The Committee still felt like they were not able to include everything they wanted to and may offer a floor amendment on their own bill.

The Senate Economic Development Committee took testimony Tuesday on proposed changes to accessory dwelling units (ADUs) in S.226. ADUs are encompass structures like in-law apartments and secondary structures on the property of an existing single-family home that could be using for permanent or temporary housing. The Committee was interested in trying to create a faster and simpler ADU process with uniform criteria.

One significant change this bill would make is that parking requirements would be updated to one space per bedroom. This would eliminate requirements for parking that may be imposed by municipalities. In most cases municipalities tend to require at least two parking places per ADU – which has been used to prohibit the construction of new ADUs. This is not in the Governor’s budget and isn’t a priority for the Administration, but the Committee would like to see more support (permitting and otherwise) for Homeowners looking to add ADUs who aren’t professional developers.

Most lenders will not provide funds for ADUs as they are a risky investment. The Committee acknowledged that ADU’s can be used as a tool to both address the housing crisis but also provide supplemental income to families who could use it. There was some debate about living the owner-occupancy requirement, but the Committee decided against it. There were also concerns about trying to address this at the statewide level instead of incentivizing municipalities to support the creation of new ADU’s. The Committee was nervous about cutting municipalities out of the process.

The Senate Economic Development Committee came back to the housing bill on Wednesday that would incorporate parts of S.270 to expedite environmental court proceedings and change the appeal process for Act 250 permits. The courts would have to act on an appeal in 30 days and issue a decision in 120 days for housing projects. If the court does not meet these deadlines then the Natural Resource Board would have to refund Act 250 permit fees. The bill would appropriate $300,000 in APRA funds for a one-year limited service position for a judge and law clerk dedicated to the environmental court.

Judge Zonay testified that all courts want to get things done as fast as possible. He noted there is a significant backlog, but limited service positions may not be constitutional. Other states have tried similar ideas that have been struck down (separation of powers issue). If the legislator wants to add more full time fully paid judges that would be supported because it takes six months or so to get a judge up to speed.

There was also concern from the Committee that refunding Act 250 fees could impact the financial stability of the Natural Resources Board.

Gus Seelig (Executive Director, VHCB) also provided testimony on the work his organization has been doing. VHCB has helped build 431 units of new housing in the past year and the created $2M development risk pool to encourage condo construction by reducing risk for developers. They are planning 1,214 new units of housing by 2023, 550 of them will be serving homeless households. Despite this work, the cost of entry into the housing market has almost doubled.

He noted that we have not spent enough money on owner-occupied housing in many years and that we need to focus more on home ownership. There is a desperate need for new construction. He floated the idea of the state picking up the tab for water/sewer infrastructure for new smart growth developments to help take pressure off developers.

VHCB reiterated on Thursday that they want to see more homes for families between 60% and 120% of median income. More than three-quarters of all projects they work on are held to affordable rental rates permanently. However, there was some concern from the Committee that this might not be true going forward in a hyperinflated rental market.

Concerns around the state’s policy on 20% of units in a project need to be held to affordable rental rates for 15 years. Members of the Committee wondered if this should be extended but VHCB was concerned that this would make development and financing more difficult and could run counter to goals of the housing bill. The priority housing project definition does not drive how affordability is structured, it’s more of a developer issue. For a private developer the amount of units that have to be permanent affordable varies depending on the amount of ARPA money received for the project. The more ARPA money the higher the percentage of units that have to be affordable.

There are mixed income projects that were stuck that are now moving forward as a result of the additional funding in the state’s budget adjustment. Housing trusts are also ready to break ground on new owner-occupied developments; there just has not been the resources committed to until now. The permitting savings in addition to the affordability grants total a modest discount for buyers of around $25k.

Advocate Brenda Siegel provided testimony Friday on the need for long-term affordable housing. She noted that many homeless Vermonters try to use motel voucher program, which gives people “agency and independence.” Many feel dehumanized by living in a tent. One of the existing loopholes is that people had been rejected from applying for permanent housing because they lack a landlord reference despite the fact they were applying to programs that did not require them. Federal rules, in particular, can make it very difficult to access housing.

She is concerned with adding federal language around downtown development and village centers in S.226 she feels it could be too restrictive. Local opposition to affordable housing can be a major barrier to building it, so requiring that projects include it is advantageous (although the definition of affordable housing is somewhat up in the air here). She also strongly supports ADUs as a way to rapidly build housing, however this effort needs funds to make it affordable long term. She also wants to restrict the use of ADUs for short term rentals (Airbnb, VRBO, etc.).

After Siegel’s testimony, the Committee reviewed the bill and struck out the mini-TIF program, land banks, and the homeless bill of rights. They added a first-time homebuyer program that would offer a $10k grant towards the purchase of the home (one must wonder how effective this would be given the inflation of housing prices). The program would only have $5M in funding. The bill would also direct the Vermont Housing and Conservation Board (VHCB) to create a matching grant program for employer housing that would match funds for employers who invest in housing for their workers.

There was also debate around whether the 120% threshold of median income was appropriate as it would be a major change in policy and could end up helping people who do not need it. However, this is where the demand is in the market. Sales and Use tax exemptions for construction materials also came up again but the Committee didn’t feel like they had enough information to proceed with that – particularly if “non-affordable” housing units were going to be included in the PHP definition. The bill allocates $1.7M to ease the construction of PHPs as it is.

The Committee will come back to this bill after the Town Meeting break.

Good Government

After another week of delays on S.171, the Senate Government Operations Committee came back on Wednesday to discuss. Again, Lawyers and judicial staff pushed back on the conflict of interest portions of the bill – asking for exemptions because their roles are “special.” However, no other state code of ethics exempts lawyers or judicial staff. The draft of the bill presented last Friday included all three branches of government under the same definition of conflict of interest but would allow lawyers, judicial employees, and the legislature to follow the procedures already in place to resolve those conflicts (recusal, disclosure, etc.). Apparently, this was not an acceptable solution.

Lawyers and judicial employees requested for their rules of conduct to override the State Code of Ethics. Campaign for Vermont, the Ethics Commission, and others pushed back on this. We should not be making carve-outs for specific occupations or areas of state government. Everyone should be able to abide by a basic set of rules for how to conduct themselves as public officials. If department or occupational codes of conduct do not hold up to this standard they should be updated or overruled by the Code of Ethics. Again, the whole point of having a statewide code is to set the floor for expected conduct. It is not unusual or undesirable for departments, agencies, or even specific professional occupations to have their own standards that are either stricter or more specific to their role.

The Committee came back on Thursday with a few wording changes to try to thread the needle between the two positions, but it did not satisfy representatives of government attorneys. The Committee, visually frustrated, agreed to add language that would allow their rules to trump the Code of Ethics. We will work to fix this in the House after the bill has made crossover. Aside from this last-minute change, the provisions in the bill offer a solid step forward in ethics policy in Vermont.

The House Rules Committee met on Thursday to discuss operational plans for the rest of the session and newly proposed ethics rules. After some debate about what acceptable reasons to be exempt from in-person legislative meetings the Committee decided to allow a narrow set of exemptions related to recommendations from health care providers that a member of the legislature is immuno-compromised and is at a higher risk from infection than the general public. Some flexibility was given to the Speaker to account for individual situations that may justify a Covid-related exemption, but this will be the general rule going forward.

Representative Gannon (Chair, House Ethics Panel) presented proposed changes to the House ethics policies that would bring all the various ethics policies into one place in the rules, require financial disclosures, and change some of the operational processes of the panel. Most notably, it would give permission to the panel to meet remotely in the event of a complaint (these often happen when the legislature is out of session). Also significant was a request to provide the panel with subpoena power. In order to trigger this authority the panel would need a super-majority in agreement to pursue such an action. The Committee indicated that they found the suggested changes favorable.

Education

Representative James presented H.456 (strategic goals and reporting requirements for the Vermont State Colleges) on the House Floor Tuesday. The bill would require that the State College System focus on affordability, accessibility, and equity and report progress on these fronts by June 2023.

The bill passed on a voice vote.

A few Committees met on pupil weighting this week (we won’t recount all of the activity here), but the Senate Education Committee ended up deferring to the Senate Finance Committee’s version of the bill. However, they did ask for a hybrid approach that would provide both a grant and a weighting factor for english language learner (ELL) students. This is what the legislature has been hung up on for several weeks now. The two proposals offered by the Student Weighting Task Force were to either fund ELL through an expanded weighting factor OR through a block grant that would have a calculation.

This change would increase the resource/tax capacity for school districts with large numbers of ELL students. Additionally, it ensures that school districts with very few ELL students would still be able to fund strong ELL programs by establishing a floor ($25k if you have one ELL student). The proposal would also enable guidance and accountability measurers to ensure all school districts are adequately funding and maintaining strong ELL programs, and bolster the Agency of Education’s capacity to support school districts with ELL programs of various sizes.

The hybrid approach is interesting, but no financial models have been presented around it.

The Agency of Education updated the House Ways and Means Committee on how school budgets are shaping up. Overall, school budgets are now projected to be up 5.2% (almost a 2% increase from a couple weeks ago). Some large districts like Burlington and CVU came in at 7-8% which pushed the average up. Spending per equalized pupil (which is used to calculate local tax rates) is up 6.7%, which means that local tax rates could see larger increases in tax rates.

There was some concern about the ballot language Burlington is using for their school budget vote. Their spending is going up but they are telling taxpayers that tax rates will likely go down, but they are assuming that ALL of the $90M surplus in the education fund will be used to buy-down tax rates. The Governor’s proposal only allocates half of those funds and it remains to be seen what the Legislature agrees to.

The Committee will continue to monitor the situation but will need to draft a yield amount bill that will set statewide tax rates shortly after they return in March.

Health Care

The House Health Care Committee heard from Robin Lunge and Jessica Holmes (members of the Green Mountain Care Board) on Thursday. They are asking for $5M in funding to support moving forward on hospital sustainability proposal from Green Mountain Care Board (GMCB). The bulk of the money would go towards public engagement around the health care delivery system, care design, and data infrastructure to indicate community needs. They would like to provide Vermonters with information about the state of the hospitals and services in their area – including cost, quality, occupancy rates, and health status.

They also want to better understand where people seek care. And, what access to essential services like mental health, primary care, and others look like in local communities. Additionally, what trends are on the horizon and are communities prepared for them. This work would support the shift towards primary (preventative) care.

$1.4M in funding support the more technical design (or redesign) of the regulatory and payment systems. Medicaid has a specific hospital payment system which hospitals are comfortable with and gives them flexibility. Payment design for Medicare aren’t the right types of payments to facilitate a transition away from fee for service. The funding would also be used to re-negotiate the global commitment waiver with the federal government (Centers for Medicare and Medicaid).

The Committee’s questions revolved around what is new in this proposal that the GMCB hasn’t been doing the last several years and what metrics they would use to measure outcomes. There weren’t clear answers to this but it sounds like much of these resources would be directed at the hospitals that are not currently part of One Care (UVM’s Accountable Care Organization that distributes payments based on projected need instead of fee for service).

The Committee is considering giving the GMCB specific numbers to hit in terms of community engagement and health outcomes.

Image courtesy of TNR
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