Friends, what a week. Governor Scott, his administration, and the legislature dove headfirst this week into deciding how to spend a historic level of federal funds and state tax receipts. Also announced was a plan to return almost $100M to Vermont taxpayers through a combination of rebates and tax credits. Historic investments in pension reform, workforce development, housing, and climate change were also pitched.

The crazy part? There is actually agreement. Agreement on what needs to be done and what changes and investments we need to make in Vermont's future. As of today, nothing seems to be off the table. A truly optimistic moment.

 

Quote of the Week: “It is not an exaggeration to say that the opportunity before us is truly historic. It’s once-in-a-lifetime, and one I never expected to see happen.” -Governor Phil Scott
		Message of the Week: “It's important to know the cost factors involved in student weighting: poverty level within a school district, percentage of ELL and special education students, grade level, geographic isolation, and population density. The Pupil Weighting Task Force and now the legislature have done great work in these areas and we will continue to monitor and report on their progress.” - CFV President Pat McDonald
Vote for Vermont: This week, Pat catches up with an old friend who represents Vermont's automotive industry. Watch the latest episode

 

Special Report: Governor Scott's Budget Address

Governor Scott introduced his $7.7B budget on Tuesday and, as anticipated, focused much of his time and attention on the 24,000 workers we have lost from our economy since February 2020. The proposed budge would put $4.7M into internship, training program, tech center programs. In addition, $33M would be used to recruit and retain nurses, mental health and other healthcare workers.

Trade programs would see an additional $10M for education assistance and the remote and relocated worker program would see an additional $8M investment (paid for by people who move here). He also asked for a program to do regional outreach for workforce recruitment. To further help address workforce issues, the budget would increase UVM's base funding by $10M and state colleges by $41M in addition to further investments in Prek-12 education.

Also emphasized was the need to build more housing - particularly for middle income families. The median home price in Vermont is $369k, out of reach for many middle income families. The Governor is recommending using $145M in ARPA funds for new single-family construction, rehabbing existing structures, and construction of affordable mixed-use housing.

To make Vermont's cost of living more competitive, he proposed (again) to exempt military pensions and student loan interest from income taxes. Layering in an earned-income tax credit and a child tax credit would net taxpayers a $50M reduction in tax liability for FY2023 (primarily targeted at middle-class families).

Somewhat surprisingly, the Education Fund is projected to net a large $90M surplus from FY2022. The Governor proposed issuing a property taxpayer rebate of $45M and spending the other half on investments in our future workforce.

Another major funding category was $216M to address climate change and resiliency. Focus on "empowering" (aka incentives) instead of mandating.

Finally, the budget carves out an additional $245M for expansion of broadband and cell coverage. Dozens of smaller programs were also mentioned, including project-based TIFs, a paycheck protection like program, outdoor recreation, municipal planning grants, hospital stabilization, mental health, E-911, water and sewer infrastructure, brownfields, extended bridge grants, transportation, short-term small business loans, and even a grant program to boost grand list values (still waiting to hear how this would work).

 

Fiscal Responsibility

Senator Kitchel (Chair, Senate Appropriations Committee) laid out the history of funding (or lack thereof) for public employee pension and health care plans. The current plan has the support of all three unions (NEA, VSEA, and Troopers Association). They are concerned about the funding of the Actuarial-Determined Employer Contribution (ADEC). They want assurances that the normal payments will be made and a ‘plus payment’ will be added to cover underfunded liability. Last session the Committee agreed to pay $13.8M into the teachers health care fund, but couldn’t get agreement done in time so they decided to put the $13.8M into the Education Fund as a reserve and promised half of any surplus would be used for this purpose.

There are three key pieces of one-time funds that are hitting this year:

1. A $52.4M transfer from the General Fund to pre-fund a new teachers health care fund (to move away from pay-as-you-go).
2. A $13.3M transfer from the Education Fund to the new new teachers health care fund.
3. A $150M transfer from the General Fund to pre-fund the state employees pension fund.

All of these monies were held back in reserve from FY22 (meaning they are essentially already paid for).

There was support for this both from the unions and the Committee because the current pay-as-you-go model for retired teacher health care costs does not generate any returns – no capital gains or no compounding, etc. The Governor is proposing a similar approach by buying down with $200M in general obligation bonds. However, the legislature seems to be pursuing a plan to use the amount of amortized payment savings (about $19M) to fund the ‘plus payments’ to the ADEC that the union’s were hoping for.

 

The Senate Finance Committee reviewed the previous work of the Blue Ribbon Tax Commission. The Commission spent most their time looking at other states in order to provide recommendations for improvements to Vermont's tax code. Some of the recommendations included broadening the sales tax base as well as reforming personal income tax. Their modeling and policy discussions were broken into two pieces: education tax and everything else.

Vermont is in a challenging tax environment given New Hampshire tax code, but the Commission ended up recommending including taxes on services. This was a jarring conversation for some, however, it would the state to lower the overall rate by including services in the tax base. Notably, the Commission did not look at property taxes.

The Committee members seem to be interested in doing something with property and/or education taxes, but their thoughts and approach were not well-defined.

 

Craig Bolio (Commissioner, Department of Taxes) shared with the Senate Finance Committee that the Governor is proposing a significant $51M tax relief package. The goal of these tax breaks is to help young workers live here, help middle class families to afford to stay, and help seniors to retire. The proposal would three key things:

1. Expand the Vermont earned income tax credit (EITC) from the current 35% to 45%.
   1. EITC is considered one of the best anti-poverty measures and this proposal would make Vermont's one of the most generous in the country.
   2. $7M estimated cost
2. Expanded Vermont's childcare tax credit by 50%.
   1. $5M estimated cost
3. Eliminate the tax on social security benefits and military pensions.
   1. 47 states have already done this
   2. $9-10M estimated cost

Senator Pearson seemed skeptical about the benefit of these cuts and their sustainability over time - particularly with the potential for growth in Social Security wages given the state's demographic trends. The Department used 2018 and 2019 data to measure long term impact of the cuts, they are pretty confident in the sustainability of the cuts and the state has a fully funded $400M stabilization reserve. There was a broader conversation in the Committee about exempting all pensions (not just military) and the implications that it would have on the tax code.

The Governor's proposal also includes:

• Create a student loan interest deduction which is intended to help young workers get on their feet.
• A flat $1,000 credit to nurses and other related fields (the Committee might want to extend this).
• Another $1,000 credit for childcare workers.
• Other various economic development and housing proposals.

 

The House Ways & Means Committee looked at the impact of establishing a child care tax credit on Thursday. The Women's Law Center testified in support of the plan, noting that it is well established that the federal child tax credits lift families out of poverty - particularly BIPOC communities where a high percentage of single parent households are over-represented. Evidence shows that the child tax credit lowered real childhood poverty by 30%. Survey data showed families used the savings to pay for bills and other necessities and prefer the payments in a monthly format instead of a lump sum. The federal program had the most impact for families making under $35,000.

The Public Assets Institute published a report on the state of working Vermont, which tried to understand the impact of Covid-19 on Vermont's families. They are concerned because their report found that many Vermonter's cannot meet their basic needs. Children in particular have higher poverty rates than across the country. The proposed program would be a big step toward addressing this and the child tax credit would not impact benefit eligibility for other programs.

Voices for Vermont's Children testified in support of the child tax credit as well. Children that are materially poor have worse outcomes over time than families financial security. Modest income transfers can improve health and longevity and parent child relationships.

 

Rebecca Sameroff (Deputy Commissioner, Department of Taxes) also reviewed the Governor's proposals. There are two bills in play so far, H.510 and H.527. The committee reviewed some of the legal requirements because the nature of these credits is that they are tied to tax returns. There are some logistics involved if a person needs to amend their tax filings, but it is not overly complicated compared to existing programs.

 

The Senate Government Operations Committee met to discuss pension reform after the public hearing they held on Tuesday evening. Committee members were disappointed that only seven employees participated in the hearing. The Committee does not want to have to do this again in ten years (no one does). Some comments that employees made in the hearing were inaccurate, particularly around the conditions that lead to the deficit situation.

The state is working on correcting their underfunding of required contributions (making good progress this year). However, over time the employee contributions from State Employees and Teachers were not increasing with normal costs, shifting more of the burden to the state. None of the required benefits require employees to work longer, except for one group in the judicial branch where new employees would have their normal retirement age increase from 61 to 65. No change in the 5-year vesting requirement.

Overall the Committee sees this as a win because they "saved" the defined benefit plans.

 

Adam Greshin (Commissioner, Department of Finance and Management) presented the Governors budget to the House Ways and Means Committee. This was largely just going over the Governor's recommendations, however one thing of note is that the Administration is bringing back a proposal around legalizing and taxing certain types of sports betting (roughly $2M in revenue the first year).

Also of interest, the stabilization reserve will require a larger payment than normal because of the expanded general fund spending (generally the state tries to keep it around 5% of the General Fund spending).

 

Workforce Development

Stephanie Yu (Policy Analyst, Public Assets Institute) highlighted the growing gap between open job positions and available workers for the House Commerce Committee. She argued that the state should invest in lowering barriers of entry into the workforce for parents of young children and those with disabilities. They think that potentially 17k disabled works could re-enter the workforce.

The Committee had a wide range of questions including how to approach doing this, the role of skills gaps between open jobs and available workers, and how Vermont's situation compares to the rest of the country.

The Joint Fiscal Office noted that much of the workforce attrition seems to be from people near retirement who are deciding to end their careers early. Another subset is women without college education (primarily in hospitality and food service) are also dropping out of the workforce. Some of these, however, are not claiming social security yet which indicates they may return at some point (or have engaged in gig work or self-enterprise that wouldn't show up in employment reporting).

 

Tom Kavet (Legislative Economist) warned that the high level of deficit spending by the federal government was going to cause continued unrest in the economy. Most economists agreed that the 2009 stimulus was about 50% of what was necessary. Today those same economists are saying the current stimulus is 5X what was needed. The economy cannot absorb this and the supply chain issues are one of the symptoms as demand exceeds supply and supply systems.

There is very little that the state can do to meaningfully move the needle on many of these issues. Per Kavet, "silly programs like bribing people to come to the state" are beside the point seen with our already significant in-migration surpluses. What causes people to come to the state at the level to affect economy and revenues is minuscule unless the economy is bolstered by these massive spending surpluses from Federal recovery funds.

One thing he pointed to was high-speed broadband, which has is a huge multiplier effect and creates a base for growth in an area.

 

House Commerce came back to this topic the following day, hearing from the Vermont Chamber of Commerce. They have really shifted gears over the past year to support businesses (not just members) in finding workers. They are finding that necessary wages to survive in a pandemic economy are in the $20-$25 per hour wage. Manufacturers have done this already, hospitality and food service are lagging, and childcare providers are stuck because families cannot afford to pay more and in many cases it would be cheaper for a family to pull two kids out of daycare and have a parent stay home.

They also echoed the disabled hiring option that Public Assets brought forward and added that we also need better access housing and broadband in order to grow our workforce. The Chamber of Commerce is planning an annual conference about Diversity, Equity & Inclusion (DEI) programs in order to show Vermont as a welcoming place and teach small businesses how to follow these practices.

Vermont Businesses for Social Responsibility boasted that their retention rates have historically been better for their businesses, but they have also struggled under Covid-19. They have found the same things as the Chamber - inadequate social infrastructure, housing, low wage scales/growth issues, childcare, disabilities, etc. Many of their businesses have reached the $15 per hour goal, some have even pushed passed it, and still struggle to hire.

They would like to see more inclusiveness and better access to affordable child care as a tool to increase attraction to Vermont for employees. They even suggested a student loan repayment program to attract young workers to the state.

Finally, they are in favor to taking a fresh look at Act 250's role in developing housing for middle income families. They are supportive of reforms in this area because housing is a consistent issue with talent acquisition.

Austin Davis (Government Affairs Manager, Lake Champlain Regional Chamber of Commerce) phrased this whole situation well, saying "we have lived off the interest of some incidental and accidental branding so we now need to be intentional about that marketing." We already have a great product but need to create better branding and serve it with the right "influencers" and message to the right audiences. If every job was filled tomorrow there is nowhere to house those workers and not nearly enough childcare slots.

A number of other organizations echoed these comments:

• Associated General Contractors of Vermont
• Vermont Ski Areas Association
• Main Street Alliance of Vermont
• Brattleboro Development Credit Corporation
• State Workforce Development Board

 

The Committee came back to workforce development again later in the week with a strategic workforce presentation from Ellen Kahler (Executive Director, Vermont Sustainable Jobs Fund). There is a bill being introduced to the Committee, but no draft is available yet. The bill will be a framework omnibus bill that will complement the omnibus housing bill being worked on in the Senate. One interesting side note of their report is that we hire about 50k workers per quarter but experience 60% turnover. The national average is 50% so reducing our turnover rate could improve workforce retention and the overall shortage problem.

Their report identifies three key areas to focus on:

1. Build a statewide ecosystem to promote continuous lifelong learning. (short term)
2. Invest in an agile, technologically resilient workforce. (medium term)
3. Enable every worker to participate in the workforce through comprehensive support. (long term)

They are proposing six regional organizations for planning and coordinating this work and serving as the connection between CTEs, RDCs, employers, and colleges and universities. An interesting thing they identified was a pre-existing deficit of credentialed staff at large intuitional employers. Meaning that our workforce has been lagging in this area for quite some time but it was hidden because by existing employment of underqualified workers.

There was some concern among Committee members about small businesses being able to access and/or manage these programs. They are hoping that the pro-active outreach planned in this program would overcome barriers to adoption. The overall goal is to start pulling together the states fragmented and siloed workforce development and educational resources.

 

Economic Development

The Senate Natural Resources Committee is trying to define the problems around Act 250 reform. The state has a unique opportunity to address these issues but we need to be clear on the specific problems are. If planning slows down development too much, the state may be required to send back ARPA money. They also want to understand to what degree Act 250 is increasing costs for affordable housing.

Sabina Haskell (Chair, Natural Resources Board) met with Senator Westman to talk about Act 250. They looked at Chittenden, Franklin, Grand Isle, and Windsor counties and which housing projects required Act 250 permits and their outcomes. On average, their review found a 22 day application process from initial filing to completion. Ten projects took over 90 days to be approved and 24 took lass than that. Most of the delays seemed to be from non Act 250 permits such as ANR opposition from neighbor parking zoning rules.

The Governor requested for ARPA projects to be exempt from Act 250, however, Chairman Bray would prefer reform as opposed to granting exemptions. There were also concerns from the Committee around the ability of for the Agency of Natural Resources or local zoning offices to handle the increase in applications if they "open the floodgates."

 

Christine Hallquist provided an update on the Vermont Community Broadband Board to the Senate Finance Committee. She noted that despite initial challenges the board is now fully staffed up and working. So far they have meet with most of the Communication Union Districts (CUDs) and other telecoms and Vermont appears to be ahead of other states in terms of having broadband projects shovel ready. It is important that Vermont stay ahead of the curve as this will help the state save money when the supply chain starts constricting (costs have already gone up significantly from last year).

The board has issued $21M in pre-construction grants, allowing many projects to purchase materials (missing the worst price increases). However, there is a real workforce shortage issue. Hallquist puts it at a shortage of 200 or more technicians. Fiber technicians require 144 hours of class work as well as 2,000 hours of apprenticeship. The Board is working with the Department of Labor to bring more people into the workforce, and it has created an opportunity for people to find a lucrative career. She feels that the work done thus far is a real success story - there are currently 202 member towns of CUDs with 404 volunteers covering 91% of the state.

One notable problem that CUDs are running into is language in Act 71 that requires the state to retain the assets if a CUD failed. This makes it very difficult for CUDs to bond as lenders see this as a big risk for their investment (they wouldn't be able to capture the assets). As a result, CUDS are under-capitalized startups and are looking for language that would help alleviate these conditions.

The Committee responded positively to the progress so far, however there were concerns about the rising costs and longevity of the workforce. It was also concerning that the cost per mile of fiber has increased from $48k to $55k (something that Campaign for Vermont has been concerned about if funding slows down).

 

Later in the day the Committee also took testimony from the Department of Public Service, which echoed many of the same things as Hallquist. They have been working on a 10-year telecom plan that addresses other issues in the state beside broadband. Cell service is becoming more and more important and the Department is engaged in a critical communications program trying to spend $100 million to deploy 50 new cell towers across the state. Wireless cell service is important to health, work and public safety as 71% of 911 calls originate from a cell phone.

The plan involves the state building the towers and then turning them over to private entities to manage and maintain with a promise of continuing service. Once the towers are in place, multiple cell carriers would be able utilize them at a reduced rate. There was some concern among the Committee that we would be offloading public assets but the Department argued that these towers would actually be a financial liability for the state to own.

 

Joan Goldstein (Commissioner, Department of Economic Development) provided testimony Friday to the Senate Economic Development Committee about economic recovery gap grants, noting they have been underutilized due to structural problems. The grant program is severely constrained by requirements that make it very difficult to use. Goldstein is interested in taking the unused funds and rolling them over into the capital investment program which is less constrained and more accessible. There was debate in the committee about the benefits of moving this money into a loan program (which is forgivable) as opposed to the current grant program. This would make funds more accessible to a wider range of businesses with fewer reporting requirements that create a barrier of entry.

 

Housing

The Senate Economic Development Committee did their first walk-through of the omnibus housing bill on Thursday. The bill is still taking shape, but will draw from H.511 and other various bills that have been introduced.

Ideas being contemplated include:

• A neighborhood development area program
• Adjust exclusions for development in flood hazard areas
• Exempts "priority housing projects" from Act 250
• Changes some of the definitions in existing law to allow for more middle income housing
• Create regional and municipal Land Banks to focus development and increase density of downtown areas (included in S.237)
• Possibility of funneling Covid-19 relief funds into private development (not clear how this would work)
• Expand the first generation home buyers incentive program covering up to $10 in closing costs
• Empowering businesses to create their own housing for employees

The Committee will likely come back to this next week as they start putting the various pieces together.

 

Good Government

Campaign for Vermont had the opportunity to testify again this week on S.171 in the Senate Government Operations Committee. We were pleased with the progress of the discussion compared to the previous week. There was some debate over the technical definitions in the bill and current law and how the code of ethics might actually be applied. We helped to clarify a debate around what definition of an immediate family member should be used in the bill.

There are still large open questions around whether or not to include legislators or persons who serve on boards and commissions across state government. We would argue that they should be included in the code of ethics because many of these commissions make consequential financial and policy decisions (think Green Mountain Care Board or the State Board of Education). The bill would simply ask them to recuse themselves on issues where they have a conflict or provide a written statement about why that conflict is inconsequential.

The Committee also plans to talk about the definition of conflict of interest and whether it is too broad and if the actions required by a conflict are too onerous (spoiler alert, we don't think so).

 

The Senate Appropriations Committee took testimony on the Governor's IT proposal. This is a request to strengthen the state's cyber security operations. The state needs to make investment in its incident logging software to better track and adjust to threats - capture and logging is a fundamental pillar of IT security. The state has about 700 incidents per year, most are minor infiltrations but they help to prevent larger breaches by showing security weaknesses. The state has spent $17M on cyber security so far and the Governor is requesting $3.3M for this new system.

 

Education

The Joint Fiscal Office reviewed the pension proposal with the Senate Finance Committee on Tuesday. There is a new one-time liability of $13.3M to pre-fund OPEB (coming out of FY22 budget adjustment) to protect volatility during the funds start-up period. There will also be a new $15.1M for the normal cost OPEB payments.

These new payments will be offset by new contributions from teachers and a reduced liability based on scaled-back COLA increases. All together, these changes would present a $7.3 additional cost to the Education Fund in FY23, but it would fall annually to $3.7M in FY26. The legislature will need to figure out how to cover these increased costs in order to avoid property tax increases (although they would be minor in this case).

The teacher's pension fund (separate from the new health care fund) is about 53% funded compared 68% for state employees.

 

The Senate Education Committee heard from the Coalition for Student Equity on Friday. Most of their members are under-weighted but there are a handful that are over-weighted. They support the UVM proposed weighting factors but does not want to drastically change how the system works (as suggested by the Task Force). In particular, they do not want english language learner funding to be broken off into a grant program. This is because the cost of each ELL student is likely to vary from one district to another and the multiplication formula currently used would account for that and weight more heavily for ELL students in rural districts. They believe that grants are inherently not equitable. Another concern was that students may need services not covered by the grant, leaving the district to pick up the bill.

Professor Kolbe noted that most other states operate on a foundation formula (which Vermont had in the 90s) where weights and categorical aid operates very differently to adjust for differences in costs between school districts. Usually grants are based on the statewide average costs for a particular type of student, but because Vermont is so diverse these average cost estimates would result in many districts receiving either too much or too little funding. One issue with the weights is that there is not way to guarantee that districts spend the money that gets offset through the weighting factors for the specific purpose they were intended for (because school boards make decisions about how to spend funds).

 

 

Things to watch for next week:

State Code of Ethics (S.171) - Senate Government Operations

Tax relief for Vermonters (H.527) - House Ways & Means

Changes to Act 250 (S.234) - Senate Natural Resources

Vermont Housing Regulation Modernization (S.270) - Senate Economic Development

Education Finance Restructuring - House Ways & Means