Divestment of State Pension Funds (S.42): March 14-17


The Senate Government Operations Committee took testimony on Tuesday regarding S.42, which proposes to divest fossil fuel investments from the state's pension funds. In their previous meeting, the Committee still had not come to a consensus on several issues. Some stakeholders agreed to meet Friday and Saturday to hopefully come up with a compromise so bill could be voted out of Committee.

Legislative Counsel reviewed the bill with amendments. The current draft is a strike-all amendment. There was a new definition of "Di Minimus Exposure" which refers to “something so small, whether in terms of financial impact, importance, or severity, that the law will not consider it.” The definition will now include looking at an aggregate of all holdings of fossil fuel to determine impact. The Vermont Pension Investment Committee (VPIC) was further charged with the request that they better define fossil fuel and develop details of how to make a determination of Di Minimus Exposure. The language required the Treasurer and VPIC to work together to come up with new language.



The Committee returned to this topic on Wednesday. Legislative Counsel reviewed the reporting requirements in the bill, the first report is due in November 2023 from VPIC which is an implementation plan for fossil fuel divestment. The second is an an annual report starting in January 2024 and essentially is a progress report on how divestment is going. The final report is due in 2031 (when the divestment phase in is supposed to complete) which is a final report on how the process played out. In order to do this work, the bill includes a $254K annual appropriation for VPIC to the establishment of two new staff members. Funding would come from the municipal, teacher, and state employee pension funds using VPIC's current formula based on percentages within each of the funds.

Treasurer Pieciak joined the Committee and was asked to discuss the process used at the weekend meeting and to describe how everyone arrived at a "presumed consensus." He explained that he had convened a group from VPIC and from Third Act. Third Act is a volunteer advisory council led by Akaya Windwood which was founded by Bill McKibben. Pieciak shared that lots of potential paths were discussed. No one wanted to put the pension funds at risk and they all agreed this was an important and complicated issue and there needed to be a partnership with VPIC, the Treasurer, and legislature.  There was a focus on VPIC’s responsibility, Vermont's management structure is apparently different than most other states but it works for us.

Senator White asked whether the bill stops us from investing in fossil fuel now. Pieciak noted that the new language does not completely divest in the short term and that balancing the investments needs to be a high priority. Many investments come in vehicles with other investments so things can get complicated. Any deadline set in the future needs to allow VPIC the time to investment in a balanced portfolio which is better for the funds. He offered to send someone from his office who is "more versed in this area" if the Committee wanted more detail. 

Pieciak expressed concern that if the legislature wanted to go 100% in the short-term there is a problem in getting there particularly with private sector investments. He hoped that the bill would allow them to move forward in a more thoughtful manner.

Tom Golonka (head of VPIC) said that the draft before them is not reflective of the conversation as he understood it over the weekend. His key objection is that the timelines are not realistic and things needs to be better defined. He felt the previous conversation was much more general and not as detailed as the bill now reads. He was very concerned that the bill as currently presented would create additional costs on the pension plans. He needs time to work with his staff and the Treasurers office to develop the plan asked for in the bill. He reminded the Committee that VPIC is the responsible party and needs to be included in any decision. Chairwoman Hardy expressed her understanding and asked Golonka when he could meet with VPIC to review and recommend any language changes as they want to vote the bill out on Friday.

Golonka reiterated his concern that the dates were one year too early and he was fearful about impact on the pension plans.

David McCoglin, a representative from Third Act, shared that they mostly supported the work done by the weekend group and the language in the bill. 

Eric Henry (Chief Investment Officer, State of Vermont) spoke briefly and reiterated concerns expressed by Golonka. He spoke about the need to review dates and discuss what is reasonable. He pointed to private equity investments and how they are different and more complicated than other investments (many times fossil fuel stocks are caught up in some of these investment funds). He also talked about the fact that 2030 date applies to everything – including index funds. He felt that private equity should perhaps be extended to 2040.



The Committee met again to discuss the bill on Thursday and to do a mark-up. The newest language now asks VPIC to divest the holdings in all three plans from the fossil fuel industries with a long-term goal to divest completely by 2040. In the bill the Commission is charged with developing a plan to include fiduciary obligations by December 2023. $100k is appropriated for this purpose.

Golonka testified that the biggest question for VPIC is about costs and how they would implement them, saying that it was a "major concern" for them. Changes of this nature take a lot of planning and they are concerned about unanticipated consequences. They want keep costs under control in order to protect the investments of employees. He observed that there was clear disagreement between VPIC and the Committee over this bill.

He stated that in order implement these plans, as currently written, they will need extra people. He noted that their experience has been that "the legislature is not responsive to their needs over the years." There are lots of things in the bill that VPIC agrees with, such as the study on carbon foot prints, having a definition of fossil fuel companies, and a required matrix on measuring carbon footprints are all good. However they are concerned about defining 'di minimus exposure' and what lines are they can't cross, there is much unknown here and the timeline is set before the report is completed. He questioned how they would realistically know the answers to these questions given the completion dates in the bill. He argued they needed more data, without it they are not prepared to support this section of the bill. He stressed that VPIC is not going to be able to do what is being asked for without more information. They cannot meet the mandates.

He also mentioned that reviewing the rate of return assumptions could be problematic as well, which is required for the analysis being asked for.

NOTE: Many believe the assumed rate of returns are unrealistic so this could be opening a can of worms if they have to re-forecast these. If the assumed rate declines then it increases the required contribution from the state and employees. If this happens it could impact both employees and taxpayers who would be required to contribute more to the pension funds.

Golonka is worried that the 'di minimus' language is a longer term issue. This protection is going away in 2030 there will be a significant impact, he warned. Divestment is only one tool, there are other tools they could use but this bill says it’s the only option. He reminded the Committee that they have 15-year contracts and the skill to deal with this situation, it's going to have to be a component of VPICs management search criteria.

Senator White was still confused and didn’t understand why VPIC couldn't divest immediately. Golonka tried to explain the process and asked at what price point is it worth it to get to zero. He stated again that he wanted the plan to be in place with dollars identified so he could know what VPIC was signing on to. They would rather have those numbers in front of them to plan ahead. White thought it was fine to not know the numbers (a similar approach to how she viewed S.5). Golonka disagreed, saying that the transition is going to cost a "whole lot of money." He noted that VPIC voted 6-1 to not support the bill. 

Senator Clarkson asked if VPIC would support the bill if the legislature changed the dates until after the report to give them more time to review. Golonka said that would be better but he would still to see the results of the report before supporting it.

He said that Pieciak's prior proposal didn’t have restrictions during the first year which he supported. He was how much additional staffing they would need. Golonka noted that they would need just need one person right away but would need another position later on. He added that if the bill is passed as written he would need both positions ASAP.

Pieciak testified again, stating that his previous testimony stands. The draft before the Committee would support his position. He believes it is a "flexible framework," which is important. There are exemptions for 'di minimus exposure' beyond 2030. The bill also frames this process as a partnership between VPIC, the Treasurer and Legislature. He also noted that the requested reports are important as the state needs to be able to measure progress and brings accountability to the process.

Clarkson asked what VPIC could provide them in a plan, if requested, in 2023. Golonka offered that they could provide general numbers and then build on those numbers over time.

Third Act reiterated support for the current version and expressed disappointment with Golonka's position. McCoglin thought they "had an agreement" over the weekend and that 2040 is "only a goal not a mandate." They understand the concerns being expressed which is why the language proposes exempting private equity. They think it’s a bill that should be supported.

The Committee decided to reduce the number of positions they were giving VPIC from 2 to 1.



The Committee returned briefly on Friday to vote the bill out. There were some minor date changes that were agreed to. Several members expressed their excitement at passing a bill that support the climate change initiative. One member noted it was a "great first step but there was much more to do beyond fossil fuel." The bill advanced out of Committee on a unanimous vote.

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