By Campaign for Vermont

The current state and school pension bailout plan has the support of all three unions (NEA, VSEA, and Troopers Association), because it includes not only “pay as you go” payments, but a ‘plus payment’ to cover underfunded liability.

This deal almost gone done last session. The Senate 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.’

Senate considers tax on services

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’s zero sales tax. The Commission ended up recommending adding a sales tax on professional services, not just some products. This was a jarring conversation for some. However, supporters say it would lower the overall tax 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 changes to property and/or education taxes, but their thoughts and approach were not well-defined.

Senate ponders Scott proposed tax cuts

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:

1. Expand the Vermont earned income tax credit (EITC) from the current 35% to 45%. 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. $7M is the estimated cost.
2. Expand Vermont’s childcare tax credit by 50%. $5M estimated cost
3. Eliminate the tax on social security benefits and military pensions. 47 states have already done this. $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.