Pension compromise may foreshadow state budget agreement

Posted June 03, 2011, at 8:32 p.m.
Last modified June 04, 2011, at 9:36 a.m.

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AUGUSTA, Maine — The Legislature’s budget-writing committee has reached a tentative compromise on reforms to Maine’s pension system, one of three major unresolved issues facing negotiators drafting a two-year, $6.1 billion spending plan for state government.

The pensions compromise, which is subject to additional review, would eliminate higher contribution levels for state employees but would freeze and then cap cost-of-living adjustments for public sector workers and retirees.

The changes negotiated by Republican and Democratic lawmakers would create a new financial shortfall that will have to be plugged before the committee completes work on the budget that begins July 1. But the revised pension plan seeks to address concerns raised by state employees, retirees and union officials during the public hearing process.

“All of the committee members worked hard to respond to those concerns,” said Sen. Richard Rosen, co-chairman of the Appropriations and Financial Affairs Committee.

Members of the Appropriations Committee expressed optimism Friday evening that they could complete work on the budget this weekend — something that seemed unlikely just a few days ago. Aside from pension reform, Democrats and Republicans on the committee are trying to reach agreement on two other contentious issues: a package of tax cuts and proposals to reduce or eliminate Medicaid benefits for thousands of people.

Rosen, R-Bucksport, said resolving the politically charged pension issue would be a major step toward completing a budget package for presentation to the full House and Senate. Lawmakers have committed to passing a budget with a two-thirds majority.

Gov. Paul LePage, a Republican, originally had proposed requiring state workers to contribute an additional 2 percent toward the state’s pension system, up from the current 7.65 percent deducted from their paychecks.

Under the tentative agreement reached by the Appropriations Committee, state workers would be able to keep that 2 percent in their paychecks. But the compromise would freeze salary levels for two years.

Additionally, the compromise would freeze for three years the cost-of-living adjustments, or COLAs, for current workers and retirees. That is consistent with LePage’s budget plan. But under the legislative compromise, future COLAs would be capped at 3 percent rather than 2 percent, as proposed by the administration.

Sen. Dawn Hill, a York Democrat and member of the Appropriations Committee, said she believes the committee has come a long way from the governor’s budget and called the compromise “thoughtful” and fair.

“There was a lot of give and take,” Hill said. “In the end, I think what we have crafted will be fair and will have treated the state workers and retirees as well as we could have,” given the budget situation.

While pleased with some of the proposed changes, union leaders continue to object to aspects of the compromise.

Specifically, the Maine State Employees Association adamantly opposes only applying COLAs to the first $20,000 of a retiree’s income, a proposal that also apparently isn’t sitting well with Democratic members of the Appropriations Committee and other Democrats.

Chris Quint, executive director of the MSEA, said the state’s largest state employee union agreed to a 3 percent COLA cap but opposes extending the freeze over three years. So MSEA is asking the committee to reopen discussion on those issues.

Appropriations Committee members were expected to meet late into the night Friday and then potentially resume work on Saturday morning as they attempt to wrap up the budget negotiations.

Rep. Kenneth Fredette, R-Newport, said Friday evening that members appeared to be in good spirits and were eager to complete work on the remaining issues. The Legislature is scheduled to adjourn the 2011 session by June 15.

Closing Maine’s estimated $4.3 billion unfunded liability in the state pension system emerged as a major political issue during the 2010 gubernatorial campaign and in the early days of the LePage administration. But the administration’s critics accuse LePage and Treasurer Bruce Poliquin of exaggerating the situation in an attempt to force draconian concessions from the unions — concessions they contend would be used for tax cuts for the wealthy.

The LePage administration had estimated that their pension proposals would have saved $400 million over the biennium and reduce the unfunded liability by roughly $2 billion over the long term.

It was unclear Friday evening how the compromise plan compares financially to the LePage administration’s original proposal, although it was clear the compromise would make a smaller dent in the shortfall. Additionally, initial reports suggested that the committee’s proposal would reduce savings in the current budget, creating a roughly $55 million budget hole. Committee members were still waiting Friday evening for representatives from the Maine Public Employees Retirement System to crunch the new numbers.

Rosen, the committee co-chairman, said he believes the compromise will improve the long-term solvency of the pension fund while addressing some concerns voiced by state employees, public sector retirees and others during public hearings. Rosen added that he did not view the compromise in partisan terms.

“I really feel it was the governor putting forward a proposal and the Legislature improving it because a lot of the changes that were made … came from both Republicans and Democrats,” Rosen said.

Although a significant step toward a budget agreement, the pension compromise is the first of several major issues that the Appropriations Committee will need to address in the coming days.

LePage also has proposed changes to MaineCare eligibility that would remove 28,000 childless adults and lower-income parents from the state’s Medicaid rolls.

Arguably the biggest fight, however, could be over a package of tax cut proposals.

LePage has threatened to veto any budget that does not include at least $200 million in tax cuts. There are also signs that a growing number of Republican lawmakers will not vote for a budget that contains a smaller tax cut package, which could prove problematic as legislative leaders seek the two-thirds majority needed to pass a budget.

A Republican-drafted plan endorsed by the LePage administration would reduce Maine’s top income tax rate from 8.5 percent to 7.95 percent. Additionally, LePage has proposed doubling the estate tax exemption from $1 million to $2 million.

Democrats have countered with their own $104 million tax-cut package, which they insist better targets lower- and middle-income Mainers.

Reiterating a union claim made throughout this legislative session, Quint said the budget and the $203 million in tax cuts proposed by LePage continues to be balanced on the backs of state employees and retirees. The Appropriations Committee has yet to settle on a tax cut package.

“If you want to do tax cuts, that’s fine,” Quint said. “But don’t have retirees pay for them entirely.”

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