AUGUSTA – The Legislature’s Appropriations Committee has reached a tentative agreement that would reduce the impact of pension-system changes on state workers and teachers and reduce the state’s long-term debt.

The 13-0 vote late Thursday on the package of changes — which could be altered as talks on the state budget continue — gave the committee a key morale boost at a critical time.

“People didn’t think we were going to be able to do this and we did,” said Rep. Peggy Rotundo, D-Lewiston, the ranking Democrat on the committee.

Democrats and Republicans agreed to eliminate Gov. Paul LePage’s proposal for a 2-percentage-point increase in employees’ share of pension costs.

The Maine State Employees Association has characterized the increase as a tax because it would not increase retirement benefits. When updated numbers on the impact showed it would boost most employees’ contribution to 9.65 percent of their pay, while the state’s share would drop below 1 percent, lawmakers looked for alternatives.

“We didn’t see it as passing the straight-face test,” said the committee’s House chairman, Rep. Patrick Flood, R-Winthrop. “It just didn’t feel right at all on a lot of levels.”

As it prepares a budget to recommend to the House and Senate in the coming days, the committee faces the same challenge as LePage, who proposed a series of changes to address short- and long-term debt in the retirement system.

The state must pay off $4.1 billion in unfunded liability by 2028 to comply with the Maine Constitution. As the payoff date nears, costs are expected to rise substantially, putting additional pressure on state budgets.

In his $6.1 billion budget for the two years starting July 1, the governor proposed using some of the savings from the retirement system to fund other initiatives, including tax cuts.

Lawmakers have yet to tackle the $200 million tax cut in the governor’s budget. They also must agree on how, or whether, to make a series of cuts to the Department of Health and Human Services.

Negotiations are expected to continue throughout the weekend.

Also at Thursday’s late-night meeting, the committee agreed on a plan to freeze cost-of-living increases for retired workers for three years. To ease the impact, the committee agreed to dedicate $30 million in surplus funds to retirees in the second and third years, Rotundo said.

The committee also agreed to cap future cost-of-living increases at 3 percent a year, instead of 2 percent as proposed by the governor. The increases would apply only to the first $20,000 of retirees’ annual pension payments. Democrats hope to raise that limit to $25,000, but haven’t been able to find the money to pay for it, Rotundo said.

The $20,000 cap and the three-year freeze aren’t acceptable to the Maine State Employees Association, said its executive director, Chris Quint.

There’s no cap now, he noted, and the third year of the freeze is unnecessary to balance a two-year budget.

The union will continue to push for changes.

“In order to do that, they are going to have to compromise on the tax cut package,” Quint said.

The committee also agreed to recommend a two-year salary freeze for state workers.

In total, the changes would create a $55 million shortfall in the budget, Flood said. As the committee works to finish its budget plan, it will have to find the funds to close that gap.

In recent weeks, the committee has addressed two other proposed changes that would affect state workers and teachers.

It eliminated a proposal to require retirees to pay a portion of their health insurance costs. The second issue involved the eligibility age for benefits.

In a package of changes to the budget, LePage altered an original proposal to require workers and teachers who are close to retirement to leave by Jan. 1 or pay for their health insurance until they turn 65.

The new proposal, endorsed by the committee, would require workers to reach normal retirement age — 60 or 62, depending on the terms of their job — to qualify for retiree health insurance benefits. If they were to retire earlier, they would have to pay for coverage until age 60 or 62.

Flood said the committee’s recommended changes to the pension system would cut a significant amount from the state’s long-term debt. He declined to cite a figure, deferring to the retirement system, which is expected to provide updated numbers early next week.

“This will be the first time in decades we’ve taken a big chunk out of the unfunded liability,” he said. “To me, that’s a gigantic step forward.”

MaineToday Media State House Writer Susan Cover can be contacted at 620-7015 or at:

scover@mainetoday.com