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July 23rd, 2018

Vote For Vermont: Vermont’s Pension Crisis

On April 9, 2018 David Coates, retired managing partner at KPMG visited Vote for Vermont to talk to Ben Kinsley and Pat McDonald, co-hosts and co-producers of the show. about the unfunded liability of the teachers’ and state employees’ pension plan to include health benefits. Just for clarification “unfunded liability” means that the fund does not have enough assets to cover its liability. This is not the easiest subject to discuss so I am going to take quotes from Commentaries that David Coates has written over the years about this issue but I would encourage you to go to vote802.com or youtube.com (voteforvermont) to see this show for yourselves, especially if you are a member of either pension plan.

“The 2017 actuary’s reports show that Vermont’s combined unfunded liability has increased by over $900 million (over 25 percent) in just one year. So as of June 30, 2017, our unfunded liabilities stand at $4.5 billion, an amount that is now three times our general fund revenues and seven times our bonded indebtedness. In other words, this is the biggest liability the state owes, is more than all of our other liabilities combined, and overwhelms the state’s balance sheet.”

“Fortunately, the state is now making the Annual Required Contribution (ARC) recommended by the actuary for at least the pensions. Remember these payments are based on what is likely an understated unfunded liability. The state has made the annual required pension payments for several years now and, in 2017 that payment was $137 million. The annual required payment for 2019 is $177 million, an increase of $40 million or 29 percent in just two years. Non-payment of the required pension payments may result in a lowering of our bond rating by Wall Street which would have serious implication on municipalities, housing loans, VSAC and other areas. NOTE: Rough estimate of $30M put aside in third 2019 budget for Teachers’ Pension from one-time money, carry-forward and revenue upgrade.

“To compound matters, another problem is likely to occur soon, which relates to the assumption used by the state for the return on the pension investments. In 2016 the assumption was 7.95 percent and in 2017 it was lowered to 7.50 percent. This assumption is still high compared to other states who are moving their rates to 7 percent and lower.”

David Coates has been sounding the alarm about this issue for over ten years. In 2009 the Legislature created the Commission on the Design and Funding of Retirement and Retiree Health Benefit Plans for State Employees and Teachers. David was asked to serve on this Commission and explained on the show the 10 recommendations that were issued in a report in 2010. We talked about one recommendation in particular which was to replace the current defined benefit plan with a defined contribution plan. Governor Douglas began talking about this concept and received strong pushback from the VSEA. David noted that perhaps a defined contribution plan could be offered on a voluntary basis or made mandatory for all new employees. It is currently available to exempt employees within state government. Any shift in employees from one plan to the other would go a long way in alleviating the current stress on the plans. In addition to the recommendations contained in the 2010 Commission Report, David reiterated several other recommendations that deserve consideration. A defined benefit plan is a type of pension plan in which an employer/sponsor promises a predetermined pension payment upon retirement. A defined contribution plan such as a 401(k) plan, is a plan in which the employee elects to defer some amount of his/her salary into the plan along with a set contribution from his/her employer in some cases and bears the investment risk.

David noted that, “several positive changes have been accomplished over the last few years. However, a major structural overhaul is the only solution to this growing fiscal problem. If not addressed now, then we will be shifting these high costs to future generations and more of our annual spending will be diverted from other important programs to these legacy costs.”

As noted above, there is a lot more detailed information shared in the video, not all included in the above summary. If you would like to see the entire show go to vote802.com. Any rebuttals or additional comments are welcome and can be expressed on the websites and Facebook pages of VFV and Campaign for Vermont or through email at voteforvermont@gmail.com.

The above piece was authoried by Pat McDonald, Vote for Vermont.

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