by David Coates, KPMG (retired) As promised in my previous commentary here, I will present in this article some possible solutions to the state'spension and retiree health care benefits crisis......and, yes,it is a crisis! Just to recap, as of June 30, 2016, the state and taxpayersare on the hook for $3.6 billion of unfunded liabilities for these benefit plans for around 32,000state workers and teachers.By comparisonthe state and taxpayers are also on the hook for about $650 million of bonds issued for basically infrastructure improvements that benefit our entire population of around 625,000.
The unfunded benefits have been increasing nearly every year despite paying over $200 million annually fromthe state'sgeneral fund. Further these unfunded benefits are likelysubstantially larger as the assumptions used by the stateto compute rate of return and discount rate are questionable according to most external or industryexperts.I understand the Treasurer has requested that the discount rate be reviewed by another Actuary.
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Before recommending any solutions, let me make it perfectly clear that none of these suggestions would impactthe current benefits thatformer state workers and teachers are receiving.”Promises made arepromises kept”is the mantra I have espoused since 2008, whenIbegan reporting on this subject.However, after many years of no meaningful changes, that promise is under serious question.
Pension
The fairest and simplest way to stop this liability is tonot allow new state workers and teachers to participate inthe defined benefit plan. Instead,set up a definedcontribution plan for new state workers and teachersthat is similar to a 401 (K) plan; thevery same typeofplan most Vermonters have for their retirement needs. If this had been done in 2010,over 500 state workers would now be on the DC plan or around 7% of the pension participants. Clearly,it would have placed Vermont on amore sustainable path than where we now find ourselves. This one change will not solve our overall problem, but it isolates the problem, therebygiving the state an opportunity to find solutions.This is an incrementalstep we must take, otherwisethe liability will continue toescalate the size of theproblem and makeany subsequent solution practically impossible.
A defined contribution plan may cost a little more in the short term, but the long term benefits would be extraordinarily beneficial to our state and taxpayers.
Another possibility would be to require state workers and teachers to contribute more to these lifetime benefits. Most of the plan participants currently pay between 5-6% of their annual pay. They receive a pension of around 50-60% (retirees also get social security benefits) basedon their last few years average pay fortheir lifetime. Most reasonable people would agree thatthese aregenerous benefits not afforded most Vermonters.
Most of the pensions pay a cost of living adjustment (COLA) that rangesbetween 1-3%. A suggestion would be to freeze these benefits until the plans are 80% funded,similar to the funding level generally required of the private sector plans.The combined plans are currently at68%.... a low level of funding and likely going lower.
The current plans could always be frozen and then place all coveredparticipants ina defined contribution plan as recommended for new participants above. The private sector has done this. If this recommendationwaspursued,then itwould need further study.
Vermonters must realize that any of the above possibilities would still leave the stateat risk for the ongoing defined benefit plans (frozenor otherwise). However, the risk would be substantially less than the path we are onnow.
Retiree Health Benefits
This benefit is a non-starteras we are underfunding it by $50 million a year. In other words, we simply can't afford it and,if you can't affordsomething, thenyoumusteliminateit instead of putting it on a credit card that you are unable to pay. This generous benefit is another one thatthe vast majority ofVermonters do not receive. Most retirees pay a co-pay of 20% of the premium. The plan is considered a Cadillac Plan (costly generous benefits) under the Affordable CareAct and would be subject to a special tax under the existing law if these plans aren't changed. This could cost the state several million a year.
Ata minimum, it must be stopped for new state workers and teachers. In addition,for those currently receiving this benefit, co-pays should be increased to a level that will make this a sustainable or pass-throughbenefit.
The complete elimination,or at leastthe restructuring,of this benefitas mentioned, above would allow for more modest changes in the pension plans I noted earlier.
In Conclusion
As is obvious, there is no secret sauce or silver bulletto this crisis. However, these suggestions would put these unfunded liabilities on a glide path that would be fair and affordable to the state and taxpayers.
What are we waiting for? We are waiting for themajority party in the Legislature to decide whether they represent all of their constituents or the union leaders.The majority party controls the Legislature and,as a result,owns this$3.6 billionunfunded liability. In the interest of full disclosure......I am a member of this majority party.