Vermont Business Magazine When Richard Schneider took over as Norwich University president in 1992 he knew he needed to make cuts to get the university back on solid financial ground. The college was $3 million in the red on what was only a $30 million budget. But he acknowledges now that those cuts were a mistake. Not because he made them, but because he did not make them deep enough.
The cuts to programs and, painfully to staff, eventually put the nation’s oldest private military college back on track (see story). But it took too long to get there. He says you must fully do what needs to be done because you’ll only get one good crack at it. Going back will be even more painful with a less efficient result.
While President Schneider was not talking about the state pension problem, the State of Vermont needs to heed that type of advice regarding its pension and health care retirement plans.
To quote the Vermont Business Roundtable, for the over 34,000 state workers and teachers covered, “The unfunded liabilities for the pension plans have increased almost 110 percent in about a decade, from $1.1 billion in 2009 to $2.3 billion in 2018.
“At the same time, the unfunded liabilities for the retiree health care plans have reached $2.2 billion, bringing Vermont’s total unfunded pension and retiree health care liabilities to $4.5 billion, with no sign of the increasing debt burden slowing down.
“Due in part to these unfunded liabilities, for the first time in modern history, Vermont has a negative net worth, and the state’s bond credit ratings have been lowered, making it more expensive to borrow money for infrastructure improvements and other projects.”
Most of the damage was done during the dark days of the 1990s.
The early ‘90s recession was, as Economist Jeff Carr describes it, Vermont’s Great Recession. The so-called Great Recession and housing crash that hit the nation in 2009 was mild here in Vermont by comparison.
Starting in 1991 Governor Snelling and then Governor Dean, working with Speaker Ralph Wright, put in a dramatic budget balancing plan. Spending was cut and taxes were temporarily raised to wipe out the deficit. The state workforce was reduced. Those were desperate times.
And the plan worked. Vermont has had a balanced budget ever since.
But one piece of collateral damage from that dramatic plan was underfunding those retirement benefits to save money.
There is never a good time for painful cuts, but a good time or not, they have to come at some point.
Many inside and outside of government, like the Business Roundtable, understand that the time has come, if it's not already long overdue.
There is no time to wait for a “good time” to address this $4.5 billion problem. But the best time to make a difficult financial decision is when finances are doing well.
Let’s not kid ourselves, between and among legislators and the governor, the budget will evoke much disagreement this year without them having to take on the retirement issue.
Finances will not get better than they are now for the foreseeable future. I think we can all agree on that.
The retirement obligation is already causing trouble. It was a contributing factor in the state’s gold-plated credit rating being lowered last year.
Two things need to be done. One is to increase the amount of money being set aside to pay down the debt. This is clear.
And to make the funds’ future performance more reliable, expectations for their return on investment need to be reduced. They’ve been too optimistic, which is one reason why even fully funding them at recommended levels in recent years has not reduced the obligation.
The governor and lawmakers will haggle over spending a couple hundred thousand on this or that, but they found a way to come up with a billion dollars over 20 years when the EPA put a gun to their collective heads over clean water.
When they have to, as in the early 1990s and with clean water last year, they found a way.
True, there is no gun pointed at anyone nor is the economy crashing to force desperate measures. But the best time to tackle a financial crisis is not when your car is being repossessed and your mortgage is underwater. Everyone knows that.
So find a way now.
This editorial first appeared in the February 2020 issue of Vermont Business Magazine.