Vermont Business Roundtable takes on troubled pension system

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Vermont Business Roundtable takes on troubled pension system

Wed, 01/15/2020 - 2:38pm -- tim

New Policy Paper Presents Options for Vermont Pension and Health Care Retirement Systems

Vermont Business Magazine Vermont is staring at $4.5 billion in government employee retirement obligations because of historic underfunding of pension and healthcare plans and because of too-little commitment by state leaders to rectify the growing problem. For the first time, the state now has a negative net worth. Today, Lisa Ventriss, President of Vermont Business Roundtable and Mark Crow, President of Tenth Crow Creative and Chair of the Pension Reform and Health Benefits Task Force, announced the release of its latest policy paper entitled, “Policy Options for Vermont State Employee and Teacher Pension and Health Care Retirement Systems.”

Click here for report.

Said Task Force Chair, Mark Crow, “Vermont has failed to meaningfully address its more than $2.4 billion in unfunded pension and $2.3 billion in retiree healthcare obligations that it owes to state employees and teachers. This liability is equal to $7,100 for every citizen in our state. Avoidance of this issue will only exacerbate our state's problems. We cannot continue to ignore this growing economic burden."  

“The weight of prior decisions to not fully fund our obligations has been built over decades. Maintaining the status quo is no longer a viable or sustainable option. This report offers lawmakers a series of policy recommendations that the Task Force believes are in the best long-term interest of Vermont’s fiscal stability, and that are accountable to future generations of public employees and taxpayers,” said Roundtable President Lisa Ventriss.

Executive Summary

Vermont is obligated to help fund the pension and retiree health care plans that it provides to its 34,665 (as of 2018) teachers and state employees. While the state has made some payments to these plans over time, billions are owed—and the amounts owed keep increasing at an accelerated rate.

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.

Unfortunately, given past investment performance for these plans, the situation is unlikely to improve. An August 2019 Institute for Pension Fund Integrity report identified Vermont as “one of the top 10 worst performing pension funds” in the nation.

Most Vermonters aren’t aware of—and likely don’t have the time, let alone desire, to try and understand—the complexities associated with these unfunded liabilities.

But they should, because they are likely to feel the impact.

Participants in these plans could lose their benefits or see them dramatically curtailed. Taxpayers could see higher taxes, as these unfunded liabilities continue to grow and, ultimately, come due.

The social safety net could be eroded because, as the costs of servicing these unfunded liabilities grow, less funds will be available for vital government services.

And, economic development could suffer as potential investors shy away from a debt-ridden state.

And, trends indicate that the burden will continue to grow.

Vermont’s state and public school teacher workforce is aging and retiring, which will increase these unfunded liabilities.

There are more participants in these pension and retiree health care plans now than there were 10 years ago, and fewer working Vermonters available to pay the taxes to fund these plans.

The purpose of this report is to educate stakeholders about the evolution and impact of these unfunded liabilities, utilizing facts and figures from reliable, objective sources, and to outline pathways and policy options for reducing these unfunded liabilities.

Doing so will not be easy, as there are no quick fixes for a problem that has been growing for many years.

Options for legislators include:

• Implementing rigorous annual stress tests to ensure Vermont can cover its future obligations without cutting core social services.
• Improving governance and transparency.
• Exploring cost-sharing policies.
• Creating defined contribution, hybrid, or other plans for new public employees.
• Developing an amortization plan for the retiree health care plans similar to the one designed to reduce pension payment obligations.

Maintaining the status quo, however, is just not viable or sustainable.

How We Got Here

Growth of Health Care Plans’ Obligations: 1979-Present

When state employees and teachers retire, they receive pension payments as well as other post-employment benefits, known as OPEB. States’ costs for OPEB are almost exclusively related to health care, and that is the case under the Health Care Plans.

In a 2017 Pew Charitable Trusts study (updated in October 2018 to reflect additional information provided by states), there is a large disparity in OPEB-funded ratios, ranging from 19 states—including Vermont—whose ratios are less than 1 percent, up to 92 percent in Arizona. The variation in these OPEB liabilities reflects the difference in how states structure health care benefits for retirees, and the expected cost of the benefits for current workers and retirees over the course of their lives. (

Like many other states, Vermont has a pay-as-you-go system; annual contributions are expected to cover only the current costs of health care for participating retirees. That means that the state is paying only the retirees’ annual medical and administrative health care expenses while unfunded liabilities grow each year. In 2018, the unfunded amount for one year was approximately $60 million, bringing the total unfunded liability for the Health Care Plans to $2.2 billion. Future health care liabilities, on a system-wide scale, are unfunded and unknown.

Effective July 1, 2014, Vermont established a separate trust in an attempt to account for the assets and liabilities of the teachers’ retiree health care fund. Prior to that date, payments for the retired teachers’ medical expenses were taken from the teachers’ pension investments. This practice was one of the main drivers for the funding ratio difference between the teachers’ pension funds and the state employees’ pension funds. Although Vermont’s treasurer projected a savings of $480 million in avoided interest costs through 2038 from this change, it has not headed in that direction. The unfunded liability of the teachers’ retiree health care plan, at June 30, 2014, was $766 million; as of June 30, 2018, it was $954 million—an increase of $188 million.

The Underfunded Teachers’ Pension Years: 1979-2006

Between 1979 and 2006, Vermont shortchanged the teachers’ pension plan by almost $172 million (net), with the majority of the underfunding—$160 million—taking place during the 14 years highlighted in the following Vermont state treasurer’s chart (1991-2000, 2003-2006). Between 1991 and 2000, the teachers’ pension plan received only 62 percent, or less than two-thirds, of its actuarially recommended contributions from the state. In all but four of the years between 1979 and 2006—more than a quarter century—Vermont underfunded its teachers’ pension plan. 

The 30-Year Pension “Mortgage:” 2009-2038

Effective July 1, 2008, Vermont required that the Pension Plans amortize their unfunded liabilities over a 30-year period. In other words, the Legislature required that these obligations be fully funded by the end of Fiscal Year 2038.

Each year, the payment is calculated using an assumed rate of return, which is defined as the net gain (or loss) on an investment during a specified time period expressed as a percentage of the initial cost. If that assumed rate of return is not met, then the state must make up the difference in contributions to the Pension Plans.

Unfortunately, the Pension Plans’ earnings have not come close to meeting the targeted rates of return. For Fiscal Year 2018, the assumed rate of return for the Pension Plans was 7.5 percent. During the same fiscal year, the 10-year actuarial value return was much lower—5.32 percent for the teachers’ pension plan and 5.61 percent for the state employees’ pension plan—leaving significant liabilities for Vermont taxpayers to cover.(See Appendix 2, VSTRS and VSERS 10-Year and 20-Year Actuarial Value vs. Market Value Returns, to see how actuarial value investment returns are different from market returns because they allocate investment gains and losses over multiple years to reduce year-to-year pension plan volatility. Actuarial value returns, not market returns, determine pension funding levels required each year.)

To help the general public better understand the 2008 legislation, some commentators have compared it to the 30-year fixed mortgages that countless Vermonters have taken out to finance the purchase of a home that serves as a key step toward living the American Dream. Yet there’s one critical difference that largely nullifies this comparison: Unlike those mortgages, Vermont’s pension payments and the debt owed are not fixed, and they keep spiraling upward owing to poor investment performance, plus unrealistic assumptions about what those rates of return will be in the future.

As mentioned above, each year Vermont’s “mortgage” payment to the Pension Plans is calculated, in part, on an assumed rate of return. To the extent the assumed rate of return is not met for a particular year, the payment for the following year is increased to cover the difference.

Though they were well-intentioned, the changes implemented in 2008 did not make the intended difference. In fact, the unfunded liability for the Pension Plans increased by 110 percent, from $1.1 billion in 2009 to $2.3 billion in 2018, and the required annual payment for the Pension Plans’ unfunded liability almost quintupled, from $30 million in 2009 to $147 million in 2018. In the unfunded pension liabilities chart below, the discrepancy between the 2009 actuarial projections for the Pension Plans and the fiscal reality is represented by the divergence of the blue and red lines.Setting unrealistically high rates of return seems like something that would be easy to correct. Yet those determining state policy may perceive advantages to projecting higher rates.

Click here for full report.

The Vermont Business Roundtable (Roundtable) is a nonprofit, nonpartisan organization of chief executive officers of Vermont's leading private and nonprofit employers, representing geographic diversity and all major sectors of the Vermont economy. The Roundtable is committed to sustaining a sound economy and preserving Vermont’s unique quality of life by studying and making recommendations on statewide public policy issues. Learn more at    

Source: (South Burlington, Vt.) Vermont Business Roundtable 1.15.2020