Coates: Finally, positive action on the state retirement systems!

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Coates: Finally, positive action on the state retirement systems!

Mon, 01/25/2021 - 1:23pm -- tim

by David Coates, KPMG (retired) For over ten years, these columns have been critical of the treatment of the state’s retirement systems (state employees and teachers) which now in their present forms, are neither sustainable nor affordable without significant reforms. This has just changed with the State Treasurer’s report to the Legislature.

The Treasurer and I have disagreed over the years on how to solve these problems. 

However, I must acknowledge and commend her for the recommendations she has made to the General Assembly on how to reduce pension and OPEB (retiree healthcare) liabilities to ensure the retirement systems are able to continue to pay their participants.

For a little background, the report from the state’s actuary as of June 30, 2020 indicates the combined (state employees and teachers) unfunded liabilities for the retirement systems increased $1 billion since the earlier year’s report.

They now stand at over $5.6 billion.

See full report HERE. See story HERE.

In addition, the annual required payment to fund just the pensions has increased by nearly $100 million and now is over $300 million.

You can imagine how this urgent challenge is impacting our state’s budget writers as the current Legislature begins its deliberations. 

Pursuant to the request made last fall by the Boards of Trustees of the state employees and teachers retirement systems, these hard but necessary recommendations are designed to put the retirement systems (state employees and teachers) on a more sustainable and affordable path by lowering the liabilities and the annual pension payments to at least the projected levels made the year before.

These recommendations include reducing cost of living increases for future retirees, increasing state employee and teacher contributions, and modifying the method for calculating benefits and the waiting times for drawing benefits.

Importantly, however, none of these proposed changes would impact retirees currently receiving benefits.

The recommendations for the pensions would reduce the unfunded liabilities by $600 million and the annual required payment by $97 million.

The recommendations for the OPEB would reduce the unfunded liabilities by over $1.5 billion.

These proposed changes would improve not only the state budget, but also the state’s balance sheet, which as of June 30, 2020, had a deficit of over $300 million.

Implementing these changes would be very positive signals to the rating agencies that lowered the state’s rating over a year ago.

Conversely, not making these changes will likely result in another decrease in our ratings, causing borrowing costs to increase again for the state, our municipalities, and others relying on the state rating, like VSAC, VHFA, and VEDA.

Another important factor to consider relates to the funding levels of the pensions plans.

The state employees’ plan is 66 percent funded and the teachers’ is 51 percent funded.

This means that, while unlikely, in the event that the retirees would be required to be paid based on these levels, they would not receive their anticipated benefits.

The Treasurer’s recommendations would improve these funding levels significantly.

Yes, the devil is in the details and these are tough choices to make, but we cannot let this opportunity escape as the situation will only become more dire, and state employee and the teacher retirees, as well as the state and all of its taxpayers, will end up in even worse shape.

The most important point is that the targeted savings recommended must be achieved or else we will have, again, just pushed the problem down the road a year or two.

The Legislature, administration, and retirement systems’ stakeholders must work together with the Treasurer to make this reform a reality, as the alternative is not a reality anyone wants.  

David Coates, KPMG Managing Partner (retired) lives in Colchester and is a member of the Vermont Business Roundtable, where he serves on the Pension and Health Benefits Reform Task Force.