by Timothy McQuiston, Vermont Business Magazine Vermont State Treasurer Beth Pearce January 15 issued her long-awaited report on how to fix the looming $3 billion unfunded liabilities in the state’s pension and retirement health plans. The report calls for the state to increase payments on the one side while requiring retirees to contribute more financially.
However, Pearce does not recommend changing benefits for any current retiree nor does she recommend changing the retiree plans from the existing “defined benefit” to a “defined contribution.”
Going from a fixed payment DB to a 401(k)-type DC has been a point of significant contention over the years with the state employees’ and teachers’ unions opposing such a measure.
There are ongoing and historical problems with the system on both the funding side and benefit side.
For its part, the state has willfully under-funded the plans, especially in the 1990s, as it backstopped other more immediate (at the time) budgetary issues.
The state also counted on a higher rate of return on the multi-billion dollar funds than what actually has transpired.
On the retirees’ side, people are living longer and therefore receiving pension and health benefits for a longer period of time.
Also, the cost of healthcare (and thus the cost of health insurance) has exploded over the last couple decades.
Pearce says her plan would reduce post-employment liabilities by $2.2 billion, which is not full obligation.
The unfunded liability for state employee pensions is $1.040 billion. For teachers, it’s $1.933 billion for a total: $2.973 billion. These two liabilities have increased by $604 million in just one year.
The reasons for the shortfall fall into two main categories, beyond the level of the benefits themselves: Past underfunding and over-estimating returns on investments.
The steep recent increase in the stated liabilities is largely because of legislative efforts to reduce the future obligation.
Governor Phil Scott has told VBM on multiple occasions that he favors getting the pension and health plans under control, but that it would require the administration partnering with the Legislature on what would be a significant effort that must also include the state employees and teachers’ unions.
Treasurer Pearce has acknowledged that her recommendations will be painful for taxpayers and future retirees, who will both have to pay more.
The report provides recommendations for lowering the liabilities for both the state and teacher pension and retiree health care systems.
Pearce calls it a “four bucket” approach, to address increasing liabilities and reduce costs, current and future, for the taxpayers.
The recommendations outlined in this report can reduce pension Unfunded Actuarial Accrued Liabilities (UAAL) for the Vermont State Employees Retirement System (VSERS) and the Vermont State Teachers Retirement System (VSTRS) by $474 million and reduce the Actuarial Determined Employer Contribution (ADEC) by $85 million.
While shy of the total target of $604 million in the UAAL and $96.6 million for the ADEC, it is a significant reduction to the existing liabilities and costs to the taxpayer.
By directing a minimal amount of funds for prefunding, including the use of existing resources, the Net Other Post-Employment Liabilities (NOL) can be reduced by $1.68 billion.
All in, these recommendations will reduce the State’s post-employment liabilities by $2.2 billion.
Recommendation #1: Maintain a defined-benefit system for current and future retirees.
Recommendation #2: Any benefit changes to the retirement systems should NOT be made for existing retirees.
Recommendation #3: Continue to fund the actuarial determined employer contribution (ADEC).
Recommendations to Reduce Pension and Other Post-Employment Benefit (OPEB) Liabilities:
- For both the VSERS and VSTRS, a series of recommendations is made to reduce liabilities and costs through:
o Reductions/elimination of cost of living adjustments for active employees upon retirement;
o Increasing the years used to calculate the Average Final Compensation (AFC);
o Expanding the use of “Rule of 87” and “Rule of 90” which combine years of service and age for the purposes of eligibility for normal retirement; and
o Increasing employee contributions.
- To the extent that additional COVID/CARES Act monies are available, allocating dollars to both pensions and OPEB to further close the unfunded liability gap and lower the ADEC. With the new Administration in Washington and changes to both houses of Congress, there is a possibility of additional revenues without strings/restrictions. Paying down the state’s debts with a portion of these funds should be a priority.
- Considering using excess revenues or federal Cares Act monies to establish a reserve that can be used to gradually reduce the ADEC requirements, taking pressure off operating budgets.
Source: Vermont State Treasurer 1.15.2021. See full report HERE.