Vermonters owe a tip of the hat to the legislative task force appointed to deal with the state’s underfunded public pension system. The group this week voted unanimously to approve a plan that addresses the $3 billion deficiency in a way that is defensible for all parties involved and in a way that makes future steps possible. In so doing, the task force, comprised of legislators from both political parties, the administration, and affected union members, defied expectations. What was thought would be the session’s most contentious issue, most likely will not be. 

The proposal is not complete, but the proposed guidelines include; union members paying a little more in and getting a little less in return, raising the retirement age for some, reducing cost of living allowances, having the state contribute $200 million in one-time funding and contributing a portion of future years’ budget surpluses toward the pensions until the fund is considered properly funded - around the year 2038. 

The task force was set up to deal with the aftermath of last session’s political flash point; when the two labor unions blasted Democratic legislators for their proposal to deal with the pension crisis, a crisis brought to the public’s attention by State Treasurer Beth Pearce when she announced the state pension funds had sunk by another $600 million. It was feared - if not expected - that the task force’s efforts would go for naught, that the unions would balk, pushing the issue into the 2022 session, also an election year.

That didn’t happen for a variety of reasons, but king among them is the amount of work the committee did, the transparency of its work, and the irrefutable conclusion that the system’s design is fatally flawed. The group met once a week for 18 weeks and the 59-page report is a veritable catalog of how the fund operates, how the underfunding issues occurred and their impact, and how each of the proposals considered would translate actuarily. It’s work that will not need to be repeated and the conclusions are not debatable. It was basically a math problem and, at the end of the day, the math made the outcome unavoidable if the pensions were ever be made whole. This, all members of the task force agreed to, even the union reps for state employees and our teachers.

Basic things needed to be acknowledged. For example, the state’s decision to perpetually underfund the pension system was a $353 million issue, or about 10 percent of the problem. It’s not the crux issue that’s been largely assumed and reported. Both pension funds have now been fully funded for more than a decade, yet the funded ratio for the state employees pension has dropped from 94 percent in 2008 to 67 percent today. The funded ratio for teachers has declined from 80 percent in 2008 to 52 percent today.

The bigger issues include health care costs that far exceed the rate of revenue growth, the implosion of the financial markets in 2008, and the fact that the number of retirees in the system far outpaces the number of active members. As the task force noted, what we have is unsustainable and expensive. The amount of general fund dollars spent on the pension funds for both teachers and state employees was $316 million for FY2022, which, according to the report was “more than state government spends on Labor, Debt Service, Commerce and Community Development and Higher Education combined.” 

And the upward pressure on costs continues. The task force reported that revenue estimates for FY2026 are expected to be almost 15 percent higher in FY2026 than in FY2021. That’s the good news. The bad news is that the task force also estimates that state pension costs over that same five years will increase 64.8 percent to cover state employees and 69.7 percent to cover teachers.

Part of the reason for this disproportionate increase is demographic, for example, over $500 million of the teachers’ unfunded liability challenge can be attributed to unexpectedly high retirement levels and net teacher turnover. Other challenges include inflation, salary growth, investment returns, etc.

Having both teachers and state employers shoulder more of the costs is essential. So is the increased support offered by the state. What has been proposed is not likely to solve the problem long term. But at least the informational foundation has been set and agreed to by all parties. It makes going forward in a bipartisan way achievable. In today’s world count that as a win.

by Emerson Lynn

 
 

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