The Legislature has before it — at long last — a proposal to address the solvency of the state’s pension system. There is nothing in the proposal for anyone to like. It’s full of pain and regret and expense. It’s the embodiment of what happens when a problem is recognized but its solution is deferred. For decades.

The proposal unveiled by the House Government Operations committee essentially follows the recommendation by state Treasurer Beth Pearce, who said in January there was little choice but to ask retirees to work longer, pay more, and to receive less in retirement. With $5.6 billion in unfunded liabilities, she said Vermont’s pensions are in a state of crisis.

Today, a public hearing on the proposal will be held between 4 and 6 p.m. Vermont NEA president Don Tinney has made it clear legislators “will hear from us loud and clear.”

It’s likely to be the session’s most pitched battle.

What’s significant is that Ms. Pearce and the legislative leadership that drafted the proposal are Democrats, traditionally aligned with the public employees’ unions opposed to any proposal that would have their members pay more and to receive less. If there were any way to deal with the issue without the pain, they would have found it.

But that’s been the problem for 20-plus years. The Legislature [and the governors along the way] kicked the can down the road. The contribution rates were unrealistically low. The performance of the invested funds was abysmal. Promises to the unions were too rich. But the chasm between assets and liabilities — while growing — didn’t loom so large as to be paralyzing. It was a problem that had a long time horizon. It was easier to push the issue to the next set of office holders.

Until this year. This year we saw a $604 million increase in liabilities, meaning legislators would have to come up with an additional $96 million to pay the bills.


So when those opposed to the committee’s proposal have a chance to speak today, they should be prepared with solutions the legislators [and Ms. Pearce] were unable to find. Solutions that would do what the legislative proposal does, which is to substantially reduce the level of liabilities going forward.

What won’t work is for Mr. Tinney, et al to suggest that our multi-billions in unfunded liabilities should be picked up by a tax on the rich. There are not enough “rich” people in Vermont to close the gap. The tax would be something borne by us all. The union’s rank and file deserves a better effort than its leadership proposing something it knows in advance won’t happen.

At a very basic level, the public service employees affected have every reason to be upset. They were over promised and poorly served. In 2019, the Institute for Pension Fund Integrity’s Public Pension Performance report included Vermont in its “Top Ten Worst Performing Pension Funds.” From 2008 to 2018 our two funds underperformed the norm by 81 percent and 74 percent respectively. Had our investments gained the return of the average state we would be hundreds of millions of dollars better off than where we are. As they were, we had an average annual rate of return of 5.32 percent and 5.61 percent for our two funds for the 10 years ending in 2018. That’s pathetic.

That failure is not the fault of the union membership and why it happened and why it has been allowed to continue, has never been satisfactorily answered. The looming question is whether the state’s investment strategy has changed and if we are performing at an acceptable level, meaning at least at the national average. If not, why not?

With all the proposed changes in the offing, it’s also important to be more honest going forward with expectations. Including the six New England states and New York, Vermont had the highest assumed rate of pension investment return at 7.50 percent. Not only is that unrealistic historically, it understates our liabilities. The state has to make up the difference between the assumed rate of return and what actually happens. Since we never, or rarely, meet or beat the assumed rate of return, each year we sink a little deeper into the mire. It’s not something the union leadership ever forced, because, until now, the Legislature was always on the hook to make up the difference between the assumed rate of return and the actual return.

Just as it is not fair to dump the blame on teachers and state workers, it’s also not fair to hold them harmless thinking that their enormous, and growing, deficits should be shouldered by the public. If nothing is done, $96 million would be spent out of the general fund just to keep things at their existing level. That’s roughly six percent of the general fund budget. It also makes no sense to dismiss the urgency, saying that improved returns over the next 30 years make the problem go away. The problem is now, and the gulf is too large to ignore. Anyone who says it can be “managed away” through an improved investment strategy is looking backward, not forward. No one knows how the markets will perform in the years ahead and, with history as a guide, it’s foolish to expect long term returns that exceed much more than five percent.

All sides of this argument have the right to be angry and disgusted. This is management at its lowest ebb. This is the disappointment that overpromising always creates. This is what the lack of political will delivers.

To the legislators’ credit, at least the committee’s proposal takes us a big step toward correction.

If there is a lesson to be drawn from this, a lesson that can be applied elsewhere [state colleges financing, health care, etc.], it’s promising not to wait until it’s too late to deal with the problems before us.

by Emerson Lynn

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