The past year has been a challenging one for Vermont teachers and state employees. Piled on top of the difficulties of working during the pandemic, a gut punch came from the State Treasurer in January in the form of news that the funding gaps in our public retirement systems are actually worse than we had thought. This is not just a problem for teachers and state employees. These systems are on an unsustainable path, with $5.6 billion in unfunded liabilities coming due in future years. That is money the state has promised or will be promising to state teachers and employees that the system has no way to pay.
For those of us who have only been involved in state government recently, it is hard to understand how this could have been allowed to happen. Vermont under-funded the pensions decades ago, and the state should have invested more in the system. However, those practices account for only about one third of the unfunded liability gap today. For the last decade Vermonters have stepped up, with the legislature and the last two administrations following the Treasurer’s plan to close the gap by 2038. The January report moved the goal post by hundreds of millions more dollars.
In our current pension programs, employee contributions are fixed percentages of wages and the state picks up the difference the actuaries determine is needed each year. We now know that the regular costs of maintaining the funds will be an additional $96 million in the coming year, on top of over $200 million in employer pension payments in the previous year. This brings the FY2022 total employer contributions to over $300 million. That is 13% of every dollar spent in Vermont’s General Fund budget. That means that Vermont taxpayers will contribute four times the amount that active employees will pay into the VSTRS and VSERS system next year.
Vermont taxpayers have paid $1 billion in employer contributions over the last five years and yet the gap continues to grow due to many factors. This is not the fault of teachers or state employees. It is also not the fault of the current legislature or Governor. Past under-funding, poor system governance, investment underperformance and overly optimistic assumptions about participant experience are all factors. There is plenty of blame to go around for the problem, but the legislators trying to bring stakeholders to the table to find a solution are facing an intractable political challenge. Telling the hard truth that no one wants to hear rarely gets rewarded in politics. That is why pension boards, unions, past legislatures, and past governors have always opted to accept overly optimistic projections instead of working on realistic solutions.
The Chair and Vice Chair of my committee, House Government Operations (HGO), put a set of proposals on the table last week as a starting point for how we might address a significant portion of the unfunded liability. Their proposal combines historic levels of additional state funding, for totals next year that could approach half a billion dollars, with some painful asks of state employees and teachers. These include ideas like raising contribution rates, extending retirement age, adjusting final compensation calculations, risk sharing, and other changes. HGO will continue to look at this proposal and others in the coming weeks, and no decisions have been made yet. The proposal also suggests no changes for those who are already retired or who are within five years of normal retirement. A pension is a promise, and keeping that promise for everyone in the future will not be possible without some changes.
I hope that those who are frustrated by this proposal will come to HGO with their own suggestions, because if we fail to act while we have access to one-time money, I cannot imagine how we will avoid breaking the promises made to retirees at some point in the not too distant future. At the very least, we should not continue to make promises to new hires and those early in their careers if we do not have confidence in the future solvency of the pension funds.
Many have asked why we can’t solve the unfunded liability problem with the big windfall coming from the recent federal pandemic relief bill. In fact, the Speaker has proposed to do just that. Public pensions are not an eligible use of American Rescue Plan funds and other federal dollars, but Vermont can use $150 million of this money to support eligible federal expenses in other state budget areas to free up flexible dollars to invest extra one-time money in the pension funds. This is in addition to the over $300 million in base pension obligations required from the state in FY2022.
Others have asked why we don’t raise revenue to cover the pension costs. Steve Klein at the legislative Joint Fiscal Office described revenue proposals to address the pension gap as “thimbles in an ocean.” With the scale of the rising cost of keeping the pension funds solvent, revenue changes alone will not solve the pension challenge. The House will consider revenue proposals as part of our discussion this week, but it is difficult to imagine any viable new revenue source putting more than a small dent in the growing obligations as they have topped $300 million per year. There may also be other needs of Vermonters that we need to consider before using additional tax capacity specifically to address pensions. Additionally, if a revenue proposal makes sustaining a veto impossible, then we won’t make any progress toward the goal of saving the pension systems this year.
To truly support Vermont’s teachers, troopers and state employees I hope we can work together to find an equitable solution to the challenge of shoring up pensions and make the most of once in a generation funding this year. I met with Maple Run teachers last week, and spent the weekend on the phone with many people concerned about the ideas under consideration in House Gov Ops. Many are angry and feel betrayed, and I would feel that way too. If we fail to find a way forward and kick the can down the road again, I fear the future of the pension funds is grim.
Rep. Mike McCarthy — St. Albans