Editor’s note: This op-ed is by David Coates, the former managing partner of the Vermont KPMG Office, the American Institute of CPAs, the Vermont Business Roundtable and a member of the Commission on the Design and Funding of Retirement and Retiree Health Benefits Plans for State Employees and Teachers.
In September 2010 I wrote to Vermonters outlining my concerns on the path our state was on regarding state and teacher pension and retiree health care costs. It is time for an update.
This summarizes the problem:
• Unfunded pension liabilities for state and teachers: $1.2 billion on 6/30/11; $1.1 billion on 6/30/09.
• Unfunded retiree health care benefits for state and teachers: $1.8 billion on 6/30/11; $1.6 billion on 6/30/09
The $3 billion total above only reflects what the state owes as of June 30, 2011. There is no evidence in sight to think that these obligations will be reduced, but moreover, the available evidence would dictate that they will continue to grow if left unchecked.
Of further interest and concern is that our state pension obligations are 80 percent funded and our teacher pension obligations are only 64 percent funded. Meanwhile, retiree health care costs are funded at less than one percent.
The Retirement Board and the actuary made an important adjustment as of June 30, 2011, by lowering our rate of earnings on our pension funds to reflect, at least for the short term, the fact that rates are at all-time low and will not achieve rates of return as in the past. This is definitely a step in the right direction, and was partially the reason for the increased unfunded pension liabilities. However, the rate is likely still too high given the current and projected rate forecasts.
Perhaps the most disturbing and challenging of these legacy costs are those related to providing health care coverage for retired state workers and teachers. Despite the good intentions when these benefits were negotiated, the costs keep soaring and the state simply cannot afford them. In a recent article linking economic competition between states and the impact of unfunded retiree health care benefits, it was noted that unfunded retiree health care benefits per person in Indiana was $81 and Illinois was $3,399. Vermont’s is $2,816 and rising.
In the past year alone, retiree health care costs increased over $200 million. These costs are paid in the year they are incurred (“pay as you go”) and no provision is provided for costs we know will be incurred in the future. As a result, these obligations will continue to expand. To fund these future costs will substantially reduce other discretionary funding in our annual General Fund appropriations putting other programs at great risk.
In the case of the teachers, their retiree health care costs are being taken out of their pension fund contribution, which puts those funds at even greater risk.
Despite some good changes that were made to the plans over the last few years, such as increasing retirement age and requiring higher payment from employees, much more must be done to get our fiscal house in order. Here are just a few ideas that might be considered to do just that.
• Change to a defined contribution plan (401k type) for state and teacher pensions, as have the overwhelming majority of private sector firms, higher education institutions, and many states.
• Eliminate health care benefits for new state and teacher retirees but, not existing retirees.
• Require state workers and teachers to shoulder more of the annual benefit costs.
• Tie pension and retiree health care eligibility to Social Security retirement age, as is the practice with most private sector workers.
• Eliminate cost of living increases on pensions.
As mentioned earlier, several positive changes have been accomplished over the last few years. However, a major structural overhaul is the only solution to this growing fiscal problem. If not addressed now, then we will be shifting these high costs to future generations and more of our annual spending will be diverted from other important programs to these legacy costs.
We have read where other states and large municipalities have tackled these problems. Some have been successful. Some are even considering bankruptcy. Others continue to “kick the can down the road.”
What do you want to do?