Editor’s note: John McClaughry is vice president of the Ethan Allen Institute.
Three billion dollars is about six times the state of Vermont’s total bonded debt. It’s also what the state owes to the retired state employees and teachers covered by the two state retirement funds, including their post-retirement health care benefits. This $3 billion – the unfunded liability — is above and beyond what the Legislature has already funded to meet those obligations.
This is an enormous debt — $4,830 for every man, woman and child in the state. Whose fault is it? It’s the fault of legislators and governors of both parties stretching far back into the past.
Long years ago legislatures and governors established state-managed pension plans for state employees (1944) and public school teachers (1947). The two plans require contributions from future beneficiaries and from taxpayers. The plans promise defined benefits on the future day when the beneficiaries reach certain ages and accumulate sufficient years of service and then retire.
The two state retirement plan management boards, supervised by the treasurer, hired fund managers to manage and grow the money until it would be paid out. They also hired actuaries to compute how much the Legislature had to appropriate each year to make sure there would be enough in the funds to make the defined future payments.
So far so good. But a latent peril of the funding system was the fact that the annual required contributions came to a very large number in the appropriations bill. When revenues were scarce, and other spending demands more popular, legislators shaved the pension fund contributions to reach a supposedly balanced budget. That of course pushed the fund’s accrued deficit further into the red.
David Coates CPA has watchdogged the status of Vermont’s retirement funds for a long time, as a member of the Commission on the Design and Funding of Retirement and Retiree Health Benefit Plans for State Employees and Teachers (CDFRRHBPSET!). In a recent commentary for the Vermont Business Roundtable, Coates laid out the dimensions of Vermont’s current problem.
The unfunded pension liabilities for state employees and teachers now total $1.2 billion. The unfunded retiree health benefits promised to state employees and teachers total $1.8 billion. That adds to $3 billion — $4,830 for every man, woman and child in Vermont.
The unfunded pension liabilities for state employees and teachers now total $1.2 billion. The unfunded retiree health benefits promised to state employees and teachers total $1.8 billion. That adds to $3 billion — $4,830 for every man, woman and child in Vermont.
These numbers were as of mid-2011. Two years prior to that date, the total was $2.7 billion. In just two years, despite appropriations, the total liabilities increased by $300 million. In the year since it is likely that the deficits have increased yet further.
A further disappointing fact is that the great bulk of the Vermont retiree post-employment health benefits are “pay as you go.” The Legislature appropriates around 40 percent of the annual required contribution for state employee health benefits.
The teachers’ health benefits are not funded at all. Whatever is needed to pay retired teachers’ benefits is simply subtracted from their retirement fund assets, driving that fund $24 million further out of whack.
In fairness, the state has in recent years created an additional fund for the purpose of paying down the shortfall in the primary fund. This effort to catch up with years of irresponsibility shows some good faith, but ultimately fiscal solvency can only be achieved by making the annual required contributions to the respective funds.
The Government Accounting Standards Board (GASB) prescribes the way in which governments present their financial condition. GASB is on the verge of requiring state and municipal governments to tell the whole truth about their unfunded retirement benefit obligations. This will, nationally, suddenly drag $3 trillion of buried liabilities into the daylight.
Kevin Williamson, writing in National Review (May 5, 2012), observes that “pension funding costs already are a significant and growing share of state and local spending. That means that taxpayers right now are going to have to bear higher taxes or reduced services (or both) in exchange for precisely nothing.”
If the state of Vermont launches a government-run single payer health care plan – Green Mountain Care – in 2017, it will have to raise well over $1 billion in new taxes to finance its benefits. It is frankly impossible to imagine that the Legislature will ever be able to do that, and also come to grips with today’s horrendous retirement liability shortfalls.
