Coates: Vermont’s expanding pension crisis

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?

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  • Dave Bellini

    When they “kicked the can down the road” it must have hit some people in the head.

  • Fran Levine

    It all comes back down to who will pay for skyrocketing healthcare costs.

  • Arthur Hamlin

    The average pension of most retired State workers is about $15,000 annually; below the livable wage for one person, below the eligibility for lifeline, food stamps, and less than the minimum wage. It is however, above the federal poverty rate, which as everyone knows is grossly outdated and unrealistic. This is the thanks they get for 30 years of working for below average wages for the good of their friends and neighbors and the state.

    The real message in Mr. Coates Op-Ed is that for some reason he won’t be happy until all publc workers are destitute. If he gets his way that won’t take long. The majority of Americans have little to no retirement savings. “401k” defined benefit plans are not a subsitute for a pension and were never intended to. They were created as yet another tax shelter for the 1%. It’s a fact that most people who rely on 401ks will not have enough money to retire on.

    State workers have made drastic increases in contributions, and negotiated with the State on benefits for new workers to ensure the fund is healthy. Vermont’s pension is one of the top best managed in the country. Mr. Coates needs to get off his soapbox.

  • Howard Pierce

    David Coates continues to offer measured and practical advice on this fundamental problem, rather than the solution-less partisan whining from both sides that typically dominates discussion these days. Thanks David.

  • David Usher

    Thanks, David, for your continued diligence on this critical issue. While it does not receive the headline treatment in the media that it deserves, the problem is akin to a rumbling volcano set to erupt on future taxpayers.

    Your suggestions for fixing this problem will require strong leadership. They are all worthy of serious consideration, especially the first. It’s beyond time for these pension plans to move from defined benefit to defined contribution for new people in the government workforce.

    The issue should be front and center in the November elections. We should ask the candidates where they stand on your suggestions. I certainly will because post-retirement health care costs are a not-so-dormant Vermont volcano.

  • Dave Bellini

    Mr. Coates misleading “chicken little” scenario is like declaring that all home owners with a mortgage are in financial peril because they didn’t pay cash in advance for the house.

    The rant is based in ideology. The state employees pension has been around for a long, long time without any crisis. Vermont’s pensions are extremely modest compared to other states and some municipial systems. The average state employee pension of about $15,000 per year, not a bank breaking amount of money. Some welfare recipients fare much better. Why would anyone want to eliminate cost of living raises for folks averaging $15,000? Because to Scott Walker and his Vermont ilk, cutting $15,000 a year people in far better than taxing wealthy folks who don’t have to worry about money.

    ” In the past year alone, retiree health care costs increased over $200 million.”

    The total annual cost of the Vermont State Employees Health care plans that includes current state employees and retirees combined don’t total anywhere near $200M. The entire state employees health care plans combined only increased by about 2.9%. So, very little clarity provided by Mr. Coates’ 200 million figure.

    As far as switching to a 401K system: This would require taxpayers to pay for two systems and cost more money as contributions to the pension fund would stop but the liability would continue. It would be good for private investment firms, wall street and brokers.

  • Ron Pulcer

    The problem isn’t just with public pensions. I have two small pensions from past jobs. One is from a company that was bought by Hewlett Packard. The EDS employee pension plan was well funded (over 100%), but when it was later merged with HP employee pension plan in early 2011, the funding percent went down to 94%, and I believe it went down in the more recent ERISA report.

    Also, CVPS is going to be merged with GMP / Gaz Metro. What will happen with the CVPS employee pension plan, given that it will be owned essentially by a Canadian company? This topic has not gotten much attention, as there has been more focus on the $21M bailout repayment plan/scheme.

    Let’s face it, it doesn’t matter if it is a public pension or a private pension, the private employers and public employers (federal, state and local government) apparently can’t (or don’t want to) fund their pension obligations.

    There are some private companies that have ended up dumping their pension obligation onto the federal government via the Pension Benefit Guaranty Corp. (PBGC), a federal agency.

  • Kathy Callaghan

    Many state and private pension systems were underfunded during the financial “good times”, leading to the problems of today. Vermont has been diligent in funding its state employees and teachers’ pension obligations on the whole, but some states, not so much. Some states have been absolutely derelict in their obligations and are now crying panic. The truth is, they knew every year what their funding obligation was, and if they chose not to appropriately fund the plan, shame on them.

    We’re not talking about the lean years; this laxity took place during the “good years”. In one state the pension plan is 26% funded! It didn’t get that way overnight. In the immortal words of Gordon Lightfoot, “the good times are all gone….”

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